Q1 2023 Silgan Holdings Inc. Earnings Call
Good day, everyone and welcome to the Silicon Holdings first quarter 2023 earnings call today's call is being recorded.
I would now like to turn the conference over to Alex Hutter, Vice President Investor Relations. Please go ahead.
Thank you and good morning, joining me on the call today are Adam Greenlee, President and CEO , Bob Lewis EVP, corporate development and administration, and Kim Ulmer, SVP CFO and treasurer.
Before we begin the call today, we'd like to make it clear that certain statements made today on this conference call. Maybe forward looking statements. These forward looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including but not limited to those described in the company's annual report.
On Form 10-K for 2022, and other filings with the Securities and Exchange Commission.
Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward looking statements with that let me turn it over to Adam.
Thank you, Alex and we'd like to welcome everyone to <unk> first quarter of 2023 earnings call.
To start today's call by congratulating, both chemo and Bob Lewis on their new roles at the company one of the hallmarks of the Silicon culture is rewarding the performance of our people and I am incredibly proud of their accomplishments and look forward to their continued success is it silicon now moving back to the first quarter performance. Once again, so going to started the year with strong up.
<unk> performance in each of our businesses and continue to leverage and advance the strong momentum generated through the pandemic as we entered the second quarter of 2023.
Our business has remained highly focused on executing our near term and long term strategic priorities, which continues to drive our outperformance in the markets, we serve and significant value creation for our shareholders. Our teams did an excellent job navigating the market challenges alongside our customers again in the first quarter.
Overall, we believe that our resilient consumer staple end markets, our customer intimacy and market positioning combined with the agility and expertise and our operations continue to set us apart from our competition.
The strategic portfolio evolution, we have been advancing since 2017 continues to perform as we envisioned and we remain confident with the prospects for our business in 2023 and beyond.
In the first quarter, our dispensing, especially closure segment delivered solid results despite significant headwinds in the quarter from rather than foreign currency with our dispensing products building on the momentum we saw early in the year and volumes improving as we exited the quarter our products for high end fragrance and beauty end markets continued to win in the marketplace.
Posting double digit volume growth in the first quarter and many of the dispensing products that had experienced headwinds from inventory management in 2022 began to see year over year improvement in the first quarter with the trend accelerating as we exited the quarter.
These positive impacts were offset by the timing of customer orders for food and beverage closures in the first quarter trends in April are strong and we are expecting volumes for the segment to inflect positively in the second quarter.
Metal containers business continues to execute extremely well posting record net sales and adjusted EBIT with the impact of the pandemic now behind us our efficient operating platform combined with organic volume growth is driving our performance. The challenge is that several customers experienced in 2022, and our pet food markets appear to be <unk>.
<unk> behind Us and as a result volumes for our pet food containers were up mid single digits in the quarter.
Our operating performance in the quarter continued to drive strong profit improvement in the segment and our early indications for the vegetable pack are consistent with our preliminary expectations.
And our custom container segment, our teams continue to take actions to mitigate the impact of our decision not to renew a contract that did not meet reinvestment hurdles and the timing mismatch of the commercialization of new business awards in the year.
As well as unanticipated headwinds from rapidly rising resin costs in the quarter that said as we look forward. We are expecting these items to also impact the second quarter comparisons as we recovered costs associated with a non renewal and we're winding down shipments and operating activities in the second quarter of 2022.
The second quarter of 2023 is also expected to continue to experience higher resin costs. Therefore second quarter profit and custom containers is expected to be slightly below first quarter levels.
We believe this business remains well positioned in the markets and continues to win new business based on our unique customer focused operating model, which will be more evident as we exit 2023.
Overall, we're off to a very strong start in 2023 and feel confident in our outlook for the remainder of the year before I turn it over to Kevin to cover the specifics of our financial results for the quarter and to provide additional color around our earnings estimates I wanted to take a moment to recognize the impact and lasting legacy of our two founders bill silver and great quarter again.
And so then Greg started this company 36 years ago with a clear vision and purpose to create a company. Unlike any other that was purely focused on competing and winning in the market served by being the best at what they do.
Moving the enduring wisdom and success of that vision Silicon has grown to become a global leader in the packaging industry with 2022 sales of $6 $4 billion and nearly 6000 employees around the world, who all embraced the principles filling Greg envisioned on behalf of our shareholders customers and the entire <unk>.
<unk> team. Thank you for creating such a special company for your lifelong devotion to our success and for your personal contributions to our development. We are all incredibly proud and honored to be part of the past present and future of Sheldon with that Ken will take you through the financials for the quarter and our estimates for the second quarter in <unk>.
All year.
Thank you Adam.
Adam highlighted the business continued to execute at a high level in the first quarter of 2023, delivering strong first quarter sales and adjusted EBIT and adjusted earnings per diluted share.
Net sales for the first quarter of 2023 were approximately $1 $4 billion sales were comparable to the prior year quarter, excluding sales associated with Russia of $9 $5 million in the first quarter of 2022, and a foreign currency headwind of approximately 1% in the first quarter of 2023 first quarter 2023 sales performance was driven by strong.
Volumes in metal containers, which was offset by expected lower volumes in the dispensing, especially closures and custom container segment.
Total adjusted EBIT for the quarter of $149 $4 million increased over 2% on a year over year basis with higher adjusted EBIT in the metal container segment offsetting lower adjusted EBIT in the dispensing and specialty closures and custom container segment.
Net income per diluted share declined one for the first quarter of 2022 with non operating headwinds from higher interest expense and foreign currency and the lag pass through of resin cost driving approximately 15 cents of earnings headwind in the quarter I wish we would expect to recover five cents in the second half related to resin.
Putting these items our strong operating performance would have driven adjusted EPS higher by a double digit percentage.
Turning to our segments dispensing and specialty closures segment sales were comparable to the prior year, excluding a 2% headwind from foreign currency and a 1% impact from Russia versus the prior year as a 2% improvement in price was offset by lower volume mix.
First quarter, 2023, dispensing, especially close adjusted EBIT decreased $13 $6 million versus the prior year period, with improving but lower year over year volume mix trends and difficult year over year cost comparisons as a result of comparative changes, resulting from the lagged pass through of resin costs in the prior year benefit from an inventory.
<unk> program.
Volume mix improvement throughout the quarter with growth in our dispensing product strengthening in the latter part of the quarter.
This trend was overshadowed by the timing of customer orders and the food and beverage markets in the first quarter, we are expecting those products to revert to a more normal trend in the second quarter of 2023.
Relative to our expectations, the dispensing and specialty closures segment delivered strong operating performance, but did not offset the significant headwinds from higher resin costs during the quarter and unfavorable foreign currency.
Our contracts in the dispensing, especially closure segment generally contain a longer lag contractual pass through of resin costs in our other businesses. We expect this impact will likely continue to weigh on results in the second quarter, but ultimately recovering the impact later in the year as rising costs are expected to abate.
And our metal container segment, our team's performance was exceptional in the quarter with volume growth of 3% driven by strong demand for pet food.
Vegetable containers.
<unk> impacts associated with Russia, and foreign currency sales grew 5% from the prior year quarter, while the first quarter is seasonally one of our smaller acquires adjusted EBIT increased nearly 60% from the prior year quarter as the business continued to contractually recover cost inflation and the operating leverage of higher volumes drove strong incremental margins.
<unk> started the year strong and is well positioned to deliver low single digit volume growth and mid single digit adjusted EBIT growth for 2023.
And custom containers or non renewal of a piece of contractual business. In this segment sales volumes were lower by 10% year over year in the first quarter of 2023, which coupled with lower resin costs on a year over year basis, and unfavorable foreign currency translation drove sales, 13% below the prior year period. Despite these top line challenges are busy.
Enable to partially offset the impact of lower volumes through operational performance, but the timing and pace of resin cost increases impacted adjusted EBIT in the first quarter we.
We expect the headwind from resin cost to continue to weigh on adjusted EBIT in the first half of 2023 that recover in the back half of the year.
In the second quarter, we are expecting lower sales on a year over year basis, as we commercialize new business later in the second half of the year to offset the business we exited in 2022 as.
As a result, we are expecting custom containers adjusted EBIT will be slightly below first quarter 2023 levels in the second quarter. Due also in part to the impact of the lagged pass through of resin cost escalation.
As we move into the second half of the year, we expect the year over year volume trends to improve in each quarter on a sequential basis.
Looking ahead, we are estimating adjusted net income per diluted share in the range of 85 to 95 in the second quarter of 2023, we are expecting higher interest expense of <unk> <unk> per share and <unk> per share impact associated with Russia, and coupled with the continued impact of the lagged pass through of higher resin costs in the first quarter. This accounts for near.
All of the 19 year over year decline from the record $1 <unk> in the second quarter of 2022.
On a segment level adjusted EBIT is expected to be higher than the prior year in metal containers comparable to the prior year and dispensing and specialty closures now lower than the prior year in custom containers for.
For the full year 2023, we continue to expect total adjusted EBIT to increase by mid to high single digits as compared to the prior year. As a result, we are confirming our outlook of adjusted net income per diluted share of $3 95 $4 15.
Which includes a year over year headwind of <unk> 20 per share for interest expense, which we continue to expect to be approximately $155 million and a tax rate of approximately 24% to 25%.
These estimates exclude the impact from certain adjustments outlined in table C of our press release.
Based on our current earnings outlook for 2023, we are also confirming our estimate of free cash flow of approximately $425 million and capex of approximately $250 million in 2023.
That concludes our prepared remarks, and we'll open the call for questions. Operator would you kindly provide the directions for the question and answer session.
Yes. Thank you if you would like to ask a question on the phone lines today that is star one on your telephone keypad. If you find your question has been answered and you would like to remove yourself you can press star. One again, we will take our first question from George Staphos with Bank of America.
Hi, everyone. Good morning, thanks for the detail.
I guess I'll.
I'll try to keep it at two or three questions and turn it over to go back to Q. So can we dig in a little bit more into <unk> Kim you mentioned.
On a segment basis, you expect earnings if I heard you correctly from metal to be up.
DSP to be flat and custom containers to be lower relative and you. Obviously gave us the earnings per share guide for the quarter relative to what you would've expected say in January or February whenever you gave your guidance for the year.
Well you know.
Where are you seeing underperforming if at all or are these really right on where you would have expected three months ago.
And in particular, where might you be seeing weakness and strength and then I had a couple of follow ons.
Hey, George It's Adam Good morning, Hey, Adam maybe.
I'll just I'll jump in first and let Kevin Bob come in with any additional comments, but really.
For us it was a strong quarter and we feel good about the operational performance really in all three segments versus our expectation. So when you go around each operating segment.
In our specialty closures.
It's obviously, a tough comp versus the prior year for the reasons that kemet outlined.
In her previous comments, but really it was it was right in line with our expectations metal containers in fairness is probably just a little bit above our expectations as we sat here coming into the year and then custom containers.
It's very close to what we expected as well, maybe just slightly behind and really that's just some of the inventory that's still working through the bottle side of our business through.
Through distribution through lawn and garden et cetera, So we're feeling pretty good about things as we look at our Q2 guide I think it's really right in line with our expectations. So.
Ill start with dispensing and specialty again, we mentioned the first quarter timing of food and beverage closures really George 2023 looks a lot like our history of food and beverage order book because of the filling season for those products back to sports drinks et cetera ready to drink iced teas.
Really does start early in the second quarter and that's what we've seen so we're still expecting food and beverage closures to be up for the year. So it's much more normal than maybe what we had seen through the pandemic from a timing perspective metal containers for the second quarter I'll just finish with the segments real quick George Yes metal can.
Good luck.
Right in line with expectations, while we've been talking about really now for maybe three or four years.
Our growing markets in pet food and protein or are driving category growth for the entire segment, we've seen stability in vegetable we've seen good strong volumes in our soup business as well as our metal containers is roughly right in line you get a custom containers and its the one I wanted to finish on George specifically, because a year ago.
We did have.
The business that we chose to not renew and.
In 2022.
At the end of Q2 last year not only did we have the normal volume of a requirements contract. We did sell through the inventory. We did have some some costs that were associated with the exit that we were fully reimbursed for.
As we look at Q2 now as we did 30 60 90 days ago. We think the profit of Q2 should look a lot like the profit of Q1. In addition, now we've got a little bit of resin headwind, that's really the difference in custom containers. So as we sit here today I think this was roughly in line interest expense was known.
The Russia year over year comparison was known and our businesses are performing really well so okay.
Yeah, No I appreciate it and maybe just a follow on to that what you just said so.
I took your comments that in dispensing, especially closure you should be up in volume to two versus <unk>, yet youre guiding.
<unk> sort of a flat earnings outlook.
So if that's the correct statement both of those are correct, then where is the if you will the loss of operating leverage if in fact, the business is performing as you like and then.
Just quickly can you go through what the effect of resin was in <unk> and <unk> and why you expect to get it back.
And how much is your guidance at risk if resin doesn't come down in the back half thanks, and good luck in the quarter.
Okay. Thanks, George So a couple of things there number one.
Again volumes.
In the second quarter I do want to be really clear dispensing volumes are really strong in the first quarter.
Certainly on the.
Fragrance and beauty side of the business, we've talked a lot about trigger sprayers, we saw sequential improvement through the quarter with our trigger sprayers and really as we enter Q2, we fully recover of the inventory correction and kind of the lawn and garden market and the home care market and our dispensing business and then.
Now we've got strong volume in our food and beverage closure business as we typically would have this time of year. So you've got that right volume is good.
Both sides of the business and then you think about what's different it's really about resin. So it was the timing and the pace of resin escalation through the first quarter no secret.
The highest increase was in the month of March that creates the longest lag for us in this business, where again typically we have a slightly longer lag than the other silicon businesses. So it's really mostly around resin and I think youre right.
If you think about the Q1 impact what I would tell you that Q1 impact of what occurred in the first quarter with escalating resin costs was about <unk> <unk> a share.
Profit and as we turn to Q2, the discrete Q2 impact of those increases from Q1, let's call. It two to three as well and we do in our forecast George expect to recover that in the back half of the year I would say.
Logan is tried and true with the pass through mechanisms that we have to protect our business that we do recover the inflation that we experienced certainly in raw materials and I really can't remember a time, where we haven't done that.
Thanks for the rundown, Adam I'll turn it over.
Okay.
We will take our next question from Gabe <unk> with Wells Fargo Securities.
Uh huh.
Good morning, guys. Thanks for all the detail.
On metal container I was curious Adam you talked about things actually performing a little bit better.
Yeah, that's put too fine a point on it but I don't know if that seems like it might be on the cost recovery side maybe.
Maybe volumes coming in better than what you're thinking maybe that's just maybe sooner in Q1 or earlier in the year than what you might've expected.
Yes, great question Gateway it really for us volumes really right, where we have been talking about for the last couple of years. So really no surprise, there I think where we exceeded our own expectation was really on the cost side. So as you think about the cost standpoint year over year number one a year ago, we still had some.
<unk>, we were dealing with the omicron variant a year ago in the first quarter.
As Youll recall through the course of the last three quarters last year, we really got at the inefficiencies that the pandemic has created as we were doing our best to get containers out to the world for nutrition and and for consumers around the world. So.
You have the continuation of that terrific cost performance that we had the last nine months of the year last year.
That drove performance in the first quarter of this year on top of that as you'll recall one of our pass through mechanisms in the metal container business is kind of the the other manufacturing costs. It is on a lag basis. So as a reminder, we're passing through 2020 to inflation and other manufacturing costs that we experienced.
And where in the P&L last year against 2020, Three's inflation that we're experiencing so there is a cost recovery of the inflation again, our cost is lower this year as we've driven those inefficiencies out of the business and Thats really whats driving our outperformance in metal containers in the first quarter and <unk>.
Early a bit in the second quarter as well.
Okay. Thank you and then I guess in DSD, you talked about double digit growth in.
The clinical value at or higher than dispensing for fragrance.
Fragrance beauty.
And then seemingly the destocking having worked through for.
The trigger spares is there the potential that I know, it's tough and you don't know exactly whats sitting in maybe.
Distributor channels et cetera, but that theres, a restock effect sometime during the year.
And if so is that embedded in your outlook or would it represent upside to what you're guiding to today.
Yes, I think that's a great question and it's one we debate here internally number one it is not included in our forecast so I'll make that really clear.
There was such an adjustment at all levels of the supply chain and this destocking effort that I'm, just going to assume Gabe, but not everybody got it exactly right and in some cases, there may have been too much draw down.
For the various components of the supply chain. So it is a potential upside for us it's not in our forecast.
To your point, we do think that Destocking is now behind US our order book for Q2 for those items is very strong and in fairness Q2 order book has been strong all year long. So we knew some of our smaller customers, we're going to be returning in Q2 to.
Replenish the demand was impacted by the Destocking activities.
Okay. Thank you I'll hop back in.
We'll take our next question from Mike <unk> with Trust Securities.
Thank you thanks, Adam bulk human Alex Congrats on a good performance thus far.
One quick question just on the on the pack you mentioned.
Good things seem to be simply looking okay can you talk about it a little bit more color around the pack, how that's shaping up and any impact from the mall.
<unk> witnessed in the west coast, even the inclement weather.
Sure Great question and really when you think about silicones pack business. There's a couple of things are primarily our core vegetables, you think of sweet corn and peas, and some of our being products really that's more upper Midwest and the U S for us.
And really that hasn't been impacted by the weather phenomenon that we've been talking about on the west coast.
When you get to the West coast, it's a little bit more about our tomato business, a little bit about fruit for us as well so our tomato business on the West coast.
Look at it wet conditions.
The acreage that's been contracted has been consistent with where we've been earlier in the year I think the plantings might be delayed one to two weeks. So nothing significant at this point, but just something to be aware of that there might be a week or two I don't think thats necessarily material when you move to Europe and think about our business in Europe .
There's there are some challenges in northern Italy for some of the pack products really southern Italy is fine most of the Mediterranean is fine from a pack perspective, so for our closures in metal containers business in Europe feel like we're right in line with our expectations as well.
Hey, Mike One thing one thing I'll add to that is as you think about tomatoes in particular and that is where where maybe some of the volatility around the pack is.
That's also if you think about the food can is being the premium portion of that pack they tend to try and allocate as much to the can as they can before they flex elsewhere. So.
It doesn't translate necessarily to as big of an impact on the food can business.
What the package itself it might look like.
Got it that's very clear appreciate that.
And then just one quick color on pet food, obviously demand was pretty strong.
<unk>.
Just wanted to get your thoughts on pet food demand trends here, some getting published in calling out normalizing demand after a period of accelerated growth the last few years.
There was a survey out or I mean, there was a conference out that made sure that the percentage of households, with pets has declined.
66% in 2022, I think it was 70% of December 2021, and I realize that slowly participates in.
Part of the market, but just want to get a sense of what youre seeing from pet food was the growth is still there would you expect that to continue with the trajectory is like just relative to some of the noise around pet food recently.
Sure and I think look we're we're very positive on the pet food market and particularly the segment that we participate in and wet pet food, primarily for small dogs and cats as kind of the focus of our market.
You know in fairness, Mike I think the.
No.
The data that you are referencing is a little inconsistent with what data we look at and what data our customers are sharing with us so for clarity our business is up again in the mid single digit area year over year, we talked a lot last year about the significant investments that our customers were making in capacity.
Additions for wet pet food for the markets that we serve a lot of challenges last year in bringing that capacity up and getting the utilization rates to an acceptable point. The great News is I think that is behind US now as our volume growth in the first quarter really is supported by our customers having.
Better utilization of the new capacity brought online.
In the first quarter of 'twenty three so as we go forward.
April has been a really good month for our wet pet food markets as well.
We have to be really careful looking at the broad market studies, because again you think about.
The products that we make again, we will talk about cat food for one second or three ounce can.
That volume component of a three ounce can is significantly different than <unk>.
40 pound bag of dry dog food and I do think you see some some buy down a rationalization of those purchases. We just simply have not seen it in our segments our customers have not seen it in the segments that we provide to last Nader points for you. We know for certain there are still stock outs of our products.
In retail and we also know that our two largest customers are displeased with their service rates to retail.
Their products and wet pet food, meaning they have orders that they are not fulfilling at the rate that they would desire to fulfill those orders again back to the stock out components. So look we feel really good about pet food I'll keep saying we've been doing this for 35 years in pet food and snow again, the trend line is exactly where it's always been.
And we have a very high degree of confidence that we will deliver our growth projections for wet pet food in the metal container segment and 23.
Really great color I appreciate it and good luck in <unk>.
Thank you.
Okay.
We will take our next question from Anthony Pettinari with Citi.
Good morning.
Hi, Anthony in Hay in custom containers, the step up that you expect in the second half I'm. Just wondering is that based on contracts or LOI that you've signed now or that you are kind of very late stage on I'm, just wondering if theres any way to kind of quantify.
If there's any risk that we get to <unk> and maybe some of those volumes don't materialize or if theres any kind of color you can add in terms of the kind of the activities.
Driving the confidence in that second half pick up.
Yeah, sure and you think about those agreements and then conversations we won't talk about any of them in particular, but I would say we have the full spectrum of what you sort of describe we have agreements we have verbal agreements, we have LOI, but we've got a broad spectrum of.
New business awards that we are working through to commercialize I think what we have realized is as we exit the pandemic some of our customers.
Or having some resource challenges, whether they be technical or whether they be in their commercial teams and procurement that we're dealing with.
And their ability to commercialize some of these new business wins seems to be coming under pressure just a bit. So I think as we showed very nicely through the pandemic Gilligan will be ready to commercialize when we said we would be ready to commercialize whether our customers are able to do that with their resources <unk>.
Rains in certain areas, that's really what we're working through now in fairness I think our language softened a little bit that we're looking now a little more later in the year.
Back half before it's probably later in the back half now for some of those commercialization is to really to really head and that obviously, you've got the startup cost associated with those new wins.
From a profit standpoint will dampen a bit the impact in the current year as we commercialize but the exciting thing for US is the volume run rates at the end of the year. We think are on track to be what we had talked about previously.
Okay. Okay. That's very helpful. And then on metal containers, there was a large food company that specifically called out.
The issues that they were seeing with food cans and I don't think Thats a comment on your business and I'm I don't want to ask you to comment on a competitor situation I'm. Just wondering is there any sort of indirect impact of silicon in terms of maybe you being able to sell a few more cans or maybe tightening up industry supply demand or.
Don't know if you'd comment on just sort of general maybe some of the challenges. The industry has had in terms of bringing on new capacity, but I don't know if theres anything that you would say you could add there.
I don't think Theres, a whole lot of read through for us on that one in particular Anthony.
You know I think again as we showed through the pandemic.
In an effort to get the lowest cost means of nutrition to consumers, who need nutrition, we're willing to step up and provide those cans.
When they are needed and particularly when others in the market and aren't able to supply so.
Outside of what happened during the pandemic, we have not been.
Participating in any other activity sort of what you described there so not a lot of read through from US I think we're still feeling great about the competitive advantage that we bring to the table in metal containers, and the quality and authority of our supply.
Has been fantastic for many many years and I think Thats one thing that does set part of the marketplace.
Place.
Okay I appreciate that I'll turn it over.
We will take our next question from Arun Vishwanathan with RBC capital markets.
Great. Thanks for taking my question I Hope you guys are well.
I guess regarding the DSC performance.
This is one of the one of the quarters I guess, where are we kind of got it wrong. So I just wanted to understand exactly.
What's going on here or is it the case that maybe is it taking a little bit longer for resins to price movements to flow through that business and is that a function of kind of the volume environment or is there's nothing really changed and this is the.
A function of those lags I guess I'll start with that.
Sure well look nothing's changed I mean, we have.
Pass through mechanisms that are again, I'll say tried and true for the history of the company and really what happened to run in the first quarter, you had resin escalating through the quarter and again, we typically pass that through on a lagged basis. What also occurred in the first quarter is the largest increase occurred in the month of March and that does create the <unk>.
Longest lag for a recovery of the inflation, but.
Again, I sit here with tremendous confidence, saying and we will absolutely recover that inflation, there's really nothing else to it other than the cost index of resin did change during the quarter for the primary resins that we utilize.
Arun I might just remind everybody that this is the part of the business where the pass through mechanisms are lagged relative to the rest of the business and that kind of comes in two parts right is this business has come from what I'll call more recent acquisitions. So we haven't had as much time with those contracts.
As well as it is the higher margin business right. So there is a perhaps a bit more of a tolerance to deal with that lag.
Given the margin profile of the business. So there's nothing nothing new about what happened with resin.
Adam said earlier, it's all about the cadence and the spike that happened in the quarter that just has you're chasing resin for a period of time.
And on that note then when you think about the full year guidance. So.
Is it the case that.
Essentially yeah.
Your EBIT dollars that would've come in.
Q2.
You know would come in Q3 and Q4 as those pass through mechanisms.
Or are enacted.
Yes, I think you've got it exactly right Arun. So I mean think about something like approximately <unk> of cost in the first half of the year will be recovered in the second half of the year that's right.
Okay, perfect and then.
Just a couple of quick thoughts if.
If I could get your thoughts on what Youre seeing in some of the verticals there and.
You have already run through pet food in metal container, but maybe on the DSC side and comes from container side.
Are you still seeing because we've been hearing obviously weaker mobility trends in China, and that's taken a little bit longer I'm curious, if that's affecting the fragrance market and some of the other markets. There and then similarly on the custom container side.
You know there has been destocking in several categories.
That subsided or you know what are you seeing across some of the verticals and in both of those businesses. Thanks.
Sure. So maybe just starting with dispensing and specialty closures first again I think as we said earlier double digit growth in fragrance and beauty products really no change in the trajectory as we look forward in that business.
As Kim mentioned in her comments earlier, we continue to win in that marketplace.
And we're expecting to continue to win in that marketplace. So continued growth in fragrance and beauty nice recovery for us kind of in lawn and garden and home products for the dispensers specifically.
Which is a big part of of our dispensing, especially closure segment. Those are the trigger sprayers, we've been talking about so it looks like the Destocking done there and then food and beverage we talked about much more of a normal timing for kind of the beverage filling side of our business in sports drinks and ready to drink teas.
When you move to custom containers at a slightly different story on the lawn and garden products, because we do sell a lot of bottles and containers to lawn and garden that recovery has not quite shown to the same degree that we've seen in our dispensing, especially closures business, which is normal for US there is typically a little bit of a separation as <unk>.
Centaury works through not only our customers pipeline, but also through retail as well so.
I think custom containers, obviously, we're cycling over the non renewal of the contract and then beyond that as I mentioned, a little bit of softness in distribution that we had expected to see a little bit of recovery in the first quarter. It just didn't materialize.
We're seeing some green shoots in that market for the second quarter, and it's something we're going to be talking about in the second quarter earnings call as well.
And just I'm, sorry, just to reiterate on the resin side was that really related to the polypropylene spike or was it kind of fell apart.
Polyethylene and polypropylene in all the restaurants that you buy.
So it really the.
Two primary resins that were impacted were polypropylene and polyethylene those are the two largest resins that we buy and both were impacted by the spike.
Rob alluded to.
Okay perfect. Thanks.
We will take our next question from Ghansham Panjabi with Baird.
Yeah. Thanks, good morning, everybody.
Maybe a question for you to start off you know if we go through a period of a protracted.
Diminished consumer spending environment in the U S.
How do you sort of visualize that impacting the pet food component of your metal food can business is that a positive negative sort of neutral ish based on what you know at this point.
Yeah.
To answer broadly first then I'll get to pet food.
We feel pretty confident in the representation that we have in consumer staple end market. So you know.
As dollars get tighter on the consumer spend typically it does move to the products that we're talking about that we supply to our customers just given our presence in consumer staple end markets. I think we spent a lot of time talking about pet food and how it performs.
Through various economic cycles. So the first thing I would say ghansham is a very small portion of our business and wet pet food is for large dog typically that is under pressure.
During tough economic circumstances, and as a product that does tend to convert to some degree back to dry and again kind of a 13 ounce can of wet dog food versus a 40 pound bag of dry kibble. The economics are a little different there. When you have got three servings four 100 pound Labrador.
Retriever every day, when you get to our core markets and wet pet food.
Small dog and cat, we have seen the humanization of pets for many many many years and we've seen these trend lines through just about every economic cycle for the last 35 years, we've been requirements suppliers to this market. So you know.
We don't see it as a negative.
We see it at least as neutral.
The economic cycle, but at the same time, we're seeing a shift of pet ownership into the smaller dog and cat ownership categories. That's what's really driven that growth over time in the business and again, we've got <unk>.
AIDS worth of of growth rates that we look at on a requirements basis and those those agreements that gives us a tremendous amount of confidence of how.
How we look at the go forward and wet pet food I'd also tell you. We just delivered mid single digit growth in the first quarter and are going to do the same in the second quarter.
Okay got it.
Ghansham I think.
What I would add to that is 2008 2009. The data supports exactly what Adam just described that what we saw migrate away from.
From pet food at that time was the large.
Animal primarily dogs and if you look at R. R.
I'll call. It consumer profile now it is it is far more weighted to the to the small animal and primarily Katz, Bart far and away much more so than in.
In in that prior timeframe.
Okay got you Thanks, Bob and then on dispensing closures you know on the in the unit volume increase for fragrance and beauty.
How much do you think came from just sort of restocking as you know, China reopens et cetera.
How long do you think that'll last in terms of momentum and then secondly.
As it relates to the operating leverage is that playing out in the way in line with your original expectations as it relates to those what seemed to be high margin businesses.
Yeah again, I think our guide for the year, when we came into the year with double digit growth in and certain dispensing products, particularly for fragrance and beauty, so really right in line with our expectations.
No no restocking if you will ghansham. We just saw continued good pull through through the holiday season Valentine's day in the first quarter was a good period for fragrance I think you've got a couple of holidays here through the second quarter as well that will also benefit.
Fragrance and beauty sales, but really no change versus what our original expectation was I think a small portion of our business.
Is it related to the China mobility issue we.
We do think our customers are benefiting from consumers around the world.
Travelling more and a little bit of a pickup in duty free stores for these products.
Really just good demand for the based products I think as we talked before 'twenty three was going to be an elevated year from a new product launch perspective, and Thats very true the product launches were limited during the pandemic and so we've seen good traction not only in the new product launches and the new products going to market.
In the consumer and the staples that have been successful for many years for our largest customers.
Got it thank you.
We'll take our next question from Daniel Rizzo with Jefferies.
Good morning. Thank you for taking my question you guys mentioned resin costs going up in March I was just wondering if there's a specific erosion you can kind of point to or are you more relying on like polyethylene or polypropylene or is it something different.
Yes, really it's those two so we've.
We've really got three primary resins that we buy.
The two largest polypropylene and polyethylene both saw a significant jump in the month of March in the first quarter.
Okay and then.
The beginning of the prepared remarks, I think you mentioned about you know what kind of a portfolio evolution I don't know if you've discussed this but I was wondering what the next steps are in the portfolio evolution that you kind of referred to.
Yeah look I think that's all about the entrants or continued growth around.
The dispensing and specialty closures right, we've long had our closures business.
And the flat cap side and back in 2017, we started to grow that business.
And so so that is really the effort. That's that's out in front of US is to continue to find ways to service those customers and to grow that segment of the business, whether it be organically or through acquisitions, and we think that the growth is supporting that and the investment opportunities are supporting that.
Thank you very much.
We'll take our next question from Jeff Zekauskas with J P. Morgan.
Thanks very much.
The 15th penalty in resins, how much came from polypropylene, how much came from polyethylene and a few other allocated to custom containers.
Youre dispensing business, how would you allocate the 15th penalty.
Well I think the.
<unk>.
Included in other items that we talked about as well so.
I think when you think.
Think about the first half of 2023, the negative impact of these changes from polypropylene and polyethylene look I'd.
I'd say, it's predominantly in our dispensing and specialty closures business polypropylene, probably drove the largest of the two.
The changes that we experience so.
It impacts our dispensing, especially closure segment more than custom containers, but it impacted both of those segments.
Okay.
Also your accounts payable in the first quarter dropped to $630 million.
Can you talk about the payables line this year.
That often your payables really lifts in the fourth quarter of the year.
Our payables are going to look this year and wire payables downtown.
So whenever I accounts payable generally we are.
Higher purchases in the first three quarters of the year as we go through as we build inventory for the containers business.
So our payables have build through that period, and then will drop into the fourth quarter. So you usually see a big move between the fourth quarter and the first quarter as we continue to build on that and really that's just from the very beginning of silicon. That's how we built the food can business model.
We've elected to make food cans, all year long for the vegetable and fruit pack, knowing full well that they sell within roughly a 90 day window. During one one quarter of the year, so that shouldn't be much of a change in I would say, Jeff as you think about it going forward, we don't anticipate much of a change.
The absolute balance may have changed over time, given inflation that we've seen through the payables line, particularly last year on the metal side of the business, but outside of that it's fundamentally as it has been for us.
Great. Thanks, so much.
Thanks, Jeff.
Yeah.
We'll take our next question from Kyle White with Deutsche Bank.
Hey, good morning, Thanks for taking the question sorry to go back to the resident I know, it's been talked about a lot, but disappointed clarity I think in the second quarter you mentioned it could be a two to three cents impact does that assume current contracted resin prices and holding it flat or are you using the forward curve projections from some.
Organizations that have resin falling just trying to understand if contracted resin prices decline here in April and May is that a source of upside to your outlook or are you already assuming that's.
Sure so kind of what we do from a forecast perspective. What's included in this forecast is we take the <unk>.
Really what CDI are IHS forecast for the quarter and we do flow that through the P&L for the businesses and what we then looked at for the back half of the year is the recovery that's expected in those same resins.
Got it that makes sense.
And then shifting to capital allocation curious, how you're thinking about your capital allocation in this environment, you'll be closer to the low end of your targeted leverage range at the end of this year.
Would you want to go even lower below the range just given the interest rate environment uncertainty or should we expect any kind of excess cash to be used for buybacks or potential acquisitions.
Yeah, I think you've got it right Kyle will be sort of pushed breakdown on the on the low end of the range as we get through.
2023, given the 425 free cash flow projections.
Look I think that depends upon how the credit markets perform here in the near term.
It's going to depend upon what the M&A landscape continues to look like.
Obviously, we think we've we've we've fully digested.
Digested the acquisitions that we've done.
We've got the integration in hand, we've got the synergy captured as we would've expected.
So if the opportunity to put capital to work within reason.
Presents itself, we'd certainly be happy to.
To participate in that where we could grow the business, which is the objective here and the absence of those opportunities then I think we probably would manage the balance sheet on a bit more conservative basis, meaning that I think we would air on a on a debt pay down versus a return of capital in that particular case.
Got it that makes sense I'll turn it over.
When we have a follow up question from George Staphos with Bank of America.
Hi, guys just some follow ons here first of all on resin just to go back through this so on the one hand I heard we had a 15% penalty and then I also heard theres, a 5% to 6% headwind in the first half.
So I probably.
Probably missing some things, but if you could help me square that circle.
That'd be great and then.
What are you doing anything differently in terms of your inventory of resin such that the spike caught you, maybe a little bit more than it normally would.
Perhaps if you're managing your inventories lower and kind of the question behind that is normally there's some price protection. So even if you get hit with a price hike in resin, it's going to be.
690 day before it starts to show up so just some quick thoughts on that would be great.
Sure. So let me let me try to clarify that 15 items. So I think in Kims remarks earlier, she had referenced a 15 cent.
Headwind versus the prior year in the first quarter and Thats made up of three things.
It's the interest expense.
The impact of currency and there is a resin component versus prior year that resin component versus prior year is much more in kind of the eight range George and that is a comparison versus prior year.
And frankly, it's more about what happened last year than what happened this year.
Got it.
You reference is that's what is discretely happening in the first half of 2023 that is impacting our results that we will pass through our normal pass through mechanisms and the second half of the year.
So maybe I'll pause there and no that makes perfect sense FLIR. Okay. Now in terms of talking about the discrete effects and whether you were.
Managing your inventory normally or not and price protection.
What are your thoughts there.
Yes, I mean, obviously a lot of moving parts to how we buy resin, how we manage resin our days on hand et cetera.
So I won't get into a lot of detail on that but I'd, just say that there was nothing out of the ordinary about our resin purchases in the in the first quarter and really over any of the near term that we've been talking about.
George it's much more about passing through those changes in resin cost to the customers and it's it's the lag effect of of the customer agreements that are creating that first half back half kind of transition that we're talking about.
I just would say you can assume whatever you had like about how we purchase resin what components go into those agreements that we have with our suppliers from a terms and conditions standpoint, we think we've got an advantage.
Versus the market and how we do things that silicon and nothing's really changed there okay.
Okay.
Appreciate that and then my last one I'll turn it over.
One can you comment at all in terms of the guidance on D. C. How much of your guidance is driven by an expectation for no.
Still being a very strong year in terms of launches new products in the back half of the year and you know well.
What would be the sensitivity there or anything that we should be mindful of given the economic backdrop.
And then you mentioned some green shoots that you're beginning to see in custom container can you talk a bit more to that thanks and good luck in the quarter.
Thanks, George So on the guide for DSC look at.
It's a pretty stable growing business that we have in DSV. So just as we sit here today, we've got pretty good line of sight of.
The consumer staples portions of that business again will talk about food and beverage being a more normal year, we feel really good about that as far as dispensing again, it's the continued.
Strong demand, we see in those those premiums segments of fragrance and beauty and importantly, the strong rebound that we're seeing in our our lawn care and our home care products and trigger sprayers and other dispensers. So I don't I don't think there's a whole lot of sensitivity around that George.
Inventory the supply chain was really depleted in those segments of lawn care and home care product line. So you know our order books look really good right now for for really well call. It. The next two quarters as we sit here and we'll figure out fourth quarter order books when lead times allow us to do that.
I'm accustomed container front.
The green shoots we're seeing more commercial activity.
That's driven in part by distribution.
As a good sign for US that's kind of the first point you can see immediate recovery in our market is is when distribution activity picks up and we are seeing a lot of activity through distribution right now.
We're fairly representative distribution too so we feel like that is a good sign for the other core products and our custom container segment. So really it's a it's a broad base in the distribution market that we're talking about so that's the green shoots that I mentioned earlier.
Thanks for all the detail let them have a good a good rest of the day and good quarter. Thank you.
Thanks Stuart.
Thank you that does conclude the question and answer session I'd like to turn the call back over to Adam Greenlee, President and CEO for closing comments.
Great. Thank you Lisa and thank you everyone. We appreciate your interest in the company and look forward to reviewing our second quarter earnings in July .
Thank you that does conclude todays presentation. Thank you for your participation and you may now disconnect.
Okay.
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