Q3 2022 Silgan Holdings Inc Earnings Call
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Thank you for all for joining the Chilean Holdings third 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, I've still got whole thing.
Please go ahead.
Thank you joining me from the company today, I have Adam Greenlee, President and CEO , and Bob Lewis EVP and CFO .
We begin the call today, we would like to make it clear that certain statements made today on this conference call maybe 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 condition of the car.
Company could differ materially from those expressed or implied in the forward looking statements and with that I'll turn it over to Adam.
Thank you Kim and we'd like to welcome everyone to Silicon <unk> third quarter 2022 earnings call I'll make a few comments about the quarter share our thoughts regarding the remainder of the year and give a preliminary look at the 2023 growth expectations. Bob will then review our financial performance provide more details around our 2022 outlook and then we'd be happy to answer.
Any questions.
You saw in this morning's press releases press release, our businesses continued to perform at a very high level and are focused on consistently delivering value and reliability for our shareholders and for our customers. The silicon team continues to drive record financial performance through operational excellence targeting efficient utilization of our assets and reducing opera.
<unk> cost commercial excellence aimed at meeting the unique needs of our customers and finally, maintaining a very disciplined approach related to our cost pass through mechanisms as a result for the second consecutive quarter Silicon delivered an all time record adjusted earnings per diluted share of $1 27 for the third quarter.
Our significant 25% increase over the prior year's record quarter, and importantly, an increase of over 20% versus our year to date earnings from 2021, while the anticipated destocking and normalization impacts in select categories drove organic volumes below prior year levels in the third quarter absolute demand.
For our products remains strong with third quarter, dispensing and specialty closures volume, 15% above pre pandemic levels and metal container volumes, 13% above pre pandemic levels more importantly, we delivered meaningful year over year operating income improvement in each of our business segments in the quarter.
Given our record performance to date and our expectations for the fourth quarter, which do include a strengthening U S dollar and higher interest rates. We are tightening the range of our adjusted earnings per share guidance for 2022 to a range of $3 90.
The $4 per share, which at the midpoint represents a 16, 2% increase versus the prior year record and will be the company's sixth consecutive year of record earnings performance. This compares to the prior range of $3 90.
To $4 <unk> per share. We're also confirming our estimate of free cash flow of approximately $350 million for the full year of 2022.
Finally, as we take an early look at 2023, we remain confident in the future prospects for each of our businesses and our ongoing ability to deliver continued growth and acknowledgment of our core mission at so again, our teams continue to execute well and as always we believe the value of our organization and the power of our broad portfolio.
So a product will position the company to compete and win in the markets. We serve through a variety of dynamic economic circumstances. As a result, we anticipate each of our business segments will deliver organic volume growth and operating improvements, which we expect to be a benefit to earnings in 2023. In addition, we do expect.
Gently higher free cash flow conversion in 2023 as well.
With that I will now turn it over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimates for the balance of 2022.
Thank you Adam.
Everyone as Adam highlighted we delivered a record third quarter and year to date results volumes, particularly in dispensing and specialty closures in metal containers were largely as expected and well above pre pandemic levels. Our operating performance was very strong in dispensing and specialty closures in metal containers and each of our businesses did a good.
Job of recovering inflationary costs through pricing and cost reductions as a result, we delivered adjusted earnings per diluted share for the quarter of $1 27.
Consolidated basis net sales for the third quarter of 2022 $1.970 billion, an increase of $319 3 million or 19, 3% as net sales increased in each of our businesses. This increase was primarily the result of the pass through of higher raw material and other inflationary costs.
Partially offset by lower volumes in the metal and custom containers and unfavorable foreign currency translation of approximately $57 million.
We converted these sales into adjusted income before interest and taxes for the quarter of $222 1 million after adjustments of $2 $7 million for rationalization charges as compared to $175 2 million in 2021 after adjustments of $4 1 million for costs attributable to announced act.
Physicians $2 $3 million for rationalization charges and $900000 for purchase accounting write up of inventory.
The increase was primarily a result of higher average selling prices with the pass through of inflationary costs.
Strong operating performance the lagged pass through of lower resin costs and a more favorable mix of products sold in dispensing and specialty closures, partially offset by inflation in manufacturing and SG&A costs lower volumes in metal and custom containers and unfavorable foreign currency of approximately $8 4 million supply.
Jane and labor challenges continue to impact certain customer demand for metal containers during the quarter.
Highlights of adjusted segment income for each of our segments is as follows <unk>.
Adjusted segment income in the dispensing and specialty closure segment for the third quarter of 2022 increased $18 1 million or 29, 5% to $79 5 million.
Primarily due to the higher average selling prices, resulting from inflationary cost recovery.
A favorable impact from the lagged pass through of resin cost changes strong operating performance, a more favorable mix of products sold and higher volumes, including from recent acquisitions.
These benefits were partially offset by inflation in manufacturing and SG&A costs and the unfavorable impact of foreign currency translation of $5 $5 million.
Acquisitions delivered $5 6 million of adjusted segment income.
Adjusted segment income in the metal container segment was $123 8 million for the third quarter of 2022, an increase of $27 7 million or 28, 8% versus prior year.
This increase was primarily attributable to strong operating performance, allowing us to better manage inventory levels and higher average selling prices as a result of the pass through of inflationary costs, partially offset by inflation in manufacturing and SG&A costs lower unit volumes and the impact of unfavorable foreign currency translation of two.
$9 million the acquisition.
<unk> contributed approximately $1 million.
Adjusted segment income in the custom container segment increased $1 4 million to $24 2 million for the third quarter of 2022.
This increase was primarily attributable to the pass through of inflationary costs and the favorable impact due to the year over year delayed pass through of changes in resin cost, partially offset by inflation in manufacturing and SG&A costs as well as lower volumes.
Turning now to our outlook for the remainder of 2022 based on our record year to date performance, our current volume outlook and our expected operating performance, we're providing an estimate of adjusted net income per diluted share for 2022 in the range of $3 90 to $4. The mid point of this tightened range represents.
16, 2% increase year over year. This estimate excludes the impact from certain adjustments outlined in table B of our press release.
Our updated 2022 earnings estimate include assumptions that full year interest expenses in the range of $125 million to $130 million in the fourth quarter and full year 2022 tax rate is approximately 21% and 25% respectively.
We're also providing a fourth quarter 2022 estimate of adjusted earnings in the range of <unk> 76 to.
The 86 per diluted share as compared to adjusted net income per diluted share of <unk> 79 and.
In the prior year period.
The fourth quarter of 2022 faces a difficult year over year volume comparison in our metal container and dispensing and specialty closure segments as we lap the impact of the pre buy in the prior year. However.
However, we expect profit improvement on a quarter over quarter basis in both segments as our teams continue to drive better operating and cost performance.
In our custom containers business with Destocking in the retail channel continuing into the fourth quarter and the timing of our continued efforts to rationalize lower return business, we expect fourth quarter volumes and earnings in the segment to be lower on a quarter over quarter basis.
In addition, we are confirming our estimate of free cash flow of approximately $350 million for the year, which which includes capex of approximately $250 million and a significant year over year headwind from working capital as a result of raw material and other inflation.
That concludes our prepared comments. So we can open it up for Q&A and I'll turn it over to Emma to provide instructions for the Q&A session.
Thank you.
If you'd like to ask a question today simply press star one on your telephone keypad.
If you would like to remove your question again press the star one.
Your first question today comes from Mark Wilde from Bank of Montreal. Your line is now open.
Thanks, Good morning, Adam Good morning, Bob.
Hey, Mark.
Just to start off I wondered if you could talk a little bit about the food can volumes they were a bit weaker than the industry numbers that came out the other day and I just kind of curious about that particularly given your waiting to pet food, which was actually stronger than the category as a whole any any issues you would call out there.
Yeah, Mark I think it's more about again, what we talked about in 2021, and how that influences our volumes in 'twenty two so.
If you go back a year ago, we had significant increased volume related to the vegetable category in particular.
As we were supporting not only our customers as they were.
Really having the first opportunity to restock the supply chain for canned vegetable products win when product went into the ground in 'twenty. One we also sold a significant amount of cans to the balance of the industry. So others in the industry of our customers et cetera, and we knew that volume would be coming out as we came into two.
Two and actually as we've talked.
Some of the benefited quite a bit of a benefit in metal containers. This year is that we've been able to reset kind of our our volume across the footprint that we had pre pandemic and.
The third quarter alone, we were 13% above pre pandemic levels from a volume perspective, and you just you overlay that 13% volume back into our very efficient platform that we had pre pandemic, that's where a lot of the improvement comes from in the segment. So really for US Mark to answer your question no surprise from a volume standpoint.
<unk>.
I think we talked about pet food again, and say that we came into the year thinking there would be.
Normal growth in pet food and our customers have had some challenges.
Commercializing their capacity investments and that sets up well for us for 'twenty three but that's the only issue that I would kind of raise as outside of expectations in 'twenty two.
Okay, and then just two other real quick ones one any there's been a lot of talk about inventory reduction efforts across the economy I'm just curious about the impact of that on your business and then also.
With travel activity picking up significantly is that helping portions of the dispensing business, particularly things like fragrances and cosmetics that move heavily through things like duty free stores.
Sure Great questions and when you think about the inventory correction broadly speaking across the market. We did talk about that a bit in the last quarterly call. So it does impact.
Dispensing, especially closure segment and our custom container segment as you think about I think the specific item. We talked about last time was kind of home care and lawn and garden products think about trigger sprayers et cetera.
Our dispensing and specialty closures segment those were caught up in the retail inventory correction and we had I think given guidance that those those corrections should be flowing through by the end of the year and we're sort of on track for that so volumes for us related to the inventory correction were roughly in line with our expectations.
And then when you get to travel and increased travel not only in North America, but on a global basis, we are seeing.
Greater activity, obviously in kind of the duty free.
Retail chain through the international airports, what I would tell you Mark is.
Beauty and fragrance for us, which has been incredibly strong all year long and I think it's more than just the travel component. That's us working very closely with our customers really at the outset of the pandemic and trying to find new ways for them to reach their end customers that consumer with our sampler platforms in beauty.
In fragrance.
And just other means of getting product in front of customers that werent necessarily obligated to travel and being one of those duty free stores. So we've seen significant growth in the category from that its also a benefit that folks are traveling again and we are seeing increased activity at the retail channel in the duty free stores.
Okay. That's helpful I'll turn it over thanks Adam.
Mark.
Your next question comes from the line of George Staphos with Bank of America.
Your line is now open.
Hi, everyone. Good morning, Thanks for the details.
Panama I wanted to peer into or under the Hood I guess on metal margins for the third quarter. So.
I think earlier in the year, you said you expected a good pack.
We know comparisons were difficult.
Margins were actually for what it is worth a.
A bit better than we were expecting and north of 10%. So can you help us understand how you got very good margins very strong EBIT dollars.
Bye.
At least an appearance of large drop in volume and then how did that drop in volume sort of.
Correlate to I think your expectation was for a good pack and related was there anything that we should be aware of in terms of timing.
<unk> in the third quarter extended into the fourth quarter were pulled forward into third quarter from fourth quarter.
Great questions George.
Maybe start at the end and work my way back through that.
So you are right a typically when we talk about the pack we talk about the back half of the year because of the pack is such a significant portion of our back half volume and that can move at times between Q3 and Q4. So what I would tell you is that Q3 pack actually yields were good throughout the pack.
Our products think of West Coast Tomatoes think of upper Midwest.
Core vegetables think of kind of eastern and central European.
Core vegetables as well.
It really had a very good Q3, so a good pack in Q3 yields were solid.
Tomatoes for us are mostly irrigated so water was not an issue we had planned for a reduction in the pack.
For my comments that I made earlier, just given the restocking that happened in 2021.
And with those higher yields that we were getting what ultimately happened George is that we had a little more volume in Q3 related to the pack and in the pack ended primarily in Q3, we will have a little bit of the ancillary pack in Q4, but not nearly what we would traditionally have so we're still going to call. It a good pack. It's just it was really completed in.
Q3, and we will have some of the outlier crops that come through in Q4.
Get back to that drop in volume I would tell you really from a veg standpoint. It was right in line with what we were thinking and you think about our prior commentary we had so much inefficiency.
And additional costs in our system last year as we were trying to support the market and trying to support our customers and ultimately consumers getting low cost.
Food into consumers' pantries and into their kitchens that we had I will give you a great example of making cans in California, Georgia and shipping them to the Midwest.
It's not something that you would normally do you've got additional freight you've got additional warehousing, we've eliminated essentially all of those costs and our team should get a ton of credit here because they did it earlier in the year than we thought we would and then what I will tell you is that 13% volume growth versus pre pandemic levels in Q3, I'll just repeat draw.
Wrap that into a very efficient operating platform that we had pre pandemic and you understand I hope.
There is a significant margin.
<unk> that you get on that incremental volume.
George Jordan I might just add to that that this is this is sort of a continuation if you will.
You are seeing in the.
The metal container business that we saw last quarter come through the dispensing and specialty closures business right. So it's taking all of that incremental cost and inefficiency that we experienced last year remember we called out.
On a consecutive quarters, what those headwinds were for the quarter were now sort of getting past that and re level setting the system back to its most efficient point in its allow us, allowing us to take all of that cost out of the system and continuing to get more and more efficient with our inventory.
<unk>, where we're taking all of that warehousing and handling and out of orbit freight out of the system and the added benefit on top of what Youre seeing in the margin drop through is we think that will be kind of fully recovered on all of that cost overrun that we saw last year by the time, we exit 'twenty two.
And we will be sitting with an inventory level that is right sized for the business on a go forward basis. So we're not sitting here with excess inventory that's at high levels.
Bob on that latter point is that what youre getting out in the release on the food inventory management program that you've got going underway is there something else there that we should be that sort of recognizing for next year.
That's exactly it it's all about the work that the teams have been doing to make sure that we get back to our core base, where we can really be most efficient with the operations.
My last question I'll turn it over and thanks for the time.
So you make the comment about the outlook for 2023 and Directionally volume growth.
It sounds like you expect earnings growth across your segments.
And you ultimately expect to convert that into.
I think you said significant free cash flow.
I guess why the statement now as opposed to waiting to fourth quarter when when you're guiding is there something youre trying to advisors.
And in particular.
Aside from well if you had to stack rank your outlook directionally not that we know necessarily what youre quantify what youre going to.
Youre thinking in terms of earnings for next year.
Is it volume is it productivity is it positive price cost what are the drivers recognizing it's all the above.
The priority is and what's going to drive you to that improved outlook for next year. Thanks, guys and good luck in the quarter.
Great. So I think Bob and I are both chime in on the answer here, George but a couple of things number one I think really we've been given.
The coming year guidance roughly in the third quarter for the last several years. So we're just trying to give at least our preliminary thoughts we're very early in our business plan process. So we don't have all the details, but we've kind of got that directional.
Kind of trajectory for each of our businesses. So I think what I would say and I'll turn it over to Bob as we think about unit volumes for next year Theres really nothing thats changed from our perspective. So you think about dispensing and specialty closures, that's going to be call. It 4% volume growth next year, that's going to be a big driver for.
For US you think about metal containers, and thats going to be low single digit volume growth in <unk>.
That's a lot of what we talked about it's going to be another good Pac next year nothing extraordinary just a normal good pack.
We've seen nice growth in soup and so we're assuming that the suite market has a reasonable performance next year and then continued growth in pet food and then as we get to custom containers from a volume perspective, we continue to believe that we will deliver something to the tune of low single digit kind of volume growth.
<unk> and custom containers. There is one item that we're continuing to now cycled through that includes the inventory correction that we've talked about for the back half of 2021. In addition to that we've chosen to not renew one of our larger contracts in the custom container segment.
Significant investment worth required to renew that contract.
And for that contract renewal and that investment did not meet our return thresholds. So given the improvements that we've made in our custom container segment and the many other investment opportunities that we have that do meet our investment criteria, we elected to maintain our disciplined approach and we're going to allocate that capital to other.
Opportunities that do meet the investment criteria within custom containers, we have new business wins that will ultimately offset this volume decline associated with this particular piece of business. The timing of that will be a little lumpy as we've kind of always talked and custom containers and that will be commercialized.
All it.
Mid to late year end 'twenty three so all of that being said, we believe low single digit and certainly that that run rate as we exit 2023.
Yes, so George maybe put a couple of finer points on that one just to the timing of why now other than we have more recently been sort of trying to give folks a heads up earlier than maybe we had typically done I think that's maybe even more importantly, so given the dynamic environment that we're in.
So I think if you take what Adam just said that probably gets us to something like a mid single digit growth in organic operating profit if you will.
I think as we look at some of the other components.
With which we don't exactly have line of sight on right now, but right now you'd say that pension is probably a headwind.
As we as we look forward.
Ill point out that we are overfunded in our pension plan. So there is no cash obligation and quite frankly, we think we'll be at a funded status that it's unlikely that we will never have a funding requirement to the plan. We have done some things to derisk that plan and we'll continue to evaluate other opportunities.
He has to further derisk the plan, but.
But that does sit out there as a headwind as we see it now and we won't know exactly what that looks like until we get.
To see what the final discount rate and returns are.
Interest also likely to be a headwind for next year.
That's probably going to be something to the tune of 15 on a year over year basis.
And that's largely rate based slightly offset by lower outstanding borrowings and a bit of an FX benefit in a perverse kind of way.
Using a forward curve rate.
Our average rate for the year is projected to be about four 2% and that's up from about three 3% in the prior year.
So if you think about that that sort of translates to variable rate debt in the high fives kind of range.
Tax given our earnings profile and no assumed tax law changes I would expect the rate to be.
Reasonably consistent with where we where we've been.
And then on.
As you pointed out free cash flow I think we are.
We're looking for a pretty sizable improvement obviously, we've got to get through final budgets around working capital and Capex.
I do think that up against the backdrop of <unk>.
Improved profitability from operations.
Partially offset by interest and taxes.
We think we can we can get to a number that's meaningfully higher than what we're forecasting right now.
Got it thanks for all that time and all the color and thanks for the reminder to on the third quarter or sort of pre outlook I'll turn it over.
Your next question comes from the line of Adam Josephson with Keybanc. Your line is now open.
Hey, good morning, everyone hope you're well.
Adam just one just to put a bow on the volume questions for this year I think on the last call. You said you expected organic volumes to be slightly down in closures and custom containers and then down I think mid single in food cans has any of that changed from three months ago or is or are your volume X.
Vacations for the full year, just about the same as they had been.
For dispensing and specialty closures and custom containers, let's say roughly theyre in line with where we thought we would be I think for metal containers.
We had projected Adam that our pet food customers would have.
<unk> gotten their capacity up and running that they've invested and installed sometime.
Sometime in the middle part of the back half of the year. So unfortunately that hasnt happened yet so that was that's the one item that I think would change. So we're now projecting pet food is flat essentially for the year versus providing growth. So that's the one that I would give you an update on that will push that year over.
Year comp for.
Metal containers, just a little bit further down versus what we had guided before.
Yeah, Adam the only other one that.
One that changed relative to our initial guidance is the volumes that we have coming out of Russia.
So so obviously with everything thats going on in the sanctions. There. We are we are operating at a much lower level than what we had anticipated.
Early on so that's probably worth a couple of points.
<unk>.
Volume growth that we originally forecasted that we're now not getting.
Got it.
Just to be clear so for metal containers in total for the year are you assuming down high single digit as much as 10% ish.
Yeah, Adam I think high single digits is probably the right number yes, okay. Okay. No I appreciate that one other clarification question before I go into something else. Bob is just the pension the likely pension drag that is below the line in other words, it's not part of the App.
Mid single organic EBIT growth expectation for next year right I just wanted to clarify that.
So so our segment income includes the pension.
So that it is it is not included and when I say that we think the businesses will grow.
That'll be offset by the by the pension and again Bill.
To be very clear that that is a noncash item right. So.
It's just sort of actuarial and accounting.
Stuff that happens there.
So the businesses will be up mid single before whatever pension drag you'll experience. So that will that's partially offset that up mid single and then interest will be higher FX might be a little bit of a drag but even with those.
Drags you would still expect op earnings next year.
That's right.
Got it Okay, and then Adam just on the volume commentary for next year I think you said DSC four ish next year, it's not it's clearly not the most economically sensitive.
That we cover in paper packaging, but there is nonetheless, some economic sensitivity to it obviously.
How confident are you putting that number out there just given the.
The obvious economic backdrop in which you're operating.
Yes, and maybe I'll try to answer that with a little bit of perspective across silicon as a whole and just remember 75% of our sales.
Do fall into kind of consumer staple categories that are just essentially more defensive in nature versus discretionary and while we do have some discretionary items in your and dispensing, especially closures to your point, we feel like we've got a pretty good line of sight now to what our customers business plans look like for 2003.
And what that would mean for us as their supply partners and again, Adam the silicon business model very well that we have.
Many requirements contracts throughout.
Throughout all of the Silicon businesses and I also think.
We talk about.
The pre buy impact for metal containers quite a bit there was a significant pre buy.
Dispensing and specialty closures segment for our food and beverage business and metal closures as well so that will normalize in 'twenty, three and I'll sit here and say, we've got a really good degree of confidence that that 4% kind of growth number is one that we're going to deliver.
I really appreciate that and then just one last one for Bob which is on leverage cap allocation.
Any change in your thinking in terms of optimal leverage ratio right now given where interest rates are given the economy et cetera.
Yeah look.
We think we're in a good spot we will be kind of.
Sub three by the time, we get to year end here with a with a pretty good increase in cash flow looking into next year. So theres pretty good direct line of sight to getting to the low end of the range in the next call. It 12 to 15 months from where we are right now so that given with given the <unk>.
<unk> portion of our of our.
That structure.
Feeling okay about that obviously it is a little bit of an earnings headwind, but I think we think it's manageable. So I think we're very comfortable with the leverage don't necessarily see.
Our path to changing that as we sit here today now obviously significantly significant changes to rates from here. We will we will have to be evaluated but where we are today it feels okay.
And particularly with the free cash flow profile of the business. So.
I think as it relates to capital allocation.
It's hard to sort of.
We have your way through what that's going to bring it at least in the near term because I think from an M&A perspective, theres been a lot of deals that have either not come to market or being pulled from market and so you really don't know what valuations look like just yet but.
But I think as.
As things do loosen up and I think that there will be some loosening in the M&A market as we move into <unk> into next year, whether it's early next year or mid year, who knows but I think theres a lot of a lot of capital that's out there and a lot of people that are going to want to sell some businesses.
So I think we will we will certainly have the appetite to look at I think there's plenty of things that we would find as attractive parts of our portfolio.
So if those things if and when those come to market. We will certainly actively engaged in looking at them and we will have to as we always do run it across our disciplined model and decide whether or not it makes sense and.
We have the luxury of being patient if those things don't fit then we can either continue to let leverage drift down.
Or we could think about a return of capital.
So really not much has changed about the strategy.
Other than making sure that we.
We look at the right things and we maintain the right discipline.
Thanks, so much Bob.
Your next question comes from the line of Anthony Pettinari with Citi. Your line is now open.
Good morning.
You talked about business wins, and custom containers and I'm just.
Terms of.
Is there anything you can say about sort of the end markets in the mix for the business that you are picking up and maybe through letting go of some business and then.
Any investment required to meet the business wins that you call out.
Sure. Good question, Anthony So the new business wins and there are multiple that we have it'll be commercialized in 2023.
Really are more focused on kind of the food.
And a bit of a beverage market that we serve and our custom container segment.
It does require capital.
Fits right into existing facilities that have a core competency or an expertise in not only the <unk>.
<unk> of equipment that will be installed but also in the resin that will be handling to manufacture those products. So feel really good about that.
Also facilities, where we've had recent investment and commercialization of new business wins over the course of the last several years as well. So I'm confident the team will continue to execute and deliver as we expect and then the item that we chose not to renew.
<unk> is a larger personal care items.
Really not a whole lot more to say than that just.
We found other opportunities to allocate our capital dollars that that meet our investment criteria.
Got it got it that's very helpful.
And then when we look at your full year guidance.
It's higher than the initial guidance that you gave at the beginning of the year. Despite what seems like a slowing economy, especially for a lot of discretionary items. Just wondering when you look back on the year, where do you think youre your real area of relative outperformance was and in terms of getting to the higher or lower.
And of of the current full year guide you know understanding it's a relatively narrow range. What are the biggest swing factors that could maybe get you to the high end or the low end.
Yes.
I think the the biggest win as you described it relative to the initial guidance is I think the teams have collectively done.
A great job and gotten to a lot of that inefficiency much faster than we anticipated. So I think coming into the year, we sort of had line of sight that we were going to attack it.
But the teams did a really good job of getting to it faster and even a little more so in terms of size and quantum in the year. So that's probably the biggest the.
The biggest win that sits there in terms of.
Risks from here.
Look I think supply chain still sits out there as as one I think it gets.
Less significant relative to the fourth quarter than it was to the broader part of the year.
FX is probably <unk>.
Largely built in so I don't see that as much of a of a risk unless something draconian happens.
That's kind of it.
Unless something really falls apart that we're not aware of right now, yes, we do have a little bit of resin benefit built into Q4, given that resin prices have been declining.
So we will see what happens with resin prices through the quarter I think the only other thing I would add to that Bob is it maybe just customers working capital year end.
Targets right.
Potentially affect our volumes, we don't see anything today, but.
It's been a challenging year for a lot of our customers as well with all the inflation that.
Dave experience through the course of the year that we pass through as well. So we're working closely with them and don't anticipate anything right now, but theres still quite a bit of time left in the quarter to work through.
Yeah.
Okay. That's very helpful I'll turn it over.
Yes.
Your next question comes from Wells Fargo Securities. Your line is now open.
Good morning, Adam.
Dave here.
Two quick ones on the raw material front.
Typically around this time youre kind of in the throes I guess talking about complete feel for next year.
Any preliminary views and kind of piggybacking off the last question or your response, Adam in terms of.
Potential for customers to.
Monkey around with with inventories either pre buy or delay purchases in advance of maybe a decline in typically just any thoughts or input there.
Yes, it's a really good question.
If you go back a year ago with that essentially doubling of tin plate prices for our customers that drove a lot of activity in Q4 of the prior year as we kind of look forward into 'twenty three.
Really what's interesting game is that as we've talked for a long time 10 players.
Specialty product for the larger steel manufacturers and it's really in our market to itself versus what's going on in broader steel with hot rolled and cold rolled steel that you kind of see in the Wall Street Journal and indices that are out there.
We've got a lot.
Large supplier in North America, that's announced a closure of a facility on the west coast that has a meaningful.
Supplier to our business that is kind of I think that is kind of.
Ultimately be exited in 2024, so we feel good about the supply of product this year and again, if you go back a year ago. It was all about are we all going to be able to get enough raw materials to support our customers. We have a really good degree of confidence that we're going to have the raw materials. This year and so the conversation has changed much more.
Price.
But as we sit here today again with that kind of capacity, that's going to be coming out of the market certainly in North America, and then the balance of kind of the global dynamics.
We're really thinking theres, not deflation coming our way as far as 10 place so.
We're thinking steel prices are rolling over or in some cases, we're going to see some increases not anything close to what we saw in 2022.
But.
Kind of low single digit increases are what are being proposed in certain geography. So again, we're early in the process as you know and we always talk about we fight.
For our customers every day and doing our very best to lower the inflationary impacts on the package of a metal container because we do think it is.
The best lowest cost most efficient means of getting food and product to consumers. So.
Gabe as we sit here today I think flu.
Flattish kind of pricing for steel and for metal containers has the right idea.
Appreciate that.
Just one quick one to the extent that maybe you've got some feedback.
Commercial.
<unk> in terms of competitive behavior dynamics.
With a falling raw material environment at least on the resin side.
Anything that you would call out positive or negative I would suspect most folks are still trying to recover some of these what I would characterize as stickier.
Input costs labor.
<unk> costs insurance things like that so just curious how that's going.
Yes, I think Youre right I think.
All of us in the market or are trying to make sure that we've got those cost recovery mechanisms correctly in place so.
Don't see a lot of.
New activity in the market regarding.
Potentially lower costs going forward.
Certainly.
The item that we talked about in customer containers.
Not about.
Any of those items that just more about.
The return on investment that we require all of our businesses to deliver so I would say no no change really to commercial activity or competitive activity and I think that goes across all of the business segments that we operate in.
Understood. Thank you and good luck.
Thanks.
Your next question comes from the line of Ghansham Panjabi with Baird.
Your line is now open.
Thank you good morning, everybody.
I guess my first question just give us a bit more color. If you could on the margin improvement in dispensing and specialty closures that you saw in <unk> and also as you step back broadly I mean this business as it.
It is on track to well exceed its previous high watermark, what what do you think structurally has changed in that business.
Apart from some of the portfolio moves you've made to.
Drive consistency in terms of that margin expansion dynamic.
Well sure I think when you think about Q3 margins Ghansham I mean, one thing.
We have worked really hard like a lot of other folks have all year long recovery in that inflation that we've experienced in <unk> and the one benefit that we have in Q3 as resin was finally kind of a benefit to the bottom line as we add those lag pass throughs that we've been talking about for the <unk>.
Couple of years as well so really that was the biggest driver I mean, you have a good mix of products. When you think about more dispensers versus <unk>.
Products for the traditional silicon markets food and beverage so margins were good during the quarter and we think Theres a lot of work that's gone into that.
As far as just kind of where we are historically.
We've been really focused on this segment, we have been allocating quite a bit of capital to this segment to continue to grow it out not only from an organic volume perspective, and revenue perspective, but those investments have been at higher margin levels as well. So we think that that's flowing through and hitting the bottom line and we're very pleased with where we.
Sit right now with dispensing and specialty closures.
Got you and then for my second question, just given the stress on the consumer at this point.
With inflation and so on you know some of the larger cpg's have been calling out pushing value packs just given the decrease in affordability have you started seeing that in any portions of your business at this point I would think you're very advantaged.
Context of the dynamic, but would just love to hear your thoughts on that.
Yeah, I mean, certainly I think you can read just about any any earnings transcript from a CPG and it does talk about lower volume higher price.
I think part of that is exactly what youre talking about more of the value pack, maybe a smaller.
The amount of products sold for a similar price kind of thing so we.
We haven't seen it actually take hold yet for many of our products, but what I would tell you is is we're ready for that conversation because I think what we've proven through the pandemic as our teams are able to very effectively execute a transition.
To an alternative format for any of our customers and our ability to commercialize and launch new products.
<unk> was fantastic through the pandemic and we continue to have success with these new business wins across each of our segments. So we're ready for that conversation.
Probably early for some of the products that we actually sell to the market and again I think we've talked about.
Most of our products or our multi use or.
A very sustainable kind of solution. So we were a little bit on the other side of that conversation is as we were looking for the value pack, putting more product into a single pack versus the opposite.
Thanks, so much Adam.
Sure.
Your next question comes from the line of Ron just one <unk> with RBC capital markets. Your line is now open.
Great. Thanks for taking my question.
Yes, so a couple a couple for me so first off just along the lines of the last question.
Have you also pivoted the business maybe to changing consumer preferences I am just wondering how much of your business. Maybe is is in private label across the three segments.
If that's material at this point.
Good question and you know what I would tell you is we feel like we've got good representation not only brand, but also with private label. So.
The retail data room would tell you that there is.
A bit of a move right now going to private label and we see that not only in North America, but also in Europe for our dispensing and specialty closures group again fair representation between branded and private label metal containers I would say.
Probably more aligned with <unk>.
Branded products, because private label has actually a smaller component of that market, but we're we're fairly representative private label and same thing for custom containers at a pretty good balance across the board between branded and private label. So we are seeing it we are benefiting from that as a representation is pretty fair.
Cross the board.
And then another question on closures I know that you guys have.
Gotten into the smaller portion.
Bottles and fragrance as well.
The outlook, there I mean, youre going into a holiday season here.
You guys are pretty excited about that is there any inventory that you'd have to build.
Maybe you can just talk a little bit about that market. Thanks.
Specific to the fragrance market I think we've touched on beauty and fragrance for some time, but we are really.
Very well represented at kind of the prestige and luxury end of that marketplace, which really does hold up very well through really any economic.
Cycle that we go through so as we sit here today and I know we mentioned this on the last call as well we have really good line of sight with our fragrance customers through probably mid of next year. They are all planning and has been planning for significant.
Volume throughout the holiday season in 2022, and then what's happening for 'twenty three around as they have delayed new product launches through the pandemic 2023 is going to be a year of a higher level of new product launches across that kind of luxury and prestige portfolio.
<unk> beverage products fragrance or beauty.
Alex excuse me.
And so we are staged for the first half of the year to make those transitions that have those new products being launched and then we'll see how those products do in the market next year, but really there is there is a really good line of sight for call. It. The next nine months of demand and our capacity utilization will be incredibly high through that entire period.
A time.
And then just last one.
So you noted definitely significant.
Capital headwind this year.
What does that kind of look like when you when you kind of combined some of the resin inflation.
And then maybe some of the extra tin plate or inventory that you had to build I mean, what do you think kind of comes back to you next year.
From a working capital standpoint.
Yes. So if you look at working capital 22 versus 21, there was a pretty significant.
Negative drag right because $1 21, what had had a reduction in work that's alright.
2021 and I had a reduction in working capital.
More significant than 20 twos drag so I think we will get some of some of if you look at the balance sheet that delta is that year over year difference.
I think there is an opportunity as we look forward to bring some cash out of working capital.
Assuming that right now the underlying assumptions around what's going to happen with raws hold that I think there is opportunity on the working capital line.
And we will wait and see what happens as we get through those negotiations.
But I would put it more on the positive side than the negative side right now.
Thanks.
Your next question comes from the line of Kyle White with Deutsche Bank. Your line is now open.
Hey, good morning, Thanks for taking the question on metal containers food cans have obviously been viewed as a recession resilient, but your mix has moved more to pet food.
Curious if you see the same performance in pet food during a recessionary environment as human food or is there a potential risk that consumers might move more to drive food for their pet.
Yes, Thanks, Kyle its a good question. We have also mentioned that a couple of times I think in the past too.
I would say for the markets, we serve and wet pet food.
And canned food really youre talking about small dogs, and small and cats and so typically what we see is not a whole lot of movement out of out of the wet category and to drive four again small dogs and cats I think if you think about the product and the larger cans for larger.
That does typically have pressure that moves to cable or.
Dry pet food.
But I think as we sit here now again with flattish volumes this year with all the challenges we've talked about.
There are significant stock outs as we sit here today across the country.
The U S at least.
Wet pet food is not on the store shelf because the customers our customers are not able to get enough product to the system. So the demand has remained very high throughout the course of the year and there is a replenishment that's going to have to happen really late this year early next year and we're just going to see how that plays out but the demand has remained very strong.
To this point.
Yeah, Kyle I think what I would add to that just as sort of evidence to the point is if you. If you looked back at what happened in kind of OE, Oh, nine right, where where our pet food customer distribution was much more to the larger size at which was really for larger dogs.
Did see a little bit of a reversion away from the can to drive through.
Through that cycle and then it kind of rebounded if you look at the mix of our customers today and the tests that theyre, serving they are much more oriented to smaller animals, because that's where all the growth has been so many households that as not as larger pads past, they're replacing those pet food smaller pets.
More pets being adopted largely on the on the smaller side a little bit of it.
This number there, but so anyway at the end of the day, we think that that same phenomenon will not recur certainly not at the level that it did back then so we think in large part pet food will react very much.
The way it has consistently over the last couple of years.
Yeah.
Got it and then sticking with this category you've talked about supply chain issues impacting your customers throughout this year.
I'm just wondering when you think that gets resolved and how much volume is actually being impacted that you could get potentially next year and then a two part question here on pet food.
Do you see any opportunities for continued organic growth in the space beyond just underlying growth in your existing markets. Obviously, you have a key customer in this space, that's been making investments as well as investments internationally and just curious about how you view potential international growth with key customers in that space.
Yeah.
Sure I think the supply chain issues that really have had been pretty prevalent across our customers certainly in pet food.
As I said Cai.
Anticipated those issues would have been mitigated by now kind of call. It late in the third quarter. They just haven't.
It's ongoing labor challenges it's ongoing.
Raw material challenges from other packaging supply.
So we're anticipating those get resolved by the end of the year Theyre just going to have to we're now offering our.
Our expertise to try to help solve some of those issues.
I'm working very closely with our customers as far as new new categories, maybe outside of pet food. We've got some new product launches that we've we've initiated through our metal container segment that we are encouraged by the initial results and.
Nothing to probably talk about yet on this call and nothing that kind of move the needle per se in the very short term, but we've got some really interesting things that are incredibly sustainable packages working with our customers for the future of the business. So more to come on that at a future time, when it's a little more appropriate to talk about it and then we have.
Have grown with our large multinational pet food customers and other geographies around the world specific to Europe . So we are growing in Europe , and we will continue to grow in Europe , and pet food and it's a core market there for silicon just as it is in the U S.
Got it thank you I'll turn it over.
Your next question comes from the line of Daniel Rizzo with Jefferies. Your line is now open.
Thank you and thank you for fitting me in just a quick question on on soup.
I don't know if I missed it today, but it is something that is mentioned in the past as being kind of a drag within a tailwind I was wondering where it's kind of settling out at this point.
Hey, Dan so actually soup.
A really good performer in Q3, so I want to say soup was up something like high single digit percentage versus prior year. So as we've talked before about one of the really interesting things that we had been seen in the soup market pre.
Pre pandemic as there was a a recovery that was taking place in soup volumes pre pandemic and we were very encouraged by that and then the pandemic happened in soup volumes increased dramatically as most of our product lines that.
Soup volumes have been very resilient and we believe and our customers believe that through the pandemic they were able to reach new consumers.
And the repurchase rates for particularly for suite products that are ingredients for broader meals.
Is incredibly high and sort of Cigna.
Significantly better than the repurchase rates that we've seen for those products for quite some time. So their marketing campaigns. They spent a lot of money trying to reach new customers and we're seeing the benefits of that so we're we're feeling very good about where soup is trending continuing to trend as we move beyond the pan.
<unk>.
Alright, Thanks, a lot.
Sure.
Your next question comes from the line of Mike Rock slammed with Jewish Securities. Your line is now open.
Thanks, Adam.
Congrats on a good quarter.
Thank you.
Just wanted a quick one.
A question for Bob just because you mentioned the <unk>.
<unk> fixed versus variable that you have.
Yeah, so it flexes, a little bit because of the because of the borrowings that we have on the revolver relative to the to the pack season for the seasonality of our fruit and veg back. So at year end, we would probably be something that looks like.
70 30 fixed.
To floating at during the year were probably a little more in kind of somewhere in the low sixty's fixed.
Got it.
Thank you for that.
And then just regarding the you mentioned that tomatoes in the West Coast had been good irrigation doesn't seem to be a problem at least for your customers.
It does look like the drought in California has worsened and maybe while there was no impact on this year's packed it could affect next year's packets farmers may decide to pass in planting tomatoes, given given the overall lack of irrigation.
And even in cases, where they are able to plan the yields have been negatively impacted as per the USDA I think forget USDA data they were estimating.
When you feel as you produced about 2 million tons committed at the beginning of the year.
They drop it to about 10 tend to heavily tied to the August So would just love to get your thoughts about.
The pack impacts from the drought and what are you hearing from your customers as to I guess.
The upcoming pack.
Yeah.
So Mike as we think about Tomatoes on the West Coast. There is a couple of things one.
Actually I agree with your numbers on the West Coast pack.
The acreage in tonnage of Tomatoes for 2022, remember canned Tomatoes are a small percentage of of that total volume and their premium products. They are protected.
For the most part in the growing season, because they are the premium products that go into cans and we've always said really the friends of the tomato pack really impacts more of that.
Okay that catch up market, the salsa markets et cetera versus the canned tomato market. So.
When there are 16000 tons of tomatoes that our process on the west coast, we pretty much get the same amount of canned tomatoes, so whether it's 12 or 16 doesn't really influence the canned tomato.
<unk> for Us and then.
The irrigation of our fields and crops for Tomatoes that all gets allocated at the beginning of the pack to your point so our customers got all the water that they required this year for the acreage that they had planted.
Anticipate the same for next year, and we're going through kind of all of those conversations now as they're planning for 'twenty three again that 23 pack will be protected.
With a certain amount of allocation to can food will go to cancer for Tomatoes, and I think we're expecting they are expecting a normal pack next year and not a whole lot of change to it for the can side of tomato, regardless of what happens with the broader tomato crops on the west coast.
Got it. Thank you congratulations good luck on the balance of the year.
Thanks.
Yeah.
Your next question comes from the line of Adam Josephson with Keybanc. Your line is now open.
Thanks, So much for taking my follow up just one question, Adam which is I think you were talking earlier about requirements based contracts in the context of demand next year and I, just my ears perked up because some of your can peers have also talked about requirements based contracts, but have turned out to have little to no visibility into what.
Demand was going to be and it just seems like you have much more confidence or visibility into what next year is likely to bring demand wise and I'm. Just wondering how much how you would characterize your level of visibility because in our requirements based contracts. The customer may tell you one thing, but if their business falls off a cliff than you are.
Not going to get business for them. So can you just kind of explain that concept to me.
Sure and you know.
I mean, maybe we will focus on the metal container segment to try to answer that question and really I think thats, our unique business model that we havent silicon what I keep calling out kind of a best in class.
Commercial partnership with our customers and Adam as you know many of our facilities are either co located or or near site with our customers. We sit in a lot of their production planning meetings. So we are working together to make sure. We both have as much information and as much visibility about the forward look.
The demand cycles.
Both of US can have in that partnership so I just I feel like we've got a tremendous.
Dialog, that's ongoing with our customers and I give our commercial team's credit as well because they're asking the hard questions. We are we're spending a lot of time throughout various levels of our customer organization to understanding the drivers in and on both the positive and negative side for their business.
And then we're trying to help solve problems, we're trying to solve for a better outcome for both companies at the end of the day. So it's truly a partnership I think thats a word that gets overused quite a bit in today's business relationships, but just the very nature of what we do and how we do it it's a partnership with <unk>.
Our customers and when we have requirements contracts, we take that obligation very seriously and in fairness, our customers do as well they they feel the obligation to make sure those communication channels are open and flowing and contained good end.
<unk> information on both sides of the equation.
Yeah, no. Thanks, and just one follow up to that was just I think George.
Touch on this earlier, but I think last year was the first time that you gave a look on the third quarter call for the following year and then you have continued that this year correct me, if I'm wrong, along those lines and if I'm remembering correctly or something.
I guess have you changed your thought process in terms of what to communicate information about next year and I think what what precipitated that exactly and is this something that you plan on continuing in future years for whatever reason.
So I'll go back and look at my notes to Adam, but I feel like we've been doing this for for several years in Q3, given the kind of preliminary look we've gone through the first round of business cycle planning with our each of our businesses at this point. So we do have a preliminary look and I do think it's important that we share that information.
With all of you folks and our investors as we're talking about how we're planning for next year really in what we're thinking about I think our information might be better as we sit in late October in 2022 than it was in late October of call. It 2015. So I think we're our teams are.
A better job of.
Getting our forward look and communicating that message to us and were therefore sharing that message with you folks as well. So we feel good about the business. We will make sure that comes through we've got pretty good line of sight and feel we should communicate that.
That's very helpful. Thanks, a lot and best of luck. Thanks.
Thanks, Adam.
That concludes today's question and answer session I'll now turn the call back to Adam Greenlee.
Thanks, Emma and thanks, everyone for joining today and for your interest in the company look forward to reviewing our full year 2022 results in late January of next year. Thank you.
This concludes today's conference call. Thank you for attending you may now disconnect.
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