Thank you for joining the Silgan Holdings Third Quarter 2021 Earnings Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Kim Ulmer, Vice President, Finance and Treasurer. Please go ahead.

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

Thank you, Kim. Welcome, everyone, to our third quarter 2021 earnings conference call. As you've seen, we had an exceptionally successful quarter, particularly considering the negative impacts from the economy-wide inflation, supply chain and labor challenges. Even more importantly, we recently completed three compelling acquisitions that will further drive growth and cost leadership in our markets. We remain confident that Silgan has the team, the focus and the positioning to continue to deliver market-leading earnings growth and superior free cash flow yields. With that, I'm going to turn it over to Adam and Bob to take you through all of this in greater detail.

Great. Thank you, Tony. As you saw in today's press release, our businesses continue to perform at a very high level in a challenging environment in order to meet our customers' unique needs, keep all of our employees safe and deliver strong results for our shareholders. The third quarter was no exception to that. Despite unprecedented inflation and continued supply chain and labor disruptions, the effects of the ongoing pandemic and tough year-over-year comparisons, we delivered very strong adjusted earnings per diluted share of $1.02 for the third quarter. Demand for many of our products remain at high levels as we achieved record volumes in our Dispensing and Specialty Closures and Metal Containers segment and the Custom Container business continues to outpace pre-pandemic demand levels. During the quarter, our Dispensing and Specialty Closures segment benefited from strong volume in the beauty, fragrance, food and beverage markets. These benefits were more than offset by the impact from the significant ongoing inflation and raw materials and the contractual lag in passing these increased costs on to our customers. Volumes in our Metal Containers segment were the highest in the company's history, driven primarily by strong seasonal vegetables in our pet food markets. This business also experienced higher production costs and operating inefficiencies as a result of continued supply chain disruptions and labor challenges. Our Custom Containers segment benefited from strong operating performance and effective cost controls, which helped to offset the expected lower volumes versus the prior year record volume levels. As previously announced, we did complete three strategic acquisitions, two in our Dispensing and Specialty Closures segment late in the third quarter and a smaller Metal Container acquisition in the beginning of the fourth quarter. And we are excited to welcome our newest team members to the Silgan family. Our combined teams are hard at work to ensure a successful and seamless integration of these acquisitions, and we remain confident about the prospects of each of these businesses. Gateway and Unicep each provide broad opportunities for continued growth as we expand our product capabilities, product offerings and customer base in our growing Dispensing and Specialty Closures segment. The Easytech acquisition, while smaller, provides a lower cost and more efficient means to supply easy-open and sanitary ends to our European customer base. While we expect market demand to remain strong and our operating teams to continue to deliver on behalf of our customers, supply chain and labor challenges are expected to continue through the fourth quarter and likely into 2022. As a result of these expectations and the fact that the fourth quarter is seasonally our smallest quarter, we are tightening the adjusted, excuse me, we are tightening the range of adjusted earnings per share for 2021 from $3.30 to $3.45 to a new range of $3.30 to $3.40, which at the midpoint represents a 9.5% increase versus the prior year record. Additionally, we are again raising our estimate of free cash flow from approximately $400 million to approximately $450 million for full year 2021 as we continue to reduce inventory levels and utilize the tax benefits from the recent acquisitions. Finally, as we take an early look at 2022, given both our and our customer views that the demand levels are holding, we anticipate another year of significant earnings growth, which are expected to exceed the 2021 growth rate before considering the impact from our recent acquisitions. With that, I will now turn it over to Bob to review the financial results in more detail and provide some additional explanation about our earning estimates for 2021.

Thanks, Adam. Good morning, everyone. As Adam highlighted, the third quarter had a number of competing dynamics. Volumes across the board for our businesses were very good as compared to historical trends. Supply chain and labor challenges were pervasive and inflation continues to impact almost every aspect of our business. Our businesses did an excellent job offsetting many of these headwinds through price pass-throughs, operational performance and cost reduction. Additionally, we have now closed the three acquisitions that will benefit our businesses going forward. And as a result, we delivered adjusted earnings per diluted share of $1.02. On a consolidated basis, net sales for the third quarter of 2021 were $1.65 billion, an increase of $162.6 million or 10.9% as net sales increased in each of our businesses. This increase is primarily the result of higher volumes in the Dispensing and Specialty Closures and Metal Containers businesses, the pass-through of higher raw material costs and foreign currency translation of approximately $6 million. We converted these sales into adjusted income before interest and taxes for the quarter of $175.2 million after adjustments of $4.1 million for costs attributable to announced acquisitions, $2.3 million for rationalization charges and $900,000 for the purchase accounting write-up of inventory versus $177.2 million in 2020 after adjustments of $2.5 million for rationalization charges and $700,000 for costs attributable to announced acquisitions. The decline was primarily a result of the lagged pass-through of inflation, primarily in resin, a less favorable mix of products sold, the negative impact of supply chain and labor challenges and lower volumes in Custom Containers partially offset by volume increases in Dispensing and Specialty Closures and Metal Containers and strong operating performance. Highlights of adjusted segment income for each of our operating segments is as follows: Adjusted segment income in the Dispensing and Specialty Closure segment for the third quarter of 2021 decreased $3.6 million to $61.4 million, primarily due to the unfavorable impact of approximately $10 million from the lagged pass-through of significantly higher resin costs; a less favorable mix of products sold and higher costs associated with labor and supply chain challenges, partially offset by the pass-through of other cost increases, plant productivity improvement and higher unit volumes. Adjusted segment income in the Metal Container segment was $96.1 million for the third quarter of 2021, essentially flat to the prior year as the benefit of approximately 6% higher unit volumes and higher pension income were offset by the negative impact from operational inefficiencies and higher costs associated with labor and supply challenges and the mix effect of more smaller size cans sold. Adjusted segment income in the Custom Container segment increased $800,000 to $22.8 million for the third quarter of 2021. This increase was primarily attributable to strong operating performance and cost control, partially offset by lower volumes of approximately 14% as compared to record pandemic volumes in the prior year and a less favorable mix of products sold. Turning now to our outlook for the remainder of 2021. As is typical for the seasonally smaller fourth quarter, we are tightening our range of estimate to a range of $0.10. Based on our year-to-date performance, our current volume outlook, expected operating performance and the inclusion of the recently announced acquisitions, which we expect to be slightly accretive for the quarter, we are providing an estimate of adjusted net income per diluted share for 2021 in the range of $3.30 to $3.40. The midpoint of this tightened range represents a 9.5% year-over-year increase. This estimate excludes the impact from certain adjustments outlined in Table B of our press release. We're also providing a fourth quarter 2021 estimate of adjusted earnings in the range of $0.69 to $0.79 per diluted share, a 23% increase at the midpoint of the range as compared to adjusted net income per diluted share of $0.60 in the prior year period. In addition, we are increasing our estimate of free cash flow from approximately $400 million to approximately $450 million for the year as we expect to continue to liquidate inventory as a result of tight supply relative to customer demand. We are also expecting lower cash taxes as a result of benefits from the recently acquired acquisitions. That concludes our prepared comments, so we can open it up for Q&A. Before turning it over, I would like to ask everyone to limit questions to one question and one brief follow up. If time allows, we will take further questions from the queue. At this point, Kian, I'll turn it back to you to provide directions for the Q&A session.

We can now take the first question from George Staphos from Bank of America.

Two questions for me. First, Bob, can you talk about the steel supply chain? If you had mentioned this earlier on the call, I might have missed it, we had some technical difficulties getting in. How is the on-time in full quality ratio in total running for you in terms of your steel supply? And do you project any problems into '22 in that regard? Secondly, the first call that you've had since you've had all these acquisition announcements. Can you give us a bit more color on Gateway, Unicep, Easytech, Kind of returns you're expecting, accretion? Anything that would be helpful to us sitting here trying to build out the models for '22 and beyond?

Good morning, George. I'll take the first question and Bob will cover the acquisitions quickly. But regarding steel supply chain, our supplier performance did improve a little bit in the third quarter. We were talking about some significantly low on-time and full delivery performance numbers in the last quarter. We're in the 50% range now, so it actually got a little bit better through the quarter. Importantly, we're getting everything we need to meet our customers' needs. We're not necessarily getting all the items that we want. And again, as we talked about on the last call, we also are looking to reward those suppliers that are performing well and meeting our needs. We are going to be making some supply mix changes as we look into 2022 and feel pretty good that we've got line of sight that we're going to continue to get the support that we need to meet our customers' demand. So no disruptions. It's getting better. It's not as good as it should be, and it still has an impact on our operations. Bob?

Yes. So George, I'll discuss the metrics related to the acquisition. To date, we've announced acquisitions totaling about $758 million in purchase price, with around $79 million of acquired EBITDA, which includes the synergies. We're pleased with each of the acquisitions we've made, and we believe we secured attractive deals that will provide us with opportunities for continued business growth alongside our customers at reasonable multiples. We also received net tax benefits from the Gateway and Unicep deals, amounting to approximately $125 million in tax shield. If you examine the purchase price multiple adjusted for net synergies, including the tax benefit, it results in an 8.2% for Gateway, 11.1% for Unicep, and less than 3% for the Easytech acquisition. Overall, we consider these transactions to be beneficial for us. Regarding accretion, it's still early, and we need to evaluate the forward-looking budget in relation to the acquisition profile and finalize our purchase accounting. However, based on what we currently know, I anticipate a modest impact for Q4, estimating around $0.01 for the quarter. Looking ahead to next year, we expect a more significant improvement, likely in the range of $0.10 to $0.12. Again, these are preliminary estimates, and the amortization of intangibles may create some drag, but the cash earnings will be substantially higher.

We can now take the next question from Salvator Tiano from Seaport Research Partners.

So the first one is, you mentioned that excluding acquisitions, you expect pretty much double-digit here since now you're at 9.5% of the guidance. So what gives you confidence on this big step-up in earnings given that inflation is still going strong and that your volumes are already very high, so you're facing tough comps?

It's a great question. And as we sit here, maybe we'll talk about Q3 for just a moment to answer that question. We did suffer $10 million of resin lag unfavorable impact in our Dispensing and Specialty Closures segment. So we know that contractually, we'll be passing those costs on to our customers in the next quarter to two quarters, maybe three quarters, depending upon what happens with resin. We've also had a very challenging operating environment with supply chain disruptions and labor challenges. Not that all of those go away, but we do think that we are seeing some signs of positive performance as we look into Q4 as far as the supply chain disruptions and labor challenges. So we feel good about next year. The Q3 was essentially what we'll call a blowout quarter for our business at Silgan. And it had a couple of very specific items that we don't anticipate will repeat next year. So we're feeling good about '22 and where we are today.

Okay. Can you provide more details on the negative mix that seems to be affecting all three segments? Looking at the end markets that have been improving since the pandemic, such as executional food cans and beauty and fragrance dispensing systems, these areas previously had a positive mix impact, but that has now shifted to negative. What is the reason for this change?

Good question. I'll go through each of the segments for you. We'll start with Dispensing and Specialty Closures. Again, some of this is because we're doing a comparative versus last year. So you have to think about last year and really the surge in the products that we supply to the health and hygiene market. You're talking about pumps and sprayers, hard surface cleaners, those types of products. And that will also apply to our Custom Container business here in a moment as well. But those products surged last year from a volume standpoint. Fragrance and beauty struggled a bit last year as we talked at great length about. And what's happened this year is you've had a reverse of those trends. Fragrance and beauty are recovering and recovering very nicely. We have an inventory correction kind of in the hand sanitizer and hard surface cleaner markets. And then we've also had continued strength in our food and beverage market. So when you put those components together, our flat cap business with continued growth does inherently have a negative mix across the segment. So it's as simple as that. When you get to the Metal Container business, we've talked for quite a long time about the growth in pet food and smaller cans. That does continue, and that is driving the unfavorable mix or less favorable mix as we describe it. In Custom Containers, again, it's much more about what happened last year. If you turn the clock back 9 to 12 months ago, any product that was available in a bottle or a custom container format was being used to fill for hand sanitizer products as we were getting those products out into the market. And those margins were quite good because literally, anything that was available on the floor, on the shelf was sold for hand sanitizers. So now we've got more of a normalized year where that volume is not recurring. As you saw, we were up 14% in Q3 last year in Custom Container volume, we're down 14% this year. So we're at the pre-pandemic level and you're seeing a much more normalized mix of products.

We can now take the next question from Adam Josephson from KeyBanc.

Adam and Bob, good morning, I hope you're well. Adam or Bob, one more question about next year, your commentary about next year. Can you give us some sense of what your volume expectations are embedded in that growth to what you guided? Are there any below the line or non-operating benefits that you're expecting? Just if you could flesh out a little bit more where you think the EBIT and perhaps below the line growth will come from beyond just getting back to resin lag that you've experienced this year. Hopefully, the operating environment will be a little more normal? Anything else would be helpful, just to give us a little more context.

Adam, before Adam takes the detailed question, I just want to be careful here that this isn't necessarily our formal guidance, right? We're just trying to give you an indication of where the business is headed here. So there's a lot of work to do between here and when we provide actual guidance.

Great. And I totally agree, Bob. And as we are early days, where the preliminary volume again, we'll kind of go by segment for you, Adam. I mean we're Dispensing and Specialty Closures, we'll see much more of a kind of our normal long-term kind of growth rate before the addition of the acquisition. So call it, 4% to 5% in Dispensing and Specialty Closures. You go to Metal Containers. I think interestingly, at this point, we're projecting down volume, flat to down volume. We had a very nice pack in Q3 of 2021. We're expecting next year to have a normal pack. Soup has been more normal in 2021. We expect soup to have a normal soup season next year as well. And we'll have continued growth in pet food. So I would say think about Metal Containers as flat to down slightly. And then our Custom Container business, we continue to win new business awards and have success in the marketplace. We've got a couple of new items coming on board next year that will drive growth in that 2% to 3% range for next year as well. And then what I have to say, just in summary, that's against record volume essentially in all three of our product categories. So we feel pretty good about where we are. As far as the resin lag, you mentioned that we are expecting resin to recover. And in fact, we're expecting resin to recover a bit here in Q4 where we do pass through some of those incremental costs to customers. I think those are the big items. The operating inefficiencies we discussed. We're going to continue to get better and we'll continue to chip away at those, which we are already, but it is having a negative impact on us in 2021.

Last...

Yes, I'm sorry, go ahead, Bob. Yes.

Yes, I was just going to finalize your question there. There really is nothing below the line at this point. That's what we’d point you to.

I appreciate that, Bob. Regarding the acquisitions and the leverage, I believe your pro forma leverage will be around 3.5x by year-end, which is at the upper limit of your long-term target range of 2.5x to 3.5x. Should we assume that you will maintain this level and work to reduce your leverage back to the 3x or 2.5x range? Or should we anticipate more significant acquisitions that might increase your leverage to 4x or higher in the near future?

Yes. Look, great question. I think you got it about right. So obviously, the leverage at the end of the quarter looks a little bit higher because we've got all the acquisition borrowings and none of the earnings essentially, right? So spot on a pro forma basis at the end of the year, we'll be sort of right at the high end of the leverage there. We think these are really good acquisitions. Our focus will turn at least in the near term to making sure we get the integration in hand. I don't suspect that there's any real challenge there, but that will be our priority. The nice thing is, given where we sit and given the free cash flow profile of this business, our hands are not tied relative to other opportunities that may come our way. That said, our priority is to make sure we get the integration done. But we're not taking our foot off the accelerator, so to speak, in terms of making sure we understand what the opportunities out there are.

We can now take the next question from Anthony Pettinari from Citi.

This is actually Bryan Burgmeier sitting in for Anthony. You did a few acquisitions in a relatively short period of time. Did anything change in M&A markets? Or have your internal views towards changed in any way? Or is this just a matter of timing and a bit of coincidence?

Yes. I would say, quite honestly, these are straight down the middle of the fairway type acquisitions for us. So nothing has changed in strategy or in financial discipline.

Got it. And do you have any early thoughts on CapEx for 2022? You did the handful of acquisitions. The business has grown organically in the last two years. I'm just trying to think about baseline CapEx from the business moving forward.

Yes. Well, look, it's probably early to put a fine point on it, but I would say directionally, probably up a little bit, just on a go-forward basis because of the acquisitions, but not materially.

We can now take the next question from Gabe Hajde from Wells Fargo Securities.

I was wondering if you could discuss tinplate inflation. I understand that negotiations are starting around this time. Some information we've come across suggests significant numbers for next year. So I have two questions. First, when considering consumer demand, elasticity, and food inflation, have you taken these factors into account in your preliminary view for 2022? If consumers choose lower-cost options, could that be a net positive, particularly for Metal Containers? Additionally, how might this impact your other two businesses? Secondly, do you foresee any actions from your customers regarding inventory management in relation to purchasing steel? I suspect the answer is no due to availability, but I just wanted to ask.

That's a very insightful question, Gabe. I agree with most of your points, but there is one exception regarding the timing of the tinplate negotiations for 2022. Typically, we would begin these discussions around now, but we've actually been engaged in negotiations for some time. We're facing significant inflation globally for tinplate, with proposals indicating increases of 50% to 100%. This level of inflation is unprecedented for us in this business. We’ve taken this into account for our projections for next year. It's important to acknowledge how this impacts consumers and our customers in the food can sector. While we do have the contractual right to pass these costs onto our customers, our primary focus is on securing the supply of raw materials, which is currently very constrained. To address one of your other questions, we are securing what we need, though not necessarily everything we desire. Raw materials are tight as we close out 2021, and we do not foresee any pre-purchase activities taking place at this time. Our priority is to lock in the supply. Given the critical nature of supply for next year, we initiated negotiations earlier and have already contracted with a few suppliers for tinplate for 2022. We are aware of the potential for significant inflation. While it’s likely that food prices will increase, food can products are not exempt from this trend. We’re experiencing inflation across all materials. However, we believe the food can offers great value to consumers, both in terms of cost and delivering nutrition efficiently. This will be a challenge, but we are actively managing the situation and have incorporated these factors into our 2022 assumptions. We remain committed to supporting our customers.

And then, I guess, just capital intensity, I'm assuming not much associated with Easytech. And I think Gateway was a single facility operation. But just I know you said directionally higher, Bob, but is that a $10 million to $15 million kind of annual number that we should be thinking about for capital associated with all three acquisitions?

Yes. Well, maybe I'll walk you through it. I think on the Easytech side, it's quite the opposite, right? This is an opportunity for capital avoidance for us because of the open capacity that they have there. So that one won't be a driver. I think on the other two, they're well capitalized, really good platforms. The question will be around CapEx is how fast this growth come? And obviously, we will certainly invest into that growth as it comes. So I think that could be either side. But again, we're not talking about large dollar CapEx spend here. So I think on the margin, it will be up a little bit, but not significant.

We can now take the next question from Anojja Shah from BMO Capital Markets.

I just wanted to stick with that topic of the recent acquisitions. We were very impressed by the margins, particularly at Gateway and Unicep. Could you give us any more detail on the product lines that are contributing to that kind of margin? And then how you think you'll be able to improve on that. I think for Gateway, you had a $2 million of synergies?

So very excited about both businesses and the products and the operating footprint that come into the Silgan family. So specific to Gateway, really, it's integrated dispensing packages. So it really starts with the closure. And in some cases, they've expanded beyond the closure to meet a customer's unique need for an entire package. But these are functional packages, which we think is really important. As Bob mentioned, they're very well capitalized. So they're very efficient in how they manufacture those products. And really, those two in combination are the drivers behind the margin rates that we see at Gateway. We do have incremental capacity available to us at Gateway, which is what Bob had just covered for you a moment ago. And so it's not so much about improving the margin at Gateway. What we're looking to do now is to grow into the capacity that they have and grow the EBITDA that way. I'll transition over to Unicep quickly for you. And Unicep is a very exciting venture for Silgan as we go further into the health care markets where we already have a reasonable position as well. Again, Unicep has opened capacity for growth. And so there are two functions with Unicep. It's a health care business, none health care and diagnostics. Number two, the open capacity as we fill that open capacity, it's across shared customers, and it's in markets that support the kind of margins that healthcare businesses have. So we feel really positive about the impact that we're going to have in utilizing the capacity in both businesses. And then as Bob talked about with Easytech, the third acquisition, that is much more about a cost avoidance, capital avoidance fill capacity for existing customers in the European market as well.

Great. That's very helpful. And then for my second question, if we could just switch over to the European food can business. You mentioned a really strong pack in the U.S. Can you talk about what you're seeing in Europe and maybe the setup going into next year?

Sure. And just maybe as a reminder, our European so can business, we really are Central and Eastward facing. So I'm not really going to talk much about the packs in the Western part of Europe. But the packs in Europe were good. All the way through to Russia, sweet peas and corn were good across the board. Now I will go a little bit further west. But the Italian tomato pack was very good. Peaches were good as well. So I wouldn't say a boomer, but just sort of right in line with our expectations for the European pack.

We can now take the next question from Arun Viswanathan from RBC Capital Markets.

I guess, first off, just on the raw material inflation. Have you seen any kind of relief? What's your expectation, I guess, for resin as we move into '22? It does appear that there's been some moderation in polyethylene in the last couple of weeks. And maybe you can also just help us understand kind of inventory-wise where you are or maybe your suppliers are, what you're hearing from the market as well?

Sure. Just resin specifically, maybe just going back, the forecast from the indices in our last quarterly call projected resin to start falling in Q3 to reach its peak and fall in Q3. That did not happen. In fact, they continued to inflate during Q3. You're right. In the last couple of weeks, we have seen what we believe is a little bit of the crest, if you will, and we're now projected to have falling resin prices. Modestly falling resin prices in Q4. And that is part of really the impact of our Q3. That was how we were going to get to the high end of our guidance in Q3 as if resin prices abated, that's also why we trend off the top part of our guidance for the fourth quarter and full year. As we then turn to 2022, the indices, again, and I'm just going straight from the indices, it does call for resin prices to abate. Now we'll see what happens with feedstocks and natural gas as a component to refining oil to get to resin. But as we sit here today, we think that we've got our appropriate pass-throughs and it may be lagged as we're dealing with in Q3, but we'll pass those costs on to the market.

Okay. And then if I could just ask maybe a question on demand for each of the segments. So enclosures, it looks like there has been some recovery in some of the markets that were impacted, I guess, due to the pandemic on the beauty side and fragrance side. I guess, first, maybe you can just update us on what your outlook is for that area. And then in Metal, I know we've got through a couple of odd periods here where you saw some pretty robust growth last year. And we've seen maybe some shift as reopenings increase. And then just lastly, on Custom Containers, again, there was also a lot of positive, I guess, from sanitizers and so on, but some other areas as well. And so maybe you can just kind of update us on your outlook and if there was any kind of COVID pull forward in any of those segments if you're kind of concerned about that as you go into '22?

That's a great question. I'll address each segment as we go along. The surge from COVID actually occurred last year, which was beneficial for many of our products in terms of volume. For instance, we achieved record volume in metal food cans in the third quarter of this year, surpassing last year's record. I believe we have moved past the significant impact of the COVID surge on our business. Regarding the fragrance and beauty segment, we initially expected a recovery of around 50%, but it has exceeded our expectations and reached about 70%. We anticipate maintaining this recovery for the remainder of the year, with further improvement expected in 2022 as we approach historical performance levels. In the Metal Container business, we recorded all-time high volume this quarter, driven by a mix of at-home consumption and institutional demand supporting restaurants. Everything seems stable, particularly with a strong performance in the U.S. market. Concerning Custom Containers, the significant surge we experienced last year, particularly related to hand sanitizer production, led to a 14% growth in the third quarter of 2021. We are now returning to pre-pandemic growth levels, and we're optimistic about the future. We're just working through the comparison with last year's surge period, which is the key point to consider.

We can now take the next question from Alton Stump from Loop Capital.

I wanted to ask about the 6% growth in food can volume, especially considering it followed a 14% growth from last year. It seemed like the vegetable pack season was strong, and pet demand remains robust. However, I was surprised by this number given the difficult comparison to last year. Was there anything else that contributed to such a strong performance in the quarter despite this challenging comparison?

Indeed it's a great question, Alton. And really, the simple answer is no, but I think we have to talk about it a little bit more. We've talked a lot this year about how through the pandemic, we were able to reach new consumers for the food can. There have been a lot of marketing campaigns targeted at new consumers for the food can. And really, the repurchase rates are very high for those new consumers. So we do think that there is an engagement with consumers, and we've been talking about it all year. That appears to be sticking. And who knows what that will mean going forward. But when you think about our record volumes that we're experiencing, we will have, again, our full year, we will have a record year of food can volumes for Silgan. So we're not surprised, actually. We've talked about pet food continuing to grow over the years. We've talked a lot about the pack. We had a nice bump in the pack in Q3. And everything else is really on a slightly elevated, but I would just say, normalized level at this point. And we feel very comfortable in our food can position and the growth rates that we're looking at going forward.

Have you observed any indications this year that consumers are going out more as some markets have reopened in the past couple of quarters? It would seem that this should lead to less eating at home, but the results suggest otherwise. Have you seen any data on the trends of food consumption at home versus away from home for consumers so far this year?

Well, year-to-date, it's a tough question to answer, but I'll take a shot at it. So I think the first thing is, over the last several months, maybe even quarter as things have opened up, there has been more consumption on-premise in restaurants. That's one thing. So that's definitely happening. I think you still have a component of the workforce that is working remotely. So actually, the data that we have says home consumption of food and meal occurrences in the home is actually up versus prior year, excuse me, not versus prior year versus the historic norm. So we think that's a very positive statement for the food can. We're continuing to evaluate that as we go forward. But it's sort of the best of both worlds. The reopening is happening. Restaurant consumption is driving certain components of our business and volume growth. And then you've got at-home consumption that's staying at a very elevated rate.

We can now take the next question from Ghansham Panjabi from Baird.

Adam, maybe a question for you related to the supply chain constraint narrative that's propagating throughout many different supply chains, including yours. Just curious as to how that's changing your order patterns, if at all. You mentioned customer optimism on 2022. You gave us some color on that. Is that supported by higher backlogs and order visibility versus what you would normally see? And then related to that, just given the shipping chaos and so on and some of the products from Dispensing that may be imported from China, are you seeing more sort of inbounds as it relates to more localized sourcing specific to that?

Certainly. The supply chain is facing challenges right now, especially in our metals businesses, where we're dealing with significant inflation affecting raw material prices. Our customers are eager to purchase more, but there just isn’t enough raw material available for manufacturing. The order book remains stable, and we have contracts in place to meet their needs, but the desire to buy more is there. This situation is occurring globally within the metals sector. Regarding our sourcing strategy, we primarily obtain raw materials from local markets; for instance, steel in the U.S. comes from the U.S., and similarly for Europe and Asia. We also manufacture our products locally, which somewhat mitigates our exposure to global logistics issues. While we do ship some items internationally, we mainly operate within the countries where we source our materials, allowing us to be less affected than some others in the industry. We view this as a great opportunity to continue locally sourcing the products we produce.

Okay. Terrific. Regarding your utilization levels, you operated at a high capacity last year and are continuing this year. Inventories appear to be low, which is reflected in the free cash flow adjustment related to working capital. How are you planning for production next year, and how does that affect your capital plans and the potential need to alleviate any bottlenecks?

I will first address 2021 and our approach for that year. To understand where we are now, we must reflect on 2020. During the peak of the pandemic last year, our customers focused on enhancing their efficiencies and throughput by limiting the variety of products offered. This resulted in fewer changeovers across our entire operation, leading to a highly efficient system due to the limited product range, which made it easier to deliver more products to the market. As we move into 2021, we are now reintroducing the product variety that was removed from our customers' orders last year. This means we are experiencing more changeovers and, as a result, our efficiency is slightly lower than it was last year while we manage the current order volume. Things are reverting to a more typical operational pattern compared to what we usually do. Our preliminary plans for 2022 reflect this normalization, anticipating standard run rates and changeover rates across all of our businesses.

We can now take the next question from Kyle White from Deutsche Bank.

I want to discuss Metal Containers and labor. Labor has clearly been an issue for everyone, and I believe your overtime hours have increased. Are you noticing any moderation in this? How do overtime hours compare now to historical periods? Additionally, has it been more difficult to find labor since the last quarter?

Great question. We'll start with the first one. We have had significant overtime. As we've mentioned, we've been operating at full capacity since the early days of the pandemic, especially in most of our facilities, including Metal Containers. Looking ahead to the fourth quarter, we plan to take some downtime. We need to perform maintenance on our equipment to meet our customers' needs next year, and our employees also require a break. This is something we are currently planning for Q4. Regarding labor availability, it has been a challenge this entire year. One of Silgan's strengths is identifying these challenges and implementing effective plans to tackle them. We are seeing progress with labor availability, and we are successfully onboarding new employees. While it’s not perfect yet, we are making strides, and that’s an important point. As we approach next year, we expect the overtime hours to normalize and for 2022 to be a more standard operating year for us.

Got it. And then can you just provide some color on Dispensing volumes, particularly with Albéa and beauty and fragrance. How is the pace of recovery gone in the third quarter and into the fourth quarter relative to your expectations? Has there been any kind of slowdown on the pace?

No. I'll talk broadly. I mean, the businesses are fully integrated now here. We're well over a year past the acquisition of the Albéa business. But what I would tell you is if you go back and you think about the surge that we saw in Dispensing systems and Custom Containers for products like hand sanitizers and hard surface cleaners, there was a rush to buy everything that was available at the height of the pandemic. So our customers probably overbought for some period of time. We've been in an inventory correction for those specific products now. For the most part, it was in Q3. And we're starting to see the signs that that inventory correction might be coming to the end. And we think that the volumes will normalize from there for those products. As I said earlier, the fragrance and beauty recovery this year has been terrific. It's above the expectations that we had at the beginning of the year, and we think we'll have recovered upwards of 70% of the volume and the units that go to the beauty and fragrance markets for the Dispensing and Specialty Closures segment.

We can now take our final question from Daniel Rizzo from Jefferies.

You just mentioned taking some downtime in the fourth quarter. I was wondering if that's like a pull forward where you're taking downtime now because it's run out, but it was something we likely scheduled for next year or the year after?

No. I think it's more just a function of we've been running really hard for 18 months. And again, we have to do maintenance to keep our equipment in top operating shape. And so it's just we actually have the time right now to do that in Q4, and we're taking advantage of it and also giving our employees a bit of a break.

Okay. For my last question, you've talked a lot about adjusting pricing to keep pace with raw material and input costs. I'm curious if you can increase prices even further, considering the value of your supply security. How much are your customers prepared to pay for that?

That's a great question. Our business model has long been about passing through cost changes we've faced. Given the supply chain situation and our capacity utilization, we have been able to implement some price increases where it made sense. For example, in our custom container business, we've seen a significant margin improvement over the past few years. We recognized that our performance needed to improve, so we increased our prices in the market and presented a unique value to our customers through a combination of competitive pricing, service, and engagement, which we believe surpasses other options available. Therefore, while it’s not the primary focus of our business model, we do have some pricing flexibility.

Hey, Dan, I want to clarify that our business model is not uniform because we have a significant amount of contract work in our portfolio. What Adam mentioned is that we are taking on capacity for customers who are not under contract, and we are definitely pursuing those opportunities. However, for customers that we do have contracts with, we must operate within the terms of those contracts. Therefore, it's somewhat of a mixed situation.

That concludes today's question-and-answer session. Mr. Greenlee, at this time, I would like to turn the conference back to you for any additional or closing remarks.

Great. Thank you very much, Kian, and thank you all for your time today and your continued interest in Silgan. We look forward to discussing our full year results for the year 2021 in January. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.