Silgan Holdings Inc.

Please stand by. We're about to begin. Thank you for joining today's Silicon Holdings first quarter 2022 earnings results conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Kim Ulmer, Senior Vice President, Finance and Treasurer. Please go ahead, ma'am.

Thank you. Joining me from the company today, I have 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 2021 and other filings with the SEC. Therefore, the actual results of operations or financial conditions of the company could differ materially from those expressed or implied in the forward-looking statement. With that, I'll turn it over to Adam.

Thank you, Kim, and welcome, everyone, to our first quarter 2022 earnings call. We trust you and your families are all doing well as we continue to cycle through the current stage of the COVID-19 pandemic and look forward to returning to a new normal. I'll make a few comments about the first quarter and share our thoughts regarding the remainder of the year. Bob will then review our financial performance and provide more details about the 2022 outlook. And then Bob and I will be happy to answer any questions. As you've seen in this morning's press release, we reported record adjusted earnings of 78 cents per diluted share at the higher end of our earnings estimates and ahead of the prior record first quarter of 2021 of 75 cents per diluted share. We achieved this performance by leveraging the power of the SILGIM portfolio with outstanding operating performance across each of our business segments as we were able to mitigate the impact of inflation and supply chain disruptions for the company and our customers. In addition, our strong commercial relationships helped ensure our ability to successfully pass through the unprecedented raw material inflation we are experiencing. These actions allowed us to overcome the known volume headwinds We faced entering the first quarter in certain portions of our business. The impact from raw materials and other manufacturing cost inflation and the negative impact of supply chain and production disruptions at several of our customers. Without these customer supply disruptions, volumes in each of our segments would have been even higher. As we anticipated, the year-over-year volume comparisons were difficult in the first quarter, but volumes across each of our businesses were in line with our Given our strong start to the year, our volume outlook for the remainder of the year, our deep customer relationships, the strong operational performance of each business, and our continued success in integrating the recent acquisitions, we are raising our full-year guidance to $3.90 to $4.05 per diluted share for our new range. representing a 17% increase at the midpoint over record 2021 levels. With that, I'll turn it over to Bob.

Thank you, Adam. Good morning, everyone. As discussed in the press release, the power of SILGEN's portfolio continues to deliver strong results owing to the discipline of our cost pass-through mechanisms, outstanding operational performance, and the benefits of the recent acquisitions. These gains were partially offset by anticipated lower volumes largely as a result of the fourth quarter of 2021 pre-buy as well as ongoing supply chain challenges primarily at our customers and a less favorable mix of products sold. Each of our teams did an outstanding job improving operational efficiencies to offset significant inflation and volume shortfalls as a result of supply chain disruptions at certain of our customers. Consolidated results for the first quarter of 2022 exceeded the prior year and were to the higher end of our estimate range. We delivered record adjusted earnings per diluted share of 78 cents versus 75 cents in the prior year period. On a consolidated basis, net sales for the first quarter of 2022 increased $203.8 million or 16.5% versus the prior year to a $1.44 billion as each of our businesses delivered top line improvements. These increases were largely the result of the pass-through of higher raw material and other costs across each business, higher volumes in the dispensing and specialty closure segment, including from acquisitions, and a more favorable mix of products sold in the custom container segment. These benefits were partially offset by unfavorable foreign currency translation of approximately $22 million and a quarter, lower volumes and a less favorable mix of products sold in the metal container segment, and lower volumes in the Custom Container segment. Acquisitions contributed sales of approximately $55 million in the quarter. We converted these sales to adjusted income before interest and taxes for the quarter of $144.8 million after adjustments of $1.4 million for rationalization charges versus $136.9 million after adjustments of $10.3 million for rationalization charges in the prior year quarter. Highlights of adjusted segment income for the segments is as follows. Adjusted segment income in the dispensing and specialty closure segment increased $16.4 million to $87.3 million in the first quarter of 2022. The prior year quarter was adjusted by $5.2 million for rationalization charges. The increase in segment income was primarily due to the benefits of the lag passer of lower raw material costs as compared to the prior year unfavorable effect from the lag passed through overall materials. Higher unit volumes, including from the Gateway and UNICEF acquisitions, and improved operating efficiency. The acquisitions contributed approximately $8 million. These benefits were partially offset by inflation and other manufacturing costs and foreign currency translation losses of approximately $2 million. Adjusted segment income in the metal container segment was $39.3 million, down $11.3 million versus the prior year, after adjustments of $1.3 million in 2022 and $5 million in 2021, each for rationalization charges. This decrease was primarily attributable to lower unit volumes of nearly 14%, the impact from the higher percentage of smaller-sized containers sold, and ongoing inflation in manufacturing costs. partially offset by strong operating performance and income contribution from the EasyTech acquisition of approximately $1 million. As expected, the decrease in volumes was largely related to the fourth quarter 2021 pre-buy activity in advance of significant raw material price increases. The first quarter of 2022 volumes are well above pre-pandemic levels, up 10% as compared to 2019. adjusted segment income in the custom container segment was $24.8 million for the quarter, slightly above the prior year quarter after adjustments for rationalization charges of $100,000 in each year. This increase was largely attributable to favorable impact from the delayed pass-through of the lower resident cost in 2022 versus the unfavorable impact in the prior year from the higher resident cost and strong operating performance. Partly offset by the impact of volume declines of approximately 8% versus a very strong pandemic-driven prior year quarter. Turning now to our outlook for 2022, as expected, we were off to a good start as we delivered first quarter results to the higher end of our earnings estimates. Our acquisition integration is going well. Our businesses continue to deliver strong operating performance, and we anticipate our customers' volumes will improve as they cycle over difficult supply chain issues. As a result, we have raised our full-year earnings estimate to a range of $3.90 to $4.05, which at the midpoint represents a 17% increase over the record 2021 performance. We're also providing a second quarter 2022 estimate of adjusted earnings in the range of $0.90 to $1 for diluted share, the midpoint representing a 12% increase as compared to the record adjusted net income of $0.85 in the prior year quarter. Based on our current outlook for 2022, we are maintaining our free cash flow guidance for approximately $350 million as we manage the impact of significant inflation in raw material and other operating costs on our 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 in order to allow everyone an opportunity to have their question asked. Alan, I'll now turn it over to you for the Q&A session.

Thank you, sir. As a reminder for everyone, it is star one. If you'd like to ask a question, please make sure that your mute function is turned off to allow your signal to reach our equipment. And like we said, please do limit yourselves to one question and one follow-up so that we can get as many questions as possible. We'll take our first question from George Staphos with Bank of America.

Hi, thanks very much. Thanks for taking the question. Hi, guys. Thanks for all the details and congratulations on the progress so far. My question's on margins. So if you could, and two parts, in metal, can you parse the 300 basis point drop that we saw versus 1Q21? You know, there's some mixed changes. Obviously, you have the impact of inflation. It's been a while since we've seen, you know, metal margins at 6%. I'd have to go back to 2005 or 2006. And then similarly, can you just talk a little bit to the countervailing mix and margin trends that you saw particularly within custom containers where there wasn't much incremental margin growth, but obviously you had some business moving around and tougher comps as we're coming off the hygiene boom. Thanks.

Hey, George, this is Bob. I'll take the metal portion of that question. So I think if you look at the drop on a year-over-year basis, I think it went from something like 9% to down in the 6% range. The biggest component of that is the significant inflation that we're experiencing predictably when you think about metal inflating at 80 plus percent, that's a large driver. So that's probably worth about 200 basis points of that change. And then the remaining is probably split between the less favorable mix and some of that is on the volume side as well. So that's kind of the bridge to the 6%. And it's no surprise that the last time we saw it, goes back to kind of the 2005 timeframe, which would have been another period where we saw, you know, the same, maybe not the same order of magnitude, but the same type of inflationary environment against raw materials.

And then, George, when you move over to custom containers, really the next change there was some of our customers in our custom container segment having difficulty securing ingredients and other packaging raw materials to fill products. So, Those are typically in some of our smaller packages, so we did have a greater mix of larger packages that we sold from custom containers in Q1, generating a more favorable mix.

Okay, I'll turn it over. All right, your next question will come from the line of Mark Wild with Bank of Montreal.

Morning, Adam, Bob, Tim. I'd like to just talk a little bit about tinplate. There's discussion that tinplate price is moving up even further in 2023, and I wondered if you can just address that issue and then also touch on, you know, any sources of incremental supply that might be available, and also whether these continued increases in tinplate are having any impact on demand or maybe, you know, prompting people to look at further substitutions.

Good morning, Mark. Maybe just to start out with 2023, I think we are starting to have those conversations with our suppliers of template as we continue to look really around the world for sourcing opportunities for our template products. As you would understand, we essentially buy more template and packaging than anybody else combined in North America with the size of our metal container business. We think we've got a pretty good insight into what's happening. We also think we are a pretty valued customer in that chain as we've been able to secure all of the raw materials that we've needed to support our customers' growth over the last several years. As we look at 23, I think it's too early to really comment. I think price stability is where our thoughts are at this point, and and there's going to be a bid-ask spread between the suppliers and the buyers of those products. But I would not anticipate significant inflation given what's happened in 2022. And the incremental supply question, clearly we like to source within the regions in which we manufacture. We supplement those sourcing strategies with strategic opportunities and opportunistic buys around the world. as they present themselves and as we uncover them. And then your final question, just what we think it's doing to demand. What I tell you right now is our data that we look at for kind of retail movement of product of canned goods is still pretty good. What is evident to us is our customers are taking credit to retail and that is being pushed onto the consumers. So that is happening. It has happened. and we see demand holding up quite well in that environment and feel pretty good in talking with our customers about their outlook for the year as well that they've got more clarity into the demand function even with the higher prices that have been implemented.

Super. That's helpful. Thank you, Adam.

All right. Next question will come from the line of Adam Josephson with KeyBank.

Thanks. Good morning, everyone. Hope you're well. Bob or Adam, just good morning, Bob. On the EPS guidance increase, can you help me with – so you beat your guidance by a few cents. You got it lower than consensus by a few cents in the second quarter. So just on my logic, they kind of even themselves out, and then you're raising for the full year. Can you just help me with relative to three months ago, what specifically has changed in your mind? Is it related to last year's acquisitions? Is it the pack? Is it less inflation? What exactly changed?

Yeah, good question. And I think you got it just about right. If you look at the front half of the year, generally, we're expecting to come in pretty well in line with what our original forecast was. Obviously, there's a little bit of difference between the two quarters, but in aggregate, pretty well in line. Stacey McGrath, Daniel Murphy, So that's a positive as well. And then I think as Adam just indicated, we've got good line of sight with our customers in terms of what the volume outlook looks like for the rest of the year. So all of that kind of gives us pretty good confidence that we're in the right spot moving earnings up a bit as we sit here today.

I appreciate that. And just for either you or Adam, in terms of your food can end markets, I would think pet food is still going very strong. Soup, perhaps less so as people eat out more. The pack of just any fertilizer impact that you expect either this year or thereafter. Can you just talk about what you're seeing in terms of your food cannon markets and if there's likely to be any impact whatsoever from the developing global fertilizer shortage on the pack either this year or beyond?

Sure. Maybe starting with pet food. Obviously, pet food's been a market that we've talked about for several years that's continued to grow and grow well in advance of either the food can market or GDP rates, just about anything that you'd want to talk about, Adam. So it's been a really good segment for our portfolio. And, you know, as we sit here today, our full year estimate of 2022 is Thank you for joining us. but well beyond 22 with our strategic pet food customers and what they're doing in their market. So we feel really good about it. I tell you right now, there are stock outs on store shelves because one of the items to talk about in our Q1 volume performance for the container segment is that pet food came in slightly below our expectations. It's very simple. Our customers invested in new capacity and as they brought that capacity online, they had trouble supporting the new capacity with labor and with additional ingredients and other packaging materials.

We had our cans ready for them.

They just were not able to fill those cans. The good news, those issues are being addressed and we'll see clarity through Q2 as those items are resolved, but the capacity is already installed. So that capacity will be filled in the back half of the year. We feel really good about it. You mentioned soup, Adam. I tell you, soup had a very strong first quarter for us. It's sort of the end of the soup season right now. I would say all of the discussions with our customers, not only about their business, but what they're seeing at retail is very favorable on soup. The new consumers that were reached during the pandemic are continuing to purchase soup products and cooking with soup products at home. We'll see how mobility plays through that as we get back into a soup season again in the fall. and then the final question you had was on pack and fertilizer increases and cost increases, how that's going to affect. I tell you that our pack customers, at least in the U.S. market right now, are fairly bullish. They saw a tremendous increase in the pull-through of packed product last year. Again, last year was really the first time they had the opportunity to increase their volumes due to the pandemic because of the planting season. So our customers are coming through with stronger pack plants than we had 30 days ago when we came out with our original guides for the year. So to Bob's point, that is part of the answer as to how we're feeling more confident about the year today than we did on the last call.

Thanks so much, Adam.

All right. Your next question will come from the line of Ganshan Punjabi with Baird.

Hi, good morning, everyone. This is actually Matt Krieger sitting in for Gontchem. I guess I wanted to focus in on the volume outlook for the year. So can you provide some added detail around your embedded volume assumptions by business for 2022? And then can you specifically break out kind of organic volume performance in the dispensing business versus what acquisitions are adding to that business as well? That'd be great. Thanks.

or maybe just we'll start with kind of the full year volume expectation. So for the most part, as we look at our dispensing and specialty closure segment, really the volume outlook hasn't changed versus what we came into the year with. We've just, the risk has been mitigated for the most part. So we feel really good about where we are volume wise. I tell you one of the items we continue to have terrific strength in our fragrance markets We've got good signs of recovery in health and hygiene, starting in late Q2, and for the balance of the year, that'll just be at a normalized rate. And then our sports drinks business is also performing quite well, and we'll see nice growth from that business this year as well. And metal containers, again, I tell you, roughly no change to our estimate that we provided at the year-end call. We're going to be down slightly on a full year basis. And again, in large part, that's just really based upon the record packed volumes that we had last year. And, you know, we've seen some uptick to that, but we're going to wait until Q3 to really get through the packed volumes in totality. And then custom containers, again, we are seeing recovery in some of those health and hygiene products that were pandemic-driven demands. that we were cycling over in Q1. They're just normalizing, but that means people are back buying those products again. So I would tell you a similar 2.5% growth rate for our custom container segment is what we continue to expect, but just more clarity on what that volume looks like. And then your last question was on the organic growth rates of dispensing and specialty closures. So a couple things. Our 8% volume growth is on top of 9% volume growth that we delivered in the first quarter of last year. And again, this is a pretty diversified segment for us. So it was going to be a tough comp because of the health and hygiene products that we were selling last year. There was a metal pre-buy impact for the metal closures portion of our dispensing and specialty closure segment. And really those those items essentially offset each other. And so we had some very slight organic volume growth in the segment and the balance of the growth is gonna come through the acquisition.

Got it, that's helpful. So high single digit acquisition contribution during the first quarter. Great, thanks.

Yeah, the bulk of the 8% was through acquisition. and then you've got some organic growth being offset by the metal pre-buy for metal closures.

All right, next question will come from the line of Gabe Hodgety with Wells Fargo.

Good morning, Adam, Bob. I apologize if I missed this. I joined a couple minutes late. I wanted to ask about margins in the dispensing and specialty closures business. You know, kind of being... High Teens, even 20% or so. It's been sustainable here now for five years. I'm curious just your thoughts on what's driving that. I mean, I appreciate you guys are efficient from a manufacturing standpoint, but maybe product mix, et cetera. And then any thoughts? I mean, Adam, you said kind of you feel like risks are mitigated for the volume outlook in that segment. When we think about re-lockdown measures in China, again, I get it. There's obviously a supply chain that we've got to think about and things going in for, let's say, Mother's Day that was probably non-existent for two years and the holiday selling season and stuff like that. Ducks have to be in order. It seems like there could be some risk in Asia. Last component for that segment, I think you're adding some capacity there. Can you remind us the magnitude of that investment and how it's going and timing and when it should be contributing?

Sure. Lots to that. So I'll see if I can hit them all and Bob will clean up from anything that I missed. So first of all, the margin rate in the segment itself, again, This segment has evolved certainly over the last five years as we've gotten bigger and bigger into the dispensing closures and dispensing systems area of the segment. So the balance of the portfolio continues to perform really well, but essentially it's favorable mix any time we sell an additional dispensing closure or dispensing system. So we've seen terrific organic growth in that business since we've acquired the first step of that business in 2017 and expect continued growth organically going forward as well. So we feel good about the margins. We think they'll continue to expand. Our most recent acquisitions add to the margin profile of the business. And as we've talked before, the wet edges of what we do in the dispensing and specialty closures segment will provide additional margins Expansion Opportunity, not only with organic growth, but through acquisition as well. And then your comments to China, I'll just remind you, China is a relatively small part of what we do. And it's still getting in total, but certainly in this segment as well. So, you know, yes, there are lockdown measures going on in China. But I think the fact that we do source materials locally in the geography where we manufacture and and we typically manufacture our products in the geography in which we sell them, largely based in the U.S., largely based in Western Europe and then you've got some exposure down in South America as well. So I think we feel like we've got a pretty good handle on what those exposures look like and the impact to the company. and then from a new capacity standpoint, those projects are underway, broadly speaking, for dispensing and specialty closures and we hope to have new capacity online by the end of the year and that's gonna be ramping up at the end of the year. So we won't get the full run rate increment until 2023.

Yeah, Gabe, the only thing I would add to what Adam said If I go back to the dispensing systems margin question, remember, too, if your question is more about the increase on a year-over-year basis, you've got a little bit of price carry-in where we're recovering the resin lag from the prior year that benefits the quarter. But that's a relatively small piece of the margin profile. It really is the leverage of everything that we've done around dispensing systems which is higher margin business than the traditional flat cap business and add to that the more recent acquisitions and you're seeing the benefit on the margin line.

Great. Thank you guys and good luck.

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

Great. Thanks for taking my question. I guess I'm just curious on a couple different things. So first off, within RBC, Custom Containers. Could you just discuss what you're seeing maybe on the resin side and maybe also on the demand side? Just curious, you know, we have seen some improvement on some of the drinks categories like energy drinks and everything. Just wondering if that's benefiting you and maybe offsetting some of the weakness you're seeing on the cleaning side.

Sure, Arun. And I may actually talk a little bit about dispensing and specialty closures as well, just as we talk resin and demand for some of the products you mentioned. But for our custom containers business, you know, this is a business that's been with Silgan since the very beginning. We've been very focused on a tight pass-through mechanism of resin. So resin doesn't have that much of an impact on this segment of our business portfolio. And so... Yes, resin did increase at the end of the quarter. It looks like Q2 is going to have a higher resin run rate as well. But we're able to quickly pass those costs through to our customers in this segment and have for some time now. From a demand perspective for our business, what I would tell you, the one hurdle that we're looking at right now is more on the food products and ingredients for food. Back to kind of the global economy, you're talking about proteins and starches. There's an egg shortage right now, so we've got a decent amount of business in food products such as mayonnaise, such as salad dressings, et cetera, that ingredients are hard to come by right now, and they're very expensive. So we're just working through our customers on that. But from a demand perspective, our trajectory has been very good. We were at a higher run rate than we were in the second half of last year, and we're expecting that to continue to improve as we go forward in Q2. And then to your question on kind of energy drinks and sports drinks, et cetera, back in our dispensing and specialty closure segment, that's really where our exposure to the beverage market exists. And we're seeing good demand almost across the board in most of our categories. There is a shortage of certain bottles to support the beverage market but for the most part we're seeing very strong demand and we're just now approaching kind of the peak filling point for our customers as they support their customers and their markets for the summer of 22.

Great, thanks.

And then maybe I could also ask about free cash flow and Looks like you are guiding a little bit below us for second quarter on an EPS basis, but you did take up the full year. So how would you think about free cash flow? Is there a little bit more working capital running through the system just given that resident price increases and the template inflation as well? And so that's a drag on free cash flow or what would you say on free cash flow? Thanks.

That's certainly where we were when we came into the year. We were expecting that working capital would be a drag, as would cash tax, and that's why we're down on a year-over-year basis. As we think about going forward, I think we've spoken to the confidence that we hold relative to the earnings outlook. To scale that for you right now, that increase is roughly $10 million of after-tax profit if you use that as a proxy of cash. And so, you know, I think right now we're just a little bit cautious in wanting to basically make sure that we've got everything in order around working capital as we continue to see the inflation. And so we felt it prudent to stay, you know, stand pat with our free cash flow guidance of approximately $350 million as we sit here today. But as we go through the second quarter and into the back half of the year, we're obviously optimistic that there's opportunity here.

And then if I could just ask one more on metal containers. So one of your peers in the business has more self-made capacity now. Is that a drag on you guys? And would you offer any comments on your own footprint? I know that there was comments about rationalization of capacity before, and then that was put on hold, for example. And Where do you stand right now with your footprint? And again, is there any negative impact from peers bringing on their own self-made capacity?

Well, I go back a little bit to what we talked about at the end of the year. And, you know, when you think about our manufacturing platform where we have capacity, it's kind of in the shoulders of the year, the first quarter and the fourth quarter of the year. So, you know, as we were all working through the pandemic a year ago, there was a very tight market for cans so we did do our best to support those in the industry with cans and so we did sell a few cans to others in the industry as well while also making sure we met all of our customer requirements as well. As we think about our capacity we like the footprint that we have. We still have you know We're always looking at cost reduction efforts and how to make our system more efficient. And I think as we talk about volumes normalizing it, call it 10% above pre-pandemic levels, we are definitely looking at our footprints to make sure that we have the right footprint to support those kind of ongoing volume levels.

Great, thanks.

All right, next question will come from the line of Anthony Patanari with Citi.

Good morning. I had a quick question on Russia. I think you had two metal container plants there. I was wondering if you could talk about the status, and is there any sort of direct impact versus the original full-year guidance? And if not, are there any kind of secondary impacts, you know, maybe trade flows into Europe or metal availability or just anything you can flag?

Sure. So maybe I'll start with the fact that, you know, Sylvan has suspended all of our new investments in Russia. And, you know, we did that immediately upon the invasion of Ukraine. On a very limited basis, Anthony, we're still selling a small number of packaging products and what we're calling for essential humanitarian and healthcare-related products. So really it's three products that we continue to sell in Russia. It's baby food, canned vegetables, and then an over-the-counter nasal spray application product. as well that we were deeming an essential healthcare product. So, you know, for us, once the invasion happened, we did cease the import of any additional raw materials into Russia and, you know, any raw materials required to produce our products. And most of our products are manufactured in, you know, for in-country consumption in Russia. And so we have two small facilities, as you mentioned. We have begun a wind down of both of those operating facilities, but our intention at this point is we have ongoing sales in those essential humanitarian and healthcare categories that I mentioned.

Okay, that's very helpful. So Anthony, just to scale that for you. So if you use 2021 as a proxy, the sales into Russia and the profit into Russia respectively were less than 1% or about 1% of our total profit. The total investment in Russia, I guess I'll say Russia slash Ukraine, is about $70 million, and that majority of that is obviously on the fixed asset side coupled with a bit of inventory, which, as Adam said, we're trying to work off, and a bit of AR makes up the balance. And so as long as we're getting paid, we'll let that continue. But that's sort of where we are on the Russian side. Got it. Got it. That's very helpful.

And then just switching gears, in the release, you mentioned, you know, customers' ability to increase their output given an easing supply chain, I think. And I just – is it – Do you have visibility into what's driving that improvement? I mean, is it maybe labor availability or access to raws or new capacity or something else that you'd like?

So I think you've got most of that correct. And really, this was very specific to pet food in our metal container segment. So what I would tell you, again, is several customers have made pretty sizable investments into increasing their own filling capacity Obviously, we've got the cans to support that investment as well. But they did have trouble staffing those lines and those facilities with additional employees. They also have had trouble getting some of the core ingredients for their pet food products, whether they be starches or proteins. And then finally, there's some other secondary packaging items that are also in tight supply as well. I think it's a testament to what our teams do at Silgan. that we have not been really our customer's challenge as far as the packaging products for them to continue operating their facilities. We've done a terrific job of supplying all the products that our customers have needed and not been a supply constraint to their filling operations.

Okay, that's very helpful. I'll turn it over.

Next, we'll go to Alton Stump with Loop Capital.

Great, thank you. Good morning. You know, just want to ask, you know, as a piece of food can demand, I understand that there's obviously a lot of, you know, you know, pieces right now with the pre-buy and then, you know, consumer inflation. But, you know, every data point we've seen, whether it's, you know, overall at-home food consumption and or beverage consumption, seems to point to the fact that you know, consumers are going out more. Obviously, mass demand is coming off, but that's not yet having any impact on at-home consumption. Is that pretty much what you're seeing as well?

Yeah, we would agree with that, Alton. That is what we see. That's what the data supports that we look at in our customer conversations as well.

Great. And then just, you know, as a follow-up to that, you know, obviously consumer demand, you know, hasn't come down, but are you seeing any pushback from customers or, you know, switching to other types of substrates because of the cost increases or, you know, anything noteworthy on that front?

Well, I do think that we're living in a very inflationary environment. So, all of the substrates that go into food packaging are seeing significant inflation. So, it is a rising tide of inflation across almost all food categories. So, at this point, really, we don't see any demand destruction, any demand fall off for our products or a switch out of the cans. We continue to believe that the can is the most efficient and lowest cost means of getting nutrition to consumers, and I think that's playing out. It played out nicely during the pandemic, and early indications here post-pandemic are that demand continues to remain strong for those products, and I'll say it one more time, that our volumes seem to have normalized. They call it 10% above pre-pandemic levels.

Got it. Thanks so much. I'll hop back in the queue.

All right. Next, we'll go to Kyle White with Deutsche Bank.

Hey, good morning. Thanks for taking the question. I just want to focus on dispensing. You know, clearly, your metal food can business is known to be resilient and defensive in the event of global slowdowns. Just curious how you would characterize your dispensing business as that portfolio has greatly expanded over the past five years with Albea and Palomar. How resilient would you expect the demand to be for beauty, your fragrances, fine myths, during any downturns?

Sure. Good question. I think as we talk about our dispensing and specialty closures business, we tend to use the term that showed up a little bit in our press release and even on this call. It's really the power of the portfolio. It's a very diverse set of business products that we manufacture and sell from dispensing and specialty closures. I'll go back to the early part of the pandemic where we had tremendous demand for health and hygiene products and very light demand for fragrance and beauty products. As we kind of transitioned through the pandemic, we saw significant increases in our home and garden product lines. So I just would tell you, Kyle, that we serve a broad array of markets that seem to have the ability to offset one another to continue to provide organic growth for this business going forward. And so we look forward, you know, fragrance is an important component of what we do, but we feel very good about other markets that would respond incredibly well if there is a slowing of the economy and fragrance is impacted in any way by that.

Got it. And just as a quick follow-on, what was the impact on demand from the inventory correction from hygiene and home cleaning products, and when do you kind of expect to cycle through this and get behind that?

And I just want to clarify the question. That was for the health and hygiene products, Kyle? Got it.

Yeah, I think the press release – yeah, sorry, go ahead.

No, go ahead. You're fine.

Yeah, I was just clarifying for the press release called out the inventory correction and hygiene and home cleaning products within dispensing.

Yeah, so we've been going through a supply chain correction for health and hygiene for several quarters now. And what we believe is that we're nearing the end of that. I think Q2, we should be cycling out of the inventory correction. We are seeing order books repopulate with health and hygiene products right now. for shipment in Q2, and we think that inventory correction will have cleared as we exit the first half of the year.

Got it. I'll turn it over. Thank you.

All right. Your next question will come from the line of Mike Roxland with Truist Securities.

Thanks very much. Hi, Adam, Kim. Congrats on the quarter. Adam, just following up on your comments just on the order book for dispensing and specialty closures, last quarter you mentioned that the order book is strong all the way through 1Q. Can you just give us an update as to where that stands now and how to really frame the volume growth in that business, you know, let's say beyond 2022? Sure.

I think it really does get into kind of the details of the individual markets that we serve. So, you know, We've talked a lot about fragrance. I'll tell you, the order book for fragrance is full, period. So we're adding capacity that will come on late in the year to support additional growth organically with our customers in the fragrance market. I think the order book for some of our health and hygiene, home care products, home products, et cetera, it's picking up and we're feeling better There's still a little bit of wiggle room in Q2 for additional orders, but we think we're sort of back to the trajectory that we've cleared the pandemic surge that we had talked about in the prior quarter. So feeling really good about it. If you look at our food and beverage business, once we get through the pre-buy activity that we've talked about and metal closures, The balance of food and beverage looks very strong to us and will contribute that kind of growth profile that we've expected for the ongoing business as well.

Gotcha. And then just any comments that you have on early trends that you've seen thus far in 2Q? You mentioned on the call a number of times that pet food customers had some issues. that you expected to correct. I'm wondering if you're starting to see that right now. Any of the other businesses in terms of some of the trends that you're seeing?

Yeah, maybe I'll start with metal containers since that was one in your questionnaire. What I would tell you, again, each month successively in Q1, we shift more cans in each month. So as that pre-buy impact wears off, our volumes increase each month and our weekly shipment rate is actually up at the highest point in April of any point this year. So that's why we feel really good about the recovery of the metal container business. I'd say roughly the same for our custom container segment as well. Shipment rates and order rates have improved and increased in Q2. And same thing for dispensing and specialty. The trajectory that we have now as we get into kind of the food and beverage season as well, we'll see the volumes The order book reflects those volume increases that we anticipated as we came into the year.

Thank you. Good luck in the quarter.

Thank you. All right. Next question will come from the line of Daniel Rizza with Jefferies.

Hey, guys. Thank you. Thanks for fitting me in. You've mentioned a lot about raw material costs and supply chain issues. I was just wondering, energy in particular, particularly in Europe, if that's a large part of costs that get sold and ended up A significant headwind given everything that's going on.

Yeah, well, there's no question it's a headwind given everything that's going on. But just to scale it for you again, it's total energy, which would be electric and gas, is probably somewhere in the 2% to 3% of our cost of goods sold. So I wouldn't say it's insignificant, but it's not as important as it is in some other parts of the industry. So I think our teams have done a really nice job, all part of that operational efficiency of trying to figure out exactly when the best time to run the lines and take downtime at the peak moments where we can. We've done a lot of work to try and procure those energy supplies in a more efficient way. So net-net, I think we're doing a fairly good job in the face of some pretty nasty inflation, and the teams will continue to to keep that as a focus as we go forward.

I think on the last call you mentioned that pensions were a headwind because of change in the asset mix or something like that, but I was wondering with the changing environment if that's no longer the case.

Well, it is a headwind because we reset the portfolio to be more fixed income related versus equity related. and so what happens with pension is basically you run at that assumption rate through the year until you get to a point where you need to true it up. So right now we think that that's been a wise move to make that conversion given what's going on in the markets but we really will have to wait until we progress through the year to understand exactly what that order of magnitude is.

Great. Thank you very much.

All right, next we'll go back to George Staphos with Bank of America.

Hi, guys. Thanks for taking my follow-on. The question is really around comparative and competitive advantage as you see it for dispensing and also for metal containers. So as you've been doing what appears to be a good job in growing organically and dispensing, what are you finding is the I don't know. The key advantage that you're able to leverage in the market to keep growing is that you're showing up with newer investments. Do you believe you have more feet on the street? What's allowing Silgan to grow? And it would seem to grow perhaps somewhat better than what we're seeing in the market as a whole within dispensing. And maybe you disagree with that. Maybe you're more or less keeping share, but we'd be interested in your thoughts there. And then within metal containers, I think there's this brought up indirectly by one of the analysts. You have a new owner, obviously, of a food can business, and you have another peer who is adding capacity. Other than track record, which has been pretty good, what gives you confidence that Sylvan's metal container business can continue maintaining the position it's maintained, its growth, its earnings, when you obviously have some new players who are quite viable are looking to take their piece of the pie. Thanks, guys, and good luck in the quarter.

Great. Thanks, George. Great questions. Maybe we'll start with the dispensing and specialty closure segment. And really, you know, I think these comments in large part would apply to all of Silgan and how we think about Silgan in total. But, you know, George, we have a very intimate service model with our customers that we believe is best in class. And and I feel confident in saying that all of the Silgan entities employ this same business model and we are very close. We understand their business incredibly well and we've done a heck of a job working with them to help them have success in their business. So the first thing is a terrific service model that's been in place for a long, long time that we continue to enhance and improve. Secondly, The one thing that I think our customers would say about Silgan is we do exactly what we say we're going to do. We deliver the goods. We don't overcommit. We support them and their initiatives, and when we say we're going to do something, they just take that to the bank, and then it happens. So we've got tremendous credibility with our customer base, and that has gone a long way in helping them grow their businesses as well. And then from a commercial perspective, I mentioned that kind of intimate relationship that we have with our customers. We're very good commercially. I'd say our commercial teams are industry best and are being rewarded with new growth opportunities for all the reasons that we just described. So we're in front of customers talking about growth and new opportunities. We are understanding how to make that even better for our customers in the rollout. and then we deliver the goods at the end of the day. So again, that's a quick summation for a few of the things that I think we are doing better than others in dispensing the specialty closures. Moving over to the metal container segment, we do have a lot of confidence that we're going to maintain and continue to grow the earnings of the business as it is. As we've talked, George, we've We've got a significant portion of this business that's under long-term contracts. And those long-term contracts, essentially, you have to work with your supplier. And so we've got great intimate relationships, again, with our customers. We're working very closely, not only on the items that might impact their Q2, but on the items that might impact their 23, 24, 25, their long-range horizon as well. And what we've done Historically, over time, we've been willing to make the investments to support their growth, and nothing about that has changed. Again, we've talked a lot about our organic food investments and growth opportunities. We're going to continue to do that. So we feel like we've got incredibly defensible positions in metal food cans, regardless of what else is going on in the market. Our relationships with our customers have stood strong. all change through time in the metal food can space.

George, the one thing I would add to what Adam said really for both businesses, and it sort of goes to the point of we've delivered, but it's really been on the operational performance of the business as well. I mean, you can see through this press release and the commentary that our teams have done a really, really good job of getting costs out of the business. and getting productivity and throughput up. And that in itself is a competitive moat against those types of threats that you're sort of questioning here. So I think we've got a lot of confidence in the teams that support our customers and get the operational efficiencies that really that's not just in the face of this inflation. That's the way we do business and the way our teams go about their jobs on a day-to-day basis.

And that's right, Bob. That's always been something you've really pushed on the productivity and the cost test. Thanks for the thoughts, Adam and Bob, and have a great quarter. Talk to you guys soon.

Thanks, George.

Next, we'll go back to Mark Wild with Bank of Montreal.

Hey, Adam. I'd like to just go a little further on food cans and maybe talk about the European business. I think it's been about 12 or 14 years since you bought Vogel & Newt. That was kind of a starter position for you in Europe. And it doesn't seem like that business has grown. You've had some challenges in the Middle East and in Eastern Europe. And it seems like since you bought the business, Silgan's focus has moved in different directions. So can you just talk about how you think about that European food can business going forward? Is that a Thank you very much, Mark.

to lower cost central and eastern filling locations. So we thought we were the opportunity to get in kind of at the ground level of potential growth for central and eastern European can filling was an interesting proposition. And as it turns out, a lot of geopolitical items have happened in that last decade. And so really the move of filling didn't materialize as we thought. And obviously we've We've shifted our thoughts on the SNP business that we conduct CAN business through in Europe. And we now have really, for probably the better part of, Bob, help me, three or four years, maybe even five years, have moved to more engaging with multinational customers that we do business with in other regions of the world and leveraging our position with them globally Thank you very much. Thank you for having me. More on large customers, more on customers that will reward us in the supply that we provide through long-term contracts. And that just was not part of the business when we bought it back in 2012. So for us, we think it's a really good and logical fit with what we do in the U.S. We think it's a logical extension for our multinational customers as they continue to grow their business in the European market. Geography, as well. So, it's done nicely, certainly, over the course of the last five years.

That's excellent. A really helpful color and perspective, Adam. Thanks so much, and good luck in the second quarter and through the year.

Great. Thank you.

All right. We have one more question in queue. We'll take that from Adam Josephson with QBank.

Thanks a lot. Thanks for taking my thoughts. I appreciate it. Adam, just two related ones, if you don't mind. If I go back to your last analyst day, just about three years ago, you kind of addressed the perceptions that you had low earnings growth, that food can declines were accelerating, and that Sylvan was primarily a defensive stock. And since then, obviously, aided by the pandemic, your earnings growth has been outstanding. And obviously, the food can market is no longer declining from where it was a few years ago. But The stock has still acted much more like a defensive stock, in my opinion, than anything else. Would you quibble with that characterization at all?

Well, it's a really good question, one that we spend some time talking around our offices here. So what I would tell you, Adam, is we've done exactly what we set out to do and what we communicated that analyst day. We do think the growth in pet food in our metal container segment has delivered significantly Exactly what we said it was going to be. And I'll reiterate that, you know, that volume now for us is almost 50% of our total food can volume. And if you think about that, it's a growing market. I recall in the end of the day, you know, we were saying that we could see a point where food cans for Sylvan actually are growing volume year over year. And we're getting very close to that outside of the pandemic impact that we've seen. Just because of the growth of certain products in our portfolio. So we do feel really good about the metal container business. We think it's the best in the world, just for whatever that's worth. And then the continued investments into the dispensing and specialty closure segment, we do think the growth rates and the margin rates for those businesses are just different than what we've had historically at Silgan, and certainly different than our metal container segment. So How the market decides to value all of those components together is really left up to the market. What I can tell you is we feel really good about the growth prospects for each of our operating segments. We feel even better about our ability to deliver upon those growth opportunities with the teams that we have in place. And we think the future is incredibly bright for Sheldon. And the strategy that we've been implementing from the very founding of our company that we're going to generate a lot of cash and we're going to put that cash to use. And really what we've done the last five years is put that cash to use in markets that are growing at a faster rate than kind of what the historic Silgan businesses have done. We feel really good about it. We love all three segments of our operating portfolio and think the future is very bright.

I appreciate that because my related question was, you know, you've paid, call it 10 times EBITDA to bulk up your closures business in recent years. That business is now 50% of your earnings, give or take. And yet you're trading below where food can transactions typically have been historically. So it seems as though investors still think of you as predominantly, if not entirely, a food can business. even though the food can market has gotten much better over the past couple of years and you have this large other business for which you've been paying higher multiples and it just seems like something's getting lost in translation. Do you think about it any differently than that?

Adam, this is Bob. I think the way you started the question, I think therein lies the problem, right? In that the perception that we are a defensive business and we only do well in some sort of dire economic consequence is an overhang that I think is one unfounded and it's one that's been hard for us to sort of break through in terms of perception because I think if you look over a long period of time and we laid this out in that meeting that you were talking about, that our growth rates have been at or near the top of the peer group not all organic necessarily but it's always been the strategy as Adam said to take the cash flow to combine business and continue to grow out the portfolio into other areas and I think through the pandemic and now post-pandemic you're seeing the strength of that portfolio and so I think you are on a really good question of what is it about this story that the investor doesn't understand that is you know that's the crux of the question because I think At least internally, we feel, as Adam said, really good about this business and what the prospects of it are on a go-forward basis. And so somehow we've got to get shareholders to understand that as well.

Thanks so much, Bob.

All right. It looks like we have no further questions at this time.

Great. Thanks, Alan, and thanks, everyone, for your interest in the company, and we look forward to reviewing the second quarter results in July. Thank you.

That does conclude today's call. We thank you all for your participation. You may now disconnect.