Good day, and welcome to the Silgan Holdings Fourth Quarter 2023 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Alex Hutter, Vice President of Investor Relations. Please go ahead, sir.

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 and CFO. Before we begin the call today, we'd like to make it clear that certain statements made on this call may be forward-looking statements. These forward-looking statements are 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. In addition, commentary on today's call may contain references to certain non-GAAP financial metrics, including adjusted EBIT, adjusted EBITDA, free cash flow and adjusted net income per diluted share. A reconciliation of these metrics, which should not be considered as substitutes for similar GAAP metrics can be found in today's press release and under non-GAAP financial information available in the Investor Relations section of our website at silgonholdings.com. With that, let me turn it over to Adam.

Thank you, Alex, and we'd like to welcome everyone to Silgan's Fourth Quarter and Full Year 2023 Earnings Call. Our team delivered another year of strong performance in 2023 amid an unprecedented and rapidly changing market backdrop, proving once again that our businesses and our company are resilient regardless of the broader economic circumstances. We delivered our second highest adjusted EPS and adjusted EBIT in the history of the company and our robust free cash flow and strong balance sheet allowed us to return over $250 million to our shareholders through buybacks and dividends. Our disciplined approach to everything we do, including our customer partnerships, our contractual arrangements and our capital deployment has positioned the company to continue to perform for years to come. During the year, we embarked upon a multiyear $50 million cost improvement program, which is the largest in our company's history to strengthen our already market-leading cost positions across each of our businesses. To achieve these savings, we made several difficult decisions beginning in late 2023 and have announced the consolidation of 5 of our manufacturing facilities to date. These actions will position the company to continue to meet the unique needs of our customers and compete and win in the markets we serve with an even lower cost operating footprint. Volume trends in 2023 were mixed among the end markets we serve and the products we produce. Our strategic growth products for dispensing and pet food continue to see success and performance to outpace broader market trends and products that had experienced post-pandemic destocking in 2022 delivered strong recovery and growth in 2023. While consumer demand for our essential food and beverage products remains resilient, midway through the year, it became apparent that our volumes would be adversely impacted across the segments by our customers'…

Thank you, Adam. As Adam highlighted, our business continued to deliver strong financial results despite several headwinds in 2023 as we achieved our second highest adjusted EPS in the history of the company and once again showed that our business performs well despite challenging economic circumstances. We continue to convert our profits into strong cash generation in 2023 and used our cash to return over $250 million to shareholders including $175 million through share repurchases. We used our remaining cash to delever to near the midpoint of our target leverage range, and our balance sheet remains strong as we enter 2024. Turning to the fourth quarter 2023 results. Net sales of approximately $1.3 billion declined 8% from the prior year period, driven primarily by lower volumes in each of our segments. Total adjusted EBIT for the quarter of $135.9 million decreased by 9% on a year-over-year basis, with record adjusted EBIT in Dispensing and Specialty Closures and higher adjusted EBIT in Custom Containers, offset by expected lower adjusted EBIT in the Metal Container segment. Adjusted net income per diluted share declined $0.22 from the record achieved in the fourth quarter of 2022, with lower volumes and higher interest expense of $0.06 driving the year-over-year decline. Turning to our segment sales. Sales in our Dispensing and Specialty Closures segment declined 3% versus the prior year, primarily as a result of lower volume mix of 5%. The decline in volume was driven primarily by customer destocking activities in domestic food and beverage markets and double-digit declines for higher-volume meadow closures for international food and beverage markets. Record fourth quarter 2023 Dispensing and Specialty Closures adjusted EBIT increased $12.4 million versus the record achieved in the prior year period as a result of strong cost recovery and lower manufacturing costs which were partially…

[Operator Instructions] And we'll take our first question from George Staphos with Bank of America.

Congratulations on the progress in the year. I guess the question I had first on destocking, I think you said you expect it to continue through the first half of the year. Destocking has been going on for a long time now. How should we think about -- if I heard that correctly, how that will vary across the segments? What gives you confidence, after towards an extended period of destocking that we're getting close to the end of it. And then a related volume question, what are you seeing in soup for metal? We've heard that things have seen some pickup there. If you have some thoughts around that, that would be great. One other follow-on.

So destocking, I know we talked about it a little bit on the last call, but let's just try to put destocking in a few buckets. So the COVID items that saw a significant surge during the COVID pandemic period, created a destocking item as we came out of the pandemic. And those are things like lawn and garden, some of our hard surface cleaners, our health products and sanitizers, those types of products. Those went through a destocking phase post pandemic and essentially, those products have now fully recovered as we exit 2023. So some of the early signs of recovery that we're going to talk about, I'm sure at some point on the call, are the items like our trigger sprayers, we did see sustained double-digit recovery later in 2023 and are expecting that growth to continue in 2024 as well. So that's the first part of destocking. Then we ran into a bit of food and beverage destocking, some challenges in Europe with inflation, et cetera. So it expanded to other categories once we got through the pandemic. I think for the most part, we're seeing those now dwindle. And really, it's just some -- a few dribs and drabs that are carrying into 2024. The last item I would call destocking, George, is the pet food item that we talked about on the last call. And it occurred later in the cycle. Really, the fourth quarter played out almost exactly like we thought it was going to with pet food. And as we look forward into 2024, we'll have some continued destocking in pet food for sure. Some other categories, again, the trends are improving. And what I would say about pet food, we're going to see nice growth in the full year of 2024. When destocking ends for pet food is somewhere between the end of first quarter, into the second quarter. So we're saying through the first half of the year, and we should be beyond destocking at that point. So I think as -- to answer your question, how should you think about it? I think it's dwindling in Q1. You've got the impact of pet food that we talked about. And as we cycle out of the second quarter, we think we'll be beyond the destocking activities.

And so the related question I had was just what are you seeing in soup. And then my follow-on, and I'll turn it over. So as we think about 2024, and the discrete items, the things that are relatively in your control, however you want to define it in terms of earnings gains you have, the cost out program, you have some new wins. What should we bake in for this year, not that it's ever easy, relative to '23. And I'll turn it over there.

Okay. Good question on soup. Sorry, I missed that on the first round there. We had talked on the last call that we were not only anticipating but seeing some further promotional activity in our food markets, particularly in soup. Soup did have a good quarter in the fourth quarter, CMI data showed nice recovery and growth in soup. And I think from our perspective, George, soup sort of played out exactly like we thought it was going to for the course of the year. We knew that -- or we anticipated that soup was going to have a more normal soup-filling season than maybe what we had seen in 2022, and that's really what happened. So for the year-on-year comps, it was difficult through the summer when soup isn't typically filled. But as we now get into call it, Q4, we're seeing a normal soup season. We're also seeing, I think, the positive impact of some of the promotional activity that our customers have done, and it seems to be resonating with consumers. So part of that is what also gives us confidence back to your original question in '24. There are actions that our customers have taken from a promotional standpoint to begin to refocus on returning value to consumers and potentially driving volume, and we're seeing some green shoots as we sit here today. And maybe the last question, George, just how you should think about all the items that come together. Obviously, they're all encompassed in our guidance as we think about 2024. And you go across the segment, sure, we had the 1 plant in the U.S. Dispensing and Specialty Closure segment. That's fully recovered, those costs as we expected. We're going to be reduced as we got through the end of the year and each quarter, we made progress. And really, those costs have now been driven out of the system as we sit here for 2024. Maybe the last one, and I can move on. But -- the new wins in the Custom Container business, we talked about the first 1 coming on sometime in Q1. We're right on track. That will be commercialized. We are fully qualified just in the final stages of commercializing right now and the second large item is kind of a midyear qualification and commercialization. So we're feeling very good that those are on track and on time. And then finally, the first piece of our $50 million 2-year program, those savings are expected to hit in '24. And as we said on the last call, the savings will be about 40% of the total. So we think we'll be at a run rate of, call it, $20 million of savings as we exit '24 and heading into '25.

We'll now take our next question from Matt Roberts with Raymond James.

Adam, if you could just please expand on -- in regard to George's question earlier on pet food, I believe I heard 2024, you're expecting mid-single-digit growth rate in that, correct me if I'm wrong, please, but that was going to be dampened in first, maybe into 2Q from destocking. So -- if you could provide any additional color into how inventory levels were exiting in 2023? And what indications are there that potentially more supply is coming online? Or just trying to reconcile getting to mid-single-digit growth there after destocking in the first half.

Sure. And you're right. So there is some continued destocking in the first quarter. I think we're being a little cautious, Matt, because as we've seen in other categories, that destocking does sort of linger on just a little bit longer. So we're working with -- closely with our customers. And as you well know, we're near site or on site with many of those customers in this category. So we've got really good visibility into what they're filling plans are for 2024. They've added some additional capacity as well. So that's helpful. So as we think about it for the year, you've got some destocking activity that will cause a difficult comp for us in the first quarter, and we will see growth the remainder of the year in pet food. And on a full year basis, again, remember, our first quarter and fourth quarter are 2 seasonally smallest quarters in the Metal Containers business. So we anticipate nice growth for the full year as we sit here in wet pet food.

And then on high-value [indiscernible], and I might have missed this in the prepared remarks as well. But I believe in the release, you said further growth in 2024. How does that compare to the growth rates you saw in that category in 2023? And what factors are driving that for either higher or lower than 2023? Is it new products and new customers? Or just any additional color on that high value would be great there.

Sure. It's a highlight for us. It's an area where we've been winning in that market for sure. We've seen really nice growth. And I would say we're still expecting significant growth in that particular sector. It's just -- it's moderating just a little bit. So instead of very consistent kind of mid-double-digit levels, we'll be kind of low double digits, high single digits as we look forward into those products. And that's still get the volume. So I think we're going to be ahead of the market for whatever that's worth. And again, we've added capacity as well to support that continued growth. So that growth comes with new product launches. It comes with innovation. It comes with growing customer relationships. So we're having a lot of success in that market because we are doing what Silgan does. We are standing and delivering on our commitments and winning with innovation in that market.

We'll now take a question from Gabe Hadje with Wells Fargo.

I had a question about -- I guess, Adam, as we look at the guidance and positioning for the business into '24. Fast forward, we're having this conversation, you talked about closing 5 facilities as part of the $50 million cost out initiatives. I know it's sensitive to talk about in a format like this. But are there other plant consolidation efforts that you have to execute against? And what are the biggest risks against kind of getting to that $20 million run rate number? Or do you all feel like that's pretty well in the bag and then maybe upside from there?

Sure. And they are tough decisions, Gabe. And what I would say is the 5 that we've announced to date go a long way to supporting the $50 million in total. Unfortunately, it doesn't get us all the way there. So there will be some additional activity, call it, over the course of the next 12 months that we'll be engaging in. Those are fluid plans, and we're continuing to evaluate and from my perspective, Gabe, this is nothing new for Silgan, unfortunately. We've had such a -- it's not unfortunate. Fortunately, we've had such a focus on driving cost out of our operations over time that this is just kind of the next page in the playbook. And we're responding, as we said, we're going to rightsize our capacities to market demand, and we've done that. We're doing that. And we're continuing to evaluate where additional opportunities to drive cost out of the system can take place. So you should assume that there will be some more activity in the course of 2024 to get us to the total $50 million by the end of '25.

Maybe Bob, one for you. It seems like some of the top webs are getting cleared out of the M&A markets, we've seen a couple of things were at a loose here. That's been a pretty big value driver for Silgan historically speaking. Again, to the extent you can comment, I know you guys are always trying to be busy there, but anything that you get excited about or that we can be talking about maybe in '24 and/or uses of cash if that doesn't come into fruition, balance sheet closer to 3 times leverage, do you see the stock as attractive at current levels?

Yes. Look, I think you hit on the strategic priority, right? I mean -- and it hasn't changed, quite honestly. We continue to be active even when the market is inactive in terms of building relationships and making sure we understand what could come to market and when that may be. We probably are aligned with your thinking that it is starting to work itself out in terms of folks thinking that 2024 at a point in time where they will bring properties to market. I think given what's going on with the credit markets right now, that probably facilitates some of that. We do think that we're continue to be advantaged in that -- in those opportunities. None of that ensures that a deal will happen, of course, but we're excited about getting back to the activity that we view as a strategic priority, and that's the way we would choose to want to grow the business. Likewise, if nothing does happen, then we'll pull other levers to make sure that we create good returns for the shareholder. And as you said, that could be in a debt reduction mode to preserve capacity or it could be in continued share repurchases. And we will look at that as to where we believe the best return for the shareholder is going to be.

Okay. One quick follow-up. Do you feel like maybe just from conversations that seller expectations have been adjusted or starting to adjust in the right direction to accommodate or compensate for the rising cost of capital?

Yes. I don't know if you ever get entirely reconciled from a buyer and a seller perspective. But I do think, given that a lot of the friction that's happened around some of the deals in the market more recently, I think there's a realization that maybe peak levels are going gone anyway. So I think there's negotiations to be had, and that's typically where we do well.

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

Adam, going back to some of the comments you made earlier. It's still very early in the fourth quarter earnings season but some of your customers and the retailers, I mean, there definitely seems to be a new tone towards a different tone, I should say, towards promotional spending and also product innovation and so on and so forth to increase volume velocity. And that -- so that seems pretty clear on the human food side, if you will. How does that sort of manifest on the pet food side because pet food is quite large for you relative to years past. So just curious as to anything you could highlight in terms of conversations with customers apart from just the obvious of going through a bit more destocking in that category.

Sure. And I think you're spot on, Ghansham, with the broader food market and that promotional activity and maybe just to add a comment to what you said. I think the price recovery was really the focus for our customers, certainly in 2023. And I think that conversation has shifted now more to a volume recovery in 2024. And you're seeing the, again, the promotional activity, advertising, et cetera, in support of that. And what I would tell you about the pet food market is I think there's a small lag to the pet food market, following some of those similar patterns as they think about promotional activity. They were a little later to pass through the price to consumers as we were working through inflationary items. And I think they'll just be a little later to look to recover the volume as -- with promotional activity, et cetera. So I think that's all factored into our guidance. We're having those conversations with our customers. And there are promotional activity plans for 2024. They're just starting a little bit later than what we've seen in other categories.

And then on Dispensing Closures, I apologize if I missed this, but the higher margin categories such as fragrances, et cetera, you're starting to cycle through some more difficult comparisons and so on and so forth, just given the extraordinary growth in those segments. How do you see those evolving in 2024??

Well, look, I mean, we're competing and winning that space all day long. So we've invested fairly heavily to support the growth as well. So we have a really good degree of confidence that those new business wins that we probably haven't talked as much about in Dispensing and Specialty Closures will deliver the growth that we're seeing in that space. So we have done a very nice job not only getting the new wins, but putting the capacity and commercializing that capacity to support the growth.

And just to clarify on that, so the categories themselves seem to be relatively intact from an overall standpoint. Is that right?

Yes. I think I go back to the comment I just made a few minutes ago that we're seeing some slight moderation from the kind of significant double-digit kind of growth to the maybe low double-digit kind of growth in the category now.

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

The EPS guidance seems to point to kind of stronger year-over-year growth as the year progresses. And I was just wondering if there's any detail on how the $20 million in cost saves could ramp throughout the year? And if there's any other kind of cost items, resin or freight or in terms of recovery, how those assumptions could kind of impact the trajectory or cadence of year-over-year growth as we go through the 4 quarters of the year.

Yes. Good question, Anthony. And I think there are really 2 items that probably really think about the timing and rollout of the savings associated with the $50 million program. Again, we'll get $20 million of savings by the end of '24. And really, if you think about it, we just announced it on the last earnings call. So those programs do need to roll out through the course of the year. So certainly, you'll have greater savings in the back half than what you're going to see in the first half of the year. But we have a good degree of confidence we're going to be able to deliver those. Again, it's sort of what we do at Silgan and focusing driving cost out of the organization. I think the other big item to think about is related to our European businesses. And the kind of year-over-year, as Kim alluded to in her comments earlier, we've got this rollout of high-cost inventory in our European metals business, both in Dispensing and Specialty Closures and in Metal Containers. There will be a negative in the early part of the year, mostly in the first quarter. And between the 2 segments, it's something like $10 million of negative impact to the P&L. And again, just -- it's that higher cost inventory rolling out through the P&L. And again, there'll probably be some lingering into the early part of Q2, but most of that should impact the first quarter.

And then maybe just following up on Europe, I mean, can you talk about from an underlying demand perspective, what you're seeing and maybe assuming for the year for your European exposure. I guess the lion's share of that is in Dispensing and Closures and maybe you have kind of a mix of more discretionary, more kind of staples kinds of products. I'm just -- how do you see the European consumer holding up and if that differs from North America?

Yes. So maybe it's a tale of 2 cities as far as we think about the businesses that we have. So maybe I'll start with the European consumer. Again, as we've talked previously, we think it's been a tough environment for the European consumer between inflation in food products, inflation in fuel and light and power. There's a lot of inflation the consumer's taken on, and they have adjusted their spending habits. So we've seen that in more discretionary items. Frankly, we've seen it in our Metal Closures business, particularly in Europe, where we are on more of a premium package with a glass package with a metal closure on the top of it. So for the food and beverage business, I think we're seeing soft demand. We saw a soft demand for the most part in 2023. That continues for the most part. We think there should be some improvement in the second half. We've taken a conservative approach to that at this point. And then you think about the balance of our dispensing products, actually, demand has remained quite resilient in the European economy for those products. And again, we've got some health care business. We've got some fragrance. Our high-value dispensers continue to do well, almost regardless of the geography and where we compete.

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

Congrats for finishing the year strongly. First question I have is just on the -- Adam, your comment on Dispensing Specialty Closures and the slight moderation that you're seeing in the growth rate at the higher end, growing now low double digits, maybe high single digits instead of mid-double digits. What's changed from your perspective? What has changed that now you're growing at a lower rate than you had been?

Fundamentally, nothing has changed. Again, we see a lot of the same type of opportunities for continued growth going forward. The base has obviously grown quite a bit. So the absolute dollar value of growth that we're talking about year-over-year, you're just claiming over a larger base every time you keep growing by a nice double-digit kind of growth rate. So nothing really beyond that, Mike. It's a strong market for us in the high-value dispensers and we're going to continue to see really nice growth.

So just the basis of larger, so it's affecting the year-over-year changes on a go-forward basis. But there's no shift in terms of demand?

That's the right way to think about it from our perspective.

Got it. Okay. And then just quickly on the cadence of dispensing, especially closures volumes in 2024. If I heard you guys correctly, you're expecting volumes to be up mid-single digits in '24. You still are calling out persistent weakness in domestic food and beverage and Metal Closures in Europe. That's like it's played you for a bit now. So I mean, is it fair to say that volumes will be weaker 1Q, slowly getting better in 2Q and then could be up more prominently in the back half of the year?

Yes. I think you've got the cadence exactly right. And again, the destocking as it relates to Dispensing and Specialty Closures really is the kind of the ending of the food and beverage destocking activities that we've been talking about. So we anticipate that to be mostly a first quarter item, and we should see that inflection point, call it, late in Q2.

Got it. If I could sneak in 1 more, just real quick. Just you mentioned promotional activity starting to improve and pet food going to be a little bit later. But where are you seeing -- what end categories, what markets are showing increasing promotional activity from your vantage point as we speak today?

Yes. And it's -- it's an interesting question because for the most part, we see it across almost all of our categories. We've been having a lot of conversations with our customers about their promotional activity and most of those comments back relate to the consumer has really been trained to buy product on promotion right now. And it's an interesting concept. And you kind of fast forward that to all of our categories, we certainly see it in food. We do see it in beverage. We see it in home care, we see in lawn care in advance of lawn and garden season. I just think it's applying just about everywhere with different degrees of productivity, but there is promotional activity across most of our segments right now. I would say, I'll exclude high-end fragrant beauty because there's really no need for promotional activity there. That's a different consumer set and a different value proposition.

Our next question will come from Daniel Rizzo.

Given the customer wins you had and what you're seeing right now, can you hit the high end of your guidance for 2024 without restocking? Or does that assume a little bit of a restock cycle maybe in the back half of the year?

Yes, good question. Obviously, as we think about the guidance that we give, it does factor in a range of outcomes. So for the most part, we don't need a full recovery of the markets to get to the high end of our range, but it would take some volume growth in our -- in each of our segments to get there.

I guess just to converse of that, to hit the bottom end, that assumes that things just don't get better or that there's some sort of demand decline or something or just a correction?

Yes. I think again, we're anticipating some nice recovery and growth in certain categories for '24. So if that does not happen, and there is some other geopolitical items that would force demand to retract a bit, that's how you get to the lower end of our guidance.

And then final question. You mentioned a lot of new contract wins, some coming in the middle of the year. I was just wondering, historically speaking, is there sometimes timing issues where customers delay commercialization or things get pushed out? Or does that -- I mean, or is generally what you see what kind of happens if follows.

Yes, I do. What I would say, Dan, is that the large contract commercializing in the first quarter was originally identified to commercialize in '23. And while that's disappointing, what's one of the great things about Silgan's disciplined approach to these customer arrangements is the contract doesn't start until it's commercialized. So while it's, let's call it, 6 months later than we anticipated, we do get the full term of the agreement that we had negotiated and agreed upon with the customer. The second item that's commercializing midyear was also supposed to be a '23 item. So unfortunately, they both got delayed. But the good news, as I said, the 1 in the first quarter, we are fully qualified and are commercializing literally as we speak. So we are right on track with commercializing both of those new business wins as we sit here today.

We'll now take a follow-up from Gabe Hadje with Wells Fargo.

Just hopefully, 1 fairly quick, Adam. My antenna went up when you talked about, I think, low double-digit decline in tinplate steel and that may be impacting order patterns on the food can side. I'm just curious if it's isolated to that or if there's anything -- if there has been any other material movements that may have influenced customer order patterns, buying patterns? And then, I guess, relatedly, if in fact that is the case, operating rates maybe in the Metal Containers business were a bit below what you were expecting in the fourth quarter. And so we need to be mindful of that in Q1 and Q4 of 2024.

Interesting question, Gabe. Let me -- I'll start, and we'll probably just work around the horn here as we try to put an answer for you. First of all, I think with that kind of steel change, we didn't really see a lot of customers delaying purchases from Q4 into Q1. So I'll just -- I'll say that upfront. We're going to get more visibility of that as we now cycle through the rest of Q1, but we just don't think that really happened in Europe. And so I don't think there's a whole lot that we're going to have to think about for Q4 either. I think we should have that conversation at the end of our Q1 call because we'll have a lot more visibility. And then I just think the cadence for the year, there's just not much else to think about for Europe. We're going to get through some of the other recovery of inflation items that the consumers had, and we are -- we see it halfway to better volumes later in the year for the European business. But as we sit here today, we're just taking that cautious approach.

[Operator Instructions] And it appears there are no further telephone questions. I'd like to turn the conference back over to our presenters for any additional or closing comments.

Great. Thank you, Anna. Thanks, everyone, for your interest in Silgan and we look forward to reviewing our first quarter results after the first quarter.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.