Silgan Holdings Inc.

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Good day, everyone, and thank you for joining the Silicon Holdings fourth quarter and year-end 2021 earnings results call. Today's conference is being recorded. At this time, I'd like to turn the call over to Kim Ulmer, Senior Vice President, Finance and Treasurer. Thank you. Please go ahead, ma'am.

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

Great. Thank you, Kim, and welcome everyone to SILGN's 2021 Year-End Earnings Conference Call. With 2021 in our rear view, having navigated the continued complexities of the pandemic, managed unprecedented inflation and supply chain disruptions, and an eye to an improved future, I want to thank the entire SILGN team Point out a few of the 2021 highlights and then provide a brief preview of 2022. Bob will then review the financial performance for the full year and the fourth quarter and provide more details around our 2022 outlook. Afterwards, Bob and I would be pleased to answer any questions. I'd like to first express my gratitude and respect for the entire Silgun team and what we have accomplished together, including delivering another year of double-digit adjusted EPS growth. a 34% increase in adjusted EPS for the fourth quarter of 2021 versus the prior year record achieved in 2022. And most importantly, we've also achieved a 10-year compounded annual growth rate for adjusted earnings per share of over 10%. We've accomplished this performance as our employees have repeatedly demonstrated their strength and commitment and the power of our performance-based culture as our employees have done everything possible to ensure our ability to continually supply our customers in a timely, efficient, and complete manner. As a result, we are able to achieve several important milestones in 2021 and are well positioned for further growth in 2022. As you saw in the press release, 2021 was an exceptional year for the company and some select highlights would include achieving record financial performance including the following. Revenue improved to $5.7 billion driven by strong volumes. Adjusted net income per diluted share of $3.40, up 11% versus the record prior year. Free cash flow of $466 million, or $4.19 per diluted share, each a new record for the company. Improved our capital structure to facilitate further growth opportunities. In addition, we increased our cash dividend for the 17th consecutive year. We also invested in several growth initiatives, which positions us well for the future, completing the strategic acquisitions of Gateway, UNICEF, and EasyTech, expanding commercial supply for a major pet food customer expansion in Eastern Europe, investing in operational improvements to drive cost out and improve customer service levels. Our business franchises are poised for further growth in 2022 as we integrate the new acquisitions, invest alongside core customers, and continue to improve upon our operational excellence. Therefore, as Bob will discuss in more detail, we are providing full-year guidance for adjusted earnings per diluted share in the range of $3.80 to $4 per diluted share. The midpoint of this range represents a 15% increase over the record performance in 2021. Our free cash flow is expected to be approximately $350 million as we anticipate higher working capital, increased capital expenditures for growth investments with core customers, and higher cash taxes to more than offset the earnings growth provided. With that, I'll turn it over to Bob.

Thank you, Adam. Good morning, everyone. As Adam highlighted, demand for our products remains strong. as we saw year over year volume improvement in our dispensing and specialty closures and metal container segments. As importantly, each of our businesses did an outstanding job managing unprecedented inflation through unwavering price discipline and operational improvement, yielding significant cost reductions across the businesses. In addition, we completed three strategic acquisitions and are making good progress on their integration. As a result, in 2021, We delivered adjusted earnings per diluted share of $3.40. We delivered free cash flow of $466 million, a significant increase over the prior year of $384 million. On a consolidated basis, net sales for the year were $5,680,000,000, an increase of $755.2 million, or 15.3% over the prior year. This increase was the result of higher net sales across each of our businesses including the pass-through of higher raw material costs across all businesses and favorable foreign currency translation of approximately $40 million. We converted these sales into adjusted income before interest and taxes for the year of $598.7 million after adjustments of $15 million for rationalization charges, $5 million for costs attributable to announced acquisitions, and $2.6 million for the purchase accounting write-up of inventory. versus $551.2 million in 2021 after adjustments of $16 million for rationalization charges, $19.3 million for cost attributable to announced acquisitions, and $3.5 million for purchase accounting write-up of inventory. The increase was primarily a result of higher unit volumes in dispensing and specialty closures and metal containers, a more favorable mix of products sold, and the pass-through of of other cost increases in dispensing and specialty closures, strong operating performance across each business, the benefits from acquisitions completed in 2020 and 2021, and higher pension income, partially offset by the lag pass-through of higher raw material costs, primarily resin, higher costs associated with labor and supply chain challenges, lower volumes in custom containers, and a less favorable mix of products sold in metal containers. Highlights of adjusted segment income for each of our segments is as follows. Adjusted segment income in the dispensing and specialty closure segment for the full year of 2021 increased $35.9 million to $269.5 million, primarily due to the inclusion of recent acquisitions, including the full year effect of the Albea acquisition completed in 2020. Year-over-year volume growth, a more favorable mix of products sold, Strong Operating Performance, and the pass-through of other cost increases. These benefits were partially offset by the unfavorable net impact from the lag pass-through of significantly higher resin costs, higher costs associated with labor and supply chain challenges, and foreign currency transaction losses. The unfavorable net impact resulting from the lag pass-through of resin was approximately $10 million after netting approximately $15 million of price recovery later in the year. Adjusted Segment Income in the Metal Container Segment was $263.6 million for the full year 2021, an increase of $7.1 million, or 2.8%, versus the prior year, as the benefit of approximately 4% higher unit volumes, higher pension income, and higher foreign currency transaction losses in the prior year were partially offset by the negative impact from operational inefficiencies, higher costs associated with labor and supply challenges, and more smaller cans sold. Adjusted segment income in the custom container segment increased 4.5 million or 5% to 92.7 million for the full year of 2021. This increase was primarily attributable to strong operating performance, cost control and lower SG&A costs, partially offset by lower volumes of approximately 10% as compared to record pandemic volumes in the prior year. For the fourth quarter, We reported earnings per diluted share of 76 cents as compared to 54 cents in the prior year quarter. Earnings per diluted share were adjusted by 3 cents in 2021 and by 6 cents in 2020, resulting in adjusted earnings per diluted share of 79 cents in the fourth quarter of 2021 versus 60 cents in the same period a year ago. Net sales for the quarter were $1.44 billion, up $212.7 million versus the prior year, driven primarily by the pass-through of higher raw material and other manufacturing costs, higher volumes in dispensing and specialty closures in metal containers, and a more favorable mix of products sold in the metal container and custom container segments, partially offset by lower volumes in custom containers and unfavorable foreign currency translation of approximately $10 million. Adjusted income before interest and income taxes for the fourth quarter of 2021 increased by $19.2 million to $133.3 million after adjustments of $2 million for rationalization charges, $900,000 for costs attributable to announced acquisitions, and $1.7 million for the purchase accounting write-up of inventory. The increase in adjusted income before interest and income taxes was primarily due to higher volumes and a more favorable mix of products sold in dispensing and specialty closures and metal containers, Strong operating performance across all businesses, higher pension income, and the benefits from recent acquisitions. These gains were partially offset by lower volumes and a less favorable mix of products sold in the custom containers business, higher costs associated with labor and supply chain challenges, and the unfavorable impact of the lag pass-through of higher resin costs in dispensing and specialty closures. Turning now to our outlook for 2022, Our estimate of adjusted earnings per diluted share for 2022 is a range of $3.80 to $4, with the midpoint representing a 15% increase over record adjusted earnings per share of $3.40 for the full year 2021. Reflected in our estimate for 2022 are the following. Segment income in the dispensing and specialty closure segment is expected to increase significantly over the prior year, primarily due to the inclusion of a full year of the acquisitions of Gateway and UNICEF, the cost pass-through benefits of a less volatile resin market, more efficient operating performance, a continued recovery in the beauty and fragrance markets, and volume normalization for hygiene and cleaning products. Segment income in the metal container segment is forecasted to benefit from improvements in operational efficiencies, cost reductions, the pass-through of other inflation and the inclusion of a full year of the EasyTech acquisition. These benefits will be partially offset by lower volumes. We're expecting segment income in the custom container segment to benefit from anticipated higher volumes as a result of a return to normal volume levels for hygiene and cleaning products, continued growth in pet food and manufacturing efficiencies. In addition, we expect interest expense to increase versus 2021 largely as a result of higher average outstanding borrowings as a result of the recent acquisitions and higher weighted average interest rates. We currently expect our tax rates to be approximately 25% as compared to the effective rate of 23% in 2021. This estimate does not contemplate the effect of any tax law changes that may arise during the year. Also, we expect capital expenditures in 2022 to be approximately 280 million, up from $232 million in 2021 as a result of various growth opportunities for core customers and the impact from the recent acquisitions. We're also providing a first quarter 2022 estimate of adjusted earnings in the range of 70 to 80 cents per diluted share as we include benefits from the recent acquisitions, improved operational efficiencies, and anticipated lower resin costs offset by volume declines in the metal container and custom container segments as compared to the prior period. The decrease in volumes for metal container is due to the pre-buy activity in 2021 ahead of significant raw material inflation for 2022. The decrease in volumes for custom container is due to strong pandemic-driven volumes in the first quarter of 2021 that are not expected to repeat. These estimates exclude rationalization charges, costs attributable to announced acquisitions, and loss on early extinguishment of debt. Based on our current outlook for 2022, we are providing an estimate of free cash flow of approximately $350 million as earnings growth is offset by a sizable headwind for working capital, higher CapEx, and we have attractive growth opportunities with core customers and the one-time cash tax benefit of $25 million related to the accelerated depreciation resulting from the recent acquisitions that will not repeat. The working capital headwind is largely the result of the significant ongoing inflation in raw materials. That concludes our prepared comments. Before I turn it over to Alan, we would ask you that you limit your questions to one question and one follow-up. So, Alan, I'll now turn it back to you to provide directions for the Q&A session.

Thank you, sir. To ask a question at this time, please signal by pressing star 1 on your telephone keypad. Please make sure that your mute function is turned off to allow your signal to reach our equipment. And as I said, please limit yourselves to one question so that we can take as many questions as possible. We'll take our first question from the line of George Staphos with Bank of America.

Thanks very much. Hi, everyone. Good morning. Thanks for the details. My questions will be around volume. if possible can you give us a view on volume for the fourth quarter by segment excluding acquisition effects and relatedly as we look to 2022 what is embedded roughly in your volume outlook x acquisitions my second question is how comfortable are you in particular that both Custom Container and DSC can grow through some of the post-COVID De-stocking and other headwinds, you mentioned hygiene and cleaning volumes returned to more normal levels for custom containers. What gives you the comfort that you'll be able to do that in both segments? Again, X acquisitions. Thanks, guys.

Sure. Good morning, George. Touching on the fourth quarter volume, I'll just go through each of the operating segments. Unfortunately, I'm going to give you the total for dispensing and specialty closures first, and then I'll give you what you asked for in the organic volume. So volumes were up 15% in dispensing and specialty closures. Organic volume growth of 8.5% in Q4. Moving to metal containers, volume was up 3% in the quarter. No acquisitions really had an impact there. And then custom containers, as you saw in the press release, volume was down 12% in Q4. As we now turn the page and talk about 2022 and what's embedded in our guidance, I'll go back to dispensing and specialty closures. Organic volume growth excluding acquisitions, we're targeting 4% in our guidance for 2022. For metal containers, I'll remind you, you saw in the press release that there was a little bit of pre-buy activity. We'll be cycling over that in Q1 of 2022. We've also anticipated a normalization of the vegetable pack. We had significant growth in 2021 in the vegetable pack for the metal container business. We're normalizing that back to pre-pandemic levels. So that being said, we're expecting Food can volumes to be down in the 4% to 5% range. And then over to custom containers. Again, we're cycling through the end of what we'll call the surge of the pandemic-related buying around specific products that we manufactured for the most part to support customers for the pandemic. We've got one more quarter of that in Q1 where we have elevated volumes that we'll be cycling over. and even with that we're anticipating volume growth in the custom container business of between two and three percent for 2022. Your second question is just now how do we feel about those growth numbers that I just provided particularly for dispensing and specialty closures and custom containers. I feel really good about dispensing and specialty closures to start there first. We've got a terrific food and beverage business that continues to be a very stable provider of growth across our franchise and we're anticipating continued growth there as we have seen in the past. We are also experiencing now late in Q4, we saw a normalization of volumes or at least the beginning of a normalization of volumes for the hygiene and home cleaning products. So some uptick versus where we were hasn't completely normalized yet, but we believe it will in 2022. and then finally George for DSC. I tell you fragrance and beauty has fully recovered to kind of our pre-acquisition, pre-pandemic volume levels. Our order book is incredibly strong all the way through Q1 and we're at the point now where we, you know, you heard Bob talk about our opportunities for additional capital expenditures. We are looking at additional capacity to support the growth of our fragrance and beauty business. That's how far that has recovered at this point. And I'll stop talking in a second, but I'll give you the custom container answer for 2022. What I tell you, this is a 15% EBITDA business. That's what we were targeting for many years. What happened over time is we made improvements to the business. We created a stronger, more profitable mix of business. The pandemic happened and what that allowed us to do was to fill all of our assets on a very low cost structure base. And as some of that pandemic volume reverts back to norm, we do believe we'll be able to take that capacity and sell it into the market at more favorable margins than what we've historically had in the business. And then we've also been winning in the market. That has not stopped through the pandemic. We do have new commercial awards. that are coming on stream in 2022, and we expect to have further wins in 2023 and beyond. So long answer for you, George, but I think I captured everything you asked.

No, Adam, I really appreciate the rundown. I'll turn it over. Thanks for the comment.

Sure. All right, next question will come from the line of Adam Josephson with KeyBank.

Thanks. Good morning, everyone. Happy New Year. Bob, just a couple questions about your guidance assumptions. Can you help me with pension income compared to last year, price cost, what magnitude of benefit you're expecting versus the $10 million drag last year, acquisition accretion, better operational performance, just given the supply chain and labor difficulties you had much of last year. Just help walk us through the $0.50 expected growth. including any below the line items if you don't mind.

Yeah, so as we said relative to the acquisitions, we expected that we would see 10 to 12 cents accretion when we gave you a preliminary guidance back at the end of the third quarter. I think we're running right in line with that. There may be a little bit of upside opportunity as we continue to look to commercialize new business wins. But that's what's forecasted in our EPS guidance for 2022 as we sit here today. Price-cost side of things, as we said, we're running about $10 million negative on the resin side. It's about a $25 million resin cost issue, and we've put through some out-of-market price increases. that our customers have taken that we've offset about $15 million of that. So we should continue to recover that in next year. That's in our guidance as well. And then you heard the volume outlook that Adam laid out, and that's sort of the rest of the story to get us to the numbers for next year. Oh, yeah, I'm sorry, and you asked about pension as well. So pension will be about a $5 million headwind on a year-over-year basis. and that's due more to do with our funded status being at about 128% at the end of the year. So we very consciously made the decision to de-risk that plan a little bit. And so we're moving our asset portfolio to be a bit more weighted to fixed income versus historically more weighted to the equity side. So that change will cost us about $5 million year over year in the income side.

Thanks, Bob. And just one other guidance related question. So the 1Q guidance implies a modest year over year decline, yet the full year guidance implies 50 cents of growth. And I know you had the buy ahead in 4Q, but is there anything else besides the buy ahead that will come out of 1Q that is influencing the year over year rate of change? In other words, why such significant growth in the latter three quarters compared to a modest decline in the first quarter?

Well, part of what you have is a comp issue, right, to the prior year. So you had really strong pandemic-driven volumes across the board in the prior year that, you know, as Adam laid out, we're expecting that to normalize for 2022. So that's probably the big driver.

Got it.

Thank you.

All right. The next question will come from the line of Gabe Hodge with Wells Fargo.

Good morning, everyone. I hope you and your families are well. My first question, I apologize in advance, may be tough to talk about open mic, but just I'm looking at kind of some transactions that have happened in the market within the past six months or so on the metal container side. And just curious your perspective, you know, either what the market might be missing in terms of how valuable your business may be worth. And I appreciate there's a difference between strategic value and sort of ongoing running the business. But just how that could influence your kind of thought process going forward.

Yeah, thanks, Gabe. Look, I think this is the message that we've been trying to send for some time now, right? That the food can business is not what everybody thinks it is from a negative perspective. It does perform pretty well through all cycles, quite frankly. It generates a lot of free cash flow and I think what we're seeing is in more private transactions that value is being ascribed to those businesses. So, you know, we'll continue to beat the drum, continue to improve performance and hopefully the equity markets, you know, begin to see that. I think that's a big part of Adam's opening dialogue about the performance, you know, in the 10-year CAGR and improvements here. That's driven, you know, A lot by acquisitions, but those acquisitions are funded upon the strength of that food can business. So, you know, we don't find anything that's real surprising about those valuations other than the public market perhaps not getting all the way there just yet.

And maybe just one other thing I would add to that, Bob, I agree with everything you said. I think, you know, as we think about food can volumes, again, on a full year basis in 21, we were up 4%. on top of the 14% growth that we experienced in 2020. What we just said about our 2022 guidance is we believe now volumes have normalized, right? For the most part, everything normalized back in 2020. The peak of the pandemic occurred in 2020. Vegetable peak was in 2021. So we believe 22 is a normalized year and that year is going to be double digit volume increases over pre-pandemic levels. And we feel really good about the line of sight we have into those volume levels that are, again, up over 10% versus pre-pandemic levels.

All right. Thank you, guys. And then, not to try to pin you down too far, but maybe some other building blocks on guidance. If I sort of back into the midpoint at 390, can you give us, I mean, I think the implied EBITDA might be around $975. If you can kind of confirm that or help us, again, maybe with building blocks as it relates to what you're expecting for DNA and or interest.

Yeah, you're pretty close on the EBITDA side. Interest will be up a bit on a year-over-year basis, and that's largely the acquisition and and some increase in weighted average rates.

Dina?

Bear with me one second.

You're forcing him to go to the book, Gabe.

Yeah. I just with the acquisitions, I apologize.

Yeah, let's just come back around to that one offline if you don't mind.

No worries. Thank you.

All right.

We'll next go to Salvatore Tiano with Seaport Research Partners.

Yes, and congratulations on having a strong year. My first question is about the growth investments you mentioned for some core customers. Can you provide more color both in which areas besides beauty and fragrance that you already clarified they are? If there are any measurable additions to your volume growth we should expect and what would be the addition to CapEx for 2022?

Sure, I'll talk about the specific projects and Bob can talk about the impact on CapEx for 2022. So, you know, again, I think as Bob correctly highlighted, these investment opportunities are with our core customers in our strategic markets that we continue to Allocate Capital, too. So the first one you would say is dispensing and specialty closures. We have many opportunities to continue to invest with our customers, and these investments would be very similar to kind of the historic Silgan investments, where these are going to be backed by customer contracts and customer commitments. And we feel like we've got a plethora of opportunities. Again, I mentioned fragrance and beauty a little bit earlier on the dispensing side of the business. will be investing there for sure. Our flat cap business, again, we've seen continued growth in flat caps required for products like sports drinks, et cetera. So we've got plenty of opportunities throughout our dispensing and specialty closure segment. We do have a couple of pet food investments that we're going to continue to make in our metal container segment. And then on custom containers, we have a large investment that's going through this year for a new business win that will be included in our guidance for this year. I think the rest of the items I described to you, for the most part, are going to be capital spent this year with a return that begins in 2023.

Yeah, so that all nets to a CapEx number that's up on a year-over-year basis. Call it round numbers, about $50 million. Some of that is acquisition-related. but a large part of that additional CapEx is related to those projects that Adam just laid out.

Okay, perfect. And my follow-up question is a little bit on the 2022 free cash flow guidance of $360 million. I think last quarter you were expecting a little bit higher number as a preliminary just figure. I guess, can you tell us a little bit what changed? And since this is largely working capital and obviously the CapEx that you mentioned, Can you see a significant boost in 2023 in free cash flow?

Yeah, great question. Look, there's a few things that are sort of, I'll call them more timing related issues that are hitting here. So, you know, 2021 benefited from the buy ahead, which helped us on volume. Many of those customers paid us as well. So we got the benefit of that in the upside to the free cash flow forecast for 2021. That was about $15 million. We also, which we talked about earlier in the year as we raised the free cash flow guidance, that we were getting an accelerated tax benefit coming with the acquisition of Gateway to the tune of about $25 million. That's kind of a one-time benefit that won't continue to recur. and conversely, as you look into 2022, the working capital is going to be a pretty significant headwind. It was a benefit in 2021, maybe even a bit more so than we were expecting because we weren't able to rebuild inventory to the level that we intended. So you've got that rebuilding effort coming back at us in terms of a headwind in working capital. and then you've got the impact of the significant inflation and raw materials that are coming through. The other piece of that will be the CapEx that we just talked about and then the higher cash taxes of that $25 million. So that kind of nets you back down to the $350. I would say if you were thinking about this business on a kind of what's a right run rate basis, Probably the normalized free cash flow looks like something in the 4 to 420 kind of range. So you could see it getting back into that level in 2023. Great.

Thank you very much.

And next we'll go to Mark Wild with Bank of Montreal.

Morning, Adam. Good morning, Bob. Just to start, I wondered if you can give us any color on sort of where the template increases have settled out. in 2022, and whether the cost increases are having any effect that you can see on consumer behavior, or if you were going to see it, which markets might you see it in?

Sure. Good morning, Mark. 10-plate, you know, we did spend some time talking about that on the last call. The guidance we gave is roughly a doubling of the cost associated with steel 10-plate for our metal containers business. As it turns out, that's essentially where we settled, so just under a doubling of the cost. It was a challenging negotiation from every respect. As you've heard us talk for many years, we do have pass-through mechanisms with our long-term contract customers, but we take it very, very seriously that this type of inflation is incredibly stressful for their business models in order to be able to deal with passing that kind of inflation onto retailers and ultimately consumers. So the market is stressed right now. Those increases roughly took effect at the beginning of the year. And as you can imagine, from a pre-buy perspective, Mark, literally anyone who bought metal packaging from Silgan was asking to participate in a pre-buy. I'll go back and talk about our supply chain challenges that we had in 2021. We just weren't able to get all the raw materials that we wanted to in order to support customers. Every chance we could support them, we did. And we worked with them to facilitate a little bit of a pre-buy, mostly for on-site, near-site type customers. So I think everybody is concerned about the inflation and the impact it's going to have certainly at the beginning of the year. But we will not have seen consumer activity around this cost inflation at this point in the year. So I think it's a great question. I think it's one that we'll probably have some data points as we move into the first quarter results that we'll be talking about in April. But it's a challenge because it was significant inflation that we've never seen in our metal container segment.

Okay, and then just as a follow-on, Adam, is it possible for you to give us some sense of what you see in terms of inventory in the channel between yourselves and consumers? So whether it's at kind of food or packaged goods firms, at like packaging distributors, what's your sense for kind of where the channel is right now?

Yeah, I think there was a bubble. Certainly, they got created, I think, through 2021. related to the pandemic surge of volumes and how quickly some of those volumes reverted back to a normalized level. And so you had this inventory bubble that was working its way through the system. I think what our data, what we see, Mark, would tell you that it did start to move through onto consumers sometime in the fourth quarter. I think our data would say we saw a nice pickup in the month of December just from a trending perspective for many of those products where we have been challenged and been going through an entire supply chain inventory correction for most of the last three quarters of 2021. So as we sit here today, we feel like we're at the end of the inventory correction cycle and those volumes are going to normalize and will normalize Very, very early in 2022.

Okay. That's helpful. Thanks, Adam. I'll turn it over.

All right. Your next question will come from the line of Arun Viswanathan with RBC Capital Markets.

Great. Thanks for taking my question. Congrats on the strong performance here. I guess I just wanted to get back to some of the comments you had on growth, I guess, in food containers. So as you noted, there was about 14% growth in 20% and then 4% on top of that on the volume side. In the past, you had talked about some rationalization. Now it seems like you're putting in some capacity on pet food. How do you kind of look at this business going forward? I guess, is this kind of a low single digit business now that you can have confidence in that will turn in some kind of consistent growth in that range? And then similarly, on the closure side, it seems like this business now is actually poised for that or maybe slightly better growth. So overall, I guess, would you look at the Silken portfolio as kind of a low single digit grower? and then you leverage that on the EBITDA line a little bit more than that. Is that the right way to look at those two algorithms?

Well, let me start with kind of the growth conversation on the metal container business very quickly. So, again, I think you've got the growth numbers correct for 2021 and for 2020 as well. I want to clarify, pet food has been a growing market for us that we've been investing in for years. And I would go back a decade and longer as far as where we've continued to see strong growth in pet food and we've continued to invest in that growth. So there's nothing new about our investments in additional pet food capacity. And in fairness, that is going to continue as we go forward as well. Again, during a pandemic situation, What we did see was pet ownership increased dramatically. That was skewed more to smaller dogs and cats. Those smaller dogs and cats typically have a higher consumption rate of wet pet food. And we're seeing that. And our numbers would show that. And they've shown that for quite some time. So that is a growth portion of our business in metal containers. And we believe metal containers is going to settle back to a point of normalization that is call it 10% higher than we were pre-pandemic. So the baseline has shifted, right? So we're up significantly in volume. I do think the forward trajectory is now going to return to a very similar plus or minus 1% on the margin with core markets like pet food, like protein continuing to provide growth as we go forward. We feel terrific about where Metal Containers sits in our portfolio, the growth it's provided, and now the baseline that has been reset for the future. As we think about closures, what I would tell you again, we just guided to 4% organic growth in 2022. That's also our longer term growth rate for the organic growth of the business. I think we have lots of opportunities to continue to invest around our closures and dispensing and specialty closures business. So that is where a lot of our capital allocation has gone. That's where our acquisition dollars have gone as well. So I don't want to give you a broad, you know, how to think about Silgan from a growth perspective including custom containers. I'd rather just talk about each of the individual components and go from there. Bob, I'll throw it over to you on how you want to think about EBITDA and everyone's question.

Yeah, so I think we'll, and I'll come back around a little bit to Gabe's question. So EBITDA probably grows about 40 million, 35 or 40 million on a year-over-year basis, and that's largely the acquisitions. You know, I think we do have a bit of an acceleration down to the profit line because of our efficiencies and the scale that we'll get of that volume growth coming through the system. So bottom line, as you see, our bottom line has grown, as Adam has said, north of 10% on a CAGR basis. That's also the benefit of acquisitions, but I don't see any reason why that isn't what the future looks like on a go-forward basis as well.

And then one last comment for you, everyone. You had asked about the previous rationalization plans. Obviously, we put those on hold for the pandemic, right? And now, again, I just want to reiterate, you know, the new baseline for our metal containers business is significantly higher than it was prior to the pandemic. So we're evaluating that. We've got a relentless focus on driving cost out of our business. That has never changed. I think as volume, you know, as we projected four to 5% decline in volume, what that's going to allow us to do in 2022 is more efficiently operate the footprint that we have to support our customers. And that's the immediate focus of what we're doing now. And we'll obviously continue to work on driving costs out, as we always do.

Great. Thanks for the comprehensive answer there. And then just as a follow-up on capital allocation, so it sounds like normalized free cash flow up in the $400 million level this year is going to be impacted a little bit by working capital. and some of the investments. But as you look into 23 then, would you prioritize maybe capital return or is there any potential to do that or would you still be looking at deleveraging? And if so, where would you want to get the leverage to, I guess?

Yeah, look, I think we're in a good spot from a leverage perspective. If you look at where we are today, we're kind of back toward the higher end of our range. particularly on a pro forma basis and then layer on that incremental free cash flow coming next year and you're kind of right back in solidly in the range. So I think that's the beautiful part of the Silgan story is we have options and I think our preference is to continue to deploy that capital to continue to grow out in the markets that we serve and in support of the customers that we serve. So I wouldn't rule out acquisitions But if in the absence of those where we don't find good opportunities or we don't find the right kind of returns with those opportunities, then a return of capital is certainly within the purview.

Thank you.

All right. Next, we'll go to Anthony Petinari with Citi.

Good morning. Is it possible to give any more detail on the inventory management issue in dispensing, you know, maybe the EBIT impact in 4Q, kind of any lingering impact in 1Q, and just sort of what drove that issue?

Sure, Anthony. I think, you know, I'll try to boil it down to its simplest terms. If you go back a year ago at the beginning of a global pandemic, I'll take our office here in Stanford as an example. We were using disinfecting wipes to wipe down tables and handles and light switches. We were using trigger sprayers and disinfectants to clean anything and everything around because no one knew what the heck was the transmissive factor of what we were dealing with with COVID. Obviously, as the CDC came out with updated guidance later in the year that surface contact was not a main priority. That's when our hard surface cleaners and home cleaning products went through a transition where the inventory correction needed to take place because at that point our customers were continuing to order at significantly elevated demand levels and all of that product had to move through the system. And that's what happened. That was the story of call it the last nine months of 2021. I'm giving you one example for hard surface cleaners. It happened for hand sanitizers. It happened for other home cleaning products. So really in our dispensing and specialty closure segment and our custom container segment, that's in a nutshell what we've been dealing with from an inventory correction. The shutoff from I'd say the governmental guidance of what to do and how to conduct business with frequent hand washing, with hand soap, et cetera, those products that were on order and in inventory and throughout the retail chain had to flush their way through the system. And we believe now we're at the very end of that cycle.

Okay. Okay. That's very helpful. And then you mentioned beauty is essentially back to pre-COVID levels and maybe metal containers is going to come out of the pandemic, maybe to structurally higher level of demand. I'm just wondering how your food service business within metal containers is doing versus pre-pandemic levels. I know it's a smaller business for you, but I think it's pretty high margin. Any thoughts there?

It is, and it's a great question. Actually, I believe in our press release, for the first time in a long time, we had a more favorable mix of products sold in our metal container business. and that's exactly what you talked about, Anthony. That is our restaurant kind of number 10 cans, our large cans being sold for restaurant and institutional demand. So we had good growth in our small cans as well, but we saw a recovery in Q4 and I think for the most part we'd say restaurants, while I don't know that they're back to pre-pandemic levels, They're very active, and the orders that we had in Q4, and I think on an ongoing basis for 22, the expectation is that normalizes as well.

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

All right. Next question will come from the line of Alden Stump with Lube Capital.

Great.

Thank you, and good morning.

Just wanted to follow up on the food, cans, and play pass-through, which obviously, as you mentioned, we're in an unprecedented deflation environment. But could you just clarify that you are confident that you'll be able to protect your margin dollars? Obviously, percentages, of course, will be affected by the pass-through, but that you have confidence that you'll be able to fully offset from a dollar standpoint that huge deflation that you are seeing this year.

It's a great question, and I think, Alton, as you know our business very well, you know, we've talked for many, many years about the pass-through mechanisms that what we experience, we pass through. And so, yes, our contracts allow for that. We do not take that lightly in any way because that burden gets borne by our customers, and they have to deal with it in the market. So, yes, you're right, the mathematical consequence of the higher inflation will hurt our margin rate, but from a margin perspective, we will be passing through those costs as we always do to our customers and then helping them deal with their ultimate customers and retailers through the rest of the supply chain.

I'll also remind you that 90 plus percent of that food can business is under contract and all of those contracts allow for the direct pass through. And I would say given the severity of the inflation, it is untenable for anybody in this market to not be passing it through. So we're confident that we'll get it on the non-contract side as well.

And I would say untenable for our customers not to be able to pass it through as well. This will ultimately make its way to the consumer is our belief.

Great, Anderson. Thanks for that call. And then just as a follow-up, as you mentioned, obviously it's too early in the year to see if it will be a consumer impact situation. just from a demand standpoint for food cans. But what are your customers saying? I mean, obviously, costs are going up everywhere, not just in templates. So other categories are going up as well. But just kind of how they are feeling from a demand standpoint when they do begin to pass through the huge inflation increase.

Sure. We spend a lot of time talking with our customers about their activities and passing through these cost increases to market. And you're right. It's We're talking about 10 plate on this call, but it's in every other packaging substrate. It's in ingredients. It's in secondary packaging. It's prevalent across the board. And I think for the most part, I would say our customers have taken the position that, to Bob's point, it's untenable for them to absorb the cost inflation they're experiencing, and they have to pass it through. And that, again, in my opinion, will get all the way through to the consumer. So Everybody's a little nervous about that as we get started here in 2022, but I think the outcome, everyone is aligned on the outcome that the increases and the inflation need to be passed all the way through the system.

Okay, great. Thanks so much. I'll hop back in the queue.

Okay, your next question will come from the line of Kyle White with Deutsche Bank.

Hey, good morning. Thanks for taking the question. Just on the supply chain, can you provide an update? Are you experiencing any challenges given the rise of Omicron in terms of labor? Is the steel supply issue and metal containers fully resolved now? Just overall kind of update on supply chain in terms of anything getting better or worse throughout the quarter.

Sure. So maybe I'll start with Omicron. And what I would tell you is that, you know, we're having – much of the same experience in our operating network that you hear about and read about regarding Omicron. So our quarantine and our positive rates are actually up quite a bit, but it is a different experience in the fourth quarter and even into the early part of 2022 than we experienced in 2020 and 2021. Employees are largely asymptomatic for us and they are also returning to work in a more timely manner than the original 10 days that was mandated earlier in the pandemic. So it's less disruptive is ultimately the point I would make for our operations. Our customers are dealing with many of the same things. One of the items that we had a lot of talk about with our customers in Q4 is their concern about and many, many more. I think we're very early days on Q1, whether they have that labor issue or not related to Omicron. So then let's move back to the supply chain. And we spent a lot of time last year talking about the challenges, particularly with metal, We had not anticipated having really any availability of raw materials to support any customer requirements outside of what the order book reflected. And as it turns out, our on-time delivery performance from key suppliers improved in Q4. So we were able to have a little more steel which then led to a small amount of pre-buy activity as we talked about. As we go forward for 22 I'll remind you that we said we were going to reward those suppliers that did perform in 2021 and we would reduce volume requirements with those that did not. It's exactly what we've done. So we have shifted our supply portfolio and we are rewarding those suppliers that have continued to perform at a higher level. And I tell you, we're not where we want to be from an on-time and full delivery perspective, but we are significantly better than the 25% and 30% that we were dealing with early in 2021. We finished the year something in the high 60s or 70%, and we believe we'll be well into the 80s for the first part of 2022.

Got it. That's helpful. And then on metal containers, can you just help us better understand what is driving earnings growth for this segment in 2022? I mean, historically, it would be pretty challenging to see growth with volumes down 4% to 5%. I know you have the easy tech acquisition, but it's somewhat marginal. So is it just better mix and lapping of the steel supply issue? Are you anticipating any benefits from a moderating supply chain and inflation environment in the back half? Just any color you could provide. Thank you.

Sure. Well, you've got a couple of things. One, We really don't have much inventory supporting the business as we exit 2021. So there will be a little bit of inventory rebuilding that we just simply need to do for the business. We've been running very tight for the last two years given the volume requirements. The second piece of that is with volume declines, we're going to be able to reset our operating network. We're going to be back to making The right cans and the right facilities for specific customers versus doing whatever we could to support our customers requirements and I'll say in an inefficient way. So, you know, we've been talking a bit over the course of 2021 about the operating inefficiencies that we were experiencing. We believe we have line of sight of recovering those operational inefficiencies, just getting back to a more normal operating environment. Really, those are the two biggest things that really drive the performance from an operational standpoint in 2022 for metal containers.

Got it.

I'll turn it over. Thank you. Okay. Next, we'll go to Mike Roxland with Truist Securities.

Thanks very much. Good morning, Adam, Bob, Kim. Congrats on the quarter and the year. Thanks. Just a quick question to follow up on supply chain logistics. Given what's happened with the supply chain, with logistics, how do you think about inventory levels coming out the other side? Should we expect maybe that they'll be 5% higher, 10% higher? To me, it seems like just-in-time might be a thing of the past and that all companies may need to maintain just some higher amount of inventory levels going forward just to meet customer demand. and not only on the finished product side, but really, you know, also with respect to raw materials. So how do you, as you think about this normalization as you've termed it for 2022, how do you think about your inventory level both for finished product and for raw materials?

Well, so I'll jump in first and I'll look over to Bob and have him chime in and clean up anything he disagrees with. But I would say, you know, look, it's a really good question. And I think the just-in-time environment of supplying the market It was definitely challenged during these last two years. I think where that gets addressed is with our customers and then their inventories to support retail. So I don't think this is about unfilled cans at Sylvan. I don't think this is about dispensers sitting on our inventory balance sheet waiting for the customer's orders. I do think we're talking about filled goods waiting to go to retail is going to be I think where the inventory build actually takes place. And again, spending a lot of time talking to customers about strategies for 2022 and how they're going to meet the ongoing demand in the marketplace, that seemed to be the most common thread just as we talked through it. Bob, I don't know what else you would want to add.

Yeah, I think Adam's got it right. The only thing I would add to that is that particularly in this environment with severe inflation, I think everybody's going to be loathed to want to build any more inventory than they have to. So I do think that there's some increase that just we fell so short, we as a system, not just Silgan, fell so short of where we used to be that there'll be a rebuilding. But I find it hard to believe, particularly given the inflationary environment, that we go all the way back to pre-pandemic levels. I think everybody has figured out how to be a little more efficient with their inventory levels. So I think there's somewhere between what the inventory levels used to look like and where they are at the low point. So there'll be some rebuilding, but not all the way back.

Gotcha. And then one just quick question on the cash taxes, Bob. You mentioned that $25 million cash tax benefits not going to repeat this year. I thought the company was supposed to receive roughly $125 million of tax benefits, both from Gateway and Unicef. So The $25 million from Gateway won't repeat, but aren't there still cash tax benefits that you should be receiving?

They're in there, but the order of magnitude was front-end weighted. So that's sort of where the rest of it's going to come, but it's going to come over multiple years. Got it. Thank you. Maybe I misspoke in saying it won't repeat. It just won't repeat at that level.

Gotcha. Thank you.

Okay, next question will come from the line of Ghanshyam Punjabi with Baird.

Thanks. Adam, just a clarification. So in answer to George's question when you were talking about the fourth quarter segment volumes, I thought I heard you say that dispensing was up 8.5%. I just want to clarify that's actually a volume number. And if that is the case, what do you attribute that strength to? Because it is well above what it looks like the industry grew specific to the fourth quarter.

Sure, it is. We were up 8.5% Gonsham in Q4 for organic volume. So there's a couple things that go into that. Obviously, it's our dispensing and specialty closure segment. So, you know, it's really the four key markets that I talked about. It's fragrance and beauty, and then it's beverage and food. And we saw strength really in all four, and I would say significant strength. And that's really what drove the year-over-year improvement in the organic volume.

Got it. And then on the same token, you saw some, you know, pull forward on the metal food side. I mean, resin prices did decline quite a bit in the fourth quarter, especially towards the back end of the quarter. Did you see any material sort of deferral or demand specific to custom containers just based on that dynamic and maybe give us some color as to what you're seeing so far in the early part of the quarter?

Yeah, it's a good question. And just on the resin cost side, I think you said that correctly. So the resin did decline in Q4, but it was more at the end of Q4, late in Q4. So there was very little benefit to Silgan of that cost decline. And then, you know, we don't believe we saw customers push out orders from Q4 to Q1 because of potential declines in resin. So we think the demand level was pretty consistent throughout the quarter. and you know as we move forward into 2022 obviously uh we're we'll be passing through again some lagged pass-throughs of of the cost inflation that we incurred in 2021 uh here for the first half of the year and then we'll see a normalization and and if resin costs uh transact the way they are projected by the indices then we'll see some cost relief for customers in the second half of the year

Okay, thanks so much.

And it looks like we have time to take one more question, so we'll take that from Josh Wilson with Raymond James. Good morning, Adam and Bob. Thanks for fitting me in.

Good morning, Bob. Josh.

Just wanted to get a little more color on some of the supply chain and mix questions. In your guidance, are you assuming everything is completely normalized as we get out the end of the year on the labor and supply chain issues? And if so, can you put like a dollar value on the benefit there that's part of the EPS walk?

Well, I think what I would say, Josh, is I would go back to kind of the walk that Bob walked through on the 50 cents. And what I would tell you... Basically everything else falls into the operational improvements, and that is the unwinding of the operational inefficiencies of the supply chain and labor issues that we experienced in 21. So I don't have a specific number for you, but it does encompass the balance of the operational improvement that we'll see for 22.

and the mixed benefit in metal containers. Is there any lag to that or will that start fairly early in the year?

No, I think what you'll see is, you know, again, a normalization of volumes across the markets that we serve. So basically now all of our markets are we've pegged back to kind of a normalized level. So vegetable and The Vegetable Pack, the industrial cans we talked about for restaurants, we think that's just back to a more normal volume with continued growth in pet food. So I think what you'll hear us talk about in Q1, if I were predicting it, is mix will be unfavorable because we'll be selling more small cans again, just like we have been for the last several years. That's where the growth is going to come from in the early part of the year.

Got it. Thanks so much.

All right, so at this time, I'd like to turn the call back over to Mr. Adam Greenlee for any additional or closing remarks.

Great. Thank you very much, Alan, and we appreciate everyone's time today and interest in the company and look forward to talking about our first quarter results in April. Thank you.

And that does conclude today's conference. We thank everyone again for their participation. You may now disconnect.