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Thank you for joining the Silgan Holdings Fourth Quarter and Full Year 2020 Earnings Results Conference Call. Today's call is being recorded.
At this time, I would like to turn the call 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 2019 and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements.
With that, I'll turn it over to Tony.
Thank you, Kim. Welcome everyone to Silgan's 2020 year end conference call. With 2020 in our rear view, and with high hopes of putting challenges of 2020 behind us, I want to thank the entire Silgan team, point out a few of the 2020 highlights and provide a brief preview of our 2021 outlook. Bob will then review the financial performance for the full year of fourth quarter and provide more detail around the 2020 outlook. Afterwards, as usual, Bob, Adam and I would be pleased to take any questions that you have.
Let me start by expressing our gratitude and deep respect for the entire Silgan team who rose to the challenges during these unprecedented times to meet the expanding needs of our customers supplying essential products to our vulnerable communities. Throughout this pandemic, our employees have repeatedly demonstrated their strength, commitment, and the power of our performance based culture as they did everything possible to ensure we met these unprecedented demands. As a result, we were able to achieve several milestones in 2020 and are well positioned for further growth in 2021. As covered in our press release, 2020 was an exceptional year for the company. Some of the highlights included, we achieved record financial performance across the board including revenue, which increased to $4.9 billion. With strong volumes experienced throughout the year. Adjusted net income per diluted share of $3.06 was up 42% versus the prior year.
Free cash flow of $383.5 million or $3.44 per diluted share, were at record levels. We attained our target leverage ratio just seven months post the recent acquisition, positioning the company to take advantage of future cash deployment opportunities. And we increase our cash dividends for the 16th consecutive year. While achieving these performance metrics, we also invested in several important growth initiatives, including completing the acquisition and integration of the dispensing operations Albéa Group, initiating commercial supply for a major pet food customer expansion in Eastern Europe. Managing several significant new business wins in the plastic container business which are expected to generate further growth in 2021 and beyond. Initiating several capacity expansion projects for dispensing triggers and pumps to support significant customer growth anticipated in health and hygiene product offerings, and meeting customers increased need for local production.
Simply put, our business franchises have never been stronger. Our employees never more resolute and our confidence in the future never more resolved. Therefore, as Bob will discuss in more detail, we're providing full year guidance for adjusted earnings per diluted share in the range of $3.30 to $3.45. The midpoint of this range represents a 10.3% increase over 2020. We also expect free cash flow to again be approximately $380 million.
With that, I'll turn over to Bob.
Thank you, Tony. Good morning, everyone. As Tony highlighted volumes remain strong throughout 2020 as we benefited from more at home consumption, a trend of more stringent personal hygiene habits, and several strategic investments in new business. All while overcoming the challenges of keeping our workforce safe and integrating a newly acquired business. As a result in 2020, we delivered adjusted earnings per diluted share of $3.06. And we delivered free cash flow of $383.5 million significantly better than the prior year of $271.7 million. On a consolidated basis net sales for the year were $4.92 million, and increase the $432 million or 9.6% over the prior year.
This increase was the result of higher net sales across each of our businesses. We converted these sales to net income for the year of $308.7 million or $2.77 per diluted share, as compared to 2019 net income of $193.8 million or $1.74 per diluted share. In 2020, adjusted earnings per diluted share included adjustments that increased earnings per diluted share by $0.29 for rationalization charges, costs attributable to announced acquisitions, the purchase accounting write-up of inventory and the loss on early extinguishment of debt. In 2019, adjusted earnings per diluted share included adjustments that increased earnings per diluted share by $0.42 for restructuring charges, costs attributable to announced acquisitions and loss on early extinguishment of debt. As a result, adjusted net income per diluted share was $3.06 in 2020, up 42% versus $2.16 in the prior year.
Interest expense before loss on early extinguishment of debt decreased $1.9 million to $103.8 million, primarily due to the lower weighted average interest rates partially offset by higher average outstanding borrowings, primarily related to the recent acquisitions, and additional revolving loans outstanding in the early part of 2020, as we held cash to guard against potential credit market disruptions in the early days of COVID-19 pandemic.
In addition, we incurred a loss on early extinguishment of debt of 1.5 million and $1.7 million in 2020 and 2019, respectively. Our effective tax rate was 24.2% and 23.1% in 2020 and 2019 respectively. The effective rate for 2019 was favorably impacted by the resolution of a prior year tax audit and the timing of certain tax deductions. Full year capital expenditures totaled $224.2 million in 2020 versus $230.1 million in 2019. Additionally, we paid a quarterly dividend of $0.12 per share in December. The total cash cost of the dividend was $13.2 million. For the full year, we've returned $53.6 million to shareholders in the form of dividends. And in addition, during the year we repurchase stock in the amount of $35.9 million.
I'll now provide some specifics regarding the individual financial performance of each of our businesses. The Metal Containers business recorded net sales of $2.56 billion, up at $84.8 million versus the prior year. The increase was primarily due to higher unit volumes of approximately 14% and favorable foreign currency translation of approximately $4 million partially offset by the pass through of lower raw material costs, a continued shift towards smaller metal packages sold and the impact from the renewal of certain significant customer contracts at the end of 2019. The increase in unit volumes was principally due to higher demand in at home consumption. Segment income in the metal container business was $246.6 million, an increase of $86.6million versus the prior year.
This increase was primarily attributable to higher unit volumes, $39.5 million of lower rationalization charges, strong operating performance, and higher pension income. These increases were partially offset by the impact from the renewal of certain significant customer contracts at the end of 2019, and a shift toward smaller metal packages sold. Rationalization charges totaled $9.9 million and $49.4 million in 2020 and 2019 respectively. The 2019 rationalization charges were largely a result of the shutdown of two manufacturing facilities and the withdrawal from the Central States pension plan. Net sales in the closures business were $1.71 billion in 2020, an increase of $306.8 million versus the prior year. The increase was primarily the result of higher unit volumes of approximately 8% and a more favorable mix of products sold, partially offset by the pass through of lower raw material costs and unfavorable foreign currency translation of approximately $4 million.
Unit volumes increased principally as a result of the inclusion of the two recent acquisitions, and increased demand for consumer hygiene, health, personal care, and food and beverage products. These volume gains were partially offset by weaker demand for certain beauty and fragrance products. Segment income in the closures business for 2020 improved $50.9 million to $224.4 million, primarily due to higher unit volumes, including from acquisitions completed in 2020. A more favorable mix of products sold, strong operating performance and higher pension income partially offset by the negative impact of a $3.5 million charge for the purchase accounting write-up of inventory as a result of the acquisitions completed during the year.
Net sales in the plastic containers business increased $40.4 million to $651.5 million in 2020. Principally due to higher volumes of approximately 11% partially offset by the pass through of lower raw material costs, a less favorable mix of products sold and unfavorable foreign currency translation of approximately $1 million. Segment income increased $38.9 million to $87.8 million for the year largely attributable to higher volumes, strong operating performance, lower manufacturing costs and higher pension income partially offset by the unfavorable impact of $3.2 million charge for non-commercial legal dispute relating to prior periods and the unfavorable impact from the lagged pass through customers of higher resin costs.
As we look at the fourth quarter, the fourth quarter we reported earnings per diluted share of $0.54 as compared to $0.31in the prior year. Earnings Per diluted share was increased by $0.06 in 2020 and by $0.07 in 2019, resulting in adjusted earnings per diluted share of $0.60 in the fourth quarter of 2020 versus $0.38 in the same period a year ago. Net sales for the quarter were $1.23 billion, up $178.3 million versus the prior year driven primarily by higher volumes in each of the businesses, a more favorable mix of products sold in closures and favorable foreign currency translation of approximately $10 million.
These increases were partly offset by the pass through of lower raw material costs, and a continued shift towards smaller metal packages sold in the metal containers business. The increases in volumes were principally due to the inclusion of the acquired businesses and continued high demand for food, consumer health, hygiene and personal care products. Interest before interest and income taxes for the fourth quarter of 2020 increased by $33.6 million to $105 million, primarily due to higher volumes and strong operating performance across all businesses. Higher pension income, a more favorable mix of products sold in the closures and plastic businesses and higher costs in 2019 attributable to announced acquisitions. These gains were partially offset by a continued shift towards smaller metal packages sold in metal container business. The impact from the renewal of certain customer contracts at the end of 2019. The unfavorable impacts in the lag pass through to customers of higher resin costs in the plastic container and coded businesses and higher rationalization charges in 2020.
Interest expense for the fourth quarter of 2020 increased $3.4 million to $26.8 million as a result of higher average outstanding borrowing, largely due to the acquisitions completed in June, partially offset by lower weighted average interest rates. Effective tax rate for the fourth quarter of 2020 was $23.2 million as compared to $27.5 million in 2019.
Turning now to our outlook for 2021. Our estimate of adjusted earnings per diluted share for 2021 is the range of $3.30 to $3.45. The midpoint representing a 10.3% increase over record adjusted earnings per share of $3.06 for the full year of 2020. Reflected in our estimate for 2021 are the following. Segment income in the metal container business is forecasted to benefit from anticipated higher volumes, continued manufacturing improvement and higher pension income. The Closures business is expected to benefit from anticipated higher volumes including the full year benefits from the acquisition some back half recovery in the beauty and fragrance markets and new business gains as well as improved manufacturing efficiencies and higher pension income.
We're expecting the plastic container business to benefit from anticipated volume gains, manufacturing efficiencies, and higher pension income. In addition, we expect interest expense to increase versus 2020 largely as a result of higher average outstanding borrowings as a result of the June 2020 acquisition, partially offset by lower average interest rates. We currently expect our tax rate to be approximately 25% as compared to the effective rate of 24.2% in 2020. This estimate does not contemplate the effect of any tax law changes that may arise during the year. Also we expect capital expenditures in 2021 to be approximately $230 million, up slightly from 2020 as we have a full year of the dispensing business acquired from Albéa, and we fund certain customer growth projects.
We're also providing our first quarter 2021 estimate of adjusted earnings in the range of $0.65 to $0.75 per diluted share. The midpoint of this range represents a 23% increase over $0.57 in the first quarter of 2020. These estimates exclude rationalization charges, costs attributable to announced acquisitions and losses on early extinguishment of debt. Based on our current outlook for 2021, we expect free cash flow to be pretty stable, and are providing an estimate of approximately $380 million as earnings growth is largely offset by slightly higher CapEx, and less cash generated from working capital.
That concludes our prepared comments. Before I turn it over, I'd like to remind everyone to limit their time to one question and one follow up. As time permits, we'll take additional questions from the queue.
With that, I'll now turn it over to Madison to provide directions for the Q&A session.
[Operator Instructions]
Our first question comes from Adam Josephson with Key Bank.
Thanks. Good morning, everyone and congrats on another very good quarter. Bob, it maybe sounds strange to ask about pension first. But if memory serves you were thinking that pension would be at $10 million to $15 million drag in 2021 on your last call, and now you're expecting higher pension income in 2021. So can you just talk about how much of a swing and expectations you've had from the last call and what drove that?
Yes, well, it's all directly related to what happened in the equity markets or in the markets broadly in the final throes of the year. So at the time of our last call obviously the market was not performing very well and returns on the portfolio pension assets were not that great. We've seen a really nice recovery so that has really swung us including degradation in the discount rate which quite frankly hurts us. The net of that is we saw it move from what we expected to be a pension headwind of about $10 million or so to being a benefit in pension to be in the neighborhood of $10 million.
Got it. That helps. And then can you be any more specific about your volume expectations in 2021? I believe you said you expect your food can volume to be up even on the exceptionally difficult comp. I know you said you expect plastics volumes to be up. Closures, I didn't catch what your organic volume expectations were for closures for 2021? Can you just provide as much detail as you can about what rate of volume growth organically you're expecting in 2021? And why?
Sure. Hey, Adam, it is Adam, and thanks for the comments and question. Maybe just starting with our metal food can business to start with for 2021. We talked a lot on the last call just about the run rate of the business and the run rate of the volumes we were experiencing. So as we head into the year, we were essentially running at full capacity in Q2, Q3 and q4. And the pandemic didn't really impact our metal food can business until very late in Q1 and certainly in Q2. So we talked about the shoulders of the year that's where our capacity exists. And that's absolutely the case, as we look at 2021.
So the good news is, we came out of the year with great momentum in Q4 with our second highest unit volume, quarter of the year, and our orders are fully loaded for Q1. So we know as we sit here today is that our Q1 volume is going to look a lot like our Q4 volume, mix might shift a little bit, but the absolute volume is going to be up pretty significantly versus 2020. And then that'll carry over the course of the year. And we've got a tough comp in Q2. So just as a reminder, as some of that pandemic buying did occur in early part of Q2, we were able to liquidate quite a bit of our inventory. So while we were running and selling, whatever it was that we were actually manufacturing, we also sold out the inventory, so and then maybe move into Q3 in the metal can business. We talked a lot about the pack, the pack was not really able to respond in a large way or customers weren't able to respond in a large way to the increased demands of the pandemic.
So while we don't have final numbers yet for pack volumes, we do know and we work with our customers very closely on this, we know that they're planning a sizable increase to their pack volumes in the US. We know they're going to contract additional acreage in the US. And they're expecting a really good pack for the year. So I think those items all together, Adam is what gives us a lot of confidence in our metal container business that we'll see, continued strength over the course of the year. And then maybe now let's move to closures. The first thing about closures is obviously we have the acquisitions in 2020; we have seven months of those. We will have a full 12 months in 2021. When we talk about the fragrance business specifically with Albéa, we're expecting a recovery of something like half of the detriment that we experienced in 2020. And when you think about that, on our last call, we said we were seeing some positive signs but didn't want to get too far in front of ourselves.
We were down in the fragrance business call it 30-ish percent in Q2 and Q3. And we did start to see improvement in Q4. So our orders are a little bit stronger in Q1 as well. So we feel really good about the Albéa business and the fit with Silgan. And then maybe moving back a step to our legacy dispensing systems business. We saw another 15% growth in Q4 in the legacy business, excluding Albéa. The business continues performing an exceptionally high level. That's been very consistent through the back half of 2020. And we're expecting that to be consistent through 2021 as well. One other item we didn't talk that much about in our closures business was our kind of hot fill plastic closures for sports drinks and ready to drink teas. We did see nice growth in 2020. We were up high single digits in that business again. And that's going to continue again next year maybe not quite at the same rate but we're expecting kind of our traditional growth rate for our hot fill plastic segment.
And then maybe moving to plastics to finish off the conversation. We continue to execute and win in the markets that we're serving in our plastics business. Our performance has been exceptional. We're being rewarded with new business when our team has done a great job of meeting those unique needs of our customers. And I think when you just look at the annualization of the business wins that we commercialized in 2020, and the new business wins that we have coming on in 2021. With some additional growth in our core markets, we feel really good about our plastics business too. So very long answer, Adam, I apologize, but there's a lot to it. And we feel really good about where we're going in 2021 and beyond.
Our next question comes from Mark Wilde with Bank of Montreal.
Thanks. Good morning, everyone. Tony, I had a portfolio question. You've made a number of moves, particularly to expand closures and dispensers in recent years, and this has shrunk the amount of your businesses in metal food cans, just help us understand how you would think about potentially toggling the portfolio back toward food cans over time.
Sure, Mark. So first of all, what you said is true. We certainly have invested a lot in last couple of years in the dispensing system side of our business, particularly in closures. In fact, if you look this year, the metric we watched the most is EBITDA business. In fact, essentially the closure business was the same EBITDA is our can business this year. And based on everything Adam just took you through our expectation right now is that closure will be a bigger business than food cans to us next year. So I think that is a telling difference. That might lead you to think that means that we're moving away from food cans. Anyway, that's not the case, what we've been doing for a long time is taking high cash generation and deploying it in areas where we think we get really good high cash returns for our shareholders.
That has happened to be more in the dispensing area. And we're glad it has been. It's been great. But as we look at the portfolio, we, as I said, we really never feel like we've been in a spot where all of our franchises are as strong as they are right now. Plastic is done a wonderful job of showing themselves to the market in a trying time. And they are being rewarded, as Adam just said in contracts, et cetera. The dispensing systems business already was known to be a premier supplier of that market. And they proved it again. And so they are being rewarded. And we said in our press release, we are making investments there to expand capacity to meet this increased demand.
So we see a lot of growth opportunities on both of those two sides, which again, are the bigger part of what Silgan is today. But with that said, we also have always liked food cans. We know that the market sort of struggles with the organic growth of food cans. We don't. And I'm taking away what's happened this last year, but to us it's been strong cash flow, good opportunity. Yes, given our share in the markets, we are in, acquisitions been a little bit tougher to find. But it's been a great business for us in terms of generating cash and opportunities going forward. And that's how we think about it as we go forward. So I think we would say any one of those areas in rigid packaging, high cash return in our portfolio thoughts going forward.
Okay. If I can just kind of follow on the can business. Is it possible that for you to continue to grow revenues and earnings in food despite of the shift toward smaller and lower price cans over time?
Absolutely. In fact, that's what we've been talking about for a couple years are that and it's a good question. What our feeling was all along that we were going to look at a growth curve for our can business. Because the fitness, the markets that we were in, in a substantial way had been growing. So we'll take pet food or protein as examples. We've got meaningful share on those. They've become a much bigger part of our overall can portfolio. And they've been growing steadily. So we never thought we were going to see a change in direction of growth. We just knew that the mix of our portfolio was getting more and more to growth can market. So we do view there has been growth opportunity in our can business. First off, secondly, now we got to kind of come back to COVID. So that's the historical answer. Now we've hit COVID. And as Adam just went through what has happened is not just about pantry stuffing, et cetera, of course that's there and yet that's going to set a comp for us in Q2. But what's happened since then is continued strong demand for can. People are using cans right now. That weren't using them before. They're being exposed to them. They're realizing that the food is good that it's, many are saying wow, and this is more sustainable. We're helping and our customers are helping to send that message.
So I think on top of what you just said about the mix of our portfolio more to areas that have growth, you also have sort of a new dynamic of people rethinking their view of food can. And so all of that sits here as part of why we like, we like the food cans as before and we like it a lot now.
We'll go ahead and take our next question from Gabe Hajde with Wells Fargo Securities.
Tony, Bob, Adams, good morning. Hope you and your families are well. I had a question that was on the inflation side, and then something that's probably a little bit more pronounced than it was last time we spoke in October. And I guess maybe if you can give us a look at it from two different angles, one is kind of on the raw material front, you guys have called out as being Q1 headwind. And I'm assuming that's mostly centered in the plastics business, but just, how the pass through mechanisms if you can remind us how those work and sort of what you're anticipating maybe for the full year, in terms of overalls on the resin side, and then even in kind of tinplate steel. And then some of your input costs. Again, I know that in metal food, you have some pretty efficient pass through mechanisms for freight and coatings, labor, et cetera, just how well the price costs may shake out by segment.+
Hey, Gabe. It's Adam. You're right. Maybe I'll just end with your last comment, we do have very good pass through mechanisms for literally all those inflationary items that you talked about, particularly in the food can business. So maybe to start with steel for a moment, we are expecting kind of high single digit to low double digit increase in our steel costs for the year. Again, as a reminder as a direct pass through to our customers have that inflation. So that's an item for the food can but not so much for Silgan. You think about coating systems, and freight and some of the other consumable items that we experienced in our steel business. Again, I'd say for the most part that inflation does get pass through to our customers. And it depends upon the contract and the language of the specific contract.
But for the most part, those items get pass through. Switching back to our kind of our plastics business and our closures business that are a little more resin based. We did call out that we had a slightly unfavorable resin impact in Q4. And it is expected to be an unfavorable impact in Q1 given the recent announcements of increases to our primary resin. So our pass through mechanisms for resin, again, it varies a little bit by business, I think you can think of it broadly as they are index based with kind of either IHS or CDI, and those are going to be on anywhere from 30 to 45, day lag, maybe a 60 day lag, depending upon the agreement. So but those costs are all pass through to the market. And the issue that we have in Q4 and Q1 is when you have a significant spike in resin costs, like we experienced in Q4 and then again here in Q1. It just takes time to get those costs pass through to the market.
Yes, the only add I would make that is everything Adam said is spot on. He didn't mean it this way. But let's just be clear that just because we pass through our customers doesn't mean it's not a problem for our customers. So we fight tooth and nail to avoid this inflation. So with Adam gave you kind of the net answer of that. But I just want to make it clear that pass through to customers doesn't help our customers. Trying to keep this inflation down as much as we possibly can is what's important for our customers.
Thank you, Tony, Adam. And then I guess the next question, you gave us a lot of detail, Adam, on the volume front. I'm just curious, specifically in metal food. If you have any insight in terms of customer inventories, I mean, I tried to look at the balance sheet and it doesn't look like inventories are up about that much. Which would kind of coincide with what you said in terms of a lot of what you were making was getting sold through. And so maybe to the extent that production this year may in fact need to be full in quite kind of full out just to maintain and then maybe replenish your inventories and your customers, especially with the increased cost plantings, et cetera. So does that imply that volumes will be up in fact in metal food? Is that what you're budgeting or how we think about it?
Yes, it's a great question. So as we sit here today, we are seeing or expecting a slight increase in our volume year-over-year in 2021. And I think you're right, Gabe. We do not see supply chain replenishment right now of inventory. What we do know is we spend a lot of time with our customers trying to understand what's going on at the consumer level. They're spending a lot of time trying to understand what's going on at the consumer level. We have new consumers for food cans as Tony just said, and what we've seen now we're a year into a global pandemic. We don't believe and our customers don't believe that those cans are sitting in someone's pantry. So those new consumers are actually using food cans. And we've seen an increase. Our customers specifically have seen an increase in the repurchase rate of those new consumers.
So all of that is part of what gives us confidence for 2021. And then I think you hit the right point at the end of your question, Gabe, another item that gives us confidence is that we're not planning for an inventory replenishment to really occur in 2021. But if it does, we're still going to have to make basically the same number of cans. So whether those cans get sold through to a consumer, or replenish inventory somewhere in the supply chain, that's got to happen, at least in late 2021 or beyond, because we think the consumer is using the can at a much higher frequency today than they were a year ago.
We can go ahead and take our next question from Salvatore Tiano with Seaport Global.
Yes, hi, Tony, Adam Bob. Congratulations on a great quarter. So firstly, I want to touch base again, it'll be done the food can volumes and see what are your expectations after 2021? It seems you're saying it's not really restocking that you're seeing in Q4, or what you're expecting 2021. So is it safe to assume that as we look past the year, you will believe your volumes can remain flattish. And then we can return to kind of the regular level that you were presenting your slides with some growth in Pet food, perhaps stability or some declines in other markets? Is that how we should think for 2022 and afterwards?
Sure, again, it's a great question. And I think, I would say we're in early days of 2021. So it's a little odd for us to be talking about volumes out in 22. But I think you've got it right. We think that, at some point, the supply chain does have to be replenished with inventory. And that's our inventory, our customers inventory, retail inventory, distribution, warehouse, et cetera. So we're not expecting that to really happen in 2021. So if there were a slight pullback from the consumer, and maybe, we always say that the restaurant really is our biggest competition in food cans. And if restaurant comp start going up, and the consumer maybe pulls back a bit from the can, there's a significant amount of inventory that still needs to be rebuilt here to replenish the system.
And I would look at 2022. Again, it's early, we'll see what happens. But I would say that's probably the earliest that would really happen with our outlook today.
Okay, perfect. And then a little bit on capital allocation. You didn't make it very clear. You're looking now at acquisitions. Firstly, I wanted to understand a bit what are your limitations with the leverage, what would be your kind of limit if you're looking at any acquisitions? And obviously, if you think you can do something in the first half of 2021, given the seasonal working capital, and then if you can just talk a little bit about the pros and cons of M&A versus buybacks, especially with the free cash flow yield of the stock at around 9%, 10% percent right now?
Yes, good question, Sal. This is Bob. Look, there's really no change in strategy here. We have long been disciplined about thinking about our balance sheet and kind of a 2.5x to 3.5x year end net debt to EBITDA leverage. We're kind of right at the top end of that, as we exit the year, having spent a lot of time and very efficiently integrated the acquisitions that we did in 2020. So feeling pretty good about the bandwidth of the broader organization to take on another opportunity. Look, I think we've never been shy about saying our M&A strategy is very disciplined. Returns matter. Industrial logic matters. So it's all about finding opportunities that fit into rigid packaging for consumer goods that earned the right kind of returns. So if they present themselves, we'd be very happy to take advantage. If they don't then look we've got some room to be patient here and perhaps delever a bit.
We have not typically done large share repurchases unless we were at the lower end of that leverage during periods where the market may get dislocated around the valuation, would we take advantage of that? Sure. But I think our discipline and our patience here is how we've created a lot of value over time. And I don't think we're necessarily going to change that.
Our next question comes from Anthony Pettinar with Citi.
Good morning. With the expectation to grow volumes over a very strong 2020. Can you talk a little bit about your footprint in metal containers? Are you basically running full out? Or do you need to debottleneck or maybe add capacity in any categories given the mix shift you just talked about? And then just, on that expectation for volume growth in food cans, you talked about the change in consumer behavior. Is it fair to say you're seeing sort of investments made by large customers that are reflecting that, either in filling lines or new brands or other investments? I was just wondering if you can give any color there if you can.
Sure, maybe I'll start with the second one first. So, our customers have really been focused on getting full utilization out of the assets that they have to meet the unique needs of the consumers and canned goods at this point. So I think we're starting to have some of those conversations, but really, right now, it's been more focused on utilizing the capacity that's available in the market as it sits today. So and then I think when you come back to our footprint at Silgan, obviously, we had announced our footprint optimization program in 2019. And we've obviously put that on a pause now. I think that, as we sit here today, our capacity is pretty well in line with our customers filling capacity.
So we are experiencing some out of orbit freight and those kinds of things and a little bit of upset to our manufacturing system, but we've done a great job of getting cans where they need to be for our customers to fill and get to the market. So I don't think there's anything that we would change per se in the short term about our footprint, or want to add capacity at this point. But we're working very closely with our customers understanding what their forward looks are as well as they think about their products.
Okay, that's very helpful. And then just switching gears, Adam, can you talk a little bit about the pathway to recovery for beauty in 2021? Just in terms of when that business first got hit; the percentage maybe that you're selling to North America versus Europe versus Asia. Are you seeing any signs of improvement in any region, and sort of the visibility that you have into demand in that market.
Sure, good question. So maybe let's just focus on fragrance specifically and say with travel restrictions that were put in place relatively early in the year of 2020, that did have a significant impact on our fragrance business again, at the time, most of our customers had products going through retail outlets, and a good portion that was in travel retail, others were in shopping malls, et cetera. So with the lockdowns that we've experienced around the world, it's had -- that's really been the driving force and weakness of our fragrance products. As we look around the world, the markets that I got impacted most severely. I think I'd start in Europe first, followed by North America. What gives us a positive view on this is what happened in South America, particularly in Brazil, the largest market in South America.
We saw a very rapid recovery in our fragrance market in Brazil, as they reopen their economy as travel started to occur again. So we feel like we've seen progress in South America, we've seen progress in Asia. And then, again, as I said, so much of our fragrance products a year ago went through some sort of on premise retail channel, we spent a lot of time with our customers and fragrance, talking about ways to reach their consumers. And moving to more of an e-commerce platform, new ideas with samplers, they go direct to consumers. So we've seen a nice uptick in the e-commerce channel for fragrance as well. And then finally, what I would tell you again, I said it a few minutes ago that we are at the height of the pandemic. Our fragrance volumes were down something in the 30% range.
In Q3, we saw a little bit of improvement to that. We saw improvements to that again in Q4. And we feel pretty good that there is going to be a recovery in 2021. We're pushing that towards the back half of the year. And as we said earlier, we're expecting roughly half of kind of the detriment we experienced in 2020 to recover for 2021.
We can take our next question from George Staphos with Bank of America.
Thanks. Hi, everyone. Good morning. Congratulations on the year, everybody. I guess my first question I want to come back to metal food. And I realize we've already covered this ground a little bit. But from our trade research, I mean, what we're hearing is customers are really trying to refill the pipeline, perhaps they can't, because there isn't an availability of capacity, but we are hearing that they are trying to refill. Is there a way that you could somehow index what your shipment might look like this year relative to consumption? I know it's a hard question. I just want to get some qualitative on that. And to what degree your customers are planning on increasing plantings, maybe as another proxy for pipeline refill relative consumption. And then I had a nitty-gritty question on earnings. Thanks, guys.
George, so first of all, you're right, that it's impossible really to answer that question. But we can give you sort of the qualitative on it. I think our customers are hoping to rebuild because they have been running absolutely bare shell and inefficiently. And so I think without doubt, they would like to rebuild. We are not assuming they're going to be able to do that. We are assuming that the market, the pull from the market will be strong enough that there won't be significant refill in 2021. That's our -- that's how we built the thing. So we'll see. What Adam had said is that for sure, we are hearing that the plantings, the contracts for land, et cetera are up. So when you talk to the fruit, vegetable market, for example, the sense is that there is the desire to pack more, whether that is to restock or to sell it is probably yet to be determined, and they are probably thinking it's restock. I think what we know is that there just wasn't enough product last year.
There would have been greater sales for our customers had there been more product. So it's almost impossible to answer. What will the market take when you have more out there? So again, our assumptions that will get consumed, that will go into 2022, with still a need to rebuild. I think the point Adam which I think is a really important one is the reason we're as optimistic as we are about 2021 is, even if that's wrong, and the markets aren't quite as robust as everything, then you'll get that rebuild. That's sort of our view is that there's sort of two ways to get there this year. And as the year develops, we'll know more about what we're thinking for 2022.
Okay. And Tony if I could ask a follow on to that and then my second question, just it could you quantify what the effect of the new volume in Europe? I think you said Eastern Europe is in terms your overall volume outlook for metal food for 2021. And then my other question, just in terms of the earnings outlook for this year. I appreciate that you talked about the benefits, you'll get from pension, I noticed that, inventory was flat 4Q versus 3Q. Not always, but typically it is down. Is there any strategic purchasing there that might give you some inventory gains that we should just have in the back of our mind, for modeling purposes, for 2021. And then also I think if you could help us just what's the outlook on depreciation for 2021 recognizing there are a lot of things that go in to FX, et cetera. Again, so that we can bridge from free cash flow to earnings. Thanks, guys, and good luck in the quarter.
Thanks George. So on the, I think on the Europe piece, what we want to do is convey to you that we are seeing global customer expansion and taking advantage that with our European business. I don't think traditionally we have given that kind of level of detail of particular customers gains on that. So I think we'll stay away from that. It's important enough that t's a whole new production sale worth mentioning.
Fair enough.
Yes. George, on the inventory line, I think what may be skewing your, what you're seeing is you got to remember that you've got incremental inventory from the Albéa business in this fourth quarter that you didn't have in the prior year. So you're getting a --
No but sequentially, Bob, usually inventories declined. So that's why I was comparing 4Q versus 3Q.
Actually, I don't -- I think that was true last after we did some inventory reduction. Q4 would normally not be, it's actually not a very predictable year in that regard, sorry predictable quarter. It kind of depends what we're getting ready for the year before that. So if there was ever a volatile quarter on inventory movements, it'd be Q4.
Okay, but it sounds like there's not much in the way of inventory gains for next year. So that's nothing we should really worry about.
Yes, that's correct
We'll take our next question from Arun Viswanathan with RBC.
Great. Thanks. Good morning. Congratulations on the great performance. I guess first off, I want to ask about the margin performance, nice drop down of the sales gain into the incremental margin side, obviously, that's going to be affected by the pass through of raw materials in 2021. And so, percent margins will likely come down, but could you just, maybe just give us an outlook on maybe the temp costs that you gained in 20? And then how much of that is maybe coming back in 2021? And then maybe also freight, if those would impact your incremental margins. Thanks.
Well, there is a lot to that question. So I mean, if you look at 2020, margins were really good for a couple of reasons where you had a heavy increase in volume and a system that really couldn't be expanded cost wise for that. So you basically filled it up. You also, as Adam said, and this is -- when you guys, when you're looking at Q2, I want to warn you again, particularly for our can business, it's a tough com in Q2 right because Q2 was if there was a pantry stuff in my language that happened in mostly in Q2, but the rest of it is more change of behavior. So we're going to cycle that in the can business side. But also as we said in that quarter, we basically -- demand was so high across the board, and we had inventory in that quarter. So we kind of -- we got the benefit of running all out and liquidating inventory.
And so that's sort of a unique thing that happened in 2020 that we can't replicate in 2021. So I think what we're here saying to you is we see really good growth opportunities in our business kind of across the board. We've invested in those growth opportunities at returns that we think are really good. We're not necessarily saying that the absolute margin rate is going to be recurring in the next year. You're going to get some growth. In some cases, that rate may come down some because of the reasons I just said. But in any case, we see it has been very good return on the capital being spend.
Okay, thanks. And then maybe if you could just address the freight and the temp costs. And then my other question was, have you seen? I know that M&A isn't necessarily a focus right now. And maybe deleveraging is more important. But have you ever seen a rise in valuations for certain businesses? And is there any situation where you'd consider getting larger in metal container? Obviously, in North America may be difficult. But is there any situation where you'd consider getting larger metal container elsewhere in the world?
So, Arun, maybe just to quickly hit the first part of the question back to the freight costs, and another temporary cost in 2020. I think we talked a little bit about freight costs on our last call that freight availability was a little bit of a challenge, particularly around the holidays, and in Q4 and 2020, that really has persisted into the first part of the year. So freight costs are up. Again, as Tony said, we fight like crazy to make sure we get the lowest absolute cost in our freight because it does get pass through to our customers for the most part. Temporary costs, I'm going to say COVID related costs, I mean we did have COVID related expenses in 2020. We've essentially assumed the same level of COVID related expenses in 2021. So it'll be flat year-over-year. And really just not much to think about in my opinion from that perspective.
And on the cash, well, so I think there are sort of two things you ask there. First of all, to be clear, our priority has always been acquisition first. We think that that's where we create the most value. If we look back on kind of value created and including even this year, even though Albéa is underperforming, we still feel really good about shareholder value created through acquisition. So that I think you kind of compare that to debt reduction. I think we still put the priority to acquisition. Now debt reduction can be sort of a temporary place where you put it, it's more if you do return to shareholder that's a little bit more permanent decision. But by the way, you'll notice in the fourth quarter, we did buy back shares so we also do view that as we always do this sort of a balance and multiple strings, we pulled to create value for shareholders. So but to your main point, we still see acquisitions really interesting. We see values, as Bob said that the opportunities are out there and so we continue to look and think about that. You're asking specifically about food cans, and we'll be doing a food cans like we would never first of all will talk about any specific opportunities, et cetera What I would say on food cans, we kind of said before, which is we like the food can business.
We think it's got great free cash flow characteristics. They're steady markets. It has a wonderful the best sustainable argument out there, if you've got product that is packed at peak of freshness, never needs any more energy after it's packed to protect it for years of time. It is the most recycled package in the world. So it's got a great argument against today's concerns for the environment. So we think it's a really good product. Now we understand quite clearly you guys have made it really clear equity markets struggled a little bit with growth characteristics of business. So we understand that. And that's certainly something that we pay attention to as well. To us free cash flow, which we then deploy to get growth for the business in the future is to us actually, the better answer.
I might pause here and say that we have had a 10.6% compounded increase in our EPS over the last decade, even though we're slow, boring, steady can business. But in any case, we do understand that that organic growth matters. And so we think about that as well. And with all that, we would say that any one of our businesses meets the criteria right now of being an interesting franchise to build upon. I wouldn't exclude any of them and was always with us price is going to matter. And the free cash flow we can get them is going to matter.
We'll take our next question from Ghansham Panjabi with Baird.
Hey, guys, good morning. I guess going back to the cost side, and just given the inflation and raw material costs across the board, how should we think about that impact on working capital? I mean, clearly you sold out of inventory last year and costs are rising et cetera? Is that going to be a negative draw as relates to working capital? And then related to that, for some of the larger contracts within metal food, do you have to cycle through any sort of CPI index from last year that may be deflationary relative to inflation this year?
Yes, so, Ghansham, and I'll take the working capital one here. Yes, so no question, we benefited from some liquidation of working capital in 2020. Obviously, that won't recur, right, so you're not going to get that same benefit going into next year, which is a large part, while we're sort of pointing to a very stable or similar free cash flow on a year-over-year basis. I would expect that there's probably a little pressure from inflation to on working capital. But all that is in the context of being built into the forecast that we've got out there.
And then, Ghansham, on your question for kind of indexed pass throughs for labor and maybe other items, those are all embedded in our numbers. So if there is disconnect between what's actually happening in the market with inflation was a deflationary pass through. That's all embedded in our outlook going forward.
Got it. And then if I could on the food service side of your metal food cans exposure. Just talk -- take us through the sort of the trend line for volumes. I assume that just given the disruption associated with COVID; there were some initial destocking, et cetera. Where are we on inventories in that channel? Have you started seeing any sort of improvement as we cycle into 2021? And just remind us how big food service specifically is for metal food? Thanks.
Good question. So when you think about our food service business and now we're talking about our big number in cans primarily with for the tomatoes market. We saw a significant slowdown. And really starting in Q2 and certainly in Q3 for that product. We're not expecting any significant recovery of volumes until we get to the pack season, really probably in Q3 of this year. So the cadence, well, you won't hear much of our conversation around number 10 cans, really until we get to the pack volume later in the year. And then as a percent of the total, I'm just trying to do the math. It's a very small percent of the total, but they're very valuable cans. So from a mix standpoint, it does have a mix impact when you're talking about the revenue line for the overall business.
We will take our next question from Kyle White with Deutsche Bank.
Hey, good morning. Hope everyone's doing well. I wanted to go back to Albéa in regards to beauty and fragrance and you touched on this a little bit. But I'm curious do you need to see a recovery here in duty free retail to really drive meaningful improvement in the volumes? Or can you get a recovery from other retail channels like digital, which you talked about a little bit? And curious as well what are the implications? Does higher ecommerce have for you any kind of mix impact or margin impacts of that retail channel shifts?
Sure, good question. As we think about it, no, we don't need retail recovery to achieve what we are planning for 2021 with our expectation for the fragrance market. So I think what's really interesting is that would likely be outside to, as we talk about, digital efforts in ecommerce, that actually might be a benefit to Silgan. And I think one great example for you would be the sampler packages that our customers are now sending out into their, to the market for their consumers that have four or five small samples of different fragrances that you purchase. And then you pick which one you like you send it back in and they send you a full bottle. So actually, there is some chance that ecommerce platform may increase our overall volume in the fragrance business. We're, again very early days to that we're seeing some traction and some benefit. But if you think about those small samplers, that is a smaller dispensing system or a fragrance sprayer than what's on the full bottle.
But we're going to sell multiples of those versus the one item for a full bottle of fragrance. So, early days, we'll see what happens. But we don't need a full travel or retail recovery to achieve what we put forward in our fragrance markets, as we sit here.
Got it and then question on the guidance, you expanded the typical EPS range by about $0.05, I assume it's due to all the kind of uncertainty around the pandemic here. But I wanted to ask and see if there's anything particular driving that decision. Just curious as closures and plastic containers becomes a larger portion of the business. Does that mean you have kind of less predictability relative to what the food can provide in terms of certainty for earnings going forward?
I think it's just what you said. It's really there's just so many moving parts, we're coming off of a pandemic, at some point, you guess when we're -- there's just -- there's a lot of unknown here. And so a little bit wider Guidance made sense to us.
We'll take our next question from Jeff Zekauskas with JPMorgan.
Thanks very much. Are the terms of trade with your food can customers improving given the increasing tightness in the market and the strength of your volumes?
Yes. So just as a reminder, the bulk of our food cans business under long-term contract. The kind of the historical story of Silgan, the deal with our customers, et cetera is consistency, predictability, et cetera, so that our customers get that, and we get the benefit of that. So the answer is no. And I would not necessarily expect that if a new piece of business came up, perhaps that would be obviously, you'd have to say, I don't have the capacity, I need to do something. But short of that, I wouldn't expect any kind of wholesale change. We're under contract, and we honor our contracts.
And in the third and fourth quarter of 2021, can you grow your can volumes given that you operated full out in the third and fourth quarter of 2020?
So I think, Jeff, as you look at Q3 that was pretty well fully utilized. And that's our largest quarter from a volume standpoint because of pack related items. So there is some chance is we've talked that in Q1 and Q4, that's where our existing capacity or where available capacity actually exists. So there's not much but if it's going to happen, it's going to be Q1 and Q4.
We'll take our next question from Daniel Reza with Jefferies.
Thank you for taking my call. How should we think about the rationalization costs as well as working capital in 2021 as compared to 2020?
Sure, I'll take the working capital one. So we benefited obviously you saw a nice improvement in the free cash flow versus what we were originally guiding to. That was largely because of the liquidation of working capital was a big slug of that, and particularly as cash receipts kind of came in very quickly in the back half of the year. So that clearly won't repeat, or we're not expecting it to repeat right now. So that's just on the surface year-over-year, that's a little bit of a headwind. And then given some of the inflation that we talked about raws, we could see a little bit of a detriment there. But overall, very comfortable with where the working capital is likely to be relative to our very $380 million guide for free cash flow next year.
And then over to rationalization cost. As we sit here today, again, we've got a relentless focus on getting costs out of our manufacturing system. But I would just tell you, given all the conversation today and our plans for 2021; we don't have any rationalization projects that we are looking to implement right now in 2021, we put a pause on the footprint optimization in the metal container business pack that we announced in 2019. But again, that is still on pause, and we are continuing to evaluate the needs of the capacity versus our customer requirements.
All right, thank you. I appreciate the color. And they just one other question then. You mentioned M&A and how it looks. So just wondering is there an upper limit on debt level? When you're looking at potential acquisitions? I mean, for the company? I mean, given your free cash flow generation, I would think it would be relatively high.
Yes, look, we've long been disciplined around that 2.5x to 3.5x range. We've ventured outside of it on a couple of occasions, more recently, in 2017 and again in 2020 when we did the two dispensing acquisitions. I'll remind you, they were relatively large acquisitions at $900 million right. So that gives you some order of magnitude. And each of those took us into the kind of low to mid 4s at the point of acquisition, with a pathway getting back into that that corridor range pretty quickly. In this case, we're there inside of seven months. So I don't know that we have a lot of appetite to go significantly beyond that. But obviously, depending upon the opportunities that exist, we would have to consider it if the returns were there.
We'll take our next question again from Adam Josephson with KeyBanc.
Thanks everyone for taking my follow ups. Tony or Adam, can you just talk about differences as you see them between the US and European food can markets in terms of growth and return profiles, given that you're in both markets, albeit much smaller in Europe than in the States?
Well, I can try a little on that, I think, our businesses are quite different. Our European business is an Eastern focused entrepreneurial, small plant and our North American businesses, of course, with the leading customers, highly efficient system, et cetera. So they're different. We certainly have higher margins, et cetera in our US business as a result of that. And that's true from the day we owned Europe. I think growth is so food cans have a higher penetration rate in Europe than they do in the US. It's a more used package in Europe. And so it's therefore little bit more stable, the American consumer over the last couple of decades has been more and more eating in restaurants as a percentage. And so there were other competing factors that happen more in the US that change. And for that very reason, the US had a much bigger change when COVID came along, because there were all these other alternatives and some of those evaporated.
So I think you've seen more growth around COVID in the North American market than in Europe. I think you generally have seen a somewhat steady Europe if you talk to the what used to be historic core can business so vegetable, for example, a little steadier throughout Europe in that side. I think the US has a couple growth areas that have been really impactful, like pet food as an example, protein that have been a little stronger in the US. So you got to, it's different markets, et cetera. But they're not wildly different results that come from that if you had a similar kind of business in Europe to our type business in North America.
Okay. I appreciate that Tony. On ESG and you mentioned that the favorable recyclability profile of this deal food can which is it's obvious, but when I talked to investors about Silgan, and the topic of ESG, it's often you don't disclose an update on your website, and you don't have a sustainability report and you perhaps don't mark it yourself as ESG friendly to nearly the same degree, as do some of your competitors, and we wondered how you think about that issue, how you think it's affecting your valuation and your perception among investors?
Great question. I think I agree with what you said. I think we thought truth would win and actually being a better solution was what mattered. I think slowly, we're learning that those that tells a better story has won in this game thus far. So we absolutely believe our answer is as good or better than anybody's out there. And I think we have been too quiet about that. So we will do a sustained ESG report sustainability report specifically on that. And so we like everyone we will get in that game. I just like what's not like everyone's we have a much better and stronger message once we do get in that game.
I appreciate it, Tony. And Adam, just one last one on resin, can you talk about what your annual resin buy is and how much of that is polypropylene versus polyethylene versus PDT and precisely what earnings drag you're expecting in 1Q as a result of what we've seen in polypropylene and polyethylene and PDT for that matter?
Sure, Adam, I'm not going to give you specific numbers, but I would say our single largest resin type we buy is polyethylene. And then we've got polypropylene, second, and PG third for our business. And we've got a variety of other resins and niche resins that we purchased for the business. So I think as we then forward into our guidance for Q1, the resin that's seen the most volatility is polypropylene followed by polyethylene. So it's just, we use polypropylene and all three of our kind of resin based businesses. And polyethylene is also used in all three of our resin based businesses. So I don't know what more I can provide beyond that. It's just that we will deal with the inflation as it comes in. We've got mechanisms to negotiate that and work that through with our customers in a timely fashion. And unfortunately in Q1 is the negative for the lag effect for our business.
We'll take question from Salvatore Tiano.
Yes. Hi. Two quick follow ups. Firstly, last quarter, you're talking about the decline in Albéa biz meaning that probably you would see zero EPS accretion this here. Just wanted to confirm if they added or actually subtracted there any earnings per share in 2020?
Yes, as we said on the last earnings call, we were not expecting much. So one of the pleasant upsides to our guidance was the $0.02 of accretion that we got with the Albéa business in Q4. So it was $0.02 accretive in the quarter.
Okay, perfect. And the second the excuse me, and the other one is, I just say yes or no. Would you consider issuing stock actually for an acquisition that would be a little bit larger than usual?
Yes, look that we've talked about this on other calls as well, we've -- it's obviously our most expensive cost to capital. So we kind of covered that. We've never done an acquisition where we've included equity. To be fair, we've contemplated one back in 2011 I guess it was. So look, I guess I would say we would never straight up say no. But it would have to be pretty compelling and viewed as valuable in the transaction. Otherwise, why particularly given where debt capacity and interest rates are today, why we would give away that expensive cost to capital.
We'll take our next question from George Staphos.
Hi, guys. Thanks for taking the follow on late. Sorry for a world peace type of questions but I can't wait. Well, no, it's really more of a compliment. I mean, again, plastics has done a phenomenal job over the last whatever number of years of getting the margins back to levels that we typically would have associated with specialty packaging margin. So kudos to you and your entire team and we know that the company has worked on realigning capacity; adding new investments, perhaps most importantly, the service model, which is gaining new customers. If we go back, whatever it is, 15 years ago the business had changed radically. Silgan was a really good high performing, use a different term, plastic packaging company, new entrant and so on change the business model and such as to do all of that.
What gives you the most confidence that the new plastics for Silgan? That's my phrasing not yours is more has a bigger moat around that business in a long term, profit performance and trajectory. Thanks, guys. And now, I mean, a good luck in the quarter. See you later.
Great. Thanks, George. And thank you for the compliment and you're right that the plastics team has done a phenomenal job with the business. And it's truly is more than what you see. And this goes to the answer your question, and I appreciate that you caught it exactly, which is the service model to use your word but really the focus on customers and needs of customers. And just a relentless pursuit to take care of what the customer absolutely has to have is really a hallmark now of that business, we think the hallmark of Silgan. But I would have to honestly say right now that team probably is engendered as much as probably any of our teams. And so that is the moat. We don't particularly have unique technology, we don't particularly have unique assets running our products, what we have is a really good capability to meet the needs of our customers who are launching lots of products, and they need it to be right and on time. And I've been as tough as anybody in those five years you are referring to of saying we weren't there before, that we weren't a franchise business.
And so I think it's incumbent on me now to say I absolutely think we are a franchise business. I think we are excelling above everyone else in that. And that's the moat. Now, your question slightly broader than that. If you ever in a leader of anything sit back in your laurels and think now you've got a moat and you're good, you're going to get beat. So we got to keep working. And we got to keep swimming and finding ways and new things and new markets and new capabilities and new ways to impress our customers over and over again. And that's the message to all of our teams is that's what it takes. So, yes, we're not here to tell you. We've got it now. And it's done. And it's lockdown. But we are here to say that we think the moat is around service and capability to customers. It's not easy to create and build. And so we right now as customer contracts are coming in, volumes coming in all the evidence say that something has changed.
All right. It appears there are no further questions. I'd like to turn the conference back to Tony Allott for any additional or closing remarks.
Great. Thank you. And thank you all for your time today and we look forward to talking about our first quarter of 2021 late in April. Thank you.
That concludes today's call. Thank you for your participation. You may not disconnect.