Thank you for joining the Silgan 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 of Silgan Holdings. Please go ahead.

Thank you. Joining me from the company today, I have Adam Greenlee, President and CEO; and Bob Lewis, EVP and CFO. Before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore, involve a number of uncertainties and risks, including, but not limited to, those described in the company's annual report on Form 10-K for 2021 and other filings with the SEC. Therefore, the actual results of operations or financial condition of the 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 Silgan's 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. As you saw in this morning's press release, our businesses continue to perform at a very high level, and are focused on consistently delivering value and reliability for our shareholders and for our customers. The Silgan team continues to drive record financial performance through operational excellence, targeting efficient utilization of our assets and reducing operating costs, 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, and for the second consecutive quarter, Silgan delivered an all-time record adjusted earnings per diluted share of $1.27 for the third quarter, a 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 remained strong, with third quarter Dispensing and Specialty Closures volumes 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 to $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 $4.05 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. In acknowledgment of our core mission at Silgan, our teams continue to execute well. And as always, we believe the value of our organization and the power of our broad portfolio of products 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 significantly 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. Good morning, everyone. As Adam highlighted, we delivered record third quarter and year-to-date results, volumes, particularly in Dispensing and Specialty Closures and Metal Containers were largely as expected and well above pre-pandemic levels. Our operating performance was very strong in Dispensing and Specialty Closures and 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. On a consolidated basis, net sales for the third quarter of 2022 were $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 acquisitions, $2.3 million for rationalization charges, and $900,000 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 chain and labor challenges continued to impact certain customer demand for Metal Containers during the quarter. Highlights of adjusted segment income for each of our segments is as follows: adjusted segment income in the Dispensing and Specialty Closure segment for the 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. The 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. The 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 $2.9 million. The acquisition contributed approximately $1 million. Adjusted segment income in the Custom Containers 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 costs, 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 midpoint of this tightened range represents a 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 includes assumptions that full year interest expense is in the range of $125 million to $130 million and 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 $0.76 to $0.86 per diluted share as compared to adjusted net income per diluted share of $0.79 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, 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 from 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 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. Your first question today comes from Mark Wilde from Bank of Montreal. Your line is now open.

Thanks. Good morning, Adam. Good morning, Bob.

Hi, 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 was kind of curious about that, particularly given you're waiting to pet food, which was actually stronger than the category as a whole. Any issues you would call out there?

Mark, it really comes down to what we discussed in 2021 and its impact on our volumes in 2022. Looking back a year, we saw a significant increase in volume in the vegetable category, particularly as we helped our customers restock their supply chains for canned vegetable products that were planted in 2021. We also supplied a large number of cans to other industry players. We anticipated that volume would carry over into 2022, and much of our benefit in metal containers this year is attributed to resetting our volume to levels we had before the pandemic. In the third quarter alone, our volume was 13% higher than pre-pandemic levels. When we apply that 13% volume to our efficient platform from before the pandemic, that's where much of our segment improvement stems from. So, in response to your question, Mark, we weren't surprised by the volume trends. Regarding pet food, we initially expected normal growth at the beginning of the year, but our customers faced challenges in realizing their capacity investments, which positions us well for 2023. That's the only point I would raise as being outside our expectations for 2022.

Okay. I have just two quick questions. First, there's been a lot of discussion about efforts to reduce inventory across the economy. How is that affecting your business? Second, with travel activity increasing significantly, is that benefiting parts of the dispensing sector, especially items like fragrances and cosmetics that are often sold in duty-free stores?

Certainly. Good questions. Regarding the inventory correction in the market, we discussed this a bit in the last quarterly call. It affects our dispensing and specialty closures segment, as well as our Custom Container segment. One specific area mentioned last time was home care and lawn and garden products, such as trigger sprayers, which were impacted by the retail inventory correction. We indicated that these corrections should be resolved by the end of the year, and we are on track for that. The volumes related to the inventory correction aligned with our expectations. As for travel, we are witnessing increased activity not just in North America but globally, particularly in the duty-free retail sector at international airports. I'd like to emphasize that beauty and fragrance have performed exceptionally well throughout the year. This success isn't solely attributed to travel; we've been collaborating closely with our customers since the pandemic began to help them connect with consumers using our sampler platforms and other strategies to present products without relying solely on duty-free stores. We've experienced significant growth in this category, which is further supported by the resurgence of travel and heightened activity in retail channels and duty-free stores.

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

Thanks, Mark.

Your next question comes from the line of George Staphos with Bank of America. Your line is now open.

Hi, everyone. Good morning. Thank you for the details. Adam, I wanted to delve into the specifics of metal and margins for the third quarter. Earlier this year, you mentioned you anticipated a good pack. Given the tough comparisons, margins were somewhat better than we expected, exceeding 10%. Can you explain how you achieved such strong margins and high EBIT dollars, despite what seems to be a significant drop in volume? Additionally, how does this volume decline relate to your expectation for a good pack? Also, is there anything we should know regarding timing of the pack in the third quarter that might have moved into the fourth quarter or been pulled forward from the fourth quarter?

Thank you for the questions, George. I'll start by addressing your points in reverse order. You're correct that we usually discuss our pack related to the latter half of the year due to its importance in our volume during that time. This can shift between Q3 and Q4. In Q3, the pack performed well across all products, including West Coast tomatoes and core vegetables from the upper Midwest and Eastern and Central Europe. So, the Q3 pack was robust with solid yields. Our tomatoes are largely irrigated, so water was not a concern. We had anticipated a reduction in the pack due to restocking in 2021. However, because of the higher yields we experienced, we ended up with a bit more volume in Q3 related to the pack, which largely concluded in that quarter. We will have some lesser amounts in Q4, but not to the extent we would typically see. Overall, it was a strong pack, mostly completed in Q3, with just a few outlier crops in Q4. Regarding the drop in volume, it aligned with our expectations from a vegetable standpoint. In previous discussions, we mentioned the inefficiencies and costs we faced last year while trying to support the market and provide consumers with affordable food. For example, we transported cans from California to the Midwest, which incurred extra freight and warehousing costs. We've now eliminated most of those expenses, and our team deserves credit for achieving this ahead of schedule. Additionally, we saw a 13% increase in volume compared to pre-pandemic levels in Q3, which contributed to significant margin absorption given our efficient operational platform prior to the pandemic.

George, I might just add to that, that this is sort of the continuation, if you will, that you're seeing in 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 consecutive quarters, what those headwinds were for the quarter. We're now sort of getting past that and re-level setting the system back to its most efficient point and it's allowing us to take all that cost out of the system and continuing to get more and more efficient with our inventories where we're taking all that warehousing and handling and out-of-orbit freight out of the system. And the added benefit on top of what you're seeing in the margin drop-through is we think that we'll be kind of fully recovered on all that cost overrun that we saw last year by the time we exit '22, and we'll be sitting with an inventory level that is rightsized 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 you're getting at in the release on the food inventory management program that you've got going underway or is there something else there that we should be 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.

Okay. For my last question, I'll wrap up and thank you for the time. You mentioned the outlook for 2023 and indicated that you expect volume growth and earnings growth across your segments. You also anticipate generating significant free cash flow. I'm curious why you're making this statement now instead of waiting until the fourth quarter when you provide guidance. Is there something specific you want to highlight? Additionally, if you had to rank your outlook directionally, even though we may not know your specific earnings thoughts for next year, what are the main drivers? Is it volume, productivity, or positive price-cost dynamics? Recognizing that it's a combination of factors, what are your priorities and what will lead you to a more favorable outlook for next year? Thanks, and good luck in the upcoming quarter.

Great. Bob and I will both address this question, George. First, we've consistently provided our guidance for the upcoming year around the third quarter for several years. We're sharing our preliminary thoughts as we're still in the early stages of our business planning process and don’t have all the specifics yet, but we do have an idea of the direction for each business segment. Regarding unit volumes for the next year, our perspective hasn’t changed. For dispensing and specialty closures, we anticipate about 4% volume growth, which will be a significant contributor for us. In the case of metal containers, we're expecting low single-digit volume growth. As we discussed, it appears we'll have another solid packaging year—nothing extraordinary, just a normal good performance. We've also seen strong growth in soup, so we expect that the soup market will perform reasonably well next year, along with continued growth in pet food. For custom containers, we believe we will see low single-digit volume growth as well. However, we are addressing one item related to an inventory correction from the second half of 2021. Furthermore, we decided not to renew a substantial contract in the Custom Container segment, which required a significant investment that did not align with our return expectations. Consequently, given our advancements in the Custom Container segment and the other investment opportunities that satisfy our criteria, we opted to maintain our disciplined approach and reallocate that capital to more promising opportunities. We have secured new business wins within custom containers that will ultimately compensate for the volume decline associated with this specific business. The timing of those will be somewhat unpredictable, as we've mentioned before in custom containers, but we expect to commercialize those around mid to late '23. Overall, we anticipate low single-digit growth and expect that run rate to carry us as we move into 2024.

Sure, George, let me clarify a few points on that. First, regarding the timing, we’ve been trying to give our stakeholders earlier notice than in the past, especially considering the current dynamic environment. Based on what Adam mentioned, it looks like we could expect mid-single digit growth in organic operating profit. However, we also have other components that we don’t have full visibility on at the moment. Currently, the pension plan appears to be a headwind moving forward, although we are overfunded in the plan, meaning we have no cash obligations. We anticipate remaining at a funded status that will likely prevent any future funding requirements. We've taken steps to derisk the plan and will keep looking for additional opportunities to do so, but it is a concern moving forward, and we won’t know the exact impact until we see the final discount rates and returns. Interest rates are likely to be another challenge next year, potentially costing around $0.15 year-over-year, primarily due to rate increases, slightly offset by lower borrowings and some foreign exchange benefits. Based on forward curve rates, we project our average interest rate for the year will be about 4.2%, up from 3.3% the previous year, which implies variable rate debt could be in the high 5% range. Regarding taxes, assuming no changes in tax laws, I expect our tax rate will remain fairly consistent with recent levels. On free cash flow, we anticipate a significant improvement. We still need to finalize our budgets for working capital and capital expenditures, but I believe with improved profitability from our operations, partially offset by interest and taxes, we can achieve a figure that is notably higher than our current forecast.

Thanks so much, Bob.

Your next question comes from the line of Anthony Pettinari with Citi. Your line is now open.

Good morning. You mentioned recent successes in custom containers. Can you share any details about the end markets and business mix you are acquiring, as well as any areas where you might be exiting? Also, will there be any investments needed to support the business successes you've highlighted?

Sure. Good question, Anthony. So the new business wins and there are multiple that we have that will be commercialized in 2023 really are more focused on kind of the food in a bit of the beverage market that we serve in our Custom Container segment. Does require capital? It fits right into existing facilities that have a core competency or an expertise and not only the technical equipment that will be installed but also in the resins that we'll be handling to manufacture those products. So we feel really good about that. Also facilities where we've had recent investment in commercialization of new business wins over the course of the last several years as well. So that confidence the team will continue to execute and deliver as we expect. And then the item that we chose not to renew is a larger personal care item, really not a whole lot more to say than that. Just we've found other opportunities to allocate our capital dollars that meet our investment criteria.

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 your real area of relative outperformance was? And in terms of getting to the higher or lower end of the current full year guide, 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?

Yeah. Look, I think 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 biggest win that sits there. In terms of risks from here, look, I think supply chain still sits out there as one. I think it gets less significant relative to the fourth quarter than it was to the broader part of the year. probably largely built in. So I don't see that as much 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.

Yeah. We do have a little bit of resin benefit built into Q4 given the resin prices have been declining. So we'll see what happens with resin prices for the quarter. I think the only other thing I would add to that, Bob, is maybe just customers' working capital year-end targets, right, would 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 they've experienced through the course of the year and that we've passed through as well. So we're working closely with them. Don't anticipate anything right now, but there's still quite a bit of time left in the quarter to work through.

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

Your next question comes from Wells Fargo Securities. Your line is now open.

Good morning, Adam, Bob. Gabe here.

Good morning, Gabe.

Just two quick ones on the raw material front. Typically, around this time, you're kind of in the throes, I guess, of talking about tinplate seal for next year. Any preliminary views and kind of piggybacking off of the last question or your response, Adam, in terms of potential for customers to monkey around with inventories either prebuy or delay purchases in advance of maybe a decline in tinplate. Just any thoughts or input there?

That's a great question. Looking back to a year ago when tinplate prices doubled for our customers, that led to significant activity in the fourth quarter of the previous year. As we look ahead to 2023, it's interesting to note that tinplate is a specialty product for larger steel manufacturers, and it operates in a market of its own compared to the broader steel market, which includes hot-rolled and cold-rolled steel featured in financial news. A major supplier in North America has announced the closure of a facility on the West Coast, which is a significant supplier for our business and is expected to be out of the market by 2024. We are confident about the product supply this year. Last year, our main concern was whether we could secure enough raw materials for our customers, but now we are more confident in our ability to source those materials. The focus has shifted to pricing. Given the capacity removed from the market, particularly in North America, along with the global dynamics, we do not anticipate deflation in tinplate prices. We expect steel prices to stabilize or slightly increase, but not nearly to the levels we witnessed in 2022—possibly low single-digit increases in certain areas. We are still in the early stages of this process, and we constantly strive to minimize the inflationary effects on metal container pricing because we believe it's the most efficient and cost-effective way to deliver food and products to consumers. Therefore, we think a stable pricing outlook for steel and metal containers is appropriate.

Appreciate that. Just one quick one to the extent that maybe you've got some feedback from the commercial chain 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 on that I would suspect most folks are still trying to recover some of these, what I would characterize as stickier input costs, labor facility costs, insurance, things like that. So just curious how that's going.

Yeah. I think you're right. I think all of us in the market are trying to make sure that we've got those cost recovery mechanisms correctly in place. So I don't see a lot of new activity in the market regarding potentially lower cost going forward. Certainly, the item that we talked about in customer containers is really not about any of those items, that's just more about the return on investment that we require all of our businesses to deliver. So I would say 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 for 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 3Q. And also, as you step back broadly, I mean, this business is on track to well exceed its previous high watermark. What do you think structurally has changed that business apart from some of the portfolio moves you've made to drive consistency in terms of that margin expansion dynamic?

I think when we consider the margins in Q3, we worked hard throughout the year to recover from the inflation we've faced. A key benefit in Q3 was that resin finally positively impacted our bottom line due to those lagged pass-throughs we've mentioned over the last couple of years. That was the biggest factor contributing to our performance. We also had a favorable mix of products, with an increased focus on dispensers compared to traditional silicon markets like food and beverage. Overall, margins were strong this quarter, reflecting the effort we've put in. Historically, we've concentrated on this segment, investing significantly to support its growth, both in organic volume and revenue. These investments have also been aimed at achieving higher margins, which we believe is benefiting our bottom line. We're very satisfied with our current position in dispensing and specialty closures.

Got you. For my second question, considering the current stress on consumers due to inflation, some of the larger consumer packaged goods companies have started promoting value packs because of the reduced affordability. Have you noticed any impact on your business in this regard? I believe you have an advantage given the situation, but I’d like to hear your thoughts on it.

Yeah. I mean, certainly, I think you can read just about any earnings transcript from a CPG and it does talk about lower volume, higher price. I think part of that is exactly what you're talking about more of the value pack, maybe a smaller amount of products sold for a similar price kind of thing. So we haven't seen it actually take hold yet for many of our products. But what I would tell you is, we're ready for that conversation because I think what we've proven through the pandemic is 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. I think 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. It's 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 are multiuse or a very sustainable kind of solution. So we were a little bit on the other side of that conversation 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 Arun Viswanathan with RBC Capital Markets. Your line is now open.

Great. Thanks for taking my question. Yeah. A couple from me. So first off, just along the lines of the last question, have you also pivoted the business maybe to changing consumer preferences. Just wondering how much of your business maybe is in private label across the three segments, if that's material at this point?

Good question. I would say that we have strong representation in both branded and private label products. Currently, there is a noticeable shift toward private label, which we observe in both North America and Europe. For our Dispensing and Specialty Closures group, we maintain a fair balance between branded and private label. In the metal containers segment, we are more aligned with branded products since private label constitutes a smaller portion of that market. However, we are adequately represented in private label, and the same applies to custom containers. Overall, we have a good balance between branded and private label, and we are benefiting from this fair representation across the board.

And then another question on closures. I know that you guys have gotten into the smaller portion bottles in fragrance as well. What's the outlook there? I mean, you're going into a holiday season here. Are you guys 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.

Certainly. Regarding the fragrance market, we have been discussing beauty and fragrance for a while, and we are very well positioned at the prestige and luxury end of that market, which tends to hold up well during any economic conditions. As of now, we have strong visibility with our fragrance customers likely through the middle of next year. They are planning for significant volume during the holiday season in 2022. For 2023, many brands have postponed new product launches due to the pandemic. This coming year is expected to see an increase in new product launches within the luxury and prestige fragrance and beauty categories. We are prepared for the first half of the year to transition and launch these new products and will observe their market performance next year. Overall, we have a solid outlook for demand over the next nine months, and our capacity utilization is anticipated to remain very high throughout this period.

And then just last one. So you noted definitely a significant working capital headwind this year. What does that kind of look like when you kind of combine some of the resin inflation and then maybe some of the extra tinplate or inventory that you had to build, I mean, what do you think kind of comes back to next year from a working capital standpoint?

If you compare working capital from 2022 to 2021, you'll see a significant negative impact. In 2021, there was a larger reduction in working capital compared to the drag we saw in 2022. Looking at the balance sheet, that difference shows the year-over-year change. I believe there is a chance to release some cash from working capital, assuming that our current outlook on raw materials remains accurate. I think we have potential in the working capital area, and we'll see how negotiations unfold. Right now, I feel more optimistic about it than concerned.

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 recession resilient, but your mix has moved more to pet food. Just 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. It's a good question. I've mentioned this a couple of times in the past as well. In the markets we serve for wet pet food and canned food, we're primarily focused on small dogs and cats. Typically, there's not a lot of movement away from the wet category for these pets. The larger cans for bigger dogs do tend to experience some pressure, with consumers shifting to kibble or dry pet food. Currently, we've seen flat volumes this year amidst various challenges. There are significant stock-outs across the United States, where wet pet food is not available on store shelves because our customers are struggling to obtain sufficient product for the system. Demand has stayed very high throughout the year, and a replenishment will be necessary late this year or early next year, so we'll see how that unfolds, but demand has remained robust up to this point.

Kyle, I would add that looking back at the events of 2008 and 2009, we saw our pet food customer distribution was primarily focused on larger dogs. During that time, there was a noticeable shift from canned to dry food, but then it eventually rebounded. Currently, the mix of our customers and the pets they cater to is more geared towards smaller animals, as this segment has been experiencing significant growth. Many households with larger pets are now opting for smaller ones, and there has been an increase in adoptions primarily of smaller pets. However, we believe that the same pattern we observed in the past will not happen again, at least not to the same extent. Overall, we anticipate that pet food demand will continue to respond as it has over the past couple of years.

Got it. Sticking with this category, you mentioned that supply chain issues have affected your customers throughout this year. When do you anticipate these issues will be resolved, and what impact on volume do you expect for next year? Additionally, regarding pet food, do you see opportunities for continued organic growth in this sector beyond just the growth in your existing markets? You have a key customer in this area that has been making investments domestically and internationally. I'm curious about your perspective on potential international growth with your key customers in that sector.

Sure. I think the supply chain issues have been significant for our customers, particularly in pet food. We expected that these issues would have been resolved by now, around late in the third quarter, but they persist due to ongoing labor and raw material challenges related to other packaging supplies. We anticipate these will be addressed by the end of the year, and we are now using our expertise to assist in resolving some of these issues while working closely with our customers. Regarding new categories beyond pet food, we have launched some products in our metal container segment with encouraging initial results. However, there isn't anything substantial to report on this call that would impact us in the short term. We have some interesting, sustainable packaging innovations in collaboration with our customers for the future, and we'll share more details at an appropriate time. Additionally, we are expanding with our large multinational pet food customers in various global markets, specifically in Europe, where we are continuing to grow, making it a key market for Silgan, just as it is in the U.S.

Got it. 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 soup. I don't know if I missed it today, but it's something that has been 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. Soup performed really well in Q3, showing a high-single digit percentage increase compared to the previous year. As we've discussed before, prior to the pandemic, the soup market was experiencing a recovery in volumes, which encouraged us. Then the pandemic hit, and soup volumes surged significantly, just like many of our other product lines. Soup volume has remained strong. Both we and our customers believe that during the pandemic, they connected with new consumers, leading to higher repurchase rates, especially for soup products that serve as ingredients for meals. These rates are considerably better than what we've observed for some time. Their marketing efforts to attract new customers have been substantial, and we're now seeing positive results from that. Overall, we're optimistic about the ongoing trend for soup as we move forward beyond the pandemic.

All right. Thanks a lot.

Your next question comes from the line of Mike Roxland with Truist Securities. Your line is now open.

Thanks, Adam, Bob and congrats on the good quarter.

Thank you.

Just one quick question for Bob. Just Bob, can you mention the proportion of fixed debt versus variable that you have?

Yeah. So it flexes a little bit because of the borrowings that we have on the revolver relative to the pack season or the seasonality of our fruit and veg pack. So at year-end, we'd probably be something that looks like 70-30 fixed to floating. During the year, we're probably a little more in kind of somewhere in the low 60s fixed.

Thank you for the information. Mr. Adam, you mentioned that tomato conditions on the West Coast have been favorable, with no irrigation issues for your customers for now. However, it appears that the drought in California has intensified. While this year's crop may not be affected, it could have implications for next year's yields, as farmers might choose not to plant tomatoes due to insufficient irrigation. Moreover, even if they do plant, yields are likely to suffer based on USDA reports. Initially, USDA estimates projected California's tomato production at about 12 million tons at the start of the year, but that number has since been revised downward. I would appreciate your insights on how the drought could impact future crops and what feedback you are receiving from your customers regarding the upcoming harvest.

So Mike, regarding tomatoes on the West Coast, I agree with your figures for the acreage and tonnage of tomatoes for 2022. Keep in mind that canned tomatoes make up a small portion of the total volume. Their premium products are mostly secured during the growing season due to their status. We've mentioned that the outer edge of the tomato pack affects markets like tomato paste, ketchup, and salsa more than it does the canned tomato market. Therefore, when 16,000 tons of tomatoes are processed on the West Coast, we receive a similar amount of canned tomatoes. Whether it's 12 or 16 tons does not significantly impact our canned tomato volumes. Furthermore, irrigation for our tomato fields and crops is allocated at the start of the packing season. Our customers received all the water they needed this year for the acreage they planted, and they expect the same for next year. We are currently discussing their plans for 2023. The 2023 pack will be protected, with a specific allocation dedicated to canned food for tomatoes. We anticipate a normal pack next year, with little change for canned tomatoes, regardless of what occurs with the overall tomato crops on the West Coast.

Got it. Thank you for the explanation. Good luck in balance of the year.

Thanks.

Your next question comes from the line of Adam Josephson with KeyBanc. Your line is open.

Thank you for accommodating my follow-up question. Adam, earlier you mentioned requirements-based contracts in relation to next year's demand. I became particularly attentive because some of your competitors have also discussed these contracts, yet have revealed little to no insight into expected demand. It seems you possess significantly greater confidence and visibility regarding what demand will look like next year. Could you elaborate on your level of visibility? In a requirements-based contract, customers might provide certain expectations, but if their business significantly declines, you won't receive orders from them. Could you clarify this concept for me?

Sure. I’ll focus on the metal container segment to address that question. Our unique business model at Silgan involves a top-tier commercial partnership with our customers. Many of our facilities are located near our customers, and we participate in their production planning meetings. This collaboration ensures we both have access to crucial information and visibility regarding demand cycles. We maintain an ongoing dialogue with our customers, and I commend our commercial team for their efforts in asking tough questions. We engage with various levels of our customers' organizations to understand the factors influencing their businesses, both positively and negatively. Our goal is to help address issues and achieve better outcomes for both parties. While the term “partnership” is often overused in business, our approach and practices truly embody a partnership with our customers. We take our obligations under requirements contracts seriously, and our customers do as well, ensuring that communication channels remain open and informative.

Yeah. Thanks. And just one follow-up to that, which is, I think, George touched 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've continued that this year, correct me if I'm wrong, alongside. And if I'm remembering correctly, is there something I guess, have you changed your thought process in terms of what to communicate information about extra, what precipitated that exactly? And is this something that you plan on continuing in future years for whatever reason?

I will review my notes as well, Adam. It seems we've been doing this for several years in the third quarter. Based on our initial assessment, we've completed the first round of business cycle planning with each of our divisions at this stage, providing us with a preliminary outlook. I believe it's crucial to share this information with all of you and our investors as we discuss our plans for the next year and our current thoughts. I think our insights now, in late October 2022, are stronger than they were in late October 2015. Our teams have improved in providing a forward-looking perspective and effectively communicating that to us, which we are now passing on to you. We feel positive about the business and want to ensure that this confidence is conveyed. We have a clear understanding of our direction, and we believe it’s important to communicate that. Thank you, Emma, and thanks, everyone, for joining today and for your interest in the company. We 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.