Silgan Holdings Inc Q3 FY2023 Earnings Call

Good day, and welcome to the Silgan Holdings Third Quarter 2023 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Alex Hutter, Vice President of Investor Relations. Please go ahead, Sir.

Thank you and good morning. Joining me on the call today are Adam Greenlee, President and CEO; Bob Lewis, EVP, Corporate Development and Administration; and Kim Ulmer, SVP, CFO and Treasurer. 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 2022 and other filings with the Securities and Exchange Commission. 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. In addition, the commentary on today's call may contain references to certain non-GAAP financial metrics including adjusted EBIT, adjusted EBITDA, free cash flow and adjusted net income per diluted share. A reconciliation of these metrics, which should not be considered substitutes for similar GAAP metrics can be found in today's press release available in the Investor Relations section of our website at silganholdings.com. With that, let me turn it over to Adam.

Thank you, Alex, and we'd like to welcome everyone to Silgan's third quarter 2023 earnings call. The third quarter delivered strong performance that was consistent with our expectations despite continually challenging market conditions, and we reported our second highest quarterly earnings as our businesses manage their costs proactively to offset softer than expected volumes in the quarter. During the quarter, we finalized our previously discussed plans to improve our cost structure and have announced a $50 million cost reduction program through the end of 2025. We expect to achieve these cost reductions through a combination of footprint rationalizations and other cost reduction actions with benefits in each of our reporting segments over the next two years. Additionally, we believe these cost improvements will help position the company to continue to meet the unique needs of our customers and compete and win in the markets we serve. Through our disciplined and balanced capital allocation process, we've repurchased $155 million worth of Silgan stock during the quarter, bringing our year-to-date repurchases to $175 million and putting the company on track to return over $250 million to shareholders through a combination of buybacks and dividends in 2023. Turning to trends in the business. Demand for our high-value dispensing products remained strong with mid-single-digit growth for these products during the quarter that drove significant mix improvement for the company overall in the Dispensing and Specialty Closures segment. We continue to see recovery in products that experienced post-pandemic destocking last year, and benefited from strong organic growth in our fragrance dispensing products for the prestige market. The consumer destocking we saw developed near the end of the second quarter across all three segments expanded during the third quarter, as these plans deepened in the food and beverage markets and grew to include adjacent categories. Importantly, all market indications we have continue to show that consumer-level demand for our products remains robust. And our customers' inventory unit levels are trending below historic levels and their focus remains on the absolute dollar value levels of inventory in their systems at year-end. Turning to our third quarter results. Performance in each of our segments was consistent with our expectations, with mid-single-digit adjusted EBIT growth driving record results in Dispensing & Specialty Closures, and with Metal Containers adjusted EBIT comparable to the prior year record levels. In Dispensing & Specialty Closures, our high-value dispensing products were a highlight for the quarter with mid-single-digit volume growth and a significant mix benefit that more than offset the headwinds we've talked about in food and beverage end markets. Domestic food and beverage volumes were flat year-over-year as customer destocking in the United States had a more pronounced impact on our volume than we anticipated in our guidance. International food and beverage volumes remained challenged as a result of the increased levels of inflation on premium products, in particular, for Metal Closures on glass packages. Despite these headwinds on volume, the growth in Dispensing products, mix benefit, and strong cost management drove record performance for this segment in the quarter. In Metal Containers, we again delivered strong results despite softer-than-expected volumes, customer destocking priorities appear to have expanded to include adjacent categories, including pet food, and many customers are targeting further inventory reductions in categories that we were already anticipating these trends. The North American fruit and vegetable pack was delayed due to late planting, and volumes in Europe were below our expectations due to lower fruit yields and the impact of flooding from Greece. Overall, the 2023 crop will be below our expectations as only a small amount of volume will be packed in the fourth quarter despite the late start. Despite these headwinds, our team offset the volume shortfall from a profit perspective with effective cost management and drove results that were consistent with our expectations. In Custom Containers, results were below the prior year, but consistent with our expectations due to the impact of customer destocking, including the delay in commercialization of new business wins. Turning now to our expectations for the fourth quarter and the full year. We have revised our estimate for full year earnings to reflect deeper and more pervasive customer destocking priorities in the fourth quarter, which has resulted in a lower volume outlook in our Metal Containers and Dispensing & Specialty Closures segments. We believe the continued progress we have made with regard to our strategic priorities and the actions we've taken to effectively manage the factors that are within our control, position the company to return to earnings growth in 2024. We see positive signs in our customers' promotional activity, inventory unit levels trending below historic norms. And while we expect market volumes to improve in 2024, we are not dependent upon it to deliver earnings growth. We'll continue to manage the business in a disciplined manner, focusing on meeting the unique needs of our customers, while delivering a compelling value proposition for our shareholders. With that, Kim will take you through the financials for the quarter and our estimates for the fourth quarter and full year.

Thank you, Adam. Net sales for the third quarter of 2023 were approximately $1.8 billion. Excluding non-recurring sales associated with Russia in the third quarter of 2022, third quarter 2023 sales declined 7% from the record prior year period driven primarily by lower volumes in each of our segments, partially offset by the pass-through of cost inflation. Total adjusted EBIT for the quarter of $214.4 million decreased by 4% on a year-over-year basis, with record adjusted EBIT in the Dispensing and Specialty Closures segment offset by lower adjusted EBIT in the Custom Containers and Metal Container segments. Adjusted net income per diluted share declined $0.12 from the record achieved in the third quarter of 2022 with higher interest expense of $0.09, non-recurring sales associated with Russia of $0.03, and lower volumes driving the year-over-year decline. Turning to our segments. Dispensing and Specialty Closures segment sales declined 2% versus the prior year, excluding a 1% impact from Russia sales, primarily as a result of lower volume mix of 3%. The decline in volume was driven by double-digit declines for higher volume closures for international food and beverage markets, which more than offset record volume and higher value dispensing products, which grew by a mid-single-digit percentage compared to the prior year. Record third quarter 2023 Dispensing and Specialty Closures adjusted EBIT increased $5.4 million versus the record achieved in the prior year period as a result of improvements in mix in the segment due to a higher volume of high-value dispensing products and lower sales in high-volume closures for food and beverage markets, as well as effective cost management, including SG&A. In our Metal Container segment, sales declined 8% versus the prior year, excluding a 2% impact from Russia sales due to lower volumes across all product categories as customer destocking priorities were more pervasive and impacted adjacent categories with the largest year-over-year decline in the soup category. Fruit and vegetable volumes were below our expectations. Metal Containers adjusted EBIT was slightly below the record level in the prior year quarter despite the shortfall in volumes as the business continued to successfully pass through labor and other manufacturing costs, while actively managing our cost structure. In Custom Containers, lower volume in most categories drove volumes 10% below the third quarter of 2022, which, coupled with lower resin costs on a year-over-year basis resulted in sales 18% below the prior year period. As expected, Custom Containers adjusted EBIT declined $11 million as compared to the third quarter of 2022, primarily as a result of lower volumes due to customer destocking and a less favorable mix of products sold. Looking ahead to the fourth quarter, we are estimating adjusted net income per diluted share in the range of $0.55 to $0.65, which includes higher interest expense of $0.06 per share and a fourth quarter weighted average share count of approximately $107 million. On a segment level, fourth quarter adjusted EBIT is expected to be higher than the prior year period in Dispensing and Specialty Closures, comparable to the prior year period in Custom Containers, and lower than the prior year period in Metal Containers, primarily due to the timing of previously discussed benefits from inventory management in the prior year. As a result, we are revising our outlook of adjusted net income per diluted share from a range of $3.40 to $3.60 to a range of $3.30 to $3.40 primarily due to a more pervasive customer destocking in food and beverage and adjacent markets. This revised estimate includes a year-over-year headwind of $0.33 per share for interest expense, which we now expect to be approximately $175 million, a tax rate of approximately 24%, and weighted average shares outstanding of approximately $109 million. These estimates exclude the impact from certain adjustments outlined in Table C of our press release. Based on our current earnings outlook, we are also revising our estimate of free cash flow in 2023 from $375 million to $340 million, which incorporates CapEx of $230 million. The revised outlook for free cash flow reflects the revision in estimated earnings for the year as well as estimated cash costs in 2023 associated with the announced cost reduction program, including additional working capital to facilitate the program. That concludes our prepared remarks, and we'll open the call for questions. Anna, would you kindly provide the directions for the question-and-answer session?

Yes, thank you. We'll take our first question from Ghansham Panjabi with Baird.

Hey, guys. Good morning. Adam, I guess, first half, maybe you can just give us more color on the cadence of destocking and how that unfolded during the third quarter. You mentioned adjacent categories, and I think you called out pet food as well. But just based on what you're seeing at this point, I guess, related to that, do you think this ends in the fourth quarter, or will there be a residual tail into the first quarter of next year as well?

Yes, sure. Good questions, Ghansham. And look, I think we are as frustrated with destocking as anybody else at this point. And for us, we anticipated it in the third quarter based upon all the conversations we were having with our customers and their new priorities at the end of the second quarter. So in fairness, we had the year-end details. What actually happened during Q3 is that those programs accelerated and the inventory destocking that our customers were working on actually happened earlier in Q3 than we anticipated, and that's what's reflected in our numbers. So that's one part of the destocking. The second piece of it is late in the quarter our several of our pet food customers indicated that they would also endeavor on a destocking program by the end of the year. So, a little bit of impact late in the quarter, but more of an impact in Q4 as we include pet food now and the destocking conversation. And so, I think from a broad standpoint, the destocking that happened post-pandemic, we feel pretty confident that we have the timing of that correct. And those products have worked their way through the system. The inventory cleanse it sells through the system. We're seeing the recovery of those markets for the most part. These new items that we're talking about in food and beverage and now in pet food, we're anticipating they're going to be done by year-end, Ghansham, but at this point, I'd just say we need to continue to work with our customers and understand what their programs are. The last piece of it is, we know for a fact that unit-level inventory across our food and beverage and certainly our pet food markets is lower than historic norms. And a lot of the dialogue with our customers right now is about the absolute dollar value of that inventory, not the unit volume level. So, at some point, it does have to stop in order to service the market and consumers. And at this point, we're anticipating that, that is at year-end.

Got it. And then just my second question, as it relates to the 2024 outlook and your confidence on earnings being up year-over-year. Obviously, volumes are a moving target, but you have cost savings. It's a two-year program, it sounds like. Just curious as to help us with the variances as it relates to how much you think in terms of cost savings will flow through in 2024. Any other variances we should keep in mind, apart from a lower share count?

Sure. And I think, first off, a lot of the dialogue we just had on destocking will influence the actual guidance that we'll get for 2024 on our next call. As we sit here today, what we have done is we decided to proactively and aggressively manage the things within our control, and that is part of the $50 million cost reduction program. And really, from a P&L savings standpoint, you should think about call it, 40% of that to be impacting in 2024. So, we’ll just round about $20 million of the $50 million cost savings program. So that is in large part what is going to drive our earnings growth next year irrespective of what happens with market recovery and volume. So that's one input, Ghansham. The other big input is what is not being talked about a lot right now is our Dispensing and Specialty Closures segment, the mix benefit we're getting from our high-value dispensing products and frankly, the growth that that's generated and has been generating all year long. Those trends will continue next year in 2024, and we anticipate continued growth and mix benefit from the high-value dispensing products, again, irrespective of recovery in food and beverage markets and our other aspects of the business. So really, we believe we can control what's immediately in front of us, but the cost savings program will drive earnings growth for next year irrespective of market recovery.

We'll now take our next question from George Staphos with Bank of America.

Hi everyone, good morning. Thank you for your time and the details. Adam, I assume the pets aren't on GLP-1 yet, so that probably isn't a reason for the destocking you're seeing. Regarding the destocking in food and beverage, was it soup? What else is happening? What are your customers saying about their reasons for doing this? You mentioned they are accelerating their destocking, which is good, but wouldn't that mean an increase in volume in the fourth quarter or shortly after? It seems like you're just moving forward the destocking that would have happened. Also, what was the volume in metal for the quarter? I have a couple of follow-up questions.

Sure. Thanks, George. And again, half of our volume in the metal container segment roughly is in pet food. So you're right, that is not part of the GLP-1 conversation at this point, which is more than meaningful part of our business. So fundamentally, George, you're right with your destocking thought and question. So it's great that it's accelerated. At some point, that will mean that there is volume recovery to replenish inventory levels. And again, it's not about the unit volume of inventory for our customers at this point. It is about the year-end absolute dollars of inventory that they hold on their balance sheet. So, even though it's accelerated, I don't think it's going to be a favorable upside for Q4 because they are targeting the year-end value. It should be for 2024, but that's not what we're factoring into our ability to drive earnings growth for next year. So I think that's an important component to what we're thinking about for the fourth quarter and for next year.

Adam, you keep saying Food & Beverage, so where in Food & Beverage was it, where you had this additional destocking?

Sure. So think about our in the metal container segment, we'll start there. So additional destocking really in our pack volume, a little bit of destocking in soup, but really, it's the adjacency that got included now for the pet food market. So that's the biggest change from what we talked about last time. Food & Beverage also applies to Dispensing and Specialty Closures as well, particularly in the US market. So it is impacting our traditional hot fill and cold fill closure market in the US business.

Okay. And the volume in metal overall for the quarter, what was it?

Down about 10%.

Thank you for the detailed explanation. I would like to discuss the cost reduction program. You provided some insights regarding its scope and other related activities. Can you clarify what changes will take place at Silgan as a result? I would appreciate more details about the capabilities we gain, how this won't affect service, and why it will enhance our competitiveness in the future. Besides the goal of incorporating $50 million in cost reductions into our financial plans gradually, what benefits can Silgan expect, and what will shareholders gain from this?

Sure. That's a great question. To start, I want to emphasize that our cost reduction and capacity rightsizing program is something we've successfully implemented many times at Silgan. Therefore, you can be confident that we can execute our plans, and we have full confidence in our ability to do so. The benefits for us are twofold. First, in our Dispensing and Specialty Closures segment, we have growing products and markets that we are supporting. This is not about reducing capacity in that area; rather, it's about optimizing our operations, taking on increased volume and placing it in more efficient facilities to drive improvements. When it comes to Metal Containers and Custom Containers, there will be some capacity adjustments as we optimize our capacity. It’s important to note that we do not anticipate significant volume growth next year due to market recovery. We expect some specific products to grow, but this is not based on a general recovery. During the pandemic, we demonstrated a remarkable ability to adjust our cost structure to meet demand. We're confident that by adjusting our capacity to align with current demand, we will be able to address growing volumes in Metal and Custom Containers as markets recover. Additionally, we consider pet food separately within Metal Containers since it has consistently grown in our portfolio over the decades. We have invested in its growth, and our customers have too. Fortunately, we don't need to add any new capacity to achieve the next level of growth in pet food. We will maintain our existing pet food assets and capacity moving forward, especially since our customers are planning for growth in that category next year, which they have openly communicated.

Okay. I have other questions, but I will turn it over to everybody else to be fair, and I'll come back if there's time. Thanks, guys.

Thank you.

We'll now take our next question from Anthony Pettinari with Citi.

Good morning. I'm wondering if you can talk a little bit more about Custom Container and any progress on customer wins. Is there anything kind of on tap for '24 that you can share? I don't know if you're maybe gaining some business back, but maybe destocking sort of offsetting that, or if you can just talk about how that's progressing versus expectations.

Yes, Anthony, I think you've got it right. I think we are having success in the market. We are winning in the market as well. And really, it's largely just offset by the destocking activities that are very broad-based in the Custom Container segment. So we do have a couple of large new wins that we'll be commercializing next year now. The first one, which is from a volume perspective, a significant win for us will be commercialized, call it, mid to late first quarter. And we feel pretty good about the timing of that one. The second new win has had a couple of delays on it, and we are now looking at a mid-year commercialization of the second item. What's interesting is, again, both are contractual. So the good news for us is our contracts start when the product is commercialized. So we get the same three or five-year runway on the volume that we've contracted with our customers. So unfortunately, we're ready to commercialize these products. And unfortunately, our customers have not been ready to do so just yet. And again, part of that does fall into destocking, spending the capital to commercialize those products and launch those new products at the end of the year is just not happening now as we had originally thought. So unfortunately, it's two large wins in the next year, really good line of sight on the first one. The second one is slated for mid-year, and it will be dependent upon our customers' ability to execute that.

Okay. That's very helpful. And then in terms of the expectation for earnings growth in 2024 is absent on whether a market recovery kind of materializes or not. Do you think you can get back to 2022 kind of EBITDA levels or potentially exceed that? I think that's what consensus is maybe assuming, or I don't know if there's any kind of finer point you can put on maybe what you view as sort of normalized earnings in maybe a difficult environment.

Yes. I think, honestly, Anthony, we're just a little too early to really provide any additional color there because that's a pretty specific question that's going to require more maturity to our 2024 budgetary process. And we're not at the beginning. We're sort of in the middle of it right now, but just not able to provide a whole lot more color than what we already have.

We'll now take our next question from Gabe Hajde with Wells Fargo Securities.

Good morning, guys. So appreciating maybe just what we're coming on the tail here of a couple of guidance cuts and a little bit of disappointing news. Your customers obviously are carrying less inventory for a variety of reasons, one of which is higher carry costs. But I also think for covering synergy for a bit, sometimes customers might deplete inventories in anticipation of lower pricing in the following year for, again, a variety of reasons. So I'm curious, number one, is there anything that you can do kind of preemptively to avoid such discussions? And are there any larger contracts that kind of come up for maturity next year across your three different businesses that we should be mindful of as we are thinking of for the year? Thank you.

I'll address the latter part of your question first. Regarding large contracts for 2024, we don’t have any major deals lined up. At the start or end of 2024, we will just continue with our usual contracts, but nothing out of the ordinary. You’ve highlighted an important point about how customers might shift their procurement activities in light of price changes. As you know, much of our business operates under long-term contracts with clear mechanisms to pass through costs. This may influence customer behavior, especially when there are significant fluctuations in raw material prices. However, we aren’t currently seeing major year-over-year changes in raw materials as we approach 2024, and there may be slight deflation, which could be beneficial for both our customers and consumers. Still, I’m not convinced this will spur increased activity. It’s worth noting that managing destocking has been challenging as we approach the year-end, but the small deflationary trend might offer some advantages for them early next year.

Okay. Maybe just a quick follow on that. Sometimes you give us a sense for maybe where tinplate might be shaking out for the following year. I know there are some, I think, settlements on countervailing duties and anti-dumping duties. So just maybe a sense of direction there. And then I’ll just ask to get it over with DSC, the high-value solutions that you guys provide has been a bright spot, and you talked about mid-single-digit growth. You talked about kind of some of that carrying over into next year. How contingent on a good holiday season is that, meaning things are good now for pipeline fill, it gets on the shelf and maybe people pull back a little bit around the holiday. Is there a potential for them destock activity in those high-value solutions in the first half of 2024?

Great question. I'll start with the tinplate. It's still in process, and we are deeply involved in negotiations. As usual, we are fiercely advocating for our customers and for consumers. We anticipate a mid-single-digit deflation for tinplate in 2024, likely greater in Europe than in the US market. However, a significant portion of our purchases in the Metal Container segment is US-based. You also raised a good point about Dispensing and Specialty and the higher value items. Currently, we're seeing a slight shift in our customer mix, and we expect to achieve mid- to high single-digit growth in 2024 regardless of the holiday season. We've noticed some customers starting destocking activities, but we have managed to offset that volume with opportunities from other customers in different market areas. Our portfolio is well-balanced and has consistently delivered mid- to high single-digit growth rates for some time now.

We'll take our next question from Matt Roberts with Raymond James.

Hi, good morning, everybody, and thanks for getting me in here. Maybe I'll just ask, last quarter, when you discussed some of those labor issues, I mean are there any changes there? Have those been resolved, or as you look forward, are there any potential contracts coming up for renewal that maybe hasn't been reset for a couple of years? Anything we need to be mindful of there in terms of how that bargaining works?

Hi, Matt, welcome to Silgan. We're glad to have you. Regarding the labor issues we discussed at the food and beverage plants in the US last quarter, we expect a cost improvement of about $4 million. This means the $10 million cost impact from Q2 will decrease to $6 million in Q3, and we have successfully met that expectation. Additionally, we indicated that this would drop to $3 million in Q4, which is reflected in our forecast and what we are currently executing. It’s good news that we have followed through on our commitments regarding this labor issue. As for the major contracts, we have our routine customer contracts up for renewal, but nothing significant to report. From a labor perspective, our union facilities are also stable, with only the usual turnover related to labor agreements. We ratified several agreements this year and will negotiate a few more next year, which is all standard for us.

Okay. Perfect. Thanks, Adam. And then maybe lastly, in terms of your cash and debt, the buybacks in the quarter were certainly encouraging. Is there any update to where you expect leverage to shake out at year-end or any considerations in 2024 in terms of either paying down debt or more of those shareholder returns? Anything to consider there would be helpful. Thank you for taking the questions.

Okay. I'll answer the leverage ratio and then pass it on to Bob. From a leverage ratio perspective, for the end of the year, we'll probably be a little bit over three times. As you know, our stated range is between 2.5 times and 3.5 times. So we're right in the middle of that and feel like it is not restricting us from any opportunities that we may see.

Yes. And on the share repurchases, as you saw, we did buy back upsized amounts relative to maybe what we've done historically in open market transactions. But I don't think it's any secret that we have maintained and continue to maintain a fairly sizable authorization. Historically, it's been about $300 million over three years. Where we stand today, after buying back roughly $175 million on a year-to-date basis, we've got about $100 million left. So where we've typically been most in the share repurchase arena is as we start to trend to the lower end of our guidance from a leverage standpoint, we're at 3.1 times; we're kind of right in the middle. That combined with the fact that we saw some market dislocation in the stock performance, it seemed like a good time to be active in the market, particularly relative to the backdrop around the M&A environment, where I think there's just some clunkiness in that market right now, given everything that's going on in the economy and interest rates that the activity has slowed to maybe a few specific ideas that are being floated, but I think generally, the M&A activity is kind of on pause, if you will, likely waiting for the calendar to flip.

And then I think it's just another example of our kind of disciplined capital allocation program that is intended to create value for our shareholders. And I think, clearly, that did.

Okay. Thank you all, again.

Our next question will come from Arun Viswanathan with RBC Capital Markets.

Great. Thanks for taking my questions. So I guess I had a broader question. Obviously, the destocking has been a little bit deeper than maybe some of us expected. Now it's obviously moved over into the pet food category as well. I guess, what are you hearing from maybe brand owners or retailers as far as some of these issues? Would you say that any of those companies are making structural changes to deal with maybe lower inventories on the retail side and then maybe lower consumption rates on the brand owners side? I mean, is that anything you're hearing from any of these companies?

No, it's not. And in fairness to the second point, what we've seen is for our product in particular, that the consumer purchases have been pretty resilient. So their consumption still remains fairly robust for our products. And we don't see, at this point, any structural changes to either retail or our customers' branded products, inventory programs or go-to-market programs that are really any different. What we have seen, which is a positive, is more promotional activity. And we anticipate that to provide a benefit to volume when it's fully integrated into the sales cycle for our customers. Again, I'm just going to repeat, Arun that really, our customers have been talking about the dollar value of inventory in their system at year-end. And that's what's driving the destocking activity for the most part across our food and beverage and now our pet food segment. I'll talk about two of our largest customers have now publicly stated that they believe 2024 is going to be a year of volume growth, specifically for our products that we provide to them. So, we're anxious to move on to 2024 and get back to a more normalized volume level. But as we said earlier, we're not waiting for that. We are going to control our own destiny and take good aggressive action to drive earnings growth for 2024.

Okay. Thanks for that. And if you were to think again on this volume kind of progression that you saw in 2023, would you be able to parse it out into maybe what is related to destocking and maybe what's related to primary demand? Just kind of curious how we've obviously had gyrations through COVID and supply chain issues, but it does appear that there has been some structural weakness on primary demand related to, and just wondering if that's what it's really going to take to see some improvement on that side.

Well, I think in fairness, we need to get through the fourth quarter to really understand the full impact of destocking in the year. But I'll go back to a little bit of what we said earlier that for our high-value Dispensing and Specialty Closures items, we are seeing significant growth in the products that we define as growth products, and that is driving benefit for the company from a mix standpoint. So really, I think it is back to food and beverage. I think we all probably can go right now based upon the expectations for the fourth quarter and do some math and get work to figure out what the destocking value was for 2023. But I think we'd rather sit here three months from now in January on our earnings call, and we'll actually talk about what we did experience from a destocking standpoint in 2023.

Okay. That's helpful. If I can just ask one more on promotional activity. You noted that there has been an increase there. Could you just elaborate on that? Is it kind of broad-based? And we've also been hearing that the depth of promotional activity is not necessarily that strong, meaning that maybe the discounts aren't as deep. What are you seeing on the promotional activity kind of incrementally that gives you a little bit more confidence?

Yes. I think there's a couple of things. One, we know the activities increased from where it was. So let's start with that. And then we also know that the activity level is not what it was pre-pandemic. So I think there was a report out earlier in the week. It was pretty clear that one of the largest food manufacturers, CPG-wise, had their sales, 21% of their sales were on promotion versus pre-pandemic at 24%. So below pre-pandemic levels, however, up from prior quarters that had a lower than 21% promotion rate. So again, I'm viewing that as progress. And we think that largely, the market is following that kind of progression. I think the other item that you raised is the absolute price or cost of the product on the store shelves. There's been a lot of inflation that's been passed through to customers. And what we're seeing is, yes, there is increased promotional activity. The promotional value is not the same proposition that was provided to consumers pre-pandemic. And what we're waiting to see now is how effective those promotions are. And that's all happening real time right now in Q4. And I think as we enter 2024. We're encouraged that the percent of product being sold on promotion is going up and approaching at pre-pandemic levels, and we think that will be a benefit for consumers and should, as it always has in the past, drive some volume activity across the segment.

Yes. Arun, I think I would take you back to the discussion that we had in the last quarter, and that was that we were getting the sense from our customers that this destocking was all about setting the stage for promotional activity. And we didn't, at that point, didn't exactly know when that was going to start. So if there's a bright spot in this, I think it's the fact that we are seeing the destocking begin and whether that's just testing the waters in terms of what the ultimate program is going to look like. We don't yet know, but the fact that the activity is there is kind of proof of concept, if you will, relative to the destocking activity.

Got it. Thanks a lot.

We'll take our next question from Mike Roxland with Truist Securities.

Thank you, Adam, Bob, Kim, and Alex for answering my questions. Adam, I wanted to quickly follow up on a comment you made earlier regarding your customers indicating that destocking would occur later in the third quarter, but they have actually pulled that process forward, which you were not expecting. Can you elaborate on how you obtain your customers' forecasts and the feedback they provide, or if there has been any adjustment in your approach given the discrepancy between what they are communicating and their actual behavior?

Yes, sure. And maybe just for clarity, Mike, I think as we were talking about the destocking activity on our last earnings call. The information was fresh hot off the presses. So there's a couple of things to think about and just to take that into context. Number one, I think remember many of our facilities were either co-located or near-located to our customers. We're in their production planning meetings for the most part. So we understand exactly what they're planning to manufacture and they understand exactly what we're planning to manufacture. So that level of the relationship has remained very strong, very transparent. We've got a really good understanding of what our customers are doing. I think the issue that we had is there were initiatives and objectives that were coming from outside of the location. So think of more from a corporate activity with a year-end free cash flow number at our customers that they were targeting. So I think the disconnect was simply a timing issue that the corporate information from our customers was working its way down to the production planners. And at the same time, it was very much focused on the year-end metric of free cash flow and what their objectives were. And then the simple reality was, as those plans got embedded into the production schedules of our customers, they were accelerated. So versus what we were originally thinking, because the disconnect for us is we thought it was a year-end target, whereas they accelerated the timing and moved it earlier into Q3. So that's just the reality of what happened. I think we've got a good handle on it now, and I think those programs are vetted through our customers. And the new item here is pet food, and we're continuing to work through that as we talked earlier.

Got it. Okay. Yeah. My second question I realized that it might still be a little early and I know you said you're still working through all the budget details, but can you help us just initially frame the EBITDA trajectory for 2024? You mentioned the $20 million of cost savings you expect next year. You have the $10 million of closure plan headwinds that they'll repeat. You also have the two new custom containers, customers you mentioned, which were all positives. But on the opposite end, you still have continued destocking, you have elevated inflation, especially in Europe, and you have higher resin costs. Can you help us with any other factors to be mindful of when thinking about the EBITDA trajectory in 2024? Thank you.

I think you've got pretty much what we've talked about and what we're thinking about at a high level at this point. So I think maybe the overarching statement I would make to that Mike is nothing has changed as far as our thesis on each of the operating segments as to where we think the kind of near-term and longer-term growth rates are for each of the segments. And we feel pretty good about that. We've got to get through this destocking. Whether it trails into next year in the first quarter, we don't believe so, but we need to get through it and make sure we understand exactly what it is. But you've got the big moving parts to what we're thinking about 2024. We then need to add how we're viewing volumes as it relates to our customer programs for next year, that we're still working through those details and will be frankly for the balance of the quarter.

We'll now take our next question from Daniel Rizzo with Jefferies.

Good morning. Thank you for taking my question. I was just wondering if you could provide a little more color on why there wouldn't be any destocking at all with the high value customers and with the high-value products that are now kind of growing, it just seems that just what I've heard from other companies, this is fairly broad based across kind of the whole spectrum.

Hey Dan, and we think it's pretty broad-based across all of our segments as well. I think the items that we're talking about and our high-value dispensing items, you've got to think about kind of what percentage of the overall package costs are that we represent to our customers. And really, the consumer that's buying those items really is not subject to a lot of the challenges that we're talking about in other areas of our business. So, we do think it's been very resilient. It's grown mid to high single-digit every quarter this year, and frankly, it was last year as well. And so we've got good confidence and good line of sight that we do continue to have that growth driver for our dispensing and Specialty Closures segment in 2024.

So, we're talking about, I guess, beauty and fragrance is kind of the main thrust there is what we're referring to? And if I missed it, I apologize.

Yes. And really, it's elements of beauty and fragrance. We are in the prestige/luxury end of those markets. Again, that I think are subject to some different economic drivers, if you will.

Okay. And I don't know if I missed this either, but what's the cash cost of the cost savings plan? Is it kind of a one-for-one basis, or how should we think about that?

I think one-for-one is the right way to think about it. And where we said the savings would be more over the two-year period, kind of 40% year one, 60% year two, that's going to be flipped for the cash cost associated. So, we'll have a little bit more cash out the door upfront, preparing to drive the cost out of the business. So, call it 60-40 on the cash cost.

Thank you very much.

We'll now take our next question from Jeff Zekauskas with JPMorgan.

Thanks very much. Your SG&A costs were $84 million in the quarter. And in the previous quarter, they were $102 million and the year ago, they were $97 million. How did you get your SG&A down so much and so quickly? Is that management bonuses or you're already capturing some of your cost savings? Does this number contain any of the $50 million in cost savings? Can you explain it?

Sure. Thanks, Jeff. So, it's a couple of components. One, there is some headcount change there. So, we are driving cost out of the business. The $50 million will be incremental to what we've executed on in Q3 and what we will continue to execute upon in Q4. So, you've got headcount, you've got the employee-related costs associated with lower headcount as well. And then we've got some other administrative costs that we were able to take action on. So, that includes everything like management bonus and all the other items associated with kind of accruals for the course of the year. And as you drew some of those up, you get a larger impact in Q3 because you're truing up nine months of costs. So, that was part of why maybe it does look like a little bit outsized reduction versus either prior year or prior quarters.

And then I have a question about your $340 million in free cash flow. I was wondering if you could check my math in that through the first nine months, including changes in outstanding checks, your cash flow is negative $660 million. And you've got call it 230 in CapEx for the year that's 890. And so in order to generate 340 in free cash flow, you've got to generate a little bit more than $1.2 billion in the fourth quarter. And last year, I think you generated around 900. And this quarter, the fourth quarter, you think is going to be a little bit weak. You've got some other things. So is that right? Do you have to do $1.2 billion to get to that 340 in free cash flow?

Yes. So what we're looking at is we have higher receivables coming into this quarter, which we are expecting to collect through the end of the year. And some of that will be offset by slightly higher inventory levels due to the rationalization programs that we have.

What was your accounts payable in the quarter?

It's included with other outstanding checks on the balance sheet, let's say, $652 million.

Thanks.

We will now take a follow-up from George Staphos with Bank of America.

Hi. Thanks for the follow-up. I want to clarify the revenue and EBITDA impact we should anticipate, particularly regarding new customers coming in next year. I have a couple of additional questions.

And George, are you in the Custom Container segment?

Yes, correct. That's where you said you're commercializing new customers.

Correct. So look, we were looking to replace the non-renewal of the contract from 2022. And we believe we'll replace the income associated with that on a full year run rate basis. Obviously, we're commercializing one in the first quarter, one midyear. So the run rate by the end of the year will fully replace that. So call it something around about $10 million of run rate profit by year-end. The revenue will not be a one-for-one replacement just simply because these are going to be smaller bottles that were manufacturing, but really, it's more of the mix benefit we're getting. And as the profit will be replacing what we decided not to renew.

Okay. Thanks, Adam. And my last two ones, a lot of your customers in food are not on year end or calendar year ends for their fiscals but mid-years. So back to the destocking question one more time, why wouldn't we see them do the same destocking, reduce working capital to drive cash flow higher relative to their end of fiscal year, which means you're still dealing with this through the first half of your calendar and fiscal year for 2024? And then a question we kind of touched on earlier, I'm guessing there's probably not a heck of a lot to talk about, but for your human food and beverage customers, what do they think on GLP-1? Thanks, guys, and good luck in the quarter.

Great. So I think, George, on the year-end items, so there's a couple of things to take into account. You're right. Several customers are not on a calendar basis or on a fiscal year end. Many customers are on a calendar basis. So clearly, there is a component of that. Really the other piece of this is retail discussions. And as our customers renew their retail conversations about cost and price change for 2024, there is a January element to that discussion that the retail discussions are based on a year-end kind of calendar year. So again, we're working through that very closely with them, and we do think that is an impact to the destocking activity.

I'm sorry, Adam, do you think it's really a calendar year-end, that has the impact, not the fiscal which we're just talking about, which could have some effect through the middle of the year?

Yes. I think it is calendar year-end. Again, … some aren't on a calendar year and some are in these retail discussions are on a year-end basis. And your other part of the question, George, I apologize.

Yeah. No worries. Just to the extent that you have any commentary from your customers on anti-obesity drugs and the effect it's having on human food and beverage. What are you hearing? What should we consider what you would not worry about? Any thoughts there would be great. Thanks and good luck in a quarter.

Thank you. We've had several discussions with our customers, and for the most part, the non-pet food segment of our business has focused on how our products provide nutrition and significant value to consumers. They offer a safe and cost-effective means of delivering high-quality nutrition. We believe that the consumers of our products are unlikely to be interested in weight loss applications. While some may be, we stand by the high nutritional value of what we offer. Snacks are not a significant part of our business, although we have some beverage products that could be more relevant. However, according to our customers, we don't anticipate any material impact from the introduction of GLP-type applications in the foreseeable future.

Thank you, Adam.

Sure.

And it appears there are no further telephone questions. I'd like to turn the conference back over to our presenters for any additional or closing comments.

Great. Thank you, Anna, and I appreciate everyone's time today and interest in the company. I look forward to reviewing our year-end and our 2024 outlook in January.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.