Robert Half Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2023

There are 15 speakers on the call.

Operator

Everyone, and welcome to the Silgan Holdings First Quarter 2023 Earnings Call. Today's call is being recorded. I would now like to turn the conference over to Alex Hunter, Vice President, Investor Relations. Please go ahead.

Speaker 1

Thank you, and good morning. Joining me on the call today are Adam Greenleaf, 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 may be forward looking statements. These forward looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and Therefore involve a number of uncertainties and risks, including but not limited to those described in the company's annual report on Form 10 ks for 20 22 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.

Speaker 1

With that, let me turn it over to Adam.

Speaker 2

Thank you, Alex, and we'd like to welcome everyone to Silgan's Q1 of 2023 earnings call. I'd like to start today's Call by congratulating both Kim Ulmer and Bob Lewis on their new roles at the company. One of the hallmarks of the Silgan culture is rewarding the performance of our people I am incredibly proud of their accomplishments and look forward to their continued successes at Silgan. Now moving back to the Q1 performance. Once again, Silgan started the year with strong operating performance in each of our businesses and continue to leverage and advance the strong momentum generated through the pandemic as we enter the Q2 of 2023.

Speaker 2

Our businesses remain 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 Q1. Overall, we believe that our resilient Consumer staple end markets, our customer intimacy and market positioning, combined with the agility and expertise in our operations, 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 Q1, our Dispensing and Specialty Closures segment delivered solid results despite significant headwinds in the quarter from resin and foreign currency. With our dispensing products building on the momentum we saw early in the year and volumes improving as we exited the quarter.

Speaker 2

Our products for high end fragrance and beauty end markets continued to win in the marketplace, posting double digit volume growth in the Q1. And many of the dispensing products that had experienced headwinds from inventory management in 2022 began to see year over year improvement in the Q1 With the trend accelerating as we exited the quarter. While these positive impacts were offset by the timing of customer orders for food and beverage closures in the Q1, Trends in April are strong and we are expecting volumes for the segment to inflect positively in the Q2. Our 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.

Speaker 2

The challenges that several customers experienced in 2022 And our pet food markets appear to be largely 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. In our Custom Containers 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 Also impact the Q2 comparisons as we recovered costs associated with the non renewal and we're winding down shipments and operating activities in the Q2 of 2022.

Speaker 2

The Q2 of 2023 is also expected to continue to experience higher resin costs. Therefore, 2nd quarter profit in Custom Containers is expected to be slightly below 1st 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 Ken to cover the specifics of our financial results for the quarter and to provide additional color around our earnings estimates, I want to take a moment to recognize the impact and lasting legacy of our 2 founders, Phil Silver and Greg Horrigan.

Speaker 2

Phil and 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 markets served by being the best at what they do. Proving the enduring wisdom and success of that vision, Silgan has grown to become a global leader in the packaging industry With 2022 sales of $6,400,000,000 and nearly 16,000 employees around the world who all embrace the principles Phil and Greg envisioned. On behalf of our shareholders, customers and the entire Sogen team, thank you for creating such a special company, For your lifelong devotion to its 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 Silgan. With that, Kim will take you through the financials for the quarter and our estimates for the Q2 and full year. Thank you, Adam.

Speaker 3

As Adam highlighted, the business continued to execute at a high level in the Q1 of 2023, Delivering strong first quarter sales and adjusted EBIT and adjusted earnings per diluted share. Net sales for the Q1 2023 were approximately $1,400,000,000 Sales were comparable to the prior year quarter, excluding sales associated with Russia of $9,500,000 in the Q1 of 2022 and a foreign currency headwind of approximately 1% in the Q1 of 2023. Q1 2023 sales performance driven by strong volumes in metal containers, which was offset by expected lower volumes in the dispensing and specialty closures and custom containers segments. Total adjusted EBIT for the quarter of $149,400,000 increased over 2% on a year over year basis with higher adjusted EBIT in With non operating headwinds from higher interest expense in foreign currency and the lag pass through of resin costs Driving approximately $0.15 of earnings headwind in the quarter, of which we would expect to recover $0.05 in the second half related to resin. Excluding these items, our strong operating performance would have driven adjusted EPS higher by a double digit percentage.

Speaker 3

Turning to our segments. Dispensing and Specialty Closure 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, The 2% improvement in price was offset by lower volume mix. 1st quarter 2023 dispensing and specialty closures adjusted EBIT Decreased $13,600,000 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 and the prior year benefit from an inventory management program. Volume mix improved throughout the quarter with growth in our dispensing products strengthening in the latter part of the quarter. While this trend was overshadowed by the Timing of customer orders in the food and beverage markets in the Q1.

Speaker 3

We are expecting those products to revert to a more normal trend in the Q2 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. As our contracts in the dispensing and specialty closures 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 Q2, but ultimately recovering the impact later in the year as resin costs are expected to abate. In 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, soup and vegetable containers.

Speaker 3

Excluding impacts associated with Russia and foreign currency, Sales grew 5% from the prior year quarter. While the Q1 is seasonally one of our smaller quarters, 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. The business started the year strong and is well positioned to deliver low single digit volume growth and mid single digit adjusted EBIT growth for 2023. In Custom Containers, our non renewal of a piece of contractual business in this segment drove volumes lower by 10% year over year in the Q1 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, our business is able to partially offset the impact of lower volumes through operational performance, but the timing and pace of resin cost increases impacted EBIT in the Q1.

Speaker 3

We expect the headwind from resin costs to continue to weigh on adjusted EBIT in the first half of twenty twenty three, but recover in the back half of the year. In the Q2, 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 a result, we are expecting Custom Containers adjusted EBIT will be slightly below Q1 2023 levels in the Q2 due also in part The impact of the lag pass through of resin cost escalation. As we move into the second half of the year, we expect the year over year volume trend to improve in each quarter on a sequential basis. Looking ahead, we are estimating adjusted net income per diluted share in the range of $0.85 to $0.95 in the Q2 of 2023.

Speaker 3

We are expecting higher interest expense of $0.10 per share and a $0.06 per share impact associated with Russia. And coupled with the continued impact of the lag pass through of higher resin costs from the Q1. This accounts for nearly all of the $0.19 year over year decline from the record $1.09 in the Q2 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 in Dispensing and Specialty Closures and lower than the prior year in Custom Containers. 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.

Speaker 3

As a result, we are confirming our outlook of adjusted net income per diluted share of $3.95 to $4.15 which includes a year over year headwind of $0.20 per share for interest expense, which we continue to expect to be approximately $155,000,000 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 $425,000,000 and CapEx of approximately $250,000,000 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?

Operator

Yes. Thank We'll take our first question from George Staphos with Bank of America.

Speaker 4

Hi, everyone. Good morning. Thanks for the details. I guess, I'll try to keep it to 2 or 3 questions and turn it over, go back to Q. So can we dig in a little bit more into 2Q?

Speaker 4

Kim, you mentioned On a segment basis, you expect earnings, if I heard you correctly, for metal to be up, DSC 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 have expected, say, in January or February, whenever you gave Your guidance for the year, where are you seeing underperformance, if at all? Are these really right on Where you would have expected 3 months ago? And in particular, where might you be seeing weakness and strength?

Speaker 4

And then I had a couple of follow ons.

Speaker 2

Hey, George, it's Adam. Good morning. Hey, Adam. Maybe I'll just I'll jump in first and let Kim and 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.

Speaker 2

So when you go around each operating segment, dispensing the specialty closures, It's obviously a tough comp versus the prior year for the reasons that Kim had outlined in her previous comments. But really 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 is 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 distribution, through Lawn and garden, etcetera.

Speaker 2

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. I'll start with dispensing and specialty again. We mentioned the Q1 timing of food and beverage closures. Really, George, 2023 looks a lot like our history of food and beverage order book because the filling season for those products, Back to sports drinks, etcetera, ready to drink iced teas really does start early in the second quarter That's what we've seen.

Speaker 2

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 Q2, I'll just finish with the segments real quick, George. Metal containers, Look, it's right in line with expectations. What we've been talking about really now for maybe 3 or 4 years that Our growing markets in pet food and protein are driving category growth for the entire segment. We've seen stability in vegetable.

Speaker 2

We've seen Good strong volumes in our soup business as well. So metal containers is roughly right in line. You get the custom containers and it's the one I wanted to finish on George specifically Because a year ago, we did have the business that we chose to not renew in 2022. So 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 costs that were associated with the exit that we were fully reimbursed for.

Speaker 2

So 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 is roughly in line. Interest expense was known.

Speaker 2

The Russia year over year comparison was known and our businesses are performing really well. Okay. I want George maybe come back in.

Speaker 4

Yes. No, I appreciate it, Adam. Maybe just a follow on to that what you just said. So I took your comments that in dispensing, especially closures, you should be up in volume 2Q versus 2Q, yet you're guiding sort of a flat earnings Outlook. So if that's a correct statement, both of those are correct, then where is the, if you will, the lost operating leverage, if in fact the And then just quickly, can you go through what the effect of resin was in 1Q and 2Q and why you expect to get it back?

Speaker 4

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.

Speaker 2

Okay. Thanks, George. So a couple of things there. Number 1, again volumes In the Q2, I want to be really clear, dispensing volumes are really strong in the Q1. Certainly on the Fragrance and beauty side of the business, we've talked a lot about trigger sprayers.

Speaker 2

We saw sequential improvement through the quarter with our trigger sprayers. And really as we enter Q2, we fully recovered the inventory correction and kind of The lawn and garden markets and the home care markets in 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, in both sides of the business.

Speaker 2

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 Q1, 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.

Speaker 1

So it's

Speaker 2

really mostly around resin. And I think you're right. If you think about the Q1 impact, what I tell you the Q1 impact of what occurred in the Q1 with escalating resin costs Was about $0.03 a share of profit. And as we turn to Q2, the discrete Q2 impact of those increases from Q1 Let's call it $0.02 to $0.03 as well. And we do in our forecast, George, expect to recover that in the back half of the year.

Speaker 2

I would say Silgan's tried and trued 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.

Speaker 4

Thanks for the rundown, Adam. I'll turn it over.

Operator

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

Speaker 5

Good morning, guys. Thanks for, I guess, all the detail. One on metal container. I was curious, Adam, you talked about Actually performing a little bit better. And not to put too fine a point out, but I don't know if that it seems like it might be on the cost recovery side.

Speaker 5

Maybe volumes coming in a tick better than what you're thinking. Maybe that's just maybe sooner in Q1 or earlier in the year than what you might have expected.

Speaker 2

Yes, great question, Gabe. It really for us volumes really right where we've 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 1, a year ago, we still had some inefficiencies.

Speaker 2

We were dealing with the omicron variant a year ago in the Q1. As you recall through the course of the last three quarters last year, we've really got at the inefficiencies that the pandemic had created As we were doing our best to get containers out to the world for nutrition and for consumers around the world. So Really, you have the continuation of that terrific cost performance that we had the last 9 months of the year last year That drove performance in the Q1 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 other manufacturing costs. It is on a lag basis.

Speaker 2

So as a reminder, we're passing through 2022 Inflation and other manufacturing costs that we experienced and were in the P and L last year against 2023's Inflation that we're experiencing. So there is a cost recovery of the inflation again. Our cost It's lower this year as we've driven those inefficiencies out of the business and that's really what's driving our outperformance in metal containers in the Q1 And really a bit in the Q2 as well.

Speaker 5

Okay. Thank you. And then I guess in DSE, you talked about double digit growth in The, what I'll call, value add or higher end dispensing for fragrance beauty, and then seemingly the destock Having worked through for trigger spares, is there the potential that I know it's tough, you don't know exactly what's sitting in maybe Distributor channels, etcetera, but that there is a restock effect sometime during the year. And if so, is that embedded in your outlook? Would it represent upside to what you're guiding to today?

Speaker 2

Yes, I think that's a great question and it's one we debate here internally. Number 1, it is not included in So I'll make that really clear. There was such an adjustment at all levels of the supply chain in this destocking effort that I'm just going to assume, Gabe, that not everybody got it exactly right. And in some cases, there may have been too much drawdown for The various components of the supply chain. So it is a potential upside for us.

Speaker 2

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, the Q2 order book has been strong all year long. So we knew some of our smaller customers were going to be returning in Q2 to replenish the demand that It was impacted by the destocking activities.

Speaker 5

Okay. Thank you. I'll hop back in.

Operator

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

Speaker 6

Thank you. Thanks Adam, Bob, Kim and Alex. Congrats on a good performance thus far. One quick question just on the PAC, Adam. You mentioned The thing seems to be looking okay.

Speaker 6

Can you talk about a little bit more color around the pack, how that's shaping up and any impact From the volatility witnessed in the West Coast, even the inclement weather?

Speaker 2

Sure. It's a great question. And really when you think about Silgan's pack business, there's a couple of things. Primarily our core vegetables, you think of sweet corn and peas and some of our bean products, really that's more Upper Midwest in the U. S.

Speaker 2

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, it's wet conditions. The acreage that's been contracted has been consistent with where we've been earlier in the year.

Speaker 2

I think the plantings might be delayed 1 to 2 weeks. So nothing significant at this point, but just something to be aware of There might be a week or 2. I don't think that's necessarily material. When you move to Europe and think about our business in Europe, There are some challenges in Northern Italy for some of the pack products. Really Southern Italy is fine.

Speaker 2

Most of the Mediterranean is fine from a pack perspective. So for our closures and metal containers business in Europe, feel like we're right in line with our expectations as well.

Speaker 7

Hey, Mike,

Speaker 2

one thing I'll add

Speaker 7

to that is, as you think about tomatoes in particular, and that is Where maybe some of the volatility around the pack is. That's also if you think about the food can as 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 as what the pack itself might look like.

Speaker 6

Got it. That's very clear. Appreciate that. And then just one quick color on pet food. Obviously, demand was pretty strong in 1Q.

Speaker 6

Just wanted to get your thoughts on pet food demand trends. Some companies have been calling out normalizing demand after a period of accelerating growth the last few years. I think there was a survey out or I think there was a conference out that mentioned that the percentage of households with pets has declined I am going to 66% in 2022, I think it was 70% or so in 2021. And I realize that Sony participates in a unique part of the market, but just want to get a sense of What you're seeing from pet food, whether the growth is still there, whether you expect it to continue, what the trajectory is like just relative to some of the noise around pet food recently?

Speaker 2

Sure. And I think, look, we're very positive on the pet food market and particularly the segment that we participate in in wet pet food, Primarily for small dogs and cats is kind of the focus of our market. In fairness, Mike, I think 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 about the significant investments that our customers were making in capacity additions for wet pet food for the markets that we serve.

Speaker 2

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 Q1 really is supported by our customers having better utilization of the new capacity they brought online In the Q1 of 2023. So as we go forward, April has been a really good month for our wet pet food markets as well. I think we have to be really careful looking at the broad market studies because again, you think about The products that we make, again, we'll talk about cat food for one second. A 3 ounce can, that volume component of a 3 ounce can is significantly different than A £40 bag of dry dog food.

Speaker 2

And I do think you see some buy down or 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. Two last data points for you. We know for certain there are still stock outs of our products in retail and we also know that our 2 largest customers Are displeased with their service rates to retail of their products in 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 component. So Look, we feel really good about pet food.

Speaker 2

I'll keep saying we've been doing this for 35 years in pet food. At Silgan, The trend line is exactly where it's always been and we have a very high degree of confidence that we'll deliver our growth projections for Wet Pet Food and thus the Metal Containers segment in 2023.

Speaker 6

Really great color. I appreciate it and good luck in 2Q.

Speaker 2

Thank you.

Operator

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

Speaker 8

Good morning.

Speaker 2

Hi, Anthony.

Speaker 8

Hey, in custom containers, the step up that you expect in the second half, I'm just wondering, is that based on contracts or LOIs that you've signed now or that you're kind of very late Staejon, I'm just wondering if there's any way to kind of quantify if there's any risk that we get to 3Q and maybe some of those volumes don't materialize if there's any kind of color you can add in terms of the kind of the activities that are driving the confidence in that second half pickup?

Speaker 2

Yes, sure. And you think about those agreements and 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 described. We have agreements. We have verbal agreements. We have LOIs.

Speaker 2

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 are 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, Silgan will be ready to commercialize when we said we would be ready to commercialize, Whether our customers are able to do that with their resource constraints 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. We said back half before, it's probably later in the back half now For some of those commercializations to really hit and that obviously you've got the startup costs associated with those new wins that From a profit standpoint, we'll dampen a bit the impact in the current year as we commercialize.

Speaker 2

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.

Speaker 8

Okay. Okay. That's very helpful. And then on metal containers, there is a large food Company that specifically called out quality issues that they were seeing with food cans. And I don't think that's a comment on your business.

Speaker 8

And I don't want to ask you to Comment on a competitor situation. But I'm just wondering, is there any sort of indirect impact to Silgan in terms of maybe you being able to sell A few more cans or maybe tightening up industry supply demand or I don't know if you'd comment on just sort of the general Maybe some of the challenges the industry has had in terms of bringing on new capacity, but I don't know if there's anything that you could add there.

Speaker 2

I don't think there's a whole lot of read through for us on that one in particular, Anthony. 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're needed and particularly when others in the market aren't able to supply. So outside of what happened during the pandemic, we've 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.

Speaker 2

And the quality and the surety of our supply Has been fantastic for many, many years and I think that's one thing that does set Silke and a part in the marketplace.

Speaker 8

Okay. I appreciate that. I'll turn it over.

Operator

We'll take our next question from Arun Viswanathan with RBC Capital Markets.

Speaker 9

Thanks for taking my question. Hope you guys are well. I guess regarding the DSC performance, this is one of the quarters, I guess, where we Kind of got it wrong. So I just wanted to understand exactly what's going on here. Is it the case that maybe is it taking a little bit longer for resins Do price movements to flow through that business?

Speaker 9

And is that a function of kind of the volume environment? Or has nothing really changed and this Just a function of those lags, I guess I'll start with that.

Speaker 2

Sure. Well, look nothing's changed. I mean we have Yes, pass through mechanisms that are again, I'll say tried and trued for the history of the company. And really what happened Arun in the Q1, You had resin escalating through the quarter. And again, we typically pass that through on a lagged basis.

Speaker 2

What also occurred in the Q1 is the largest increase occurred in the month of March and that does create the longest lag for our recovery of the inflation. But again, I sit here With tremendous confidence, Iain, 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.

Speaker 7

Yes. Arun, I might Just to 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 2 parts, right? 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?

Speaker 7

So there's perhaps a bit more of a tolerance to deal with that lag Given the margin profile of the business. So there's nothing new about what happened with resin. It's just as Adam said earlier, It's all about the cadence and the spike that happened in the quarter that just has you chasing resin for a period of time.

Speaker 9

And on that note then, when you think about the full year guidance, so is it the case that essentially Your EBIT dollars that would have come in Q2 would come in Q3 and Q4 as those pass through mechanisms Are enacted?

Speaker 2

Yes. I think you've got it exactly right, Arun. So I mean think about something like approximately $0.05 Of cost in the first half of the year will be recovered in the second half of the year. That's right.

Speaker 9

Okay, perfect. And then Just a couple of quick thoughts, if I could get your thoughts on what you're seeing in some of the verticals there. And You've already run through Pet Food and Metal Container, but maybe on the DSC side and Custom Container side, are you still seeing because we've been hearing obviously Weaker mobility trends in China and taking 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, there's been destocking in several categories.

Speaker 9

Has that subsided or what are you seeing across some of the verticals in both of those businesses? Thanks.

Speaker 2

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 our dispensing and especially closures segment.

Speaker 2

Those are The trigger sprayers we've been talking about. So looks like the destocking is 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 and sports drinks and ready to drink teas. When you move to custom containers, it's 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 and specialty closures business, Which is normal for us.

Speaker 2

There's typically a little bit of separation as inventory works through not only our customers pipeline, but also through retail as well. 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 Q1. It just didn't materialize. We're seeing some green shoots in that market for the Q2 and it's something we're going to be talking about in the Q2 earnings call as well.

Speaker 9

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 Both polyethylene and polypropylene and all the resins that you buy?

Speaker 2

Yes. So it really the 2 primary resins that were impacted were polypropylene Polyethylene, those are the 2 largest resins that we buy and both were impacted by the spike that Bob alluded to.

Speaker 9

Okay, perfect. Thanks.

Operator

We'll take our next question from Ghansham Panjabi with Baird.

Speaker 10

Yes, thanks. Good morning, everybody. Adam, maybe a question for you to start off. If we go through a period of protracted Diminished consumer spending environment in the U. S.

Speaker 10

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?

Speaker 2

Yes. Well, I mean, I was going to answer broadly first and I'll get to pet food. But I mean, We feel pretty confident in the representation that we have in consumer staple end market. So 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.

Speaker 2

So the first thing I would Say Ghansham is a very small portion of our business in wet pet food is for large dog. Typically that is under pressure During tough economic circumstances and is a product that does tend to convert to some degree back to dry and again kind of 13 ounce can of wet dog food versus a 40 pound bag of dry kibble, the economics are a little different there when you've got 3 servings for a £100, Labrador retriever every day. When you get to our core markets and wet pet food of 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 requirement suppliers to this market. We don't see it as a negative. We see it at least as neutral with the economic cycle.

Speaker 2

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 the growth over time in the business. And again, we've got decades' worth of growth rates that we look at On a requirements basis in those agreements, that gives us a tremendous amount of confidence of how we look at the go forward in wet pet food. I'd also tell you we just delivered mid single digit growth in the Q1 and are going to do the same in the 2nd quarter.

Speaker 10

Okay. That's helpful. Yes, John,

Speaker 7

I think what I would add to that is 2,008, 2,009, The data supports exactly what Adam just described. That what we saw migrate away from pet food at that time was the large Animal, primarily dogs. And if you look at our, I'll call it consumer profile now, it is far more Weighted to the small animal and primarily cats far and away much more so than In that prior timeframe.

Speaker 10

Okay. Got you. Thanks, Bob. And then on dispensing closures and the unit volume increase for Fragrance and Beauty, how much do you think came from just sort of restocking as China reopens, etcetera? How long do you think that will last in terms of momentum?

Speaker 10

And then secondly, as it relates to the operating leverage, is that playing out in a way In line with your original expectations as it relates to those what seemed to be high margin businesses?

Speaker 2

Yes. Again, I think our guide for the year when we came End of the year with double digit growth in certain dispensing products, particularly for fragrance and beauty. So really right in line with our expectations. No restocking, if you will Ghansham. We just saw continued good pull through through the holiday season.

Speaker 2

Valentine's Day in the Q1 was a good period for fragrance. I think you've got a couple of holidays here through the Q2 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 It's related to the China Mobility issue. We do think our customers are benefiting from consumers around the world Traveling more and a little bit of a pickup in duty free stores for these products, but really just good demand for the Base products, I think as we talked before, 'twenty three was going to be an elevated year from a new product launch perspective. And that's very true.

Speaker 2

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, But in the consumer or in the staples that have been successful for many years for our largest customers.

Speaker 10

Got it. Thank you.

Operator

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

Speaker 11

Good morning. Thank you for

Speaker 12

taking my question. You guys mentioned resin costs going up in March. I was just wondering if there's a specific resin you can kind of point to. Are you more reliant on like polyethylene Polypropylene or is it something different?

Speaker 2

Yes, really it's those 2. So it's we've really got 3 primary resins that we buy. The 2 largest are polypropylene and polyethylene, both saw a significant jump in the month of March in the Q1.

Speaker 12

Okay. And then at the beginning of the prepared remarks, I think you mentioned about 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?

Speaker 7

Yes. Look, I think that's all about the entrance or continued growth around the dispensing and specialty closures, right? We've long had a closures In the flat cap side and back in 2017, we started to grow that business. And so that is really the effort 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 Supporting that and the investment opportunities are supporting that.

Speaker 11

Thank you very much.

Operator

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

Speaker 13

Thanks very much. Of the $0.15 penalty in resins, how much came from polypropylene? How much came from polyethylene? And if you had allocated to custom containers and your dispensing business, how would you allocate the 0.15

Speaker 2

Well, I think the $0.15 included other items that we talked about as well. So I think when you think about the first half of twenty twenty three, the negative impact of these changes From polypropylene and polyethylene, look, I'd say it's predominantly in our dispensing and specialty closures business. Polypropylene probably drove the largest of the 2 changes that we experienced. It impacts our Dispensing and Specialty Closure segment more than Custom Containers, but it impacted both of those segments.

Speaker 13

Okay. Also your accounts payable in the Q1 dropped to 630,000,000 Can you talk about the payables line this year in that often your payables really lifts in the Q4 of

Speaker 6

the year? How are payables going

Speaker 13

to look this year and why are payables down so much?

Speaker 3

So in our accounts payable, generally, we are higher purchases in the 1st three quarters of the year as we go through as we build inventory for the So our payables have built through that period and then will drop into the Q4. So you usually see a big move between

Speaker 2

And really that's just from the very beginning of Silgan. 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 1 quarter of the year. So that shouldn't be much of a 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.

Speaker 2

But outside of that, it's fundamentally as it has been for us.

Speaker 13

Great. Thanks so much.

Speaker 3

Thanks, Jeff.

Operator

We'll take our next question from Kyle White with Deutsche Bank.

Speaker 14

Hey, good morning. Thanks for taking the question. Sorry to go back to the resin. I know it's been talked about a lot, but disappointing clarity. I think in the second quarter, you mentioned it could be a $0.02 to $0.03 impact.

Speaker 14

Does that assume current contract 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 May, is that a source of upside to your outlook or are you already assuming this?

Speaker 2

Sure. So Kyle, what we do from a forecast perspective, what's included in this forecast is we take these Really what CDI or IHS forecast for the quarter and we do flow that through the P and Ls for the businesses. And what we've then looked at for the back half of the year is the recovery that's expected in those same resins.

Speaker 10

Got it. That makes sense.

Speaker 14

And then shifting to just 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 those range, just give the environment uncertainty or should we expect any kind of excess cash to be used for buybacks or potential acquisitions?

Speaker 7

Yes. I think you got it right, Kyle. We'll be sort of pushed right down on the low end of the range as we get through 2023 given the $425,000,000 free cash flow projection. Look, I think that depends upon how the credit markets Perform here in the near term. It is going to depend upon what the M and A landscape continues to look like.

Speaker 7

Obviously, we think we've fully digested the acquisitions that we've done. We've got the integration We've got the synergy captured as we would have expected. So if the opportunity to put capital to work within reason Presents itself, we'd certainly be happy to participate in that where we could grow the business, which is the objective here. In 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'd on a debt pay down versus a return of capital in that particular case.

Speaker 14

Got it. That makes sense. I'll turn it over.

Operator

We have a follow-up question from George Staphos with Bank of America.

Speaker 4

Hi, guys. Just some follow ons here. First of all, on resin, just to go back to this. So On the one hand, I heard we had a $0.15 penalty and then I also heard there's a $0.05 to $0.06 headwind in the first half. So I Probably missing some things, but if you could help me square that circle, that'd be great.

Speaker 4

And then were you doing anything Differently in terms of your inventorying of resin such that the spike Caught you maybe a little bit more than it normally would, perhaps if you were 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 60, 90 days before it starts to show up. So just Some thoughts on that would be great.

Speaker 2

Sure. So let me try to clarify that $0.15 item. So I think in Kim's remarks earlier, She had referenced a $0.15 headwind versus the prior year in the Q1. And that's made up of 3 things. It's the interest expense, it's the impact of foreign currency and there is a resin component versus prior year.

Speaker 2

That resin component versus prior year is much more in kind of the $0.08 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. Reference That's what is discretely happening in the first half of twenty twenty three that is impacting our results that we will pass through our normal pass through mechanisms in the second half of the year. So maybe I'll pause there and

Speaker 4

No, that makes perfect sense.

Speaker 2

Okay.

Speaker 4

Now in terms of talking about the discrete effects and whether you are managing your inventory normally or not and price protection, Yes. What are your thoughts there?

Speaker 2

Yes. I mean, obviously, a lot of moving parts to how we buy resin, how we manage resin, our days on hand, etcetera. So I won't get into a lot of detail on that, but I'd just say there was nothing out of the ordinary about our resin purchases in the Q1 And really over any of the near term that we've been talking about. I think, George, it's much more about passing through those Changes in resin costs to the customers and it's the lag effect 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'd like about how we purchase resin, What components go into those agreements that we have with our suppliers from a terms and conditions standpoint?

Speaker 2

We think we've got an advantage versus the market and how we do things at Silgan and nothing's really changed there.

Speaker 4

Okay. I appreciate that. And my last 2, I'll turn it over. One, can you comment at all in terms of the guidance on DSC, how much of your guidance is driven by and an expectation for No, it's still being a very strong year in terms of launches, new products in the back half of the year. And What would be the sensitivity there?

Speaker 4

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.

Speaker 2

Sure. Thanks, George. So On the guide for DSC, look, it's a pretty stable growing business that we have in DSC. So I just As we sit here today, we've got pretty good line of sight of the consumer staples portions of that business. Again, we'll talk about food and beverage Being a more normal year, we feel really good about that.

Speaker 2

As far as dispensing, again, it's the continued strong demand we see in Those premium segments of fragrance and beauty and importantly, the strong rebound that we're seeing in our lawn care and our home Products and trigger sprayers and other dispensers. So I don't think there's a whole lot of sensitivity around that, George. The inventory, the supply chain was really depleted in those segments of lawn care and home care product lines. Our order books look really good right now for really, we'll call it, the next two quarters as we sit here. And we'll figure out 4th quarter order books when lead times allow us to do that.

Speaker 2

On the custom container front, The green shoots, we're seeing more commercial activity. That's driven in part by distribution, which is a good sign for us. That's kind of the first point you can The immediate recovery in a market is when distribution activity picks up and we are seeing a lot of activity through distribution right now. We're fairly represented at distribution too. So we feel like that is a good sign for the other core products in our Custom Containers segment.

Speaker 2

So Really, it's a broad base in the distribution market that we're talking about. So that's the green chute that I mentioned earlier.

Speaker 4

Thanks for all the detail, Adam. Have a good rest of the day and good quarter. Thank you.

Speaker 2

Thanks, George.

Operator

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.

Speaker 2

Great. Thank you, Lisa, and thank you, everyone. We appreciate your interest in the company and look forward to reviewing our 2nd quarter earnings in July.

Operator

Thank you. That does conclude today's presentation. Thank you for your participation and you may now disconnect.

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Earnings Conference Call
Robert Half Q1 2023
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