Q4 2022 Silgan Holdings Inc Earnings Call
[music].
Please standby were about to begin.
Good morning, ladies and gentlemen, and welcome to the Silicon 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 speakers' prepared remarks, there will be a question and answer session. If you would like to ask a question. During this time. Please press star one.
On your telephone keypad and he would like to withdraw your question Press Star One 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.
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.
Or any 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.
Before 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. Thank.
Thank you Kim and welcome everyone to silicones 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 silicon posting our sixth consecutive year of record sales and delivering yet another year of record double digit growth in adjusted EPS as the momentum we built in the business continues to show in our results I'm incredibly proud of the entire silicon team and the accomplishments that we've achieved together proving it.
Through a variety of economic environments still gonna remains a steadfast partner to our customers employees and shareholders day in and day out our teams proved 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 yet 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.
Boeing supply chain disruptions in customer and retail inventory destocking throughout the year.
In combination with our outstanding operational performance, our long term contractual arrangements and focus discipline of passing through inflationary cost helped our business to grow adjusted earnings in a period of unprecedented inflation in raw materials labor energy and other cost a few highlights we delivered in 2022.
Two are as follows.
<unk> 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 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 volume as well ahead of prepaying delek levels in our businesses is executing at an exceptionally high level.
We remain confident in our ability to build on our momentum in 2023 and beyond.
Specifically as we look to 2023, we believe the business will continue to drive at least mid single digit improvement in 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.
And 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 our 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 a 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 our 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 silicon and the opportunity to continue to showcase the unique nature and continued success of our business in 2023 and beyond.
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 and 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 are.
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 or $1.460 billion 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.
Volume declined 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 are.
Our metal container segment.
Decrease from the prior year as a result of $66 million of rationalization charges in the quarter.
<unk> 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 efficient inventory levels.
These benefits combined with inflationary cost recover.
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.
Head 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 our 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.
And not to renew the expiring contract. We 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're expecting further growth in 2023, because we estimate adjusted earnings per diluted share for 2023 in the range of $3 95.
It's a $4 15.
To align our external reporting more closely with the internal metrics by which we manage our businesses were 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've elected to deploy a liability driven investment portfolio, which we believe will satisfy the cash requirements of the plan after.
So the amortization of acquired intangibles. Our view is this is a noncash expense that is not reflective of the ongoing performance of the acquired businesses.
Are there more this will align us on a comparison basis with our peers for.
For competitive 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 <unk> <unk> per share, which includes full year interest expense of approximately $155 million a year over year headwind of.
<unk> 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.
Our current earnings outlook for 2023, we're providing an estimate of free cash flow of approximately $425 million and 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 75 to 85 per diluted share as compared to adjusted net income per diluted share of <unk> 79.
In the prior year period.
Included in the first quarter of 2023 estimate as incremental interest expense of approximately five per <unk> per share as a result of higher interest rates, while the first quarter of 'twenty. Two 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 the benefit in the first quarter of 2022 from the lagged pass through of resin price declines 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 activity 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 this segment are expected to improve throughout the year.
That concludes our prepared comments and we're happy to open the question for 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 will take further questions from the queue. So I'll turn it back to you to give directions for the Q&A.
Thank you Mr. Louis Ladies and gentlemen at this time any questions Thats Star One and then again if you would like to withdraw. Your question you can press star one at a subsequent time.
Our first question this morning from Adam Josephson of Keybanc.
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 can business from rising tin plate 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 segments performance. Both in terms of volume and profitability compared to what your expectations were in and how that might affect your outlook for 'twenty three.
Sure. Good morning, Adam So a couple of things we did expect the pre buy to have a negative impact just like it had in our metal containers business on our dispensing, especially closure segment. As a reminder included within that segment is our kind of long time legacy Silga enclosures business and it really.
The food and beverage industry, a combination of metal closures and and plastic closures in that business. So we.
We did anticipate that what I would tell you Adam is that as we sit here and look at the pre buy impact it accounted for about 95% of the shortfall from a volume perspective in the quarter for dispensing and specialty closures segment.
It was food and beverage primarily.
It's metal closures that that go on glass jars than we typically supply for many many years so.
No real surprise for us.
And 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 expect that so my words, Adam I'd say the quarter for DSC was really roughly just in line with expectations that we had.
Okay got it thank you and Bob when we I know, we're the ones who come up with a consensus earnings estimate for 'twenty three not you, but 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 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 else equal consensus I guess should've been three cents higher in 'twenty three as a 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.
Yeah, I think you basically have it right. The two adjustments that we made for very different reasons, obviously, but they basically offset so so if you think about where we're at consensus would've been it's roughly in line with what we're what we're suggesting now so theres really no no more.
Broader detail to that and then those two main points.
So it's really just that interest went up by five.
That's pretty much it from your vantage point.
That's right.
Interest rates continue to affect the later part of the year.
Got it thank you Bob.
Thank you we'll go next to Ghansham Panjabi at Baird.
Hey, guys. Good morning, Thanks for fitting me in.
I guess first off on the Destocking question, Adam I mean, 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 relative to inventory with inventories relative to.
The end market demand at the consumer.
Consumer the.
The consumer uptake if you will yes.
Yes, sure it's a great question.
Maybe I'll go back to Q4 in and give you. Some insight there just what we saw through Q4. It 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.
P J customers essentially sort of shut down the last couple of weeks, so a little bit unexpected for us, but that was a bit of 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, ghansham I'd tell you that January has started.
On a pretty strong note for us and all of those same customers. So we are seeing recovery, we've talked about trigger sprayers and on this call to 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 .
Okay perfect. 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 substrates that you're exposed to and then also on the variable cost side with transportation et cetera, but what what are you seeing at this point in real time.
Sure. So you know I guess, we'll start with steel first that affects a couple of our segments. So.
Look we have as Bob mentioned in the prepared remarks, we pass through approximately 80%.
Tin plate 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 'twenty three we do see.
Stability in the prices of 10 plate right now so.
Not a whole lot of change as we sit here in 'twenty three I think there is 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 is a very small benefit in resin and 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 of years and looks like there is stability in the price forecast going forward, we will see what happens here, but as we typically do ghansham.
We take the changes that we've got that are known right now for Q1, and we basically hold that rate for the balance of the year. So.
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.
Is that your other question is kind of moving into some of the other categories like freight we are seeing again some increased freight costs.
I think the fuel surcharges has had been down rates and availability of freight have been challenging and certainly the last couple of years.
I don't know that that theme.
And of the relief valve on some of that pressure that we've seen in other categories.
I think we will 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 ghansham I hope that answered all of your <unk>.
Questions.
Yes. It does thank you so much sure.
Thank you. We'll go next now to George Staphos at Bank of America.
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'll be my two questions can you size for us.
How important that new business, you're onboarding of custom containers is for the fourth quarter and for your overall guidance for the year and what are the sort of the key things, we need to be evaluating and that youll need to tell us about that will mean that the business comes on the earnings come on as expected or not related to.
What are the risk factors there.
Same thing with DSC with a very very strong growth outlook. This year that youre looking for recognizing we are done with Destocking. What are the key risks in your view that we should be mindful of in checking back with you. One 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.
George So maybe we'll start with custom containers and the new business wins.
The impact for 'twenty, three relatively small from a province profit standpoint, obviously the volume kicks in we'll call. It Q4. 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.
It is more about the run rate as we exit 2023, and then enter 2024 within those new business wins. So I think we'll be talking about them as we go through the year on the earnings call just to give an update on where we stand regarding those commercialization. So I think that that's the right way to think about <unk>.
<unk> and then on dispensing and specialty closures.
Really there's a couple of things one we don't have any pre buy activity in our metal closures segment. So we will have a normal year end and that portion of our business. We see continued strength in fragrance and beauty and 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 and to that order book has gone further into 2023, then we had on the last call. So we're we're thinking 2023.
<unk> really is a strong year again for fragrance and beauty, we're engaged with our customers talking about incremental capacity adds 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.
General risk, we're not expecting a massive recovery in lawn and garden, that's going to impact either dispensing and specialty closures or custom closure. So I don't think that risk is built into to <unk>.
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.
Thanks, Adam very clear I'll turn it over.
Thanks George.
Thank you we'll go next to Gabe Poggi at Wells Fargo.
Good morning, Adam.
Yeah.
Wanted to dig in a little bit about your voice inflicted Adam when you when you talked about DSC and the potential into 2023, specifically calling out.
I think the fragrance dispensers or the dispensing specifically being up low double digits. So I guess, maybe taken a big piggybacking off of George's question.
Is there something specifically that that maybe youre doing with your customers.
<unk> seen success with <unk>.
And then.
Any thought towards asks about risks.
Their upside potential.
That you might get from China, reopening and more so about our China consumer mobility and travel as it relates to the duty free just any thoughts there would be would be helpful.
Sure So maybe if I.
I won't take the risk of repeating myself from what I said, so I apologize for the bad connection there but.
You know what we're doing in the market specifically gave on dispensing, especially closures again, we've got a really strong team focused on that market focus 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.
Right, so long as our premium and luxury fragrance and beauty product lines as long as we keep providing 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 and our dispensing and specialty closures segment. So we feel really good about it.
If I broke up Gabe I would tell you we are in conversations to add capacity with our customers to support their growth in those markets and we continue to.
To feel very good about the prospects for future growth in 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 Theres, a couple of things one China 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 it.
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 and 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.
And outsized.
Well, you won't get an outsized benefit from silicon related to the broader Chinese reopening so it'll be a bit impactful for travelers, but for the market itself, we don't see a big impact for our business.
Okay no. The inflection comment was actually it sounded like you were a little bit more increased conviction in optimism on the business.
Alright.
Your opening remarks, yeah, all good bye.
Connection got it there yes no.
And Bob maybe we're at them.
Talk about just sort of what youre seeing across the M&A landscape.
That's been obviously.
<unk> 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.
It is evolving.
Yeah look I think there's a lot to that that point right I mean, where we are.
Coming through the year and being kind of right, where we expected we would be from a leverage standpoint that will be kind of right around the three times leverage mark with improving free cash flow going into next year.
Up to the.
To a level above what we delivered in 2022, that's probably just under another half a turn of deleveraging. So that will put us back kind of to the lower end of our range I think the capital markets continue to evolve still higher higher rates than maybe we've seen over the last decade.
So, but continuing to evolve I think as we talked about on our last call there was a.
A bit of a pause in M&A opportunities coming to market.
As they sort of.
I 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 is a lot of activity that's starting to generate businesses wanting to come to market. We will 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 with some surety.
So that's that's obviously fei.
<unk> 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.
It's the same playbook really it's it's.
<unk> 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 and during the year.
I appreciate it good luck. Thank you.
Thank you we'll go next now to Anthony Pettinari Citi.
Hi, This is actually Brian birchmeier sitting in for Anthony and thanks for taking the question.
Following up on <unk> question on inflation do you expect your PPI pass throughs in metal containers will meet or exceed the level of cost inflation you are forecasting for 2023.
And can you remind us when those pass throughs typically reset.
Sure Good morning, Brian So.
First of all.
We do have.
Inflation that we are continuing to experience in 2023, it will probably be no surprise that the level of that inflation is going to be less than what we experienced in 2022. So given the lag nature of that portion of our pass through mechanism, you'll be passing through last year's inflation this year against a low.
Sure experienced inflation in 2023, so that should be a slight benefit for us.
I don't think we get into the specific details of Windows 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.
Yeah, I would add to that that across the contracts. It's not one particular metric 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.
Given the fact that we've got.
Relatively lesser inflation on a year over year basis should be some benefit for the year.
There is some benefit to the year.
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.
Yes, so the Capex came in a little bit lighter really more to do with the timing of payments to vendors than than actual projects. So we feel like we're adequately investing in the right opportunities at the right time.
So I think.
Let's think about that from the free cash flow.
There is 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.
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 with the right for the right opportunities with the right customers.
Got it thanks, a lot I'll turn it over.
Thank you we'll go next to Matthew Kyle White at Deutsche Bank.
Hey, good morning, Thanks for taking the question I wanted to go back to dispensing in the beauty and fragrance markets in terms of the growth rates that you called out are you seeing any differences between mass or prestige market in beauty in terms of the growth rates for 2023, or you don't see any trade down from consumers going away from prestige and mass or anything that you would call out.
So really no we haven't seen that I mean, our to our.
Our presence is much more in the prestige and luxury and we're just seeing commend 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 opportunity.
I'll tell you I'll as you know 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 are 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 end of the mass market.
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 cans in the U S and any room for optimism.
Nation or are you content with what you have.
Sure I'll take the second part first and we're always thinking about that footprint and what we typically say is for every two plants that we have in our metal containers business. We've closed one through the course of time so.
That relentless focus on driving cost 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 something that is very much a focus of what we do each and every day and then the <unk>.
Fly chain challenges that 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 is protein available theres 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 in Q4, where labor availability challenges and I would 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 it.
Investment that went into that.
The category in 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's roughly in the early part of the year here the rest of that gets figured out at our customers.
Sounds good I'll turn it over.
Thank you the next path to Arun Viswanathan RBC capital markets.
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 thresholds.
Certain contracts does that just happened from time to time or whats the thrust of that is it maybe some of your 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.
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. There's a lot of different reasons for why that happens I think what youre seeing here is just sort of the overall silicon discipline.
And that we're cognizant of that we're making sure that we're.
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 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 in the long term returns.
Okay. Thanks for that.
Then on a similar note.
It sounded like there was still some macro challenges.
You know maybe some some volume.
Destocking.
Pretty much run its course, but still some some potential risks.
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 too.
How does that affect.
You know youre kind of decision, making on some of these projects I'm just I'm just curious if.
Promotional activity has picked up if your customers are now feeling a little bit better given that inflation has kind of moderated touch and maybe we can we can see some extra volume come through promotions.
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.
Fragrance and beauty products and we are seeing greater promotion, we understand greater promotion will continue in those particular markets.
And maybe I will 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 pet food youre 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 theyre trying to leverage that volume growth in and turning 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 and where our products collectively sit in the marketplace for consumers.
As we turn the page to 2023.
And then just lastly, if I could just on the M&A aircraft maybe.
Just maybe.
Some of your priorities if you do have any.
Maybe does the Russia exit provide you with with any extra.
Extra capital to potentially deploy into that area or how should we think about M&A going forward. Thanks.
Yeah look I think as.
I have mentioned before M&A is a core part of the strategy, it's where a lot of our growth over over a longer period of time comes from.
So we will 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 withdraw 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 competencies. So that's just that.
That part of the business is just a victim of circumstance in.
We'll deal with it and we'll get on with with running the broader business.
Thanks.
Well go next to Daniel Rizzo at Jefferies.
Hi, guys. Thank you for taking my question.
I know you're a different company now, but can you just just restore whole purposes, just show what happened with volumes during the 2008 and 2009 recession.
We largely unaffected or was it kind of a different different time different thing.
Yeah.
Yeah, I think the.
The main impact at least the one that got talked about the most was on food can volumes in that in that timeframe and essentially what you saw was volumes hold pretty steady across both.
In the downturn and then the.
And the recovery for very different reasons right and so you saw.
As an example, during the downturn sort of fruit and vegetable it really improved.
As you might expect as people sort of hunker down and stayed 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 in 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 change if you will.
I think what's different this go around.
Okay.
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.
Got the pets are eating and how people are trading the path. So I would expect that.
The food can business will continue to do do well.
Okay.
Sorry for a dumb question, but so I mean people have small dogs down as it was.
We're kind of saying.
But more of them as well so yes, the pet pets in the households have trended to the smaller size and there's more of them as a consequence of smaller pets being more manageable in the house and the wet pet food category, Dan is both small dogs and cats and the cat population as continued to grow over recent years as well.
<unk>.
Okay, and then you mentioned I think 80% pass through for metal metal.
Our metal containers have you ever said, what resin resin pass throughs did I Miss it or something.
Yeah.
Generally we pass through resin.
On a on a lagged basis, so it varies by by resin type and by business.
But.
At its longest its probably 60 days in terms of the lagged pass through and in many cases much shorter than that but to be clear, we do pass through the.
Cost changes of RASM to the market as well and I think if you go back to our dispensing and especially closure segment. It was a large negative roughly in 2021. If memory serves me correct and we basically recover that negative through the course of 2022 and now we are anticipating relatively stable price.
Mrs for Russell as we move forward into 2023 alright.
Thank you very much guys.
Okay.
And we'll go next to Jeff Zekauskas at Jpmorgan.
Thanks very much.
Yes.
Different pad associations are talking about how.
People can't afford their pets know that.
Third of pet owners.
Are worried that.
Pet is putting too much of a strain on their their income.
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 debt.
Sheltered from some of these trends or do not see these trends that is.
Do you see more stress on the pet owner that may affect kept demand or you don't.
So a couple of things there, Jeff I think first of all.
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 <unk> nine I think large pads do have the pressure that youre talking about a the consumption of product just by the sheer nature of the size of the pet.
It is much greater and I do think you see a trade down to dry I'll also say a 40 pound bag of drive absolute it's quite expensive.
When you look at the products that we manufacture and the markets that we serve and 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 youre describing.
Again, we talk a lot about the silicon 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 and dealing with our customers having that dialogue.
Yes, Jeff I would take that a step further and just remind you that we're not we're not speculating on the market right, 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.
Okay.
And then for my follow up.
Is it fair to say that your EBIT growth.
2023 will really be a function of your volume growth.
And that price raw materials spread.
We won't make so much of the difference to the EBIT change.
I think thats right. There are no acquisition timing issue. So what youre 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 profile of each of our segments then.
Then deliberated in 'twenty two it rolls right, 4% to 23, so youre seeing the kind of power of the portfolio and each of our.
Individual opt.
Operating segments delivering growth in their own way for 2023, I think you've got it right. Yes, okay. Great. Thank you so much.
Okay.
And we will take a follow up question from George Staphos with Bank of America.
Hi, everyone. Thanks for taking the follow ons.
I'm guessing the answer will be no theres no change, but it's a box checking exercise here. So given that there has 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.
Things like that that we should be mindful of and then.
Knowing that it's not 2024, yet can you size for us a couple of things.
One how big was that.
Customer care, when you're going to get at the end of this year on an annualized basis in terms of what it might mean for 'twenty four and as we.
Now or in the next.
Sort of phase are you done with your big contract renewals and metal container for next several years. Thank you guys and good luck in the quarter.
Bob and I will have an extra of that for you George but for competitive activity. A good question I think youre right with the answer two so really no change.
As a reminder, so much of our businesses is under long term contract that we're just we're not necessarily out.
And the market bidding on new opportunities each and every day, we win and we grow when we have competitive advantage to our customers in that market and they go win in the markets that they serve so.
No great shape there.
And then as far as our contractual renewals in the metal container business.
You 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.
This significant but again you understand our business model as well, but we're always in conversations.
With our customers about investing in new capacity for their growth et cetera, and we reserve the right to maintain those conversations yeah, I would say George just to remind you that with 90 plus percent of our business under some form of long term contract. There is always something that's coming for renewal, but theres nothing thats out of the ordinary.
Nor is it a large block of business. We've had these periods, where we have the conversation that we have renewed a significant piece of our business and it's had a meaningful price step down we don't have any of that coming at us in the near term and that's what I was getting at this as more ordinary course, that's out in front of us.
Understood and custom.
Might that be someday.
So theres a couple of.
Large contractual pieces of business. So I think George you should think about them.
Tenet for each of those opportunities so call. It two opportunities that will be commercializing in that range got it. Thank you so much.
Thank you we'll take a follow up question now from David Excuse me gave hygiene at Wells Fargo.
Yep.
Actually I wanted to ask you about the metal container renewal. So its been covered thank you guys.
Thanks, Dan.
Thank you we'll go next to Adam Josephson at Keybanc.
Yeah. Thanks, everyone to Jeff's question earlier by the way I, certainly hope Youre doing your part to support National Pet ownership.
Bob in terms of profit caviar atom.
[laughter] fancy feast.
Right.
Bob on working capital you're expecting improvement there can you flesh out roughly how big a source of cash you would expect that to be is it coming from lower inventories lower receivables any impact on payables.
Yeah, well so what we're really looking at is a is a smaller use on a year over year basis. So it's a bit of a benefit but given given where inflation is and as we anticipate it to go.
Its not like were liquidating a lot of working capital. We 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 slightly.
Slightly higher Capex is how you get to the.
Due to the broad bridge for.
Working capital change.
Got it.
Okay.
Right. So there are no components of working capital that you are expecting it to be major.
Sources or uses it sounds like just a modest use on an absolute yes, nothing nothing out of the ordinary.
Okay, and and Adam just to put a bow around all the comments you provided your guidance range for this year the range of 5% which is.
It's entirely consistent with what it's been in previous years, obviously, many people have concerns about the global economy, but those don't seem too.
Yeah.
Be manifest in any wider arrange for you than normal because I asked because some other companies have provided much wider ranges than usual given the tremendous uncertainty that seems to exist.
Do you have any 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 I was just hoping you could address that anyway.
Sure maybe I'll start with the last peso no.
Right. The answer is no we actually have more confidence I think as we sit here heading into 2023, and then we had heading into 2022 because of all the uncertainty that we were facing in and out and we did have a lot of debate around this table and with our team about what that range should be in and ultimately 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 there was discussion of a change but ultimately we.
We all agreed and decided that it was the approach you to leave the range exactly where it was.
No.
I appreciate and what is that if there is a particular source of uncertainty for you is it about around inflation is it demand is there anything is it the pack.
It's January so you probably don't know much of anything about the pack, but is there any particular source of uncertainty that you would call out or not really.
Well I think.
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 and dispensing and that over in costume 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 four so.
So we were up significantly and expected a normal pack in 'twenty, two 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 and.
You know theres 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.
That does have some play into the absolute volume numbers at the end of the pack.
Terrific. Thanks, so much and best of luck. Thank.
Thank you.
Thank you. It appears we have no further questions today this degree.
Back to you for any closing comments.
Thank you Bo and appreciate everyones interest in Silicon and we look forward to discussing the first quarter results in late April . Thank you.
Thank you and again, ladies and gentlemen, thank you for 2000 and Silicon Holdings fourth quarter earnings conference call, we'd like to thank you. All so much again for joining us and wish you all a great remainder of your day Goodbye.
Okay.
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