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spk15: Good morning ladies and gentlemen. Welcome to the Silgan Holdings fourth quarter 2022 earnings conference call. At this time all participants are in a listen only mode and please be advised that this call is being recorded. After the speaker's prepared remarks there will be a question and answer session. If you would like to ask a question during this time just press star 1 on your telephone keypad and if you would like to withdraw your question press star 1 again. And now at this time, I'll turn things over to Ms. Kim Ulmer, Senior Vice President, Finance and Treasurer. Please go ahead, ma'am.
spk01: Thank you. Joining me from the company today are Adam Greenlee, President and CEO, Bob Lewis, EVP and CFO, and Alex Hutter, Vice President of Investor Relations. Before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company. and therefore involve a number of uncertainties and risks, including, but not limited to, those described in the company's annual report on Form 10-K for 2021 and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements. With that, I'll turn it over to Adam.
spk14: Thank you, Kim, and welcome, everyone, to SILGEN's fourth quarter and full-year 2022 earnings call. On the call today, we will review the highlights of our full-year performance and provide details around our fourth quarter results and our outlook for continued growth in 2023. 2022 was another exceptional year for Silgun, hosting our sixth consecutive year of record sales and delivering yet another year of record double-digit growth in adjusted EPS, as the momentum we've built in the business continues to show in our results. I'm incredibly proud of the entire Silgun team and the accomplishments that we've achieved together, proving that through a variety of economic environments, Silgan remains a steadfast partner to our customers, employees, and shareholders. Day in and day out, our teams prove that our founding principles of competing and winning in the marketplace by being the best at what we do continues to translate into meaningful value creation for all of our stakeholders. Our ongoing and unwavering focus yielded significant adjusted earnings growth in 2022 despite difficult volume comparisons as our business overcame known challenges from the prior year pre-buy activity ahead of significant raw material inflation, ongoing supply chain disruptions, and customer and retail inventory destocking throughout the year. In combination with our outstanding operational performance, our long-term contractual arrangements and focused discipline of passing through inflationary costs helped our business to grow adjusted earnings in a period of unprecedented inflation in raw materials, labor, energy, and other costs. A few highlights we delivered in 2022 are as follows. Record sales of $6.4 billion, up 13% versus the prior year. Record adjusted earnings per diluted share of $3.98, which increased 17% versus the record prior year. Free cash flow of $368 million, while continuing to make investments in future growth opportunities, And finally, record revenue, volume, and segment income in our high-margin dispensing and specialty closures business. As we exit 2022 with unit volumes well ahead of pre-pandemic levels and our businesses executing at an exceptionally high level, we remain confident in our ability to build on our momentum in 2023 and beyond. More specifically, as we look to 2023, we believe the business will continue to drive at least mid-single-digit improvements and total adjusted segment income organically, which will be partially offset by higher interest expense due to higher interest rates expected in 2023. In addition, and as outlined in the press release, beginning in 2023, we have adjusted the prior year results, the prior year periods for pension income and the amortization of acquired intangibles. From a segment perspective, we expect our dispensing and specialty closure segment to produce high single digit adjusted segment income growth driven by mid single digit volume growth and improved mix, including double digit volume growth in our higher value dispensing products. In our metal container segment, we see low single digit volume and low to mid single digit adjusted segment income growth in 2023, primarily as the result of mid single digit volume growth in our pet food markets, which represent roughly half of our total volume in the segment, and continued operational improvements in the business. In our custom container segment, we expect adjusted segment income to grow in the low single digits, with low single-digit volume growth as volume trends are expected to improve throughout the year as we continue to cycle over a previously discussed decision to not renew a long-term piece of business and to replace that volume with new, higher-margin contractual business later in the year. We're excited about what the future has in store for Sylvan and the opportunity to continue to showcase the unique nature and continued success of our business in 2023 and beyond. With that, Bob will take you through the specifics of our financial results for the quarter and provide additional color around our earnings estimates for 2023. Thank you, Adam.
spk02: Good morning, everyone. As Adam highlighted, the business continues to execute at a high level, delivering record fourth quarter and full year sales and adjusted earnings per share. Our businesses did an outstanding job managing through a complex volume backdrop, ongoing supply chain disruptions, and significant cost inflation. This is a testament to our contractual pass-throughs, cost recovery discipline, and endless pursuit of operational excellence to mitigate inflation. Net sales for the fourth quarter of 2022 were $1,460 million, up $16 million, or just over 1% versus the prior year, as net organic revenue growth was partially offset by unfavorable foreign currency of approximately $39 million. Our organic growth was driven by favorable price mix resulting from inflationary cost pass-throughs, which more than offset expected volume declines in each of our segments. Total segment income for the quarter of $81 million declined on a year-over-year basis, primarily as a result of rationalization charges of $67 million in the fourth quarter of 2022. During the quarter, we recorded a restructuring charge of $74 million to write down assets which were used to service the Russian market, as we will no longer produce the limited humanitarian products sold in 2022 for this market. Highlights of our segment income for the quarter are as follows. Our dispensing and specialty closure segment income increased from the prior year driven by strong pricing and cost recovery disciplines and better operating performance. These benefits more than offset a foreign currency headwind of approximately $3 million and an 8% volume decline. The volume decline in the quarter was primarily the result of lower demand for steel closures in the food and beverage end markets as compared to the prior year period, which benefited from pre-buy activity ahead of significant steel inflation in 2022. Our metal container segment, decreased from the prior year as a result of $66 million of rationalization charges in the quarter. Excluding the impact of rationalization charges, segment income increased 28% versus the prior year, with strong operating efficiency as a result of lower volumes, which allowed us to better utilize our footprint and more efficiently manage our inventory levels. These benefits combined with inflationary cost recovery more than overcame a 13% volume decline. The decline in volumes in the quarter was primarily due to difficult volume comparisons from the pre-buy activity in the prior year quarter ahead of approximately 80% steel inflation in 2022. Segment income in our custom container segment decreased as a result of an expected 11% decline in volumes, overshadowing improvements in price pass-through and cost recovery. As we previously discussed, the decline in volumes in the quarter was primarily the result of not renewing a customer contract, that did not meet our reinvestment return hurdles, as well as the delayed recovery in lawn and garden, home, and personal care products. The decision not to renew the expiring contract will continue to have an unfavorable impact on volumes through the first half of 2023, as we expect to commercialize new business awards later in the year. Turning to the outlook for 2023, as we leverage the momentum of delivering six consecutive years of record-adjusting earnings, we are expecting further growth in 2023 as we estimate adjusted earnings per diluted share for 2023 in the range of $3.95 to $4.15. To align our external reporting more closely with the internal metrics by which we manage our businesses, we are excluding the impact of U.S. pension income and amortization of acquired intangible assets from our definition of adjusted segment income and adjusted earnings per diluted share. Our domestic pension plans ended 2022 at approximately 130% funded and are closed to new participants. Therefore, we have elected to deploy a liability-driven investment portfolio, which we believe will satisfy the cash requirements of the plan. As to the amortization of acquired intangibles, our view is this is a non-cash expense that is not reflective of the ongoing performance of the acquired businesses. Furthermore, this will align us on a comparison basis with our peers. For comparative purposes, a reconciliation of prior periods to remove these adjustments has been posted to our website on the investor relations section. We expect total adjusted segment income to increase by mid to high single digits in 2023 as compared to the prior year. The midpoint of our range of adjusted earnings per share represents a year-over-year increase of $0.04 per share, which includes full-year interest expense of approximately $155 million, a year-over-year headwind of $0.20 per share, and a tax rate of between 24% and 25%. These estimates exclude the impact from certain adjustments as outlined in Table B of our press release. Based on our current earnings outlook for 2023, we're providing an estimate of free cash flow of approximately 425 million in 23, a 16% increase from 2022 as earnings growth and lower use of cash for working capital as compared to 22 is partially offset by higher CapEx, which we expect to be approximately $250 million in 2023 as we invest alongside our core and new customers. Turning to our outlook for the first quarter of 2023, we're providing an estimate of adjusted earnings in the range of $0.75 to $0.85 per diluted share as compared to adjusted net income per diluted share of $0.79 in the prior year period. Included in the first quarter of 2023 estimate is incremental interest expense of approximately $0.05 per share as a result of higher interest rates, while the first quarter of 2022 included approximately a penny per share from earnings from our Russian operations. Adjusted segment income in dispensing and specialty closures is expected to be flat as a benefit in the first quarter of 2022 from the lag passed through a resin price decline in the prior year is not expected to repeat. We anticipate higher adjusted segment income in our metal containers business as a result of the negative impact in the first quarter of 2022 from the customer pre-buy activities during the fourth quarter of 2021. We also expect slightly lower volumes and adjusted segment income in the custom container business as a result of the previously discussed exit of a customer that did not meet return hurdles. Volumes in the segment are expected to improve throughout the year. That concludes our prepared comments, and we're happy to open the call for questions. I'd like to ask everyone to limit your questions to one question and one follow-up, and if time allows, we'll take further questions from the queue. So, Bill, I'll kindly turn it back to you to give directions for the Q&A.
spk15: Thank you, Mr. Lewis. Ladies and gentlemen, at this time, any questions, please press star 1. And if you would like to withdraw your question, you can press star 1 a subsequent time. We'll take our first question this morning from Adam Josephson of KeyBank.
spk10: Thanks. Thanks, everyone. Good morning. Good to talk to you. Adam, can you – Help me with the closures volume performance in the fourth quarter. I know a year ago you called out the impact of the pre-buy in the metal cans business from rising template costs, but I don't think you said anything about closures along similar lines, but then you mentioned it this quarter as having been a very difficult comparison versus last year. Were you expecting your closures lines to be down as much as they were Can you just talk about that segment's performance both in terms of volume and profitability compared to what your expectations were and how that might affect your outlook for 23?
spk14: Okay, sure. Good morning, Adam. So a couple things. We did expect the pre-buy to have a negative impact just like it had in our metal containers business. On our dispensing and especially closure segment, as a reminder, you know, included within that segment is our kind of, you know, longtime legacy Sylvan closures business that really supports the food and beverage industry, a combination of metal closures and plastic closures in that business. So we did anticipate that. What I tell you, Adam, is that, you know, as we sit here and look at the pre-buy impact, you know, it accounted for about 95% of the shortfall from a volume perspective in the quarter. for dispensing and specialty closures segment. So it was food and beverage. Primarily it's metal closures that go on glass jars that we typically supply for many, many years. So no real surprise for us. Then I think from a profit standpoint, we had a good quarter. We were really overcoming the volume shortfalls within the quarter, again, with good operating performance as we had. Resin was slightly favorable. We expected that. So, you know, in my words, Adam, I'd say the quarter for DSC was really roughly just in line with expectations that we had.
spk10: Okay. Got it, Adam. Thank you. And, Bob, when we – I know we're the ones who come up with the consensus earnings estimate for 23, not you – When I'm trying to compare your guidance to the estimate that was out there, obviously versus three months ago, interest expenses five cents higher than what you and we were expecting. And then you chose to exclude amortization of intangibles and pension income or expense, which added, I think, three cents to last year's earnings. So all is equal. Consensus, I guess, should have been three cents higher in 23 as a consequence. But can you help me? reconcile your guidance to what you think consensus was or was expecting, et cetera, if you catch my drift?
spk02: Yeah, I think you basically have it right. The two adjustments that we made for very different reasons, obviously, but they basically offset. So if you think about where consensus would have been, it's roughly in line with what we're suggesting now. So there's really no more broader detail to that than those two main points.
spk10: So it's really just that interest went up by five cents, and that's pretty much it from your vantage point.
spk02: That's right.
spk11: As interest rates continue to affect the later part of the year. Got it. Thank you, Bob. Thank you. We go next now to Donchum Punjabi at Baird.
spk08: Hey guys, good morning. Thanks for putting me in. I guess first off on the destocking question, Adam, I mean, you know, so many end market verticals have called out destocking all the way from the retail channel all the way down. You yourself have experienced that to some extent. What's your best guess in terms of where we are with inventories relative to sort of the end market demand of the consumer uptake, if you will?
spk14: Yeah, sure. It's a great question. And I think maybe I'll go back to Q4 and give you some insight there. What we saw through Q4 was really a pretty good early part of Q4, October, November. And that was, I'll just say, both in our North American markets and in Europe as well. What we saw also at the end of Q4 was that our large CPG customers essentially sort of shut down in the last couple weeks. So a little bit unexpected for us, but that was a bit of the volume shortfall for the quarter as well as sort of the abrupt end of the year. I think the better news is that we were also seeing some good signs of recovery in some of the markets and product lines that had been challenged due to the destocking effort a little bit earlier in the year. And most importantly, Gancham, I tell you that January has started on a pretty strong note for us and all those same customers. So we are seeing recovery. We've talked about trigger sprayers on this call, the last, I think, two calls. We've seen almost a full recovery in Europe at this point, which typically is a precursor to what happens in North America for many of our product lines. We're feeling better about the recovery of the destocking than we were, I think, as we entered the last call. And we've certainly seen more positive signs from our customers. And then we're having a really good start to the year so far here in January.
spk08: Okay, terrific. That's very helpful. And then in terms of the inflation dynamics that you've been experiencing, maybe just lay out for us what your embedded assumptions are for the big substrates that you're exposed to. And then also on the variable cost side with transportation, et cetera, what are you seeing at this point in real time?
spk14: Sure. So, you know, I guess we'll start with steel first that affects a couple of our segments. So, you know, look, we have, as Bob mentioned in the prepared remarks, we passed through approximately 80% template increase onto the market. It does appear that our customers were able to successfully pass that through at retail and to their customers. As we turn the page to 23, you know, we do see, you know, stability in the prices of template right now. So, you know, probably not a whole lot of change as we sit here in 23. I think there's some capacity availability challenges for the supply side of template. I'll remind you we are the largest template buyer in the world and feel like we've got good relationships and partnerships with our supply base that we're going to get the template that we need in the geographies in which we need it. Moving over to resin, as we go forward, there's a very small benefit in resin built into our Q1 guidance. For the most part, I would tell you, as volatile as resin has been over the course of the last couple years, it looks like there's stability in the price forecast going forward. We'll see what happens here, but as we typically do, Gonsham is We take the changes, you know, that we've got that are known right now for Q1, and we basically hold that rate for the balance of the year. So, you know, I think there are times where we've been conservative with that outlook. I think this year, based upon the forecast, it seems to be about right. Then your other question is kind of moving to some of the other categories like freight. We are seeing, again, some increased freight costs. You know, I think the fuel surcharges have been down. Rates and availability of freight have been challenging certainly the last couple of years. I don't know that that's seen kind of the relief valve of some of that pressure that we've seen in other categories. I think we'll still experience inflation to some degree, not nearly to the extent that we had over really the course of the last 18 months. And again, as I think you all know and understand, most of our contractual agreements allow for the pass-through of that inflation onto the market. So a lot there, Gautam. I hope that answered all your questions.
spk11: Yeah, it does. Thank you so much. Sure. Thank you. We'll go next now to George Staffos at Bank of America.
spk06: Hi, everyone. Good morning. Thanks for all the details. I wanted to talk about the importance on two factors to your guidance relative to DSC and custom containers. Can you size for us, and that will be my two questions, can you size for us how important that new business you're onboarding in custom containers is for the fourth quarter and for your overall guidance for the year? And what are the key things we need to be evaluating and that you'll need to tell us about That will mean that the business comes on, the earnings come on, as expected or not. Relatively, what are the risk factors there? Same thing with DSC. With a very, very strong growth outlook this year that you're looking for, recognizing we're done with destocking, what are the key risks, in your view, that we should be mindful of and checking back with you on in terms of that volume, that earnings, that incremental margin showing up this year as you expect for DSC? Thank you, guys, and good luck in the quarter.
spk14: Okay, George, so maybe we'll start with custom containers and the new business wins. Really, the impact for 23 is relatively small from a profit standpoint. Obviously, the volume kicks in, and we'll call it K4. So the good news is we're moving forward with getting capital spend in place, and we'll work to commercialize those products, call it late in Q3, early Q4. So It is more about the run rate as we exit 2023 and then enter 2024 with those new business wins. So, you know, I think we'll be talking about them as we go through the year on the earnings calls just to give an update on where we stand regarding those commercializations. So I think that's the right way to think about custom containers. And then on dispensing and specialty closures, again, Really, there's a couple things. One, we don't have any pre-buy activity in our metal closure segment, so we'll have a normal year in that portion of our business. We see continued strength in fragrance and beauty. I think in the last one or two calls here for the earnings call, we had talked about our order book. We talked about our visibility. The reality is our customers had a really good holiday season and therefore a really good product launch, new product launch season here as we begin 2023. So our clarity into that order book has gone further into 2023 than we had on the last call. So we're thinking 2023. really is a strong year again for fragrance and beauty. We're engaged with our customers, talking about incremental capacity as we typically do at this point. So we're bullish on fragrance and beauty and really what it's going to deliver to the course of 2023. I think general risk, you know, we're not expecting a massive recovery in lawn and garden that's going to impact either dispensing and specialty closures. for custom closures. So I don't think that risk is built into our budget as we think about the year. I think just broadly, economic conditions that are out there, we'll see how that impacts consumers. I continue to say the power of the silicon portfolio of products tends to do really well regardless of the economic circumstances. So maybe different products do better in a poor economy versus a booming economy. But bottom line is we still continue to perform regardless of what that circumstance seems to be.
spk11: Thanks, Adam. Very clear. I'll turn it over. Thanks, George. Thank you. We'll go next now to Gabe Hodge at Wells Fargo.
spk03: Good morning, Adam, Bob. Hi, Gabe. Wanted to dig in a little bit. Your voice inflected, Adam, when you talked about DSC and the potential in the 2023, specifically calling out, I think, the fragrance dispensers or the dispensings specifically being a low double digit. So I guess maybe piggybacking off of George's question, is there something specifically that maybe you're doing with your customers that you've seen success with? And then any thought, I mean, you know, George asked about risks. Is there upside potential that you might get from China reopening and more so about China consumer mobility and travel as it relates to duty-free? Just any thoughts there would be helpful.
spk14: Sure. So maybe it's, I won't take the risk of repeating myself from what I said, so I apologize for the bad connection there. You know, what we're doing in the market specifically, Gabe, on dispensing and special closures, again, we've got a really strong team focused on that market, focused on areas of growth and delivering new products, new innovations to our customers that are allowing them to then take those products to market and grow their business. And we're the beneficiaries of that, right? So long as our, you know, premium and luxury fragrance and beauty product lines, as long as we keep providing products new products to those customers that allow them to win in the marketplace, we benefit from that. And we've seen that now for several years in our dispensing and especially closure segment. So we feel really good about it. I think if I broke up, you know, Gabe, I tell you, we are in conversations to add capacity with our customers to support their growth in those markets. And we continue to feel very good about the prospects for future growth And 2023 looks to be a really good year with, I'll say, limited downside risk based upon our conversations with our customers for volume specific to fragrance and beauty. And then as we think about China, there's a couple things. One, China's Asia broadly is relatively small for silicon, always has been and probably will be to some extent. But as we sit here and think about a more mobile consumer in those parts of the world, Again, fragrance and beauty, there is an element of fragrance and beauty that goes through our kind of duty-free international airport locations. And the more people are moving around, frankly, the better that will be for the product lines that we're talking about. So I think it will be good. Likely you'll get an outsized – well, you won't get an outsized benefit from Silgan. related to the broader Chinese reopening. So, you know, it'll be a bit impactful for travelers, but for the market itself, you know, we don't see a big impact for our business.
spk03: Okay. No, the inflection comment was actually, it sounded like you were a little bit more increased conviction and optimism on the business. Sorry. From your opening remarks. Yeah, all good.
spk04: My phone is not playing connection.
spk03: Got it. Yeah, no. Okay. Bob, maybe, or Adam, talk about just sort of what you're seeing across the M&A landscape that's been obviously in savings DNA for a long time, just in terms of assets coming to the market or expectations for sellers, et cetera, with rising interest rates and how that is evolving.
spk02: Yeah, look, I think there's a lot to that point, right? I mean, we're... Coming through the year end, being kind of right where we expected we would be from a leverage standpoint, so we'll be kind of right around the three times leverage mark with improving free cash flow going into next year up to a level above what we delivered in 2022. That's probably just under another half a turn of deleveraging, so that'll put us back kind of to the lower end. of our range. I think the capital markets continue to evolve, still higher rates than maybe we've seen over the last decade or so, but continuing to evolve. I think as we talked about on the last call, there was a bit of a pause in M&A opportunities coming to market as they sort of just wanted to get through year end and see where the markets were heading. I think what we're seeing in the early part of the year that there's a lot of activity that's starting to generate of businesses wanting to come to market. We'll see how that ultimately plays out, but that's encouraging because there are certainly a few that we would have interest in. I think we're well positioned to take advantage of that on two fronts. One, not only is our leverage in the right spot, but we've got a fair bit of available capacity on our revolver That puts us in a pretty good competitive position against other potential buyers of assets that we could move quickly and with some surety. So that's obviously favorable as well. So we'll see where that all goes. But the fact that we've got the most recent round of acquisitions fully integrated, we feel like we've got management bandwidth across our businesses to be able to to integrate something new if and when we find it. So, you know, it's the same playbook, really. It's, you know, been a core competency and one where we think we have and will continue to generate good value and good returns for shareholders. So hopefully we get some opportunities here during the year.
spk11: Appreciate it. Good luck. Thank you. Thank you. We go next now to Anthony Peppinari at Citi.
spk12: Hi, this is actually Brian Bergmeier sitting in for Anthony. Thanks for taking the question. Just following up on Gonstrom's question on inflation, do you expect your PPI pass-throughs in metal containers will meet or exceed the level of cost inflation you're forecasting for 2023? And can you remind us when those pass-throughs typically reset?
spk14: Sure. Good morning, Brian. So, first of all, you know, we do have uh inflation that we are continuing to experience in 2023 it'll probably be no surprise that the level of that inflation is going to be less than what we experienced in 2022 so uh given the last nature of of that portion of our pass-through mechanism you'll be passing through last year's inflation this year against a lower experienced inflation in 2023 so that should be a slight benefit for us um you know i Don't think we get into the specific details of when those pass-throughs hit. They vary by contract, and they are throughout the course of the year. Then they run for 12 months from the implementation date.
spk02: Yeah, I would add to that that across the contracts, it's not one particular metric. I mean, we speak to it as a PPI-like, but the metrics do vary contract to contract. But Adam's point is the right one, is that the pass-through, you know, given the fact that we've got relatively lesser inflation on a year-over-year basis should be some benefit to the year, or is some benefit to the year.
spk12: Got it. Thanks for the detail. And just one last one. It looks like 2022 CapEx came in a bit lighter than expected. Did you decide to push out or walk away from any projects? And then 2023 CapEx, are there any growth or productivity-related projects that you'd like to highlight?
spk02: Yeah, so the CapEx came in a little bit lighter, really more to do with the timing of payments to vendors than actual projects. So we feel like we're adequately investing in the right opportunities at the right time. So I think if you think about that from the free cash flow, there's some noise in the overall number, but up in total. because you had less CapEx and more interest expense that we were carrying through the year. So overall, a really good free cash flow generation. And then as we look forward to the CapEx in next year, it's up a bit largely because of some of these new opportunities really across the business, but primarily in the custom container business, which we just talked about. as well as some good opportunities in the dispensing and specialty closures business. So we feel like we're adequately investing for the right opportunities with the right customers.
spk11: Got it. Thanks a lot. I'll turn it over. Thank you.
spk15: We go next now to Kyle White at Deutsche Bank.
spk13: Hey, good morning. Thanks for taking the question. I want to go back to dispensing and the beauty and fragrance markets in terms of the growth rates that you called out. Are you seeing any differences between mass or prestige markets in beauty in terms of the growth rates for 2023? Are you seeing any trade downs from consumers going away from prestige to mass or anything that you would call out?
spk14: So really, no, we haven't seen that. I mean, our presence is much more in the prestige and luxury, and we're just seeing continued high demand in that segment of the market. And again, great relationships with our customers, a very intimate relationship, and I think that they are clearly seeing additional growth opportunities. What I tell you, Kyle, is through the pandemic, new product launches were relatively limited, and we're now just now getting to the point where the new product launches are hitting the market, and they've been very well received for the holiday season. And we're feeling, again, really good about our volume as we go forward in the prestige area of the business without a whole lot of trade-down that we can see into the mass market.
spk13: Got it. And then on metal containers, you guys have called out some supply chain issues impacting commercialization of new product within – I believe pet food at the customer level. Is that mostly resolved as we go into 2023? And then relatedly, how are you thinking about your footprint within the metal food can in the U.S.? Any room for optimization or are you content with what you have?
spk14: Sure, I'll take the second part first. And we're always thinking about that footprint. And, you know, what we typically say is for every two plants that we have in our metal containers business, you know, we've closed one through the course of time. So, you know, that... relentless focus on on driving costs out of that business is critical to our success and that's just part of our DNA so we're always looking at that we don't have anything to talk about on this call at this point but it's it's something that is is very much a focus of what we do each and every day and then um the supply chain challenges that are our customers experienced in 2022 again our investments to support their growth we made we were able to commercialize on time Early in the year, there were ingredient problems for our customers. All of those have now been resolved. There's protein available. There's other packaging products available as well to ship additional products into the market. Really, what we got to towards the latter half of the year, Q4, were labor availability challenges. And I tell you, for the most part, those are getting resolved as we start the year. We still have a couple of of minor instances here or there across a broad set of customers. There was a lot of investment that went into the pet food category and filling additional product. And for the most part, we're seeing the progress that we wanted to see. And it is part of our growth assumption for 2023 that, you know, roughly in the early part of the year here, the rest of that gets figured out at our customers.
spk11: Sounds good. Turn it over. Thank you. The next now to Arun Vishwantan at RBC Capital Markets.
spk07: Great. Thanks for taking my question. I guess maybe I wanted to start with some of the comments you made about returns not meeting your return threshold from certain contracts. Does that just happen from time to time, or what's the thrust of that? Is it maybe some of your customers also dealing with a lot of inflation and not being able to – pass that on or maybe just provide a little bit more detail on that.
spk02: Yeah, Arun, it does happen from time to time, particularly as contracts age out and maybe volume trajectory changes a bit. The competitive landscape has something to do with that relative to what assets may be available in the marketplace versus a customer that wants to have new assets put in place. So there's a lot of different reasons for why that happens. I think what you're seeing here is just sort of the overall Silgan discipline in that we're cognizant of that. We're making sure that we're maintaining, particularly in that business, right? We went back a long way to recover that business and say, look, we need to get the return profile to a point where that business can make money. We've actually done better than what we anticipated or what goal we set. So this is just staying the course with that and making sure that we're not doing anything that's detrimental to the overall profitability of that business and the long-term returns.
spk07: Okay, thanks for that. And then on a similar note, you know, it sounded like there was still some macro challenges there. you know, maybe some volume, you know, destocking that's pretty much run its course, but still some potential risk. Would you say that the customer activity has migrated to now a little bit more promotional activity to move volumes? Is that something that we could potentially look forward to? And how does that affect, you know, your kind of decision-making on some of these projects? I'm just curious if If promotional activity is picked up, if your customers are now feeling a little bit better given that inflation is kind of moderated just a touch, and maybe we can see some extra volume come through promotions.
spk14: Well, I think maybe we should just talk about that by business segment because I think the answers will vary by segment. So certainly in dispensing and specialty closures, promotion is part of the answer for those prestige and luxury closures. fragrance and beauty products, and we are seeing greater promotion. We understand greater promotion will continue in those particular markets. And maybe I would jump over to the metal containers business and say we have seen more promotion in soup, and we believe it's working for whatever that's worth. And I think, you know, pet food, you're going to see more promotion in pet food in a variety of different formats. So I think in fits and starts, yes, there's more promotional activity. It's where I think volume growth is coming from as well. They're trying to leverage that volume growth and turn it into an even greater set of volume for the business. So I think our customers are feeling better, broadly speaking, about where we are, where our products collectively sit in the marketplace for consumers as we turn the page to 2023.
spk07: And then just lastly, if I could, just on the M&A front, maybe you can just discuss maybe some of your priorities. If you do have any, you know, maybe does the Russia exit provide you with any, you know, extra capital to potentially deploy into that area? Or how should we think about M&A here going forward? Thanks.
spk02: Yeah, look, I think, you know, as I mentioned before, M&A is a core part of the strategy. It's where a lot of our growth over a longer period of time comes from. So we'll continue to remain active. I don't think it's any secret that the dispensing and specialty closure side of the business is kind of the tip of the spear of where we would like to continue to invest. but we're also not afraid to look for opportunities to strengthen other parts of our business as well. But I think if we could draw up the playbook, it would be oriented towards the dispensing side. The withdrawal from Russia really doesn't have any bearing on our ability or our desire to allocate capital across the rest of the business. It remains part of the core competency. So that's just a That part of the business is just a victim of circumstance, and we'll deal with it, and we'll get on with running the broader business.
spk11: Thanks. We'll go next now to Daniel Rizzo at Jefferies.
spk09: Hi, guys. Thank you for taking my question. I know you're a different company now, but can you just, just for historical purposes, just tell us what happened with volumes during the 2008 and 2009 recession? were you largely unaffected or was it kind of a different time, different thing?
spk02: Yeah, I think that the main impact, at least the one that got talked about the most, was on food can volumes in that time frame. And essentially what you saw was volumes hold pretty steady across both, you know, in the downturn and in the in the recovery for very different reasons, right? And so you saw, as an example, during the downturn, sort of fruit and vegetable really improved, as you might expect, as people sort of hunkered down and ate at home more often. Likewise, at that particular point in time, the pet food market, which was a different pet population, if you will, more broadly larger pets, and that converted away from wet pet food to dry. And then as the recovery happened, there was a reversion. So through both periods, volumes were pretty steady. The mix changed, if you will. I think what's different this go-around is the fact that there has been such a change in pet ownership and pet population that it is far more dependent on the wet pet food market and less likely to see a meaningful change away from what the pets are eating and how people are treating the pets. So I would expect that the food can business will continue to do well.
spk09: I'm sorry for the dumb question, but does that mean people have smaller dogs now? Is that what we're kind of saying?
spk02: More of them as well. So, yes, the pets in the household have trended to the smaller size, and there's more of them as a consequence of smaller pets being more manageable in the house.
spk14: And the wet pet food category, Dan, is both small dogs and cats. And the cat population has continued to grow over recent years as well.
spk09: Okay. And then you mentioned, I think, 80% pass-through for metal costs or metal containers. Have you ever said how much of resin is pass-through? Did I miss it or something?
spk02: Generally, we pass-through resin on a lagged basis. So it varies by resin type and by business. But at its longest, it's probably 60 days in terms of the lag pass-through, and in many cases much shorter than that.
spk14: But to be clear, we do pass through the cost changes of resin to the market as well. And I think if you go back to our dispensing and especially closure segments, You know, it was a large negative roughly in 2021, if memory serves me correct. And we've basically recovered that negative through the course of 2022. And now we're anticipating relatively stable prices for resin as we move forward into 2023.
spk11: That's right. Thank you very much, guys. And we'll go next now to Jeff Sakakis at J.P. Morgan.
spk04: Thanks very much. Different pet associations are talking about how people can't afford their pets now, that a third of pet owners are worried that the pet is putting too much of a strain on their income. And the number of pets in shelters has really risen both in the United States and in Europe. is the pet food, is the cat food market that you're in higher end so that it's sheltered from some of these trends? Or do you not see these trends? That is, do you see more stress on the pet owner that may affect canned demand or you don't?
spk14: So a couple things there, Jeff. I think, first of all, you know, we don't see that stress through the markets that we serve. And again, I think Bob really highlighted a very good point about the mix of business that we had, call it back in 08 or 09. I think large pets do have the pressure that you're talking about. A, the consumption of product just by the sheer nature of the size of the pet is much greater, and I do think you see a trade down to dry. I'll also say a 40-pound bag of dry pet food is quite expensive. When you look at the products that we manufacture and the markets that we serve in that kind of small dog and cat, wet pet food population, we don't see a trade down. We don't see that same level of stress that you're describing. Again, we talk a lot about the Sylvan customer service model and our customer intimacy. We spend a lot of time talking to and with our customers about the specifics of the markets that we collectively serve and we are not feeling that pressure in dealing with our customers having that dialogue.
spk02: Yeah, Jeff, I would take that a step further and just remind you that we're not speculating on the market. We're making investments where our customers are making investments, and we're doing that with commitments from those customers. So we feel like we're pretty well aligned with what what is happening in their markets and where their markets are going.
spk04: Okay. And then for my follow-up, is it fair to say that your EBIT growth in 2023 will really be a function of your volume growth and that the price raw material spread really won't make so much of a difference to the EBIT change?
spk14: I think that's right. You know, there are no acquisition timing issues. So what you're seeing is really what we've been talking about, right? I mean, I think we stood and delivered in 2022, and we talked a lot about the dynamics of each of our segments and the growth profiles of each of our segments, then delivered it in 22. It rolls right forward to 23. So you're seeing the kind of power of the portfolio and each of our individual segments operating segments delivering growth in their own way for 2023.
spk11: I think you've got it right, Jeff. Okay, good. Thank you so much. And we'll take a follow-up question now from George Scott, host of Bank of America.
spk06: Hi, everyone. Thanks for taking the follow-ons. I'm guessing the answer will be no, there's no change, but it's a box-checking exercise here. So given that there's been changes in the landscape of other players in the North American metal container sector? Are you seeing any change in the level of competitive activity, you know, bids, things like that that we should be mindful of? And then, you know, knowing that it's not 2024 yet, can you size for us a couple things? One, how big was that a custom container win that you're going to get at the end of this year on an annualized basis in terms of what it might mean for 24. And as we now are in the next sort of phase, are you done with your big contract renewals and metal container for the next several years? Thank you, guys, and good luck in the quarter.
spk14: So maybe Bob and I will hand an egg through that for you, George. But for competitive activity, a good question. I think you're right with the answer, too, so really no change. As a reminder, so much of our business is under long-term contract that we're not necessarily out in the market bidding on new opportunities each and every day. We win and we grow when we pass competitive advantage to our customers in that market, and they go win in the markets that they serve. So no great shakes there. And then as far as our contractual renewals in the metal container business, We always have a couple here and there. Nothing that I can think of off the top of my head as we sit here for 2024 that's significant, but again, you understand our business model as well. We're always in conversations with our customers about investing in new capacity for their growth, etc., And, you know, we reserve the right to maintain those conversations.
spk02: Yeah, I would say, George, just remind you that with 90 plus percent of our business under some form of long-term contract, there's always something that's coming for renewal, but there's nothing that's out of the ordinary, nor is it a large block of business. You know, we've had these periods where we have the conversation that we've renewed a significant piece of our business and it's had a a meaningful price step down, we don't have any of that coming at us in the near term.
spk05: That's what I was getting at.
spk02: This is more ordinary course that's out in front of us.
spk05: Understood. And custom, how big might that be someday?
spk14: So there's a couple of large contractual pieces of business. So I think, George, you should think about them in kind of the range of $8 million to $10 million of revenue range. kind of for each of those opportunities. So call it two opportunities that we'll be commercializing in that range.
spk15: Got it. Thank you so much. Thank you. We'll take a follow-up question now from Gabe Hodge at Wells Fargo.
spk03: Yep. George, actually, I wanted to ask about the metal container renewal. So it's been covered. Thank you, guys.
spk11: Okay. Thanks, Gabe. Thank you.
spk15: We go next now to Adam Joseph at KeyBank.
spk10: Thanks, everyone. To Jeff's question earlier, by the way, I certainly hope you're doing your part to support national pet ownership. Bob, in terms of working capital, fancy feast. Bob, on working capital, you're expecting improvement there. Can you flesh out roughly how big a source of cash you expect that to be? Is it coming from lower inventories, lower receivables, any impact on payables?
spk02: Well, so what we're really looking at is a smaller use on a year-over-year basis, so it's a bit of a benefit. But given where inflation is and we anticipate it to go, it's not like we're liquidating a lot of working capital. We've just got a lesser use as we move year-over-year. So basically, if you think about where the free cash flow generation is coming from, it's essentially the improvement in earnings, a little bit less of a use of working capital, and the elimination of the payment for the European Commission that was made offset by the slightly higher cap back is how you get to the broad bridge for working capital change.
spk10: Got it. Right. So there are no components of working capital that you're expecting to be major sources or uses, it sounds like, just a modest use on an absolute.
spk02: Yeah, nothing out of the ordinary.
spk10: Okay. And Adam, just to put a bow around all the comments you've provided, your guidance range for this year, the range is 5%, which is entirely consistent with what it's been In previous years, obviously, many people have concerns about the global economy, but those don't seem to be manifest in any wider range for you than normal. I ask because some other companies have provided much wider ranges than usual, given the tremendous uncertainty that seems to exist. Do you have any concerns? less confidence just in the outlook than you've had in previous years, given the state of the economy? I assume the answer is no, but just hoping you could address that anyway.
spk14: Sure. Maybe I'll start with the last piece of no. You're right. The answer is no. We actually have more confidence, I think, as we sit here heading into 2023 than we had heading into 2022 because of all the uncertainty that we were facing. And And Adam, we did have a lot of debate around this table and with our team about what that range should be. And ultimately, it's kind of the last point. We said that we think there's less volatility and less risk than what we came into 2022 with. And we think that we've got pretty good insight into the depths of our business. And we should be providing that level of insight to the market. And there was discussion of a change, but ultimately, we all agreed and decided that it was the appropriate time to leave the range exactly where it was.
spk10: No, I appreciate it. And what is the, if there is a particular source of uncertainty for you, is it around inflation? Is it demand? Is there anything, is it the PAC? It's January, so you probably don't know much of anything about the PAC, but is there any particular source of uncertainty that you would call out or not really?
spk14: Well, I think, you know, look, The destocking situation that affected both dispensing and specialty closures and custom containers, that will resolve itself at some point, right? We think we've got really good signals that that is resolving literally as we speak. If that gets delayed for any reason or for whatever reason, that would be a little bit of risk, Adam. That's probably the biggest one in dispensing and then over in custom. I think the food can business you've got right, I think that is more about the pack. Remember, 21 was the year that the supply chain got replenished for vegetables, so we were up significantly and expected a normal pack in 22, which we got. The pack ended in Q3, which was a little earlier than what we expected, but that was fine for us. So we are anticipating a good pack this year. There's always the normal risk around the pack, but it's not like the year is dependent upon pack volumes. It's just the one item that, you know, does have some play into, you know, the absolute volume numbers at the end of the pack.
spk10: Terrific. Thanks so much, Adam. Best of luck.
spk11: Thank you.
spk15: Thank you. And in case you have no further questions today, Mr. Green, I'll hand things back to you for any quotes and comments.
spk14: Great. Thank you, Bo. And I appreciate everyone's interest in Sylvan, and we'll look forward to discussing the first quarter results in late April. Thank you.
spk15: joining Sylvan Holdings' fourth quarter earnings conference call. Rebecca, thank you all so much again for joining us. I wish you all a great remainder of your day. Goodbye.
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