Silgan Holdings Inc

NYSE:SLGN

Earnings Call Transcript 2021-Q4

[Operator]

Good day, everyone, and thank you for joining the Silgan Holdings' Fourth Quarter and Year-End 2021 Earnings Results Call. Today's conference is being recorded.

At this time, I would like to turn the call over to Kim Ulmer, Senior Vice President, Finance and Treasurer. Thank you. Please go ahead, ma'am.

[Kim Ulmer, Senior Vice President, Finance and Treasurer]

Thank you. Joining me from the company today, I have Tony Allott, Executive Chairman; Adam Greenlee, President and CEO; and Bob Lewis, EVP and CFO.

Before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and, therefore, involve a number of uncertainties and risks, including, but not limited to, those described in the company's Annual Report on Form 10-K for 2020 and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements.

With that, I'll turn it over to Adam.

[Adam Greenlee, President and Chief Executive Officer]

Great, thank you, Kim, and welcome everyone to Silgan's 2021 year-end earnings conference call. With 2021 in our rearview, having navigated the continued complexities of the pandemic, managed unprecedented inflation and supply chain disruptions, and an eye to an improved future, I want to thank the entire Silgan team, point out a few of the 2021 highlights, and then provide a brief preview of 2022. Bob will then review the financial performance for the full-year and the fourth quarter, and provide more details around our 2022 outlook. Afterwards, Bob and I would be pleased to answer any questions.

I'd like to first express my gratitude and respect for the entire Silgan team and what we have accomplished together, including delivering another year of double-digit adjusted EPS growth, a 34% increase in adjusted EPS for the fourth quarter of 2021, versus the prior year record achieved in 2022. And most importantly, we've also achieved a 10-year compounded annual growth rate for adjusted earnings per share of over 10%. We've accomplished this performance as our employees have repeatedly demonstrated their strength and commitment and the power of our performance-based culture, as our employees have done everything possible to ensure our ability to continually supply our customers in a timely, efficient, and complete manner.

As a result, we are able to achieve several important milestones in 2021, and are well-positioned for further growth in 2022. As you saw in the press release, 2021 was an exceptional year for the company. And some select highlights would include achieving record financial performance, including the following. Revenue improved to $5.7 billion, driven by strong volumes, adjusted net income per diluted share of $3.40, up 11% versus the record prior year, free cash flow of $466 million or $4.19 per diluted share, each a new record for the company, improved our capital structure to facilitate further growth opportunities. In addition, we increased our cash dividend for the 17th consecutive year.

We also invested in several growth initiatives which positions us well for the future, completing the strategic acquisitions of Gateway, Unicep, and Easytech, expanding commercial supply for a major pet food customer expansion in Eastern Europe, investing in operational improvements to drive cost out, and improve customer service levels. Our business franchises are poised for further growth in 2022 as we integrated the new acquisitions, invest alongside core customers, and continue to improve upon our operational excellence. Therefore, as Bob will discuss in more detail, we are providing full-year guidance for adjusted earnings per diluted share in the range of $3.80 to $4.00 per diluted share.

The midpoint of this range represents a 15% increase over the record performance in 2021. Our free cash flow is expected to be approximately $350 million as we anticipate higher working capital, increased capital expenditures for growth investments with core customers, and higher cash taxes to more than offset the earnings growth provided.

With that, I'll turn it over to Bob.

[Bob Lewis]

Thank you, Adam. Good morning, everyone. As Adam highlighted, demand for our products remain strong as we saw year-over-year volume improvement in our Dispensing and Specialty Closures and Metal Containers segments. As importantly, each of our businesses did an outstanding job managing unprecedented inflation through unwavering price discipline and operational improvement, yielding significant cost reductions across the businesses. In addition, we completed three strategic acquisitions and are making good progress on their integration. As a result, in 2021, we delivered adjusted earnings per diluted share of $3.40; we delivered free cash flow of $466 million, a significant increase over the prior year of $384 million.

On a consolidated basis, net sales for the year were [$5,680 million] [Ph], an increase of $755.2 million or 15.3% over the prior year. This increase was the result of higher net sales across each of our businesses, including the pass-through of higher raw material costs across all businesses, and favorable foreign currency translation of approximately $40 million.

We converted these sales into adjusted income before interest in taxes for the year of $598.7 million after adjustments of $15 million for rationalization charges, $5 million for costs attributable to announced acquisitions, and $2.6 million for the purchase accounting write-up of inventory versus $551.2 million in 2021 after adjustments of $16 million for rationalization charges, $19.3 million for costs attributable to announced acquisitions, and $3.5 million for purchase accounting write-up of inventory. The increase was primarily result of higher unit volumes in Dispensing and Specialty Closures and Metal Containers, a more favorable mix of products sold and the pass-through of other cost increases in Dispensing and Specialty Closures, strong operating performance across each business, the benefits from acquisitions completed in 2020 and 2021, and higher pension income, partially offset by the lag pass-through of higher raw material costs, primarily resin, higher costs associated with labor and supply chain challenges, lower volumes in custom containers and a less favorable mix of products sold in metal containers.

Highlights of adjusted segment income for each of our segments is as follows: Adjusted segment income in the Dispensing and Specialty Closures segment for the full-year of 2021 increased $35.9 million to $269.5 million, primarily due to the inclusion of recent acquisitions, including the full-year effect of the Albéa acquisition completed in 2020. Year-over-year volume growth, a more favorable mix of products sold, strong operating performance and the pass-through of other cost increases. These benefits were partially offset by the unfavorable net impact from the lag pass-through of significantly higher resin costs, higher costs associated with labor and supply chain challenges and foreign currency transaction losses. The unfavorable net impact resulting from the lag pass-through of resin was approximately $10 million after netting approximately $15 million of price recovery later in the year.

Adjusted segment income in the Metal Container segment was $263.6 million for the full-year 2021, an increase of $7.1 million or 2.8% versus the prior-year as a benefit of approximately 4% higher unit volumes, higher pension income and higher foreign currency transaction losses in the prior-year were partially offset by the negative impact from operational inefficiencies, higher costs associated with labor and supply challenges, and more small accounts.

Adjusted segment income in the Custom Container segment increased $4.5 million or 5% to $92.7 million for the full-year 2021. This increase was primarily attributable to strong operating performance, cost control and lower SG&A costs partially offset by lower volumes of approximately 10% as compared to record pandemic volumes in the prior-year.

For the fourth quarter, we reported earnings per diluted share of $0.76, as compared to $0.54 in the prior-year quarter. Earnings per diluted share were adjusted by $0.03 in 2021 and by $0.06 in 2020, resulting in adjusted earnings per diluted share of $0.79 in the fourth quarter of 2021 versus $0.60 in the same period a year-ago. Net sales for the quarter were $1.44 billion up $212.7 million versus the prior-year driven primarily by the pass-through of higher raw material and other manufacturing costs, higher volumes in Dispensing and Specialty Closures and Metal Containers and a more favorable mix of products sold in the Metal Container and Custom Container segments partially offset by lower volumes in Custom Containers and unfavorable foreign currency translation of approximately $10 million.

Adjusted income before interest and income taxes for the fourth quarter of 2021 increased by $19.2 million to $133.3 million after adjustments of $2 million for rationalization charges, $900,000 for costs attributable to announced acquisitions, and $1.7 million for the purchase accounting write-up of inventory. The increase in adjusted income before interest in income taxes was primarily due to higher volumes and a more favorable mix of products sold in Dispensing and Specialty Closures and Metal Containers, strong operating performance across all businesses, higher pension income and the benefits from recent acquisitions. These gains were partially offset by lower volumes and a less favorable mix of products sold in the Custom Containers business, higher costs associated with labor and supply chain challenges, and the unfavorable impact of the lag pass-through of higher resin costs and Dispensing and Specialty Closures.

Turning now to our outlook for 2022, our estimate of adjusted earnings per diluted share for 2022 is a range of $3.80 to $4 with the midpoint representing a 15% increase over record adjusted earnings per share of $3.40 for the full year 2021, reflected in our estimate for 2022 are the following, segment income and the dispensing and specialty closure segment is expected to increase significantly over the prior year, primarily due to the inclusion of a full year of the acquisitions of Gateway and Unicep. The cost path through benefits of a less volatile resin market, more efficient operating performance, a continued recovery in the beauty and fragrance markets, and volume normalization for hygiene and cleaning products.

Segment income in the metal container segment is forecasted to benefit from improvements in operational efficiencies, cost reductions to pass through other inflation and the inclusion of a full year of the Easytech acquisition. These benefits will be partially offset by lower volumes. We are expecting segment income in the custom container segment to benefit from anticipated higher volumes as a result of a return to normal volume levels for hygiene and cleaning products, continued growth in pet food and manufacturing efficiencies.

In addition, we expect interest expense to increase versus 2021 largely as a result of higher average outstanding borrowings as a result of the recent acquisitions, and higher weighted average interest rates. We currently expect our tax rate to be approximately 25% as compared to the effective rate of 23% in 2021. This estimate does not contemplate the effect of any tax law changes that may arise during the year.

Also, we expect capital expenditures in 2022 to be approximately $280 million, up from $232 million in 2021, as a result of various growth opportunities for core customers and the impacts in the recent acquisitions. We're also providing a first quarter 2022 estimate of adjusted earnings in the range of $0.70 to $0.80 per diluted share, as we include benefits from the recent acquisitions, improved operational efficiencies, and anticipated lower resin costs, offset by volume declines in the metal container and custom container segments as compared to the prior period. The decrease in volumes for metal container is due to the prebuy activity in 2021. Ahead of significant raw material inflation for 2022. The decrease in volumes for custom container that due to strong pandemic driven volumes in the first quarter of 2021 that are not expected to repeat, these estimates exclude rationalization charges, costs attributable to announced acquisitions and loss on early extinguishment of debt.

Based on our current outlook for 2022, we're providing an estimate of free cash flow of approximately $350 million as earnings growth is offset by a sizeable headwind for working capital, higher CapEx, as we have attractive growth opportunities with core customers and the one-time cash tax benefit of $25 million related to the accelerated depreciation resulting from the recent acquisitions that will not repeat. The working capital headwind is largely the result of the significant ongoing inflation in raw materials.

That concludes our prepared comments. Before I turn it over to Alan, we would ask you that you limit your questions to one question and one follow-up. So, Alan, I'll now turn it back to you to provide directions for the Q&A session.

[Operator]

Thank you, sir. [Operator Instructions] We'll take our first question from the line of George Staphos with Bank of America.

[George Staphos, Bank of America]

Thanks very much. Hi, everyone. Good morning. Thanks for the details. My questions will be around volume. So, if possible, can you give us a view on volume for the fourth quarter by segment, excluding acquisition effects, and relatedly as we look to 2022, what is embedded roughly in your volume outlook ex-acquisitions?

My second question is, how comfortable are you in particular that both Custom Container and DSC, can grow through some of the post-COVID de-stocking and other headwinds, you mentioned hygiene and cleaning volume return to more normal levels for Custom Containers, what gives you the comfort that you'll be able to do that in both segments, again ex-acquisitions? Thanks, guys.

[Adam Greenlee, President and Chief Executive Officer]

Sure. Good morning, George. Touching on the fourth quarter volume, I'll just go through each of the operating segments. So, unfortunately, I'm going to give you the total for Dispensing and Specialty Closures, and then I'll give you what you asked for in the organic volume. So, volumes were up 15% in Dispensing and Specialty Closures, organic volume growth of 8.5% in Q4. Moving to Metal Containers, volume was up 3% in the quarter, no acquisitions really had an impact there. And then Custom Containers, as you saw in the press release, volume was down 12% in Q4.

As we now turn the page and talk about 2022, and what's embedded in our guidance, I'll go back to Dispensing and Specialty Closures. Organic volume growth excluding acquisitions, we're targeting 4% in our guidance for 2022. For Metal Containers, I'll remind you, you saw in the press release that there was a little bit of pre-buy activity. We'll be cycling over that in Q1 of 2022. We've also anticipated a normalization of the vegetable pack. We had significant growth in 2021 in the vegetable pack for the Metal Container business. We're normalizing that back to pre-pandemic levels. So, that being said, we're expecting food can volumes to be down in the 4% to 5% range.

And then, over to Custom Containers, again, we're cycling through the end of what we'll call the surge of the pandemic-related buying around specific products that we manufactured, for the most part, to support customers for the pandemic. We've got one more quarter of that in Q1, where we have elevated volumes that we'll be cycling over. And even with that, we're anticipating volume growth in the Custom Container business of between 2% and 3% for 2022.

Your second question is just, now how do we feel about those growth numbers that I just provided, particularly for Dispensing and Specialty Closures and Custom Containers. Feel really good about Dispensing and Specialty Closures, to start there first. We've got a terrific food and beverage business that continues to be a very stable provider of growth across our franchise. And we're anticipating continued growth there, as we have seen in the past. We are also experiencing now, late in Q4, we saw a normalization of volumes or at least the beginning of a normalization of volumes for the hygiene and home cleaning products. So, some uptick versus where we were, haven't completely normalized yet, but we believe it will in 2022.

And then finally, George, for DSC, I'd tell you fragrance and beauty has fully recovered to kind of our pre-acquisition pre-pandemic volume levels. Our order book is incredibly strong, all the way through Q1. And we're at the point now where we -- you heard Bob talk about our opportunities for additional capital expenditures. We are looking at additional capacity to support the growth of our fragrance and beauty business, that's how far that has recovered at this point. And I'll stop talking in a second, but I'll give you the Custom Container answer for 2022. What I'd tell you, this is a 15% EBITDA business. That's what we were targeting for many years. What happened over time, as we made improvements to the business we created a stronger, more profitable mix of business.

The pandemic happened, and what that allowed us to do was to fill all of our assets on a very low cost structure base. And as some of that pandemic volume reverts back to norm, we do believe we'll be able to take that capacity and sell it into the market at more favorable margins than what we've historically had in the business. And then, we've also been winning in the market. That has not stopped through the pandemic. We do have new commercial awards that are coming on-stream in 2022, and we expect to have further wins in '23 and beyond. So, long answer for you, George, but I think I captured everything you asked.

[George Staphos, Bank of America]

No, Adam, really appreciate the rundown. I'll turn it over. Thanks for the comments.

[Adam Greenlee, President and Chief Executive Officer]

Sure.

[Operator]

Our next question will come from the line of Adam Josephson with KeyBanc.

[Adam Josephson, KeyBanc Capital Markets]

Thanks. Good morning, everyone. Happy New Year. Bob, just a couple questions about your guidance assumptions. Can you help me with pension income compared to last year, price-cost, what magnitude of benefit you're expecting versus the $10 million drag last year, acquisition accretion, better operational performance just given the supply chain and labor difficulties you had much of last year? Just help walk us through the $0.50 expected growth, including any below-the-line items, if you don't mind?

[Bob Lewis]

Yes, so, as we said relative to the acquisitions, we expected that we would see $0.10 to $0.12 accretion when we gave you a preliminary guidance, back at the end of the third quarter. I think we're running right in line with that. There may be a little bit of upside opportunity as we continue to look to commercialize new business wins. But that's what's forecasted in our EPS guidance for 2022, as we sit here today. Price cost side of things, as we said; we're running about $10 million negative on the resin side. It's about a $25 million resin cost issue, and we've put through some out-of-market price increases that our customers have taken, that we've offset about $15 million of that. So, we should continue to recover that in next year, that's in our guidance as well.

And then, you heard the volume outlook, that Adam laid out, and that's sort of the rest of the story to get us to the numbers for next year. Oh yes, sorry, and you asked about pension as well. So, pension will be about a $5 million headwind on a year-over-year basis. And that's more to do with our funded status being at about 128% at the end of the year. So, we very consciously made a decision to de-risk that plan a little bit. And so, we're moving our asset portfolio to be a bit more weighted to fixed income versus historically more weighted to the equity side. So, that change will cost us about $5 million year-over-year in the income side.

[Adam Josephson, KeyBanc Capital Markets]

Thanks, Bob. And just one other guidance-related question, so, the 1Q guidance implies a modest year-over-year decline, yet the full-year guidance implies $0.50 of growth. And I know you had the buy-ahead in 4Q. But is there anything else besides the buy-ahead that will come out of 1Q that is influencing the year-over-year rate of change? In other words, why such significant growth in the latter three quarters, compared to a modest decline in the first quarter?

[Bob Lewis]

Well, part of what you have is a comp issue, right, to the prior year. So, you had really strong pandemic-driven volumes across the board in the prior year that, as Adam laid out, we're expecting that to normalize for 2022. So, that's probably the big driver.

[Adam Josephson, KeyBanc Capital Markets]

Got it. Thank you.

[Operator]

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

[Gabe Hajde, Wells Fargo]

Good morning, everyone. Hope you and your families are well. My first question, I apologies in advance, may be tough to talk about [open mic] [Ph]. But just, I'm looking at kind of some transactions that have happened in the market or in the past six months or so in the Metal Containers side. And just curious your perspective, either what the market might be missing in terms of how valuable your business may be worth? And I appreciate there is a difference between strategic value and sort of ongoing running the business, but just how that could influence your thought process going forward?

[Bob Lewis]

Yes, thanks, Gabe. Look, I think this is the message that we've been trying to send for some time now, right, that the food can business is not what everybody thinks it is from a negative perspective. It does perform pretty well through all cycles, quite frankly. It generates a lot of free cash flow. And then I think what we're seeing is, in more private transactions, that value is being ascribed to those businesses. So, we'll continue to beat the drum, continue to improve performance, and, hopefully, the equity markets begin to see that. I think that's a big part of Adam's opening dialogue about the performance in the 10-year CAGR in improvements here. That's driven a lot by acquisitions, but those acquisitions are funded upon the strength of that food can business. So, we don't find anything that's real surprising about those valuations, other than the public market perhaps not getting all the way there just yet.

[Adam Greenlee, President and Chief Executive Officer]

And maybe just one other thing I would add to that. Bob, I agree with everything you said. I think as we think about food can volumes, again on a full-year basis in '21 we were up 4% on top of the 14% growth that we experienced in 2020. What we just said about our 2022 guidance is we believe now, volumes have normalized, right? For the most part, everything normalized back in 2020, the peak of the pandemic occurred in 2020. Vegetable peak was in 2021. So, we believe '22 is a normalized year, and that year is going to be double-digit volume increases over pre-pandemic levels. And we feel really good about the line of sight we have into those volume levels that are again up over 10% versus pre-pandemic levels.

[Gabe Hajde, Wells Fargo]

All right, thank you, guys. And then not to try to pin you down too far, but maybe some other building blocks on guidance, if I sort of back into the midpoint at 3.90, can you give us I mean, I think the implied EBITDA might be around 975. If you can kind of confirm that or help us again, maybe with building blocks as it relates to pull you're expecting for D&A and or interest?

[Bob Lewis]

Yes, you're pretty close on the on the EBITDA side. Interest will be up a bit on a year-over-year basis. And that's largely the acquisition and some increase in weighted average rates.

[Gabe Hajde, Wells Fargo]

D&A?

[Bob Lewis]

Bear with me one second.

[Adam Greenlee, President and Chief Executive Officer]

You're forcing him to go to the book.

[Bob Lewis]

Yes.

[Gabe Hajde, Wells Fargo]

Just with the acquisitions, I apologize.

[Bob Lewis]

Yes, let's just come back around to that one offline, if you don't mind.

[Gabe Hajde, Wells Fargo]

No worries. Thank you.

[Operator]

We will next go to Salvator Tiano with Seaport Research Partners.

[Salvator Tiano, Seaport Research Partners]

Yes, congratulations on having a strong year. My first question is about the growth investments, you mentioned for some core customers. Can you provide more color both on in which areas besides beauty and fragrance have you already clarified, if there are any measurable additions to your volume growth, we should expect and what would be the addition to CapEx for 2022?

[Adam Greenlee, President and Chief Executive Officer]

Sure, I'll talk about this specific project. And Bob can talk about this, the impact on CapEx for 2022. So, again, I think as Bob correctly highlighted, these investment opportunities are with our core customers, and our strategic markets that we continue to allocate capital to.

So, the first one you would say is Dispensing and Specialty Closures, we have many opportunities to continue to invest with our customers. And these investments would be very similar to kind of the historic Silgan investments where these are going to be backed by customer contracts and customer commitments. And we feel like we've got a plethora of opportunities. Again, I mentioned fragrance and beauty a little bit earlier on the Dispensing side of the business. We'll be investing there for sure. Our flat cap business again, we've seen continued growth in flat caps required for products like sports drinks, et cetera. So, we've got plenty of opportunities throughout our Dispensing and Specialty Closures segment, we do have a couple of pet food investments that we're going to continue to make and our Metal Container segments.

And then on Custom Containers, we have a large investment that's going through this year for a new business, when that will be included in our guidance for this year. I think the rest of the items I described to you, for the most part are going to be capital spent this year with a return that begins in 2023.

[Bob Lewis]

Yes, so that all nets to a CapEx number that's up on a year-over-year basis, call it round numbers, about $50 million. Some of that is acquisition related, but a large part of that additional CapEx is related to those projects that Adam just laid out.

[Salvator Tiano, Seaport Research Partners]

Okay, perfect. And my follow-up question is little bit on the 2022 free cash flow guidance of $350 million. I think last quarter you were expecting there'll be higher number as a preliminary figure, I guess can you tell us a bit what changed and since this is largely working capital and obviously the CapEx have you mentioned impact here, can you see a significant boost in 2023 free cash flow?

[Bob Lewis]

Yes, great question. Look there's a few things that are sort of, I'll call them more timing related issues that are hitting here. So, 2021 benefited from the buy ahead, which helped us on volume, many of those customers paid us as well. So, we got the benefit of that in the upside to the free cash flow forecast for 2021. That was about $15 million, we also which we talked about earlier in the year, as we raised the free cash flow guidance that we were getting an accelerated tax benefit coming with the acquisition of Gateway to the tune of about $25 million, that's kind of a one-time benefit, that won't continue to recur. And conversely, as you look into 2022, the working capital is going to be a pretty significant headwind, it was a benefit in 2021, maybe even a bit more so than we were expecting, because we weren't able to rebuild inventory to the level that we intended.

So, you've got that rebuilding effort coming back at us in terms of a headwind in working capital, and then you've got the impact of the significant inflation in raw materials that are coming through. The other piece of that will be the CapEx that we just talked about. And then the higher cash taxes of that $25 million, so that kind of back down to the 350, I would say, if you were thinking about this business on a kind of a, what's a right run rate basis, probably the normalized free cash flow looks but something in the 4 to 4.20 kind of range. So, you can see it getting back into that level in 2023.

[Salvator Tiano, Seaport Research Partners]

Great, thank you very much.

[Operator]

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

[Mark Wilde, Bank of Montreal]

Good morning, Adam, good morning, Bob. Just I wondered if you can give us any color on sort of where the tinplate increases have settled out in 2022 and whether the cost increases are having any effect that you can see on consumer behavior, or if you're going to see it, which markets might we see it in?

[Adam Greenlee, President and Chief Executive Officer]

Sure, good morning, Mark. Tinplate, we did spend some time talking about that on the last call. And the guidance we gave is roughly a doubling of the costs associated with steel tinplate for our Metal Containers business. As it turns out, that's essentially where we settled, so just under a doubling of the cost and it was a challenging negotiation from every respect as you've heard us talk for many years, we do have pass-through mechanisms with our long-term contract customers. But we take it very, very seriously that this type of inflation is incredibly stressful for their business models, in order to be able to deal with passing that kind of inflation on to retailers and ultimately consumers so. So, the market is stressed right now, those increases roughly took effect at the beginning of the year. And as you can imagine from a pre-buy perspective, Mark, literally anyone who bought metal packaging from Silgan was asking to participate in a pre-buy, I'll go back and talk about our supply chain challenges that we had in 2021.

We just weren't able to get all the raw materials that we wanted to, in order to support customers, every chance we could support them, we did. And we worked with them to facilitate a little bit of a pre-buy mostly for on site, near site type customers. So, I think everybody is concerned about the inflation and the impact it's going to have certainly at the beginning of the year, but we will not have seen consumer activity around this, this cost inflation at this point in the year. So, I think it's a great question. I think it's one that we will probably have some data points as we move into the first quarter results that we'll be talking about in April, but it's a challenge because it was significant inflation that we've never seen in our Metal Container segment.

[Mark Wilde, Bank of Montreal]

Okay, just as a follow-on, is it possible for you to give us some sense of what you see in terms of inventory in the channel between yourselves and consumer so whether it's a kind of food or packaged goods firms that like packaging distributors, What's your sense for kind of where the channel is right now?

[Adam Greenlee, President and Chief Executive Officer]

Yes, I think we're -- there was a bubble certainly they got created, I think through 2021 related to the pandemic kind of surge of volumes and how quickly some of those volumes reverted back to a normalized level. And so, you had this inventory bubble that was working its way through the system. I think what our data, what we see Mark would tell you that it did start to move through on to consumers sometime in the fourth quarter. I think our data would say we saw a nice pickup in the month of December just from a trending perspective, for many of those products where we had been challenged and been going through an entire supply chain inventory correction for most the last three quarter of 2021. So, as we sit here today, we feel like we're at the end of the inventory correction cycle, and those volumes are going to normalize and will normalize very, very early in 2022.

[Mark Wilde, Bank of Montreal]

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

[Operator]

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

[Arun Viswanathan, RBC Capital Markets]

Great. Thanks for taking my question. Congrats on a strong performance here. I guess, I just wanted to get back to the some of the comments you had on growth, I guess in food container. So, as you noted, there was about 14% growth in 20 and then 4% on top of that, on the volume side. In the past you talked about some rationalization. Now it seems like you're putting into capacity on pet food. How do you kind of look at this business going forward. I guess, is this kind of a low single-digit business now that you have confidence in that will turn in some kind of consistent growth in that range? And then similarly, on the closure side, it seems like this business now is actually poised for that or maybe slightly better growth. So, overall, I guess, would you look at the Silgan portfolio as kind of a low single digit grower and then you've leveraged that on the EBITDA line, a little bit more than that. Is that right way to look at those two algorithms?

[Adam Greenlee, President and Chief Executive Officer]

Well, let me start with kind of the growth conversation on the metal container business very quickly. So, again, I think you've got the growth numbers correct for 2021, and for 2020 as well. I want to clarify, pet food has been a growing market for us that we've been investing in for years, and I would go back a decade and longer as far as where we've continued to see strong growth in pet food. And we've continued to invest in that growth. So, there's nothing new about our investments and additional pet food capacity, and in fairness, that is going to continue as we go forward as well, again during the pandemic, what we did see was pet ownership increased dramatically. That was skewed more to smaller dogs and cats. Those smaller dogs and cats typically have a higher consumption rate of wet pet food, and we're seeing that and our numbers would show that and they've shown that for quite some time. So, that is a growth portion of our business in Metal Containers. And we believe Metal Containers is going to settle back to a point of normalization, that is call it 10% higher than we were pre-pandemic.

So, the baseline has shifted right, so we're up significantly in volume. I do think the forward trajectory is now going to return to a very similar plus or minus 1% on the margin, with core markets like pet food, like protein, continuing to provide growth as we go forward. So, we feel terrific about where metal container sits in our portfolio, the growth is provided. And now the baseline that has been reset for the future.

As we think about closures, what I would tell you again, we just guided to 4% organic growth in 2022 that's also our longer-term growth rate for the organic growth of the business. I think we have lots of opportunities to continue to invest around our closures and Dispensing and Specialty Closures business. So, that is where a lot of our capital allocation has gone. That's where our acquisition dollars have gone as well. So, I don't want to give you a broad, how to think about Silgan from a growth perspective, including Custom Containers, I'd rather just talk about each of the individual components and go from there.

And Bob I'll throw it over to you on the -- how do you want to think about EBITDA on Arun's question.

[Bob Lewis]

Yes, so I think we'll and I'll come back around a little bit to gauge question. So, EBITDA probably grows about $40 million -- $35 million or $40 million on a year-over-year basis. And that's largely the acquisitions. I think, we do have a bit of an acceleration down to the profit line because of our efficiencies, and the scale that will get of that volume growth coming through the system. So, bottom line as you see our bottom-line has grown as Adam has said, north of 10% on a CAGR basis, that's also the benefit of acquisitions, but I don't see any reason why that isn't what the future looks like on a go forward basis as well.

[Adam Greenlee, President and Chief Executive Officer]

And then one last comment for you Arun, you'd asked about the previous rationalization plans. Obviously, we put those on hold for the pandemic, right and now, again, I just want to reiterate, the new baseline for our Metal Containers business is significantly higher than it was prior to the pandemic. So, we're evaluating that, we've got a relentless focus on driving cost out of our business that has never changed. I think is as volume, as we projected 4% to 5% decline in volume what that's going to allow us to do in 2022 is more efficiently operate the footprint that we have to support our customers. And that's the immediate focus of what we're doing now. And we'll obviously continue to work on driving cost out, as we always do.

[Arun Viswanathan, RBC Capital Markets]

That's great. Thanks for the comprehensive answer there. So, and then just as a follow-up on capital allocation, so it sounds like normalized free cash flow, in the form of million-dollar level. This year, it's going to be impacted a little bit by working capital, and some of the investments, but as you look into '23 then, would you prioritize, maybe capital return or is there any potential to do that, or would you still be looking at de-leveraging and if so, where would you want to get the leverage to, I guess?

[Bob Lewis]

Yes, look, I think we're in a good spot from a leverage perspective. If you look at where we are today, we're kind of back toward the higher end of our range on a -- particularly on a pro forma basis, and then you layer on that incremental free cash flow coming next year and you're kind of right back in solidly in the rain. So, I think that's the beautiful part of the Silgan story, right as we have options, and I think our preference is to continue to deploy that capital to continue to grow out in the markets that we serve and in support of the customers that we serve. So, I wouldn't rule out acquisitions. But if in the absence of those where we don't find good opportunities, or we don't find the right kind of returns with those opportunities, then a return of capital is certainly within the purview.

[Arun Viswanathan, RBC Capital Markets]

Thank you.

[Operator]

All right. Next we'll go to Anthony Pettinari with Citi.

[Anthony Pettinari, Citi]

Good morning. Is it possible to give any more detail on the inventory management issue in dispensing maybe the EBIT impact in 4Q, kind of any lingering impact in 1Q and just sort of what drove that issue?

[Bob Lewis]

Sure, Anthony. I think, I'll try to boil it down to its simplest terms. If you go back a year ago, at the beginning of a global pandemic, I'll just -- I'll take our office here in Stanford as an example. We were using disinfecting wipes to wipe down tables and handles and light switches. We were using trigger sprayers and disinfectants to clean anything and everything around because no one knew what the heck was the [transmissive] [Ph] factor of what we were dealing with COVID. Obviously, as the CDC came out with updated guidance later in the year that surface contact was not a main priority. That's when our hard surface cleaners and home cleaning products went through a transition where the inventory correction needed to take place because at that point, our customers were continuing to order it significantly elevated demand levels, and all of that product had to move through the system. And that's what happened. That's was the story of call us the last nine months of 2021. I'm giving you one example for hard surface cleaners. It happened for hand sanitizers, it happened for other home cleaning products. So, really in our Dispensing and Specialty Closure segment, and our Custom Container segment, that's in a nutshell what we've been dealing with from an inventory correction. The shutoff from I'd say the governmental guidance of what to do and how to conduct business with frequent hand washing, with hand soap, et cetera. Those products that were on order and an inventory and throughout the retail chain had to flush their way through the system, and we believe now we're at the very end of that cycle.

[Anthony Pettinari, Citi]

Okay, okay, that's very helpful. And then you mentioned beauty is essentially back to pre-COVID levels, and maybe Metal Containers is going to come out of the pandemic, maybe to structurally higher level of demand. I'm just wondering how your food service business within Metal Containers is doing versus pre-pandemic levels? I know it's a smaller business for you, but it's pretty high margin. Any thoughts there?

[Adam Greenlee, President and Chief Executive Officer]

And it's a great question. And actually, I believe in our press release, for the first time in a long time, we had a more favorable mix of products sold in our Metal Container business. And that's exactly what you talked about Anthony, that is our restaurant kind of number 10 cans are large cans being sold for restaurant and institutional demand. So, we had good growth in our small cans as well. But we're seeing, we saw a recovery in Q4. And I think for the most part, we'd say, restaurants while I don't know that they're back to pre-pandemic levels, they're very active and the orders that we had in Q4, and I think on an ongoing basis for '22, the expectation is that normalizes as well.

[Anthony Pettinari, Citi]

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

[Operator]

All right, next question will come from the line of Alton Stump with Loop Capital.

[Alton Stump, Loop Capital]

Great, thank you. Good morning. Just want to follow-up on food cans pass through which obviously as you mentioned, we're in an unprecedented inflation environment. But could you clarify that you are confident that you'll be able to protect your margin dollars, obviously percentages of course, will be impacted by the pass-through. But you got confidence that you'll be able to fully offset from a dollar standpoint that huge inflation that you are seeing this year?

[Adam Greenlee, President and Chief Executive Officer]

It's a great question. And I think Alton, as you know, our business very well, we've talked for many, many years about the pass-through mechanisms that what we experienced with pass-through. And so, yes, our contracts allow for that, we do not take that lightly in any way, because that burden gets borne by our customers, and they have to deal with it in the market. So, yes, you're right, the mathematical consequence of the higher inflation will hurt our margin rate. But from a margin perspective, we will be passing through those costs, as we always do to our customers, and then helping them deal with their ultimate customers and retailers through the rest of the supply chain.

[Bob Lewis]

Alton, I will also remind you that 90 plus percent of that food can business is under contract, and all those contracts allow for the direct pass-through. And I would say, given the severity of the inflation, it is untenable for anybody in this market to not be passing it through. So, we're confident that we'll get it on the non-contract side as well.

[Adam Greenlee, President and Chief Executive Officer]

And I would say untenable for our customers not to be able to pass it through as well, this will ultimately make its way to the consumer is our belief.

[Alton Stump, Loop Capital]

Great, understood. Thanks for that color. And that just as a follow-up, as you mentioned obviously, it's too early in the year to see, if it will be a consumer impact, just from a demand standpoint for food cans, but what are your customers saying? I mean, obviously, costs are going up everywhere, not just in tinplates. So, other categories are going up as well, but you're just kind of how they are feeling from a demand standpoint, when they do begin to pass-through the huge inflation increase?

[Adam Greenlee, President and Chief Executive Officer]

Sure, we spend a lot of time talking with our customers about their activities and passing through these cost increases to market. And you're right, we're talking about tinplate on this call, but it's in every other packaging substrate, it's an ingredient, it's in secondary packaging. It's prevalent across the board. And I think for the most part, I would say our customers have taken the position that to Bob's point, it's untenable for them to absorb the cost inflation they're experiencing, and they have to pass it through. And that again, in my opinion, will get all the way through to the consumer. So, everybody's a little nervous about that as we get started here in 2022. But I think the outcome everyone is aligned on the outcome that the increases in the inflation need to be passed all the way through the system.

[Alton Stump, Loop Capital]

Okay, great. Thanks so much. I'll hop back in the queue.

[Operator]

Okay, your next question will come from the line of Kyle White with Deutsche Bank.

[Kyle White, Deutsche Bank]

Hey, good morning. Thanks for taking the question. Just on the supply chain, can you provide an update? Are you experiencing any challenges given the rise of Omicron in terms of labor? Is the steel supply issue in Metal Containers fully resolved now, just overall kind of update on supply chain in terms of anything getting better or worse throughout the quarter?

[Adam Greenlee, President and Chief Executive Officer]

Sure, so maybe I'll start with Omicron. And what I would tell you is that, we're having much of the same experience in our operating network that you hear about and read about, regarding Omicron. So, our quarantine and our positive rates are actually up quite a bit. But it is a different experience in the fourth quarter, and even into the early part of 2022 than we experienced in 2020 and 2021. So, employees are largely asymptomatic for us. And they are also returning to work in a more timely manner than the original 10 days that was mandated earlier in the pandemic. So, it's less disruptive is ultimately the point I would make for our operations. Our customers are dealing with many of the same things. One of the items that we had a lot of talk about with our customers in Q4, is their concern about labor availability early in 2022.

And they wanted to fill product and have build product available to support needs of the consumers in the event, they couldn't get labor in Q1, I think we're very early days on Q1, whether they have that labor issue or not related to Omicron. So, then let's move back to the supply chain. And we spent a lot of time last year talking about the challenges, particularly with metal supply and steel supply. What I would tell you, is it did improve in Q4, we had not anticipated having really any availability of raw materials to support any customer requirements outside of what the order book reflected, and as it turns out, our on time delivery performance from key suppliers improved in Q4. So, we were able to have a little more steel, which then led to a small amount of pre-buy activity, as we talked about. As we go forward for '22, I'll remind you that we said we were going to reward those suppliers that did perform in 2021. And we would reduce volume requirements with those that did not exactly what we've done. So, we have shifted our supply portfolio. And we are rewarding those suppliers that have continued to perform at a higher level. And I tell you we're not where we want to be from an on time in full delivery perspective. But we are significantly better than the 25% and 30% that we were dealing with early in 2021, we finished the year something in the high 60s or 70%, and we believe we'll be well into the 80s for the first part of 2022.

[Kyle White, Deutsche Bank]

Got it, that's helpful. And then on Metal Containers, can you just help us better understand what is driving earnings growth for the segment in 2022? I mean, historically, it'll be pretty challenging to see growth with volumes down 4% to 5%. I know you have the Easytech acquisition, but it's somewhat marginal. So, is it just better mix and lapping of the steel supply issue? Are you anticipating any benefits from a moderating supply chain and inflation environment in the back half? Just any color you could provide? Thank you.

[Adam Greenlee, President and Chief Executive Officer]

Sure, well, you've got a couple things. One, we really don't have much inventory supporting the business as we exit 2021. So, there will be a little bit of inventory rebuilding that we just simply need to do for the business. We've been running very tight for the last two years, given the volume requirements.

The second piece of that is, with volume declines, we're going to be able to reset our operating network, we're going to be back to making the right cans and the right facilities for specific customers versus doing whatever we could to support our customer's requirements. And I'll say it in an inefficient way. So, we've been talking a bit over the course of 2021 about the operating inefficiencies that we were experiencing, we believe we have line of sight of recovering those operational inefficiencies just getting back to a more normal operating environment. So, really, those are the two biggest things that really drive the performance from an operational standpoint in 2022 for Metal Containers.

[Kyle White, Deutsche Bank]

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

[Operator]

Okay, next we'll go to Mike Roxland with Truist Securities.

[Mike Roxland, Truist Securities]

Thanks very much. Good morning, Adam, Bob, Kim. Congrats on the quarter-end, the year.

[Adam Greenlee, President and Chief Executive Officer]

Thanks.

[Mike Roxland, Truist Securities]

Just a quick question to follow-up on the supply chain logistics, given what's happened with the supply chain, with logistics, how do you think about inventory levels coming out the other side? Should we expect maybe that they'll be 5% higher, 10% higher? And to me, it seems like "Just in time" might be a thing of the past, and that all companies may need to maintain just some higher -- inventory levels going forward just to meet customer demand, and not only on the finished product side, but really also with respect to raw material. So, as you think about this normalization, as you've termed it, for 2022, how do you think about your inventory level, also finished product, and for raw materials?

[Adam Greenlee, President and Chief Executive Officer]

Well, so, I'll jump in first, and I'll look over to Bob and have him chime in and clean up anything he disagrees with. But I would say, look, it's a really good question. And I think the just-in-time environment of supplying the markets is -- it was definitely challenged during these two years. I think where that gets addressed is with our customers, and then their inventories to support retail. So, I don't think this is about unfilled cans at Silgan. I don't think this is about dispensers sitting on our inventory balance sheet, waiting for the customer's orders. I do think we're talking about filled goods waiting to go to retail; it's going to be, I think, where the inventory build actually takes place. And again, spending a lot of time talking to customers about strategies for 2022, and how they're going to meet the ongoing demand in the marketplace, that seemed to be the most common thread just as we talked through it. And, Bob, I don't know what else you would want to add?

[Bob Lewis]

Yes, I think Adam's got it right. The only thing I would add to that is that, particularly in this environment, with severe inflation, I think everybody is going to be loath to want to build any more inventory than they have to. So, I do think that there is some increase that just we felt so sure -- we as a system, not just Silgan, felt so sure of where we used to be, that there'll be a rebuilding. But I find it hard to believe, particularly given the inflationary environment, that we go all the way back to pre-pandemic levels. I think everybody has figured out how to be a little more efficient with their inventory levels. So, I think they're somewhere between what the inventory levels used to look like and where they are at the low point. So, there's been some rebuilding, but not all the way back.

[Mike Roxland, Truist Securities]

Got you. And then one just quick question on the cash taxes, Bob. You mentioned that the $25 million cash tax benefit is not going to repeat this year. I thought the company was supposed to receive roughly $125 million of tax benefits, both from Gateway and Unicep. So, the $125 million for Gateway won't repeat, but there, isn't there [indiscernible] cash tax benefits that you should be receiving for Unicep?

[Bob Lewis]

Yes, they're in there, but the order of magnitude is, it was front-end weighted. So, that's sort of where you'd get -- the rest of it is going to come, but it's going to come over multiple years.

[Mike Roxland, Truist Securities]

Got it. Thank you.

[Bob Lewis]

So, I -- maybe I misspoke in saying it won't repeat. It just won't repeat at that level.

[Mike Roxland, Truist Securities]

Got you. Thank you.

[Operator]

Okay, next question will come from the line of Ghansham Panjabi with Baird.

[Ghansham Panjabi, Robert W. Baird]

Thanks. Adam, just a clarification, so, in an answer to George's question, where you were talking about the fourth quarter segment volumes, I thought I heard you say that Dispensing was up 8.5%. I just want to clarify that's actually a volume number. And if that is the case, what do you attribute that strength to, because it is well above what it looks like the industry grew specific to the fourth quarter?

[Adam Greenlee, President and Chief Executive Officer]

Sure. It is -- we were up 8.5%, Ghansham, in Q4, for organic volume. So, there's a couple things that go into that. Obviously, it's our Dispending and Specialty Closures segment, so it's really the four key markets that I talked about, it's fragrance and beauty, and then it's beverage and food. And we saw strength really in all four, and I would say significant strength. And that's really what drove the year-over-year improvement in the organic volume.

[Ghansham Panjabi, Robert W. Baird]

Got it. And then, on the same token, you saw some pull-forward on the metal food side. I mean resin prices did decline quite a bit in the fourth quarter, especially towards the backend of the quarter. Did you see any material sort of deferral of demand specific to Custom Containers just based on that dynamic? And maybe give us some color as to what you're seeing so far in the early part of the quarter?

[Adam Greenlee, President and Chief Executive Officer]

Yes, it's a good question. And just on the resin cost side, I think you said that correctly. So, resin did decline in Q4, but it was more at the end of Q4, late in Q4. So, there was very little benefit to Silgan of that cost decline. And then we don't believe we saw customers push out orders from Q4 to Q1 because of potential declines in resin. So, we think the demand level was pretty consistent throughout the quarter. And as we move forward into 2022, obviously we'll be passing through, again, some lagged pass-throughs of the cost inflation that we incurred in 2021, here for the first-half of the year, and then we'll see a normalization. And if resin costs transact the way they are projected by the indices, then we'll see some cost relief for customers in the second-half of the year.

[Ghansham Panjabi, Robert W. Baird]

Okay, thanks so much.

[Operator]

And it looks like we have time to take one more question, so we'll take that from Josh Wilson with Raymond James.

[Josh Wilson, Raymond James]

Good morning, Adam and Bob. Thanks for fitting me in.

[Adam Greenlee, President and Chief Executive Officer]

Good morning, Josh.

[Josh Wilson, Raymond James]

Just wanted to get a little more color on some of the supply chain and mix question. So, in your guidance, are you assuming everything is completely normalized as we get out the end of the year on the labor and supply chain issues? And if so, what's -- can you put like a dollar value on the benefit there that's part of the EPS walk?

[Adam Greenlee, President and Chief Executive Officer]

Well, I think what I would say, Josh, is I would go back to kind of the walk that Bob walked through on the $0.50. And what I would tell you, basically everything else falls into the operational improvements, and that is the unwinding of the operational inefficiencies of the supply chain and labor issues that we experienced in '21. So, I don't have a specific number for you, but it does encompass the balance of the operational improvement that we'll see for '22.

[Josh Wilson, Raymond James]

And the mix benefit in Metal Containers is there any lag to that or will that start fairly early in the year?

[Adam Greenlee, President and Chief Executive Officer]

No, I think what you'll see is, again, a normalization of volumes across the markets that we serve. So, basically, now all of our markets are -- we've had it back to kind of a normalized level. So, vegetable and -- the vegetable pack, the industrial cans, we talked about, for restaurants we think that's just back to a more normal volume, with continued growth in pet food. So, I think what you'll hear us talk about in Q1, if I were predicting it, is mix will be unfavorable because we'll be selling more small cans again, just like we have been for the last several years. That's where the growth is going to come from in the early part of the year.

[Josh Wilson, Raymond James]

Got it. Thanks so much.

[Operator]

All right, so at this time, I'd like to turn the call back over to Mr. Adam Greenlee for any additional or closing remarks.

[Adam Greenlee, President and Chief Executive Officer]

Great, thank you very much, Alan. And we appreciate everyone's time today and interest in the company. And look forward to talking about our first quarter results, in April. Thank you.

[Operator]

And that does conclude today's conference. We thank everyone again for their participation. You may now disconnect.