Good day, 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 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 may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and, therefore, involve a number of uncertainties and risks, including, but not limited to, those described in the company's annual report on Form 10-K for 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 Silgan's First Quarter 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, and I am incredibly proud of their accomplishments and look forward to their continued successes at Silgan. Now moving back to the first quarter performance. Once again, a good 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 second quarter of 2023. 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 first quarter. 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 continue to set us apart from our competition. The strategic portfolio evolution we're 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 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. Our products for high-end fragrance and beauty end markets continue 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. While 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 impact positively in the second quarter. 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. The challenges that several customers experienced in 2022 in 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 in 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've recovered cost associated with the nonrenewal 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 in Custom Containers is expected to be slightly below first quarter levels. We believe this business remains well positioned in the market 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 Kim 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 two founders, Phil Silver and Greg Oregon. So 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 $6.4 billion 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 Silgan 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 second quarter and full year.

Thank you, Adam. As 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 and Specialty 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 segments. Adjusted net income per diluted share declined by $0.01 from the first quarter of 2022 with non-operating headwinds from higher interest expense and 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. 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. A 2% improvement in price was offset by lower volume/mix. First quarter 2023 Dispensing and Specialty Closures adjusted EBIT decreased by $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 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 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. 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 second quarter, but ultimately recovering the impact later in the year as resin costs are expected to abate. In our Metal Containers segment, our team's performance was exceptional in the quarter with volume growth of 3%, driven by strong demand for pet food and vegetable containers. Excluding impacts associated with Russia and foreign currency, sales grew by 5% from the prior year quarter. While the first quarter 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 the segment drove volumes 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, 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 adjusted EBIT in the first quarter. We expect the headwind from resin costs to continue to weigh on adjusted EBIT in the first half of 2023, but 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 a result, we are expecting Custom Containers adjusted EBIT to be slightly below first quarter 2023 levels in the second quarter due also in part to 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 second quarter of 2023. We're expecting higher interest expense of $0.10 per share and a $0.06 per share impact associated with Russia. Coupled with the continued impact of the lag pass-through of higher resin costs from the first quarter, this accounts for nearly all of the $0.19 year-over-year decline from the record $1.09 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 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. 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 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.

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

I guess I'll try to keep it to two or three questions and turn it over, go back to queue. So can we dig in a little bit more into 2Q? 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? 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.

George, it's Adam. Maybe I'll just 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 expectations. So when you go around each operating segment, Dispensing and 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, etc. 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 I'll 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, etc., 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. Metal Containers, look, it's right in line with expectations. What we've been talking about really now for maybe three or four years that our growing markets in pet food and protein are driving category growth for the entire segment. We've seen stability in vegetables. 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 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. 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 in 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. The Russia year-over-year comparison was known and our businesses are performing really well. So I think George maybe back in.

Yes. No, I appreciate it, Adam. Maybe just a follow-on to what you just said. So I took your comments that in Dispensing and Specialty 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 business is performing as you'd like? 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? And how much is your guidance a risk if resin doesn't come down in the back half?

Okay. Thanks, George. So a couple of things there. Number one, again, volumes in the second quarter. I 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 the inventory correction and kind of the lawn and garden market 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. 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 Silgan businesses. So it's really mostly around resin. And I think you're right. If you think about the Q1 impact, what I'd tell you, the Q1 impact of what occurred in the first quarter 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 is, 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. I would say, Silgan's 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.

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

I was curious, Adam, you mentioned that things are actually performing a bit better. I'm wondering if this might be related to cost recovery, perhaps volumes are improving slightly more than you anticipated, maybe even earlier in Q1 or at the start of the year than you expected?

Yes. Great question, Gabe. Really, for us, volume is 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 one, a year ago, we still had some inefficiencies. We were dealing with the Omicron variant a year ago in the first quarter. As you'll recall, through the course of the last three quarters last year, we 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 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 other manufacturing costs. It is on a lag basis. So as a reminder, we're passing through 2022 and inflation and other manufacturing costs that we experienced and were in the P&L last year against 2023'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 that's really what's driving our outperformance in Metal Containers in the first quarter and really a bit in the second quarter as well.

Okay. And then I guess in DSC, you talked about double-digit growth in the what I'll call value add or higher-end Dispensing for fragrance and beauty and then seemingly, the destock having worked through for trigger sprayers. Is there the potential that I know it's tough, you don't know exactly what's sitting in maybe distributor channels, etc., but there's 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, 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. It's not in our forecast. To your point, we do think the 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 was impacted by the destocking activities.

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

Congratulations on the good performance so far. I have a quick question regarding the pack. Adam, you mentioned that things are looking okay. Can you provide a bit more insight into how the pack is shaping up? Also, has there been any impact from the volatility observed on the West Coast, including the harsh weather?

Sure. It's a great question. When considering Silgan's pack business, our core vegetables primarily include sweet corn, peas, and some bean products, mainly from the upper Midwest in the U.S. This segment hasn't been affected by the weather issues we've discussed regarding the West Coast. On the West Coast, our focus is more on the tomato business and some fruit products. The acreage contracted for tomatoes has aligned with our earlier expectations this year. There may be slight delays in plantings of one to two weeks, but this is not seen as significant. In Europe, some unions in Northern Italy have affected some pack products, but overall conditions in Southern Italy and most of the Mediterranean are stable. Our closures and Metal Containers business in Europe also appear to meet our expectations.

Mike, I want to add that when considering tomatoes specifically, it highlights some of the volatility regarding the pack. The food can represents the premium part of that pack, and they usually try to allocate as much as possible to the can before making adjustments elsewhere. Therefore, the impact on the food can business may not be as significant as what the pack itself might indicate.

Got it. That's very clear. And then just one quick color on pet food. Obviously, the demand was pretty strong in 1Q. Just wanted to get your thoughts on pet food demand trends. Some have been calling out normalizing demand after a period of accelerating growth the last few years. I think there was a survey out there was a conference out that mentioned that the percentage of households with pets has declined to 66% in 2022. I think it was 70% or so in 2021. I realize that still participates in a unique part of the market. But I just want to get a sense of what you're seeing from pet food where the growth is still there? When do you expect it to continue what the trajectory is like just relative to some of the noise around pet food recently?

Sure. And I think, look, we're very positive on the pet food market, and particularly the segments that we participate in and wet pet food primarily for small dogs and cats as kind of the 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 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 they brought online in the first quarter of '23. 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 three-ounce can, that volume component of a three-ounce can is significantly different a 40-pound bag of dry dog food. 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 to less data 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 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. 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 Container segment in '23.

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

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 stage on. I'm just wondering if there's any way to quantify if there's any risk that we get to 3Q and maybe some of those volumes don't materialize or 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?

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. 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 the 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 then obviously, you've got the start-up costs associated with those new wins that 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. That's very helpful. Regarding Metal Containers, a major food company has pointed out quality issues with food cans. I don't believe this reflects on your business, and I don't want to ask you to discuss a competitor's situation. However, I'm curious if there could be any indirect effects on Silgan, such as an increase in your can sales or adjustments in industry supply and demand. Additionally, could you comment on the general challenges the industry faces in terms of adding new capacity?

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

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

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 resin to price movements to flow through that business? And is that a function of kind of the volume environment? Or has nothing really changed this is 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 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 longest lag for our recovery of the inflation. But again, I sit here with tremendous confidence in 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.

Yes. 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? 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'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 as Adam said earlier, it's all about the cadence and the spike that happened in the quarter that just has you chase in 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 your EBIT dollars that would have come in Q2 would come in Q3 and Q4 as those pass-through mechanisms are enacted?

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.

Okay. Perfect. I have a couple of quick thoughts. Can you share what you're seeing in some of the verticals? You've mentioned pet food and Metal Container, but I’m curious about the DSC and Custom Container sides. Are you still noticing the weaker mobility trends in China affecting the fragrance market and others? Additionally, on the Custom Container side, with destocking in several categories, has that situation improved? What insights do you have across those verticals in both businesses?

Sure. So maybe 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 dispenser specifically, which is a big part of our Dispensing and Specialty Closures segment, those are the trigger sprayers we've been talking about. So it looks like the destocking is done there. 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 was impacted by the destocking activities.

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

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., 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?

Yes. Well, 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. 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 a thirteen-ounce can of wet dog food versus a forty-pound bag of dry, the economics are a little different there when you've got three servings for a one hundred-pound Labrador or 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. So we don't see it as a negative. We see it at least as neutral with 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 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 first quarter and are going to do the same in the second quarter.

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 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 cat far and away, much more so than in that prior time frame.

Okay, I understand. Regarding the increase in unit volume for fragrance and beauty and the restocking due to China's reopening, how much do you believe is attributed to that? How long do you expect this momentum to continue? Additionally, is the operating leverage aligning with your initial expectations concerning those high-margin businesses?

Yes. I believe our guidance for the year, which started with double-digit growth in certain Dispensing products, especially in fragrance and beauty, aligns well with our expectations. There wasn't any restocking; we saw consistent demand during the holiday season. Valentine's Day in the first quarter proved to be a strong period for fragrance. We have a few holidays coming up in the second quarter that should also boost fragrance and beauty sales. Overall, there hasn't been a change from our initial expectations. A small part of our business is affected by the mobility issues in China, but we believe our customers are benefiting from increased global travel and a slight improvement in duty-free store sales for these products. Demand for our core products remains strong. As we mentioned earlier, 2023 is set to be a significant year for new product launches, which is certainly the case. Product launches were limited during the pandemic, and we've noticed good traction not only with these new products but also with the staples that have been successful for many years with our biggest customers.

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

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 relying on like polyethylene or polypropylene or is it something different?

Yes, it's those two. We have three main resins that we purchase, with polypropylene and polyethylene being the largest, both of which saw a significant increase in the first quarter.

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.

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 business 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 is supporting that and the investment opportunities are supporting that.

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

Of the $0.15 penalty in resins, how much came from polypropylene? How much came from polyethylene? And if you had to allocate it to Custom Containers and our Dispensing business, how would you allocate the $0.15 penalty?

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 2023, 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 two changes that we experienced. So it impacts our Dispensing and Specialty Closures 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 in that often your payables really lifts in the fourth quarter of the year? How are payables to look this year and why are payables down some?

So in our 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 built through that period and then will drop in 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 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 one quarter of the year. So that shouldn't be much of a change. And 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.

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

Sorry to go back to the resin. I know it's been talked about a lot, but just a point of clarity. I think in the second quarter, you mentioned it could be a $0.02 to $0.03 impact. 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 and May, is that a source of upside to your outlook? Or are you already assuming this?

Sure. From a forecasting perspective, we take the predictions from CDI or IHS for the quarter and incorporate them into the P&Ls for the businesses. For the second half of the year, we are considering the expected recovery in those same resins.

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 million free cash flow projection. 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 fully digested the acquisitions that we've done. We've got the integration in hand. 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 air on a debt pay down versus a return of capital in that particular case.

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

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'm probably missing some things, but if you could help me square that circle, that would be great. And then were 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 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.

Sure. Let me explain the $0.15 item. In Kim's earlier remarks, she mentioned a $0.15 headwind compared to the previous year in the first quarter, which comprises three factors: interest expense, the impact of foreign currency, and a resin component relative to last year. The resin component is significantly around $0.08. This comparison is primarily about last year's events rather than this year's. This reflects what is specifically affecting our results in the first half of 2023, which we will account for through our usual mechanisms in the second half of the year. I'll stop here for now.

No, that makes perfect sense. Okay. Now in terms of talking about the discrete effects and whether you are 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, etc. 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 first quarter 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, we think we’ve got an advantage versus the market and how we do things at Silgan, and nothing’s really changed there.

Okay. I appreciate that. And my last two, 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 an expectation for? 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 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?

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. 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 care 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 line. So 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 fourth quarter order books when lead times allow us to do that. 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 see immediate recovery in a market as when distribution activity picks up, and we are seeing a lot of activity through distribution right now. We’re fairly represented a distribution too. So we feel like that is a good sign for the other core products in our Custom Container segment. So really, it’s a broad base in the distribution market that we’re talking about. So that’s the green shoot I mentioned earlier.

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 today's presentation. Thank you for your participation, and you may now disconnect.