Ladies and gentlemen, thank you for standing by and welcome to the Silgan Holdings Second Quarter 2023 Earnings Call. I would now like to turn the call over to Alex Hutter, Vice President of Investor Relations of Silgan Holdings. Please go ahead..

Thank you and good morning. Joining me on the call today are Adam Greenlee, President and CEO; Bob Lewis, EVP, Corporate Development and Administration; and Kim Ulmer, SVP, CFO and Treasurer. 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 2022 and other filings with the Securities and Exchange Commission.

Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements.

In addition the commentary on today's call may contain references to certain non-GAAP financial metrics including adjusted EBIT, adjusted EBITDA, free cash flow and adjusted net income per diluted share.

A reconciliation of these metrics which should not be considered substitutes for similar GAAP metrics can be found in today's press release available in the Investor Relations section of our website at silganholdings.com. With that, let me turn it over to Adam..

Thank you, Alex, and we'd like to welcome everyone to Silgan's second quarter 2023 earnings call. I'll make a few comments about the second quarter and share our thoughts regarding the remainder of the year.

Kim will then review our financial performance and provide more details around our 2023 outlook, and then Bob, Kim and I will be happy to answer any questions.

The second quarter presented a challenging comparative versus the prior year's record performance and as market conditions evolved late in the quarter our businesses took quick actions to adapt to those changes. We continue to advance our strategic initiatives and once again the company benefited from a balanced portfolio of businesses.

Strong operating performance in our Metal Containers segment helped drive double digit adjusted EBIT growth in the segment while we also continued to experience increased demand and volume growth in our high value dispensing products.

As we exited the first quarter and earlier in the second quarter consumer demand for our products and our customer demand forecast remained strong. As the quarter progressed, we began to see what appeared to be a broad based volume shift with many of our large customers.

As we worked with our customers to better understand the drivers of this dynamic and given how closely integrated we are with many of them, we came to understand that while consumer demand remained resilient, several of our customers were initiating internal working capital and inventory management initiatives for the second half of 2023.

These initiatives are separate from the prior destocking activities related to the products that had seen a significant surge in COVID related volumes. As expected, except for lawn and garden products, that destocking is now complete as those products have returned to a normalized level of demand.

While our targeted growth markets in each of our businesses continue to perform well, growth in 2023 has been overshadowed by these inventory management programs in the second half of the year.

Due to our customers' changed priorities for the second half, we are also shifting our focus to align our operational footprint and business activities to the revised second half projections and we will be driving out cost from each of our businesses.

As always we have an intense focus on understanding and meeting the unique needs of our customers and supporting any of their initiatives. Turning to our second quarter results, strong performance in metal containers and inline performance in custom containers were offset by two primary items in our Dispensing and Specialty Closures segment.

The largest item was the result of a skilled labor challenge at one of our U.S. closures, food and beverage facilities, which limited the output of that facility and created significant incremental costs in our overall system to serve those customers.

As always, Silgan worked diligently to insulate our customers from any operational issues we may face as we work to mitigate these impacts.

We will continue to incur incremental costs to serve our customers in the second half, but have already taken aggressive actions that will result in those costs reducing through the end of the year and the issue itself being resolved as we transition into 2024..

In certain products in certain regions we have seen evidence of consumers trading down to lower cost packaged products.

We have a long history that clearly shows that Silgan's products tend to do well in challenging economic times, and we continue to believe that our broad portfolio of products is well positioned to once again be a preferred vehicle of nutrition and at home use for consumers who are seeking value at retail..

In certain products in certain regions we have seen evidence of consumers trading down to lower cost packaged products.

We have a long history that clearly shows that Silgan's products tend to do well in challenging economic times, and we continue to believe that our broad portfolio of products is well positioned to once again be a preferred vehicle of nutrition and at home use for consumers who are seeking value at retail..

As a result of these items, we now expect adjusted EBIT for both the Dispensing & Specialty Closures and Metal Containers segment to be comparable to the prior year record level despite our customers' inventory management programs.

We have also revised our expectations for Custom Containers adjusted EBIT lower as the commercialization of the new contractual business awards has been delayed into 2024 in conjunction with those customers' inventory management programs.

With that, Kim will take you through the financials for the quarter and our estimates for the third quarter and full year..

As a result of these items, we now expect adjusted EBIT for both the Dispensing & Specialty Closures and Metal Containers segment to be comparable to the prior year record level despite our customers' inventory management programs.

We have also revised our expectations for Custom Containers adjusted EBIT lower as the commercialization of the new contractual business awards has been delayed into 2024 in conjunction with those customers' inventory management programs.

With that, Kim will take you through the financials for the quarter and our estimates for the third quarter and full year..

Thank you, Adam. Net sales for the second quarter of 2023 were approximately $1.4 billion.

Excluding non-recurring sales associated with Russia in the second quarter of 2022, second quarter of 2023 sales declined 6% from the record prior year period, driven primarily by lower volumes in each of our segments, partially offset by improved mix and the pass-through of raw material and other cost inflation.

Total adjusted EBIT for the quarter of $160.8 million, decreased by 14% on a year-over-year basis with record adjusted EBIT in the Metal Containers segment, offset by lower adjusted EBIT in the Dispensing & Specialty Closures and Custom Containers segments.

Adjusted net income for diluted share declined $0.26 from the record achieved in the second quarter of 2022 with higher interest expense of $0.08, non-recurring sales associated with Russia of $0.06 and lower volumes driving the year-over-year decline.

During the quarter we wrote up a tax indemnity and related tax reserves from a historical acquisition as the statute of limitation expired.

The write-off of these items adversely impacted corporate expense by approximately $2 million and interest expense by approximately $3.5 million and benefited our tax expense by approximately $5 million in the quarter.

The net impact of these tax related items was neutral to adjusted earnings per diluted share and our effective tax rate excluding these impacts would have been approximately 23%.

Turning to our segments, Dispensing & Specialty Closures segment sales declined 6% versus the prior year, excluding a 1% impact from Russian sales primarily as a result of lower volume mix of 6%.

The decline in volume was driven by double digit declines for higher volume closures for Food & Beverage markets primarily in Europe, which more than offset high single digit volume growth in higher value dispensing products.

Second quarter 2023 Dispensing & Specialty Closures adjusted EBIT decreased $23.4 million versus the record achieved in the prior year period as a result of the benefits in the prior year from an inventory management program and cost recovery for customer project expenditures and lower volume mix.

Relative to our expectations entering the quarter, the shortfall in adjusted EBIT was driven primarily by skilled labor challenges and associated costs at a U.S. Food & Beverage Closures facility, which impacted the quarter by approximately $10 million and lower volume for Food & Beverage products primarily in Europe.

In our Metal Containers segment, our teams continued to perform at a very high level again in the quarter and while volume was below prior year levels due to prior year post pandemic restocking activity ensued, Pet volumes remained strong in the quarter.

Metal Containers adjusted EBIT was a new record for the second quarter and increased nearly 20% from the prior year quarter as the business continued to successfully pass-through labor and other manufacturing costs while actively managing our cost structure.

In Custom Containers, our previously discussed non-renewal contractual business in the segment and lower food and personal care volume drove volumes 14% below the second quarter of 2022, which coupled with lower resin costs on a year-over-year basis resulted in sales 17% below the prior year period.

As expected Custom Containers adjusted EBIT declined $11 million as compared to the record achieved in the second quarter of 2022, primarily as a result of lower volumes.

With customer inventory management programs impacting volume and the timing of the commercialization of new business being deferred to 2024, we anticipate third quarter volume to decline approximately 10% from the prior year and third quarter adjusted EBIT to be below second quarter levels.

Looking ahead to the third quarter, we are estimating adjusted net income per diluted share in the range of $1.10 to $1.20, which includes higher interest expense of $0.08 per share and a $0.03 per share impact associated with non-recurring sales for Russia.

On a segment level with adjusted EBIT comparable to the prior year record levels in Dispensing & Specialty Closures in Metal Containers and below the prior year in Custom Containers.

For the full year 2023, we now expect total adjusted EBIT to decrease by a low single digit percentage as compared to the record prior year with adjusted EBIT comparable to the prior year record levels in Dispensing & Specialty Closures in Metal Containers and below the prior year in Custom Containers.

As a result, we are revising our outlook of adjusted net income for diluted share from a range of $3.95 to $4.15 to a range of $3.40 to $3.60, which includes a year-over-year headwind of $0.30 per share for interest expense, which we now expect to be approximately $170 million and a tax rate of approximately 24%.

These estimates exclude the impact from certain adjustments outlined in Table C of our press release. As we bridge our revised expectations for the full year to our prior estimates, we are now expecting approximately $0.55 cents lower adjusted net income per diluted share in 2023, which is comprised primarily of the following items.

Approximately $0.30 per share, primarily due to the customer inventory management programs across all the segments with roughly half of that impact being in custom containers due to the inclusions of delay in commercializing the new business awards, approximately $0.15 per share for the full year from the labor challenges and associated costs in our U.S.

Food & Beverage Closures facility, and approximately $0.10 per share higher interest expense as a result of higher interest rates on our variable rate debt. Based on our current earnings outlook for 2023, we are also revising our estimate of free cash flow to $375 million with CapEx now expected to be approximately $230 million.

That concludes our prepared remarks and we'll open the call for questions.

Operator, would you kindly provide the directions for the question-and-answer session?.

[Operator Instructions] Our first question comes from the line of Anthony Pettinari from Citi. Please go ahead..

Hi good morning. Adam, in terms, hey, in terms of customer inventory management programs, it seems like a lot of CPGs have been destocking maybe for close to a year now, and it sounds like we have kind of a new round of destocking initiatives.

Is it possible to talk a little bit more, maybe qualitatively about how these inventory management programs are maybe different than what was initiated, I guess, late last year and is it possible to quantify maybe days on hand, are customers going back to pre-pandemic levels or is there sort of a way to frame what this new inventory level might be versus history for your customers?.

Hey sure, and Anthony, maybe before I get into those details, I just want to make it really clear to everybody that the team here at Silgan is very disappointed with our performance in the second quarter and our revised outlook for the remainder of the year.

We believe the current issues we're facing are transitory in nature and will be contained to the year of 2023. What I can also tell you is that the Silgan team collectively understands the challenge that's right in front of us, and we remain confident in the earnings power and the outlook for each of our franchise businesses.

So as we think about what's different about this inventory situation, Anthony versus the, what I'm going to call the COVID related destocking that we were experiencing in certain products last year, this is much more broad based.

So in fairness, the destocking we talked about previously related to COVID items, again, items that had a surge during COVID, like hard surface cleaners and sanitizers, those types of products, we have essentially cleared that destocking and we are now seeing growth again in those products.

So unfortunately this is an entirely new program and I think this has really centered around the fact that there has been significant inflation that has been not only passed through to consumers, but to our customers as well, not just in the products that we sell, but in ingredients and other packaging raw materials, et cetera.

And the reality is, I don't think the days of units on hand of finished goods are terribly different. The dollar value of that inventory is significantly higher than it's been at any time in recent past.

And you take into account the interest rates that we're now paying collectively that we're all dealing with, the interest expense of holding that inventory is really what I think is driving our customers to make a broader based decision on how they're thinking about working capital and inventory management and again, it's across all of our businesses.

So we view this as something much different than the COVID related destocking activities from last year..

Okay. That's very helpful. And then you talked about aligning cost structures with the new volume outlook.

In terms of the benefits of restructuring programs on a dollar basis, are there any numbers that you can give us for 2023 or 2024 in terms of what you expect those programs to deliver?.

Sure, and in fairness to our teams, Anthony, the revised forecast that we got in from our customers really were in the very late days of June and into early July. So this is a very recent phenomenon that we're dealing with as far as the inventory management program. So we have instituted a few of those activities already.

We've got a lot more activities that we're going to be talking about on the next call that we have in October. But I think just given the sensitivity to some of the changes that we're going to make, we're going to hold off having those conversations until our teams are fully informed of all of those actions that we're taking..

Okay, understood. I'll turn it over..

Thank you..

Our next question comes from the line of Gabe Hajde from Wells Fargo. Please go ahead..

Adam, Bob and Kim, good morning all. I had a question I think, or I suspect I know the answer to this, but there was also a reference of I want to say $5 million or so of incremental corporate development costs in the quarter.

I'm just curious maybe Bob, if you can speak to that sort of calibrate what maybe timing or things that we should be expecting, I mean, I know you guys have talked about being active, but anything else would be helpful?.

Yes, sure Gabe. Look, this is not anything that's out of the ordinary, right? We maintain an active posture in the M&A corporate development market. I think what you just see is what's happening in the quarter is kind of the timing of some, when some of those costs came through.

I wouldn't read a whole lot into it because it is ongoing activity that happens pretty regularly through our P&L. It may be a little more visible in this quarter, but that's really it. And I would take that as kind of no change to our posture around capital allocation and corporate development activity.

So nothing, there should be no read through there one way or the other around how we're feeling about the M&A side of the business..

Okay.

And then the other one, as it relates to the skilled labor issue that you guys are dealing with right now, I guess the natural extension or the question would be to the extent you look across the, the remainder of the platform, are there any upcoming contract negotiations, union or otherwise that you guys are kind of preemptively going after at this point to avoid that or could something go wrong with what you're dealing with now such that it bleeds into 2024? Like how, you know, degree of confidence there that it's $0.15 and we can kind of look past it as being transitory?.

Sure. So we just have our normal course union contract negotiations, nothing outside of the ordinary from that perspective for the first part of your question, Gabe. That really wasn't what happened at the facility that we're talking about with the labor challenge that we have.

I think what I'd say is that we are very proud of all of our Silgan employees and really how everyone stepped up through the pandemic and took it very personally to meet the significantly elevated demand levels that we saw for our products through the pandemic.

And unfortunately, I think what we've gotten to is just, we've got one facility in kind of a rural location where we are having some absenteeism problems and we are addressing those very clearly and very quickly and it is absolutely our opinion that we will resolve those issues within the year for sure.

Some of the aggressive actions that we've taken, we've got a broad network in our Food & Beverage Closures manufacturing platform around the world to utilize and we are doing that. So we've moved a significant amount of volume out of that facility.

We have also moved one production line to another facility within the United States all of which is really why the expense is so large in the quarter is all the actions that we've taken to mitigate it and insulate our customer at the exact same time.

So, I think we've got a really good degree of confidence that the situation is going to be resolved one way or the other with all of the actions we've taken and actions that we can continue to move forward with as well..

Understood, thank you. I'll jump back in..

Our next question comes from the line of George Staphos from Bank of America. Please go ahead..

Yes, hi, good morning. This is actually [indiscernible] sitting in for George. He had a conflict this morning.

So just on Dispensing & Specialty Closures obviously volumes have been challenged for several quarters now and I understand that you're guiding a low single digit growth for 3Q, but ultimately what does this say about kind of the intermediate and long-term growth outlook for that business and when can we expect DSC [ph] to get back to sort of sustained growth?.

Sure, great question and really it's the markets that we're talking about that are impacting the overall volume trend in the business. So our dispensing products, again, had been growing at kind of the double digit percentage growth rates year-over-year. I think in the quarter we were up high single digits in our dispensing products.

So the conversation for today's conversation is about the Food & Beverage market and it's really about our European Food & Beverage customers that we're talking about. So, we've seen softness in Q2. Really as a reminder, our Metal Closures in Europe are part of a premium package in the marketplace.

And what we are seeing to some degree in the European economy is the consumers struggling a bit and they are in fact trading down in some cases.

We have the benefit of having a metal food can business in Europe as well, that we are seeing some benefit in volume as consumers trade down, but it's been a very tough year thus far for consumers, particularly for Food & Beverage products in Europe. So look, we think that's going to ultimately resolve itself.

We think that the dispensing platform continues to grow, delivers high single digit growth and then we've got really as we move through the second half of the year, relatively fair comps versus the prior year where we had seen softer food and beverage volumes in the second half of last year.

And then we also talked about the COVID related destocking activities last year that we've already cleared. So we feel confident about the back half forecast that we have for Dispensing & Specialty Closures, and maybe more importantly, we feel really good about the long-term growth rate that we've applied to the business.

Nothing has changed from our perspective due to this short-term transitory issue..

Okay. Got it, got it.

And then just on Custom Containers with the delay of the commercialization of that new business, I guess can you just expand on that a little bit and I guess when, how is the timing shifted on, on that front?.

Yes, good question. And when we came into the year we were looking for commercialization in the second half of the year. As it turns out many of our customers that we have these new business awards with have had labor challenges of their own. And we were having difficulty in having the right teams at our customers to work on these projects.

And as it turns out as part of the inventory management, working capital management, those positions are have been pushed off to rehire until the early part of next year.

So the contracts are signed, the capital is being spent and we are preparing for commercialization, but our customers teams will be ready to begin those commercializations early in 2024. Our products will be ready to ship in early 2024 as well and we're confident that we have a full year of those volumes as we turn the page..

Good, thanks..

Our next question comes from the line of Mike Roxland from Truist Security. Please go ahead..

Thank you, Adam, Bob, Kim and Alex for taking my questions. First one, just on the cost actions, I understand you're electing to discuss if it's relatively new.

But would it be fair to assume, Adam, that since that these costs are, or these actions that you're taking are going to be temporary, you indicated that the destocking headwinds themselves should be temporary? And does this also give me the opportunity to maybe go through your portfolio more holistically to make more permanent action moves?.

So actually, I would say that the actions that we're going to be taking are more permanent. We are rightsizing our capacities, our footprint, our business activities to the projections from our customers for the second half of the year.

And Mike, I think the interesting piece of that as we look forward into 2024, what Silgan has historically done, has been able to flex our capacity up to meet our customers' increased needs and that's how we're viewing our first look at 2024 at this point.

We're going to make sure we get the cost out this year, and we'll be able to flex up to meet those needs next year..

And just a quick follow-up then Adam thank you for the color, would you say that you've -- as your customers enroll, maybe you've grown a little bit more relative to your customers since you can actually close facilities permanently and still flex up to meet their needs?.

I don't think we're going further than our customers. I think we are going to right size our footprint and our capacity to the demand that we see. And we're in intimate conversations with our customers daily on what that looks like, not only for the remainder of the year, but going forward.

And again, I think what I'll just reiterate, Mike, is that we have a long history of having a very low-cost platform that we're able to flex up, and it's the entirety of our fixed cost system that that incremental margin fully utilizing a facility and stressing the assets is where Silgan's made a lot of money for our shareholders over time..

Mike, just to add some color to that. I think if you look back as we came through the whole pandemic-related volume surge, right, we all sort of kept capacity available to meet that peak demand.

And I think part of this is just getting back to the roots of what Silgan does and being able to take cost out and doing that at a time where we're seeing some softness coming from our customers at least in a transitory way.

But what we've always been able to do over time is take those kind of fixed costs out and flex up when we need, which is exactly Adam's point. So I wouldn't view this as we're permanently rightsizing or downsizing. We're just getting, maybe I'll use the reverse terminology, we're not permanently downsizing.

We're rightsizing with the ability to flex back up when we need to..

Got it. Very clear. And then just one quick additional question. Can you talk about the benefit, if any, do you expect to have lower resin costs particularly around polypropylene? Obviously, that was a headwind in 1Q, those costs have declined significantly in 2Q. It wasn't really -- you didn't guys have mentioned it at all.

So I'm just wondering if you could do expect some type of tailwind from lower resin costs. Thank you..

Yes. Maybe just as a quick reminder, we're right at the beginning of hurricane season. So any commentary will be subject to whatever happens with the weather along the Gulf Coast and the East Coast. But as we sit here today, you're right, polypropylene is expected to decline in the back half of the year, and we'll see what happens.

We typically take a conservative view on resin in our forecasting models. And as you'll recall from the last earnings call that we had, resin and polypropylene specifically had increased dramatically, I think in excess of 10% on CDI in both February and March. And ultimately, it wound up falling, I'll say, just as fast in the second quarter.

So we didn't mention it much, Mike, simply because it didn't have much of an impact versus our expectation that we had in the quarter. And again, we're just going to be conservative in how we look at it as the remainder of the year plays out..

Thanks very much..

Our next question comes from the line of Arun Viswanathan from RBC Capital Markets. Please go ahead..

Great. Thanks for taking my question. I just wanted to ask a little bit about the demand environment. You talked a lot about inflation impacts and or we've seen that with -- in many categories.

Do you think that that is the main issue going on here? I know that there's, obviously, the customer loss, but aside from that, do you think demand is really being impacted by inflationary aspects historically? I mean, many of these smaller kind of food beverage categories have been a little bit more stable.

I know there's a whipsaw effect with COVID and so on. But maybe what are you hearing from your customers as far as inflationary impacts on consumer demand levels? Thanks..

Sure. Thanks, Arun. And I think it's important to differentiate the geographies in which we deal with. So maybe the tougher one to start with is Europe. And we think the consumer has been weaker in Europe and that is reflected in our Dispensing & Specialty Closures, Food & Beverage business.

It also translates to our metal food container business in Europe, where we are seeing some of the benefits of the trade down that seems to be occurring. I think broadly what I would say again is that the consumer seems to be spending the same amount of money at retail on a monthly basis.

Maybe they're taking more trips to the store, but they're roughly spending the same dollars. We are very clear they are getting less for the money that they're spending. So inflation is having an impact.

And I think, not speaking for any customer in particular, but you look at CPG companies and what they've been reporting, they are talking a lot about the price recovery that they've gotten and price ahead of cost and shrink inflation. Again, all of that does fall down to the consumer. So in the U.S.

market, I think the consumer has been very resilient thus far. We have not seen a significant impact from the consumer. And I'd say that in all of our businesses, including we haven't seen necessarily a trade down to the food can in the U.S. market at this point.

Look, we've got a long history of dealing with different economic cycles throughout our businesses. Silgan typically does well when economic circumstances are challenging and so we're ready for this if it happens.

If not, we think our businesses are continuing to perform pretty well at this point, even with the transitory issue that we're dealing with, with the inventory management programs our customers have initiated..

Okay. Thanks for that. And given that backdrop then, when you look into the next couple of years, I guess, is it mainly maybe some deflation that would return you to maybe low single-digit volume growth or I know that you have a number of different end markets and fragrance, for example, maybe holding up pretty well as is Pet food.

But is that really the main driver here that we need to see some deflation and relief for the consumer before Silgan kind of returns to more consistent positive volume growth or are there other levers you can pull?.

No, I actually don't think that's what we're waiting for. I mean, again, taking a half a step back, I'd say we're cycling over all-time record volumes and record profits in our business from last year. So our comps are very difficult. That's fine. We expect to continue to grow from there.

So once we pass this transitory issue, I mean, I would say nothing has changed about our near-term or long-term outlook for the businesses. So dispensing and in Dispensing & Specialty Closure segment, dispensing is going to continue to grow at kind of a high single-digit rate from a volume perspective.

We think food and beverage markets will normalize and provide kind of GDP-ish kind of growth. But the DSC segment, we're expecting nice growth from it. You move over to metal containers, nothing's changed. Really, what's happening in 2023 is exactly what we expected to have happened. We have nice growth in Pet food.

We have stability in vegetable and really soups returning to kind of a normal soup pattern. And so that is going to drive with 50% roughly of our volume in wet pet food. That will drive growth in metal containers as well.

You move to custom containers, we do have this mismatch of business wins versus the piece of business that we chose not to renew our contract on. And if you go back several years, we've been talking about the wins and what we decide not to renew is going to be a little bit lumpy. That's what we're riding through right now.

So we're excited about the new business that we've won that we have signed contracts for, that will return more profit than what we walked away from in the other agreement in 2024. So margins in that business remain strong. We had set a 15% EBITDA margin for Custom Containers many years ago. We've operated well above that for several years.

The new business awards we're talking about will be at or above that level and those are long-term contracts. So we feel really good about all three of our franchise businesses for the near-term and the long-term outlook, we're just riding in through this transitory issue for the next six months..

Got it. Thanks a lot..

Our next question comes from the line of Ghansham Panjabi from Baird. Please go ahead..

Hey guys. Good morning. I missed [indiscernible] I apologize if you covered this, but on dispensing closures, Adam, you talked about some of the weakness in Europe.

Is that -- how do you sort of see that playing out, right? Because the classic CPG strategy is to raise prices when inflation goes up and then as inflation sort of moderates to adjust on a promotional activity basis and stuff like that, that's been true in the U.S. historically.

How do you sort of see that playing out for Europe?.

Well, I think the issue in Europe, specifically for this business in Food &Beverage is again, the glass package with the metal closure is considered the premium package in the marketplace. So it is we are seeing the trade down to private label. We're I'd say, fairly well represented.

We're probably a little more weighted to brand versus private label, but we're seeing that trade down. We're also seeing the trade down from private label into food cans. So look, the consumer is in a tough spot in Europe and we think they've taken specific actions to trade down.

Really, it's more of a question about the inflation on our package, which is driven in large part by what the glass manufacturers are doing in the marketplace. And that's, I think, the biggest component that our customers are thinking about and as we think about the premiumization of that package..

And then on the same token back in May of last year where on the big box stores, we're talking about too much inventory and destocking, now they're starting to inform and talk about promotional activity and partnering with their suppliers and so on.

Is it just sort of a lag that in the supply chain as it relates to using incremental weakness now versus maybe a forward-looking trajectory that's actually more favorable for the market back half onwards to 2024?.

Well, I do think that -- I agree with you that I think what needs to happen is promotional activity. And some of that price versus cost that we talked about for the large CPGs and retail collapsing a little bit and getting back to where consumers are engaged in procuring those products and inflation is going to match what is happening in the market.

So I think I've read the same reports, Ghansham, from retail partnering with some CPGs. I tell you, I think for the most part, what we're seeing right now with our customers is they are liking the price points that they're at in the marketplace, and they've been willing to forgo a little bit of volume to retain that price.

I think that has to change at some point. And we're in those conversations all the time. We'll see what happens here as we work through this inventory management program for the end of the year as we head into 2024, I think it has to be addressed. I think that will drive volume in the future periods..

Yes. I wouldn't walk too quickly past Adam's prior comments as well, just as some of our customers are getting after the carrying cost of this high-value inventory, and looking to land with lower cost inventory as that promotional activity comes back.

So that's kind of what gives us some confidence that this is a bit transitory, right? It's just getting after cost that they're carrying particularly in these high interest rate environments and looking to position themselves well for moving into 2024..

Okay, awesome. Thanks so much..

Our next question comes from the line of Daniel Rizzo from Jefferies. Please go ahead..

Good morning. Thank you for taking my call. So I think you mentioned that the issues with labor or a $10 million headwind in the quarter. I was just wondering how we should think about it for the next two quarters.

I know there were some onetime stuff here or some transitory stuff, but how will it -- what will the cadence be in Q3 and Q4 with those costs?.

Thanks, Dan. Yes, it will mitigate throughout the quarter. So I mean, I think if it was $10 million in the quarter in Q2, I think Q3 is let's call it $6 million and kind of Q4, we're kind of ending the year at $3-ish million and then having it fully resolved by the end of the year.

To be clear, our objective is to beat all those numbers I just gave you, but that's what's included in our forecast..

When you say it's going to resolve by the end of the year, that's not -- are you assuming that, I guess, your labor resolves itself or is this like kind of working around them, if you know what I'm saying, like, regardless of what they do, this will be resolved by the end of the year?.

I think that's what I tried to say earlier is regardless it will be resolved. So yes, it's a little bit of both. So in fairness Dan, look, with our manufacturing footprint around the world, we have sent hundreds of millions of units to other facilities to support our customers.

We have, as I said, picked up one operating line and moved it to another facility in the U.S. that has labor that is able to manufacture the parts. That line is already up and running in the other plant. That's how quickly we've moved and our team actually did a great job in coordinating all of those activities.

So one way or another, this is going to get resolved..

Okay, great. Thank you. And then you mentioned trading down in Europe with some of your higher-end products, but Beauty wasn't mentioned. And I think in the past, you said that's fairly resilient even though you are in high-end products there.

I was wondering if that's something that's still intact or if you could potentially see some trade down within that end market as well?.

Sure. It's a great question. I was trying to be very specific to Food & Beverage when I was talking about the premium products on the retail shelf. So when you move over to kind of our dispensing products, again we're seeing high single-digit growth across the board, some of our higher value items are even growing at a greater rate than that.

So if you think about Beauty & Fragrance, look, it's been a wonderful growth engine for the entirety of the business. The future is also very bright for those products. We really have seen at this point no slowdown in the European market for those premium products in fragrance and beauty at this point..

Okay.

And then one final question just on your own inventories in terms of your own, I guess, destocking, could we expect some, I guess, some cash relief as you kind of adjust yourselves as well to what kind of the new dynamic is within some of the closures end market?.

Yes. So I think that's what you're seeing is embedded in our free cash -- our revised free cash flow guide is that we've taken a hard look at return rates on CapEx. We're looking at our inventory levels to get those rightsized as well. So yes, that's part of the DNA of what we do in this scenario..

Thank you very much..

Our next question comes from the line of Kyle White from Deutsche Bank. Please go ahead..

Hey good morning. Thanks for taking the question. A couple of questions on the outlook, just starting with dispensing, you're targeting for segment income to be flat for the year, kind of implies a pretty meaningful step up on a sequential basis as well as year-over-year.

Just trying to understand what's kind of driving that uptick given it seems like volumes are still a bit challenged and then you have the labor issue. And then longer term, what's the right margin profile for this segment just given the moving parts related to mix with the higher value products relative to the legacy closures..

Sure. Great questions, Kyle. So look, when we look at the back half of Dispensing & Specialty Closures, really it's more about what happened last year and again, the significant impact of COVID-related destocking in this particular segment occurred in the second half of last year. So we're cycling over that.

Those products, again, to be clear, I'll just keep using the example on this call of our trigger sprayers or hard surface cleaners, they were up double-digit percentage in Q2, and we anticipate that continuing on through the remainder of the year as we have fully cycled through that destocking activity.

As I mentioned earlier, we also had some softer volumes last year in the U.S. market for Food & Beverage in the second half of the year. Our current outlook is for a normal third and fourth quarter for Food & Beverage in the U.S. market, so cycling a little bit against a softer comp there.

And then, at the end of the day, we continued to grow in our core markets for this segment. So we'll continue to see growth in those high-value dispensing systems and dispensers. All that is sort of offset a little bit by the challenge of the European market.

We've got a relatively conservative Food & Beverage forecast for the back half of the year and then obviously, working with our customers through this inventory management program in the last six months of this year. All of that nets to low single-digit kind of growth for the back half of the year in the segment.

So we feel pretty good that we've got that captured correctly and are pulling all the levers to execute and make that happen. From a margin profile standpoint, again, I think what you're seeing in this business is accelerated and outsized growth in the high-value dispensing applications. So margins will continue to trend upwards as we go forward.

We've talked a lot about mix. I probably will spare everyone on this call again from going through the mix conversation with our Food & Beverage Closures. But look, this business will continue to trend favorably in margins as we continue to grow the dispensing side of the segment..

Yes.

I think Kyle, there's not much that's changed around the margin profile between those categories, right? So if you think about, what I'll call the legacy dispensing side of our business, that's kind of a, call it a mid-to-high teens margin profile and the dispensing side, which is where the growth is coming is in the low to mid-20s kind of profile on a margin basis.

So as we continue to see growth there, that should accrete to margins, assuming neutral raw material, right, the pass-through mechanisms will have some import there. But the underlying margin should be accretive as we continue to grow in the dispensing side of the business..

And just to tie terminology, your legacy that Bob just mentioned, is the Food & Beverage that I was talking about earlier. So we're -- Bob's got it exactly right..

Got it. It’s very helpful. And similar type of question on metal containers, I mean this business has been exceeding expectations for the first half of the year, I think income is up 33%, and now you're forecasting for income to be flat for the full year. So I'm just kind of trying to understand the second half dynamics there.

Is there anything related to the PAC [ph] versus to why we should see a year-over-year decline in income?.

Well, hey look, the PAC in the U.S. market, in particular, the PAC is running a little bit late. So that is reflected in our forecast. There was a little bit of slippage from Q2 into Q3, and then we'll also see some push from Q3 into Q4, all of which is relatively normal for us.

But I would say the PACs running call it, maybe three to four weeks late at this point. So we are expecting some PAC to get into Q4.

As you think about it being flat, it was really about, again, what we did last year as far as our inventory management programs, late in the year last year that created significant benefit for the company, it's just not repeatable. So we're cycling against a significant benefit from the prior year..

Got it. That makes sense. I’ll turn it over..

Our next question comes from Gabe Hajde from Wells Fargo. Please go ahead..

Thanks for taking the follow up. Just a quick one and Adam, I don't feel like I've maybe got a clear answer.

Going back to economics class, if you're talking about higher cost to carry inventory for your customers, has there been anything in the discussions in terms of maybe them delaying purchases or wanting to destock in anticipation of lower cost products from yourselves or maybe lower ingredient costs going into 2024? Just trying to understand like to the extent there could be a restock event or something like that in 2024 and they draw things down too far..

Yes. I think -- look, we're early in that conversation right now. I think the most significant item I can give you there, Gabe, is that there are trade cases for 10 plate steel that are in front of the government right now, which we're expecting to hear resolution one way or the other, call it in late August, early September.

And we don't know how the -- we don't know what the decision is going to look like and it creates a really wide disparity of outcomes. So I think we and our customers have both elected to wait to make that decision once we have more information.

So I genuinely don't believe that, that is what's driving any of the conversation that we're having with our customers. I just would say when you look at their unit volumes and inventory, I don't think it's terribly different than what they've historically held in unit volumes.

I think the dollar value associated with that inventory is so significantly higher, because of inflation in raw materials, because of inflation in ingredients and their labor cost, and their logistic costs. That's what's driving the inventory management program that we've been talking about with our customers..

Thank you..

Sure..

I would now like to turn the call over to Adam Greenlee for closing remarks..

Great. Thank you very much, and thank you all for your interest in the company. We look forward to talking about our third quarter earnings results in late October. Thank you. Have a great day..

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