Welcome back, everybody. Very happy to have Silgan Holdings Inc. as our next fireside chat. Here from the company are Adam Greenlee and Robert Lewis, who we both know for a number of years. Robert is Senior Vice President and Chief Financial Officer, having come to the company, I think, in 2004.
Right.
If memory serves. Adam Greenlee is President and Chief Executive Officer. Adam, welcome.
Thank you.
Adam has been with the company, I think, since the White Cap acquisition in 2005.
2005.
Has been in a number of ascending senior leadership roles. Again, welcome, Adam Greenlee. Welcome, Robert Lewis. Happy to have you here. I guess, you know, a lot of discussion off the last earnings call, a lot of fruitful dialogue, you know, all about stability in cans, the incremental growth in dispensing, lots that we're gonna cover today. I guess first off, relative to your guidance, you know, when you think about it, what we should take away, what are the biggest supports for the outlook this year, the $3.95-$4.15 for this year and the call it $0.80 for the first quarter that you're guiding to?
Do you think, you know, as we sit here, we should consider perhaps that there's more headwinds or there's more support for your guidance range given what we know March 1st , 2023? Whoever wants to take that to start.
Sure, I'll start, and Robert Lewis can help me out. As we give our guidance for the full year, George, as always, we try to be balanced between risk and opportunity. I think the forward guidance that we gave for 2023 on a full year basis is reflective of that. I think the primary supports as we kind of look around the business franchises that we have, our largest segment by profit, dispensing and Specialty Closures, continues to see very strong growth rates, particularly in the dispensing products. As we said on our last earnings call, you know, we're expecting low double-digit growth rates in some of those dispensing products. Our legacy business in food and beverage continues to show resiliency and has proven to be those markets have proven to be very consistent over the years.
We move to Metal Containers, I think one of the largest changes is our participation in the wet pet food market. It's not a change for us as we've been supplying really on a requirements basis that market for the last 20-25 years.
Right.
We've got a long track record of really consistent growth rates in the kind of mid-single digits. What has changed is that now represents approximately 50% of our total unit volume for the segment. 50% of our unit volume for the segment now is growing in kind of the mid-single digit range. That is driving the overall growth for the entire segment. Seeing good growth in soup. Vegetables will be stable again next year. We think that the metal food container business stands tall right now, and the specific growth in wet pet food is what's driving the overall growth in the category. Custom Containers, we're cycling over the decision to not renew one contract.
Mm-hmm.
That's creating some volume instability in that business. The new business wins that we've already achieved and have been awarded will commercialize late in the year, and we think we'll be exiting the year kind of in that low single digit growth rate, as we go forward.
Understood. Can you talk about the level of destocking you saw in 2022 in some of your markets like Can 10 and lawn and garden? Is there much left to do in 2023 or, you know, not asking for trajectory, but are we at least at bottom now on those trends or on that trend for those markets?
Sure. I think maybe we'll start with the end of the question. We do think we bottomed in 2022, at the end of 2022 in those markets. For clarity, this does not apply to the Metal Containers segment, so really this is our dispensing and Specialty Closures and Custom Containers segment. Mid-year, we did see the inventory correction that started to take place in the marketplace. We worked with our customers. I think we've got great visibility with our customer intimacy that we have with our customers. We worked with them to get greater visibility through the retail channels as well. We have seen recovery in some areas, already, you know, at the end of the year. Already again in January, we had a solid January, as we mentioned on the earnings call.
Mm-hmm.
We've seen good recovery of certain markets in Europe, which for our business is a precursor to the recovery in the U.S. We do feel good that as we work through the balance of the first quarter, that the destocking will essentially be complete.
Adam, just on that, and it's probably something obvious and I'm forgetting about, why would Europe be a precursor here relative to what you'd see in the U.S.?
We don't think even with this destocking, we don't think consumer behavior has changed, the underlying behavior of consumers in their homes. I don't know that you're not cleaning a countertop today versus cleaning it during the pandemic. You just might have an extra bottle of hard surface cleaner in your pantry.
Right.
Pantries in Europe are much smaller. It's just that simple.
Got it.
So historically-
Makes sense.
As we've seen over time, they don't have the pantry load, nor do they have the deplete that the U.S. customers are able to execute upon.
Makes sense. Makes sense. You know, one question we're trying to ask of all of our companies, and you've heard me sort of talk at this in the past in varying ways, right? Investors here, investors listening on the web, they have lots of choices, right? Packaging is currently 0.3% of the S&P 500. Yeah, every company thinks it's great and has wonderful people, wonderful businesses. Look, most every company we're talking to today and tomorrow will probably forecast some growth. At the end of the day, why should everyone here and everyone listening say, "You know what? I need to own more Silgan." What's the one or two things that make you differentiated and they should rush to a PM and say, "Buy Silgan now-
Sure. A couple things.
Or not.
Well, a couple things. They should.
Okay.
We'll be clear about that. as we go forward and we project growth, I think one of the things that we're most proud of is we can also look backwards and say that we've delivered it. we do exactly what we say we're going to do. our 10 years, or I'm sorry, our sixth consecutive year of double-digit EPS growth this year in 2022, we're very proud of that. we've got a very unique business model.
As you should be.
Thank you. The unique business model does provide for very defensible positions in the markets that we serve. We've got blue-chip customers. We've got a wonderful cash generative business. We've also got vehicles of growth that we can deploy that capital. Finally, you know, we've been active in the M&A world, doing 35 acquisitions in our 40-year history or. We've shown an ability to integrate and execute on those acquisitions and make them accretive for our shareholders.
Thanks, Adam. Any questions from the audience? Again, we'll try to make these interactive like all the others. Linda is at the ready with a microphone in case anybody wants. We'll keep forging ahead, Linda. We'll get you going at some point. You have 113 factories in total, roughly 40% metal, 40% dispensing, balance, obviously in custom. What opportunities do you have to further integrate roofs, you know, across the segments at attractive you know, Silgan-esque cash-on-cash returns or have you pretty much tapped that out, that can't be a driver of EBIT and EBITDA growth for the company over time? However you wanna...
Yeah, I'll start and let Robert finish.
Yeah.
I think it's just in our DNA that we've got a relentless focus on driving cost out of our system, and I think we've done a terrific job over the course of time in the history of the company. Today, for our Metal Containers business, for every two plants that we operate, we've closed one over time. It's all about right-sizing our capacity and our footprint to support the needs of the market and the unique needs of our customers.
Yeah, look, I think that that is past is prologue. It is what we do. You know, pre-pandemic, we talked about the 6 facilities that were at least being contemplated from a restructuring standpoint around the food can business. Obviously, with the incremental volume that we saw through COVID, we chose not to do that. We chose to be in a position where we could support the market, as we exit the COVID period and get to more normalized volume levels, albeit at growth levels on a relative basis. We do think that there are some opportunities there for us to take cost out of the system. Likewise, in the rest of the portfolio, we make a lot of those same decisions.
As we continue to be acquisitive, those opportunities will expand as well.
Understood. You know, on the subject of metal, you know, for that matter, let alone dispensing and Custom, we frequently talk about, hey, when's the next contract up for renewal? Where do you stand? Et cetera, et cetera. Obviously, there's only so much that you can get into in that regard. You know, should we be cognizant of when you have any, you know, large renewals coming up? Said differently, do you have any large renewals coming up in the next year or two? Is that largely kind of in the rear view?
Not in the next year or two. I think as a reminder, we did renew our largest steel can customer contract last year. That extension was in for a total of 10 years, which is very consistent with our typical metal can contract.
They really kind of like you know, for 10 years. Yeah.
Well, it's our third 10-year contract, so yes.
Yeah, I think that's the important point, right? Is that we've never lost a major contract customer. We're in that unique position where, at least in the food can business, where most of the contractual volume is, we're in close proximity, in some cases, passing cans through the wall. We've got a long experience with their filling operations, in many cases, help them fine-tune those lines. We're deeply embedded in their business. That makes it difficult to be displaced. I don't say that lightly. It doesn't mean that we're a guarantee-
Right.
from a renewal standpoint. I think we understand what makes our customers tick and vice versa. It's a good relationship all the way around.
To be clear again, you said for the next two years you've got nothing big?
Next couple of years, yeah.
Okay.
We have the normal churn, but nothing significant in the next 1-2.
Yeah. Keep in mind, there's 90%+ of that business is under long-term contract, right? Theoretically, there's always some level of turnover in contracts, but there's no big step change hurdle that we've got coming at us.
Thank you, Robert. Thanks, Adam. Any questions from the audience? We'll keep forging ahead. In dispensing, what do you think your biggest challenge is versus your peer set, and/or what do you hear from your customers that they say, "Gee, we really wish Silgan was more blank in dispensing." What would it be? Similarly, what do you think is your greatest comparative strength in terms of technology or end markets or approach to management?
Sure. Maybe the ask from the market is our customers wish we would do more. You know, we've grown into the dispensing marketplace since 2017 with the acquisition of the dispensing business from WestRock Company, again, with the Albéa acquisition in 2019. Both acquisitions brought unique manufacturing and product capabilities to Silgan. We've done a really good job Silganizing those businesses and putting our Silgan business model in place, and that has been very well received by the marketplace. I think we find more opportunities that our customers would like us to expand our offering and support them in other areas. That's a wonderful challenge to be working on every day.
When was Calmar again? 2017.
2017.
Yeah.
2017.
Yeah. When you Silganize a business, what is it that you're doing differently that the prior owner wasn't doing or couldn't do if they, even if they wanted to?
Sure. Well, there's two things. One, I'll go all the way back to the founding of Silgan with Phil and Greg in 1987. The mission statement is very simple. It's compete and win, which we're not embarrassed that we like to compete and win and be the best at what you do. With that being said, customer intimacy is a high priority for our business and something I think we're best in class at doing across our businesses. Then, you know, you think about our dispensing, Specialty Closure segment, it's our highest margin, fastest-growing business. It is a priority for us. If you go back to where we bought the Calmar business in 2017, it was an $800 million revenue business, a resin-based re-revenue business, and a $10 billion paper business.
It just didn't really fit, and I don't know that it got the capital allocation that frankly, it gets at Silgan because it is a priority for us.
Makes sense. When you said you're trying to target high value in dispensing, what does that actually mean? I mean, we kinda get it.
Sure.
What does that mean in practical terms? You know, why are you targeting double-digit growth in 23? Why is that reasonable as an objective here from what you know?
Sure. For the segment, when you get into the dispensing products that we manufacture, we are targeting double-digit growth. Really, the entire dispensing segment is value added, high value for Silgan coming from our legacy flat cap business. Specifically, we'll talk about, you know, products like, you know, fragrance and beauty applications where in fragrance in particular, we're at the very high end of the marketplace, luxury, premium, and we've seen time and time again, that is a very resilient customer who is a repeat buyer, really regardless of the economic circumstance. That has played out time and again.
We've now enabled our customers to reach consumers in a new way with our sampler portfolio of products, it's very simple math, where they used to sell one bottle of high-end fragrance, they're now selling seven samplers and one bottle of high-end fragrance. That experience from the sampler portfolio needs to be, you know, indicative of the consumer experience with the entire bottle. We're selling seven or eight sprayers now for one.
Why can't, you know, anybody else get into the sampler business and replicate what you're doing?
I think innovation is maybe the second question ago.
Yeah.
One thing that sets us apart from competition is our innovation and our capabilities of product portfolio enhancement from our team. We think we're doing a terrific job as a high priority item for Silgan to continue to work with our customers to understand their very unique needs and innovate around those needs. Whether it's dispersion, whether it's angle of spray, whether it's, you know, I think I've even seen the notes from you, George, you know, the disappearing dip tube.
Yeah.
You know, that was a specific ask from a customer just saying they didn't like to see the dip tube in the bottle of fragrance. We innovated a solution to make the dip tube disappear. I think it's just all the different attributes that we bring to the market from an innovation standpoint provide a winning playbook that we're executing against.
On that and the, and the Melody product line, right, in terms of the disappearing tube, again, has anyone else replicated that yet to your knowledge and why?
I think there are various versions of that out there. I clearly would say we think ours is the best.
Right.
We were first to market with that.
Yes.
I do think that it's an enhanced product versus what else is out there in the marketplace. Melody, in particular, you know, I think as we integrated the acquisition from Albéa, we had two very good solutions for different sets of the dispensing market between our legacy Calmar business and the Albéa business combined.
What kind of incremental margin should we expect in dispensing this year? Can you talk to that?
Yeah, look, I think the majority of the growth is coming at the higher end, you know, development type projects. That business in itself is higher margin. The dispensing side of the business would have been, call it the, you know, low to mid-20s% in a margin relative to the flat cap portion of the business being kind of in the mid to high teens%, and the growth is coming at the higher end margin. I would expect that the incremental margins will rise accordingly.
You said Robert, you said the flat cap would have been traditionally like a mid to high teens?
Mid to high teens.
Okay. Thank you for that. Any questions from the audience, for Robert or Adam? There's a question. Hang on for. Thanks, Jim.
Why does it make sense to have a metal food can business along with plastic containers and closures segment? Those seem to kinda go hand in hand to me, but metal food can seems to kinda be off in left field. I know you've always done it, but either how did it come about, or how does it make sense to keep it together?
Sure. I think we'll start with the overlap of customers. You know, part of the Silgan solution is that, you know, we work with those customers to, again, understand their unique needs regardless of substrate. You know, you think about Metal Containers and the overlap with some of our resin-based plastic packaging, there is direct overlap. We are servicing many of the same markets, many of the same customers. You know, there's a broader customer relationship to consider. The second piece of that is you've got this cash generative engine in Metal Containers, and now a growth platform, not only in dispensing and Specialty Closures, we've been growing in our Custom Containers business as well. It's another outlet for that cash to continue to grow the company and create value for shareholders.
If you look across the portfolio, some 70%-75% of our business comes from food and beverage.
Okay.
There is a lot of customer overlap.
That goes across all three segments, right?
Correct.
Thank you. Thanks, Jim. Any other questions from the audience? Why do you see metal well-positioned versus other substrates within the food market for, you know, shelf stable, you know, go to the grocery store type of applications? You know. Well, it's interesting, maybe not with the same rate over a long enough period of time, you've seen plastics gaining share. Do you think that that is now changing and that your business and metal is able to reclaim share? How should we think about it, and what do you think the, those share drivers and changes could look like over the next few years?
Sure. A couple of quick things. One, I think, you know, what remains in the food can today really does actually need to be in the food can for the most part. The food can is the cooking vessel for the thermal processing of the contents in the can. We think that's a really important aspect of this. We don't really have, you know, fruit in a can anymore. That's converted to plastic. We don't really have coffee in a can anymore. Those products didn't need to be processed, if you will, in the can. The packaging wasn't quite as critical to the end use as it is for what remains. We think we're in a really good spot from that perspective. We don't feel like there's a substrate disadvantage for everything that's left in a can.
We think there's a significant advantage from a sustainability standpoint. The food can is the most recycled packaging product in the world. We're over 70% recycling rates in the U.S. market. It's got a high recycled content as well. We think that we are absolutely helping our customers achieve their sustainability initiatives. We are seeing, in some cases, migration from plastic and resin-based packaging to the food can. We're seeing some migration from cartons to the food can. We think that's a really exciting opportunity because we know for certain that our customers' thermal assets, how they actually process food in a can, are the lowest cost food assets available to get product to consumers. We think the food can is advantaged right now in the marketplace.
Yeah, George, I think that's a fundamental point, right? There was a period of time where there was conversion the other way, or at least discussion about conversion the other way. Not so much that the consumer disliked the can, but the marketing folks wanted a refresh of the package, right? I think with sustainability coming into play, that's sort of gone the other way. I think the focus of many of our customers recognizing the value of that install base in their thermal assets, they recognize that by that package conversion to plastic, they were outsourcing a lot of that value proposition that they have internally, and they're refocusing efforts there on their own profitability, which is driving volume to the can.
Pick a side on this. Are the customers where they're shifting back to metal from plastic, assuming that's happening, are they doing it because of the recycle rate, or are they doing it because the can gives them a really good carbon outcome because of logistics? It might be through the wall, from your, you know, converting to their operation. Which is it?
I think it's all of the above. I think they weren't seeing.
You sound like me now. I give you five-part questions.
No, no, I think they weren't seeing the conversion rates that they wanted in moving toward plastic. I think they are seeing.
Conversion rate, what do you mean by that?
The end consumer, I think at the end of the day, prefers the can.
Okay.
The marketing play was to have a fresh perspective with a new package that didn't play as well as maybe they had hoped. From the sustainability standpoint, I think they're getting value, in that chain relative to the sustainability efforts with the food can versus plastic, and their own ESG scores and their ability to hit their objectives gets jaded by a conversion going to plastic.
I would just like to add the other thing that Robert said at the beginning, it's more profitable for them to manufacture products through their thermal assets in a can. I actually think profitability drove part of this as well.
For sure.
You have the sustainability and ESG advantages on top of that.
Should that make me concerned about your dispensing business or Custom Containers business since they're more plastic-based? Why not?
For the most part, we are broadly in multi-serve applications, single-use plastic is a very small part of what we do at Silgan. We do think we're also meeting the unique needs of the consumers by providing multi-use, whether it's a multi-use dispenser or a large format Custom Container.
I think on the dispensing side, in particular, there's a value proposition that product brings to the overall product that can't be replicated in a different substrate.
Understood. Any questions from the audience? Mr. Sassine, you wanna hang on a second?
I'm gonna ask you a question focused on e-commerce. We see two things here that are potentially problematic. One is the weight of cans, of course, in, in shipments, and the other is the...
Difficulty with which e-commerce distributors secure dispensers, caps, trigger sprayers, anything else that would be part of that portfolio. Have you seen e-commerce as a benefit, as a potential risk? Are you exposed to these kinds of things that I think pop up from time to time?
Sure. Starting on the dispensing and Specialty Closures aspect of that, our dispensers, we absolutely have e-commerce solutions. We've worked with our customers to understand what those requirements are as their products work their way through e-commerce. We do have solutions literally across the board. Those are being rolled out literally as we speak. There is a cost premium to those solutions, and so that has been, in some cases, a challenge for our customers to take on that cost premium because they are not raising the price of their product through e-commerce. We're working through that with our customers, but we have multiple solutions that are, I think, that pass all of the e-commerce shipping tests today. As far as the food can is concerned, there's not a whole lot of e-commerce with the food can.
It is more on-site retail and, you know, kind of a big box retail kind of segment. We sort of laugh. The food can was used as part of the testing requirement. It essentially was the item in the box that the dispenser had to survive shipping across the country with. We do think Look, the food can is the most efficient means of getting product safely to consumers and the lowest cost means. How that happens through our retail channels, you know, that's continued to prove to be a wonderful outlet for food cans. I'm not sure the e-commerce section of food cans is really the viable forward look.
Thanks, Ron. Actually, a question. I guess probably about 10 years ago, your former company had an analyst day, and they talked about, you know, MeadWestvaco talked about shelf racking for food cans as being a growth driver. I don't know that it ever took off. Where do we stand on that, if at all, and why did it not take off, if it didn't take off?
It did. It was implemented in certain categories. I do think the slotting fees for those dispensers increased dramatically over the life. Due to marketing budgets for our customers.
Yeah.
They have moved away from them for the most part. Also, I think shelf size availability has shrunk to some of the canned products as the configuration of grocery stores has changed over time.
Got it.
At the end of the day, you know, our products are well-represented in the market, at grocery, at retail, and we feel like they're moving nicely through the channel as kind of indicated by our volumes that are high single digits above pre-pandemic levels.
Thanks, Adam. Why should we not worry about the overweight you have in pet food? Does this at some point become a sword that cuts the other way, and why not?
Great question. I think I'd go back to our 25 years of history of supplying requirements, contracts for the wet pet food segment. Got a long history of growth. That CAGR that we've seen since the inception of kind of mid to upper single digits has not changed over time. I think the pet population continues to migrate to the fastest-growing segment of cat and small dog. Large dog's in decline. It's cat and small dog that are primary consumers of wet pet food. Then you have this whole, you know, I think population shift that's happened as well as far as pet ownership. You've got folks getting married later in life. You've got boomers that are bringing additional family member via an animal into their homes.
During the pandemic, obviously, most of those pets, because we were all locked in our homes or apartments or wherever you may live, were smaller animals. You didn't really see a whole lot of 100-pound Labrador retrievers going into apartments in New York City.
I have a 120 pound Labrador.
There you go.
In an apartment in the city, so.
Hopefully, eating dry, or dry with a little wet topping on top of it.
I'd have to work nights if I was gonna put him in wet pet food.
Well, maybe that is one point.
Yeah.
You think about our segment in cat and small dog, these are 3-ounce servings.
Yeah.
Your 120-pound lab's gonna eat probably at least 1 pound of food a day. We're talking about 6 ounces. You think about the impact on the consumer. You know, they treat these small dogs and cats much more like family members. They are very reticent to change the diet.
Okay. No, I appreciate that. We probably have time for one more question, and if not, I'm going to take it. In Custom Containers... Actually, it's a two-part that totally unrelated. First of all, how strategic is Europe to you? Second, Europe, sort of food cans. Custom, you know, 15 years ago, you and another peer who's no longer in the business ran into difficulty as new entrant came in. We're hearing a lot of the same things. Oh, you know, that business wasn't at the returns we wanted, and slowly but surely, Silgan lost its momentum there. Why isn't this latest sort of renegotiation or decision not to go forward with this customer a forerunner of or a repeat of that?
I'm gonna take your last question. I'll let Robert take the European question. I think what's different about Custom Containers today is we are actually winning in the markets right now.
Yeah.
Not only did we elect to maintain our discipline about the return rate and profitability of that contract, but we've elected to deploy capital where we are getting the appropriate returns in the business. You know, we have two new business wins that will be coming in towards the end of the year that offset the decision that we made not to renew that contract. I think that is different than 15 years ago.
Yeah.
We didn't necessarily have the other business to replace. I'd say we've been winning, George, in that market for the last six or seven years.
Yeah.
I think we've done a really nice job securing our position that there are opportunities to deploy capital for growth in Custom Containers at our return thresholds. It just wasn't with this particular piece of business. That is a customer we continue to do business with in other areas, so.
Got it.
Great relationship. You know, they understood the decision-making that we went through, and we supported them.
Robert, quickly on Europe.
That question was specifically to the European food can business?
Correct. Yeah.
Yeah, look, I think that part of the portfolio has evolved over time since the acquisition, right? When we first bought the business, we were targeting the more Eastern European markets primarily because it was less competitive, and it had slightly higher growth rates. You know, along the way, we hit some bumps in the road with some geopolitical issues and the like. I think more recently, that business has started to evolve to multinational customers, the same customers that we're dealing with in our U.S. food can business.
Yeah.
That level of customer intimacy and stickiness.
Okay.
is the driver there.
Got it. Thank you very much, Robert, Adam. Please join me in thanking Silgan Holdings, great group of people. Thanks for the Q&A, everybody.
Thanks, George.
Adam, thank you.
Great to see you.
Thank you, sir.
Robert, great to see you.