Operator: We go next now to George Staphos at Bank of America.
George Staphos: I wanted to talk about the importance on 2 factors to your guidance relative to DSC and Custom Containers. Can you size for us and that will be my 2 questions — can you size for us how important that new business you’re onboarding of Custom Containers is for the fourth quarter and for your overall guidance for the year? And what are the — so the key things we need to be evaluating and that you’ll need to tell us about that will mean that the business comes on, the earnings come on as expected or not? And relatedly, what are the risk factors there? Same thing with DSC with a very, very strong growth outlook this year that you’re looking for recognizing we’re done with destocking. What are the key risks in your view that we should be mindful of and checking back with you on in terms of that volume, that earnings that incremental margin showing up this year as you expect for DSC? Good luck in the quarter.
Adam Greenlee: Okay, George. So maybe we’ll start with Custom Containers and the new business wins. Really, the impact for ’23 is relatively small from a profit standpoint. Obviously, the volume kicks in and we’ll call it . So the good news is we’re moving forward with getting capital spend in place and we’ll work to commercialize those products, call it, late in Q3, early Q4. So it is more about the run rate as we exit 2023 and then enter 2024 with those new business wins. So I think we’ll be talking about them as we go through the year on the earnings call, just to give an update on where we stand regarding those commercialization. So I think that’s the right way to think about Custom Containers. And then on Dispensing and Specialty Closures, really, there’s a couple of things.
One, we don’t have any pre-buy activity in our metal closures segment. So we’ll have a normal year in that portion of our business. We see continued strength in fragrance and beauty and I think in the last 1 or 2 calls here for the earnings call, we had talked about our order book, we talked about our visibility. The reality is our customers had a really good holiday season and therefore, a really good product launch — new product launch season here as we begin 2023. So our clarity into that order book has gone further into 2023 than we had on the last call. So we’re thinking 2023 really is a strong year again for fragrance and beauty. We’re engaged with our customers talking about the incremental capacity adds as we typically do at this point.
So we’re bullish on fragrance and beauty and really what it can deliver through the course of 2023. I think general risk, we’re not expecting a massive recovery in lawn and garden that’s going to impact either Dispensing and Specialty Closures or Custom Closures. So I don’t think that risk is built into our budget as we think about the year. I think just broadly, economic conditions that are out there, we’ll see how that impacts consumers. I continue to say the power of the Silgan portfolio of products tends to do really well regardless of the economic circumstances. So maybe different products do better in a poor economy versus a booming economy. But bottom line is we still continue to perform regardless of what that circumstance seems to be.
Operator: We go next now to Gabe Hajde at Wells Fargo.
Gabe Hajde: I wanted to dig in a little bit — I mean, your voice inflected, Adam, when you talked about DSC and the potential into 2023, specifically calling out, I think, the fragrance dispensers or the dispensing specifically being up low double digits. So I guess piggybacking off of George’s question, is there something specifically that maybe you’re doing with your customers that you’ve seen success with? And then any thought, I mean, George asked about risks. Is there upside potential that you might get from China reopening and more so about China consumer mobility and travel as it relates to duty free. Just any thoughts there would be helpful.
Adam Greenlee: Sure. So maybe it’s — I won’t take the risk of repeating myself from what I said, so I apologize for the bad connection there. But what we’re doing in the market, specifically, Gabe, on Dispensing and Specialty Closures, again, we’ve got a really strong team focused on that market, focused on areas of growth and delivering new products, new innovations to our customers that are allowing them to then take those products to market and grow their business and we’re the beneficiaries of that, right. So long as our premium and luxury fragrance and beauty product lines. As long as we keep providing new products to those customers that allow them to win in the marketplace, we benefit from that. And we’ve seen that now for several years in our Dispensing and Specialty Closure segment.
So we feel really good about it. I think if I broke up, Gabe, I tell you, we are in conversations to add capacity with our customers to support their growth in those markets. And we continue to feel very good about the prospects for future growth. And 2023 looks to be a really good year with, I’ll say, limited downside risk based upon our conversations with our customers for volume specific to fragrance and beauty. And then as we think about China, there’s a couple of things. One, China, Asia broadly is relatively small for Silgan, always has been and probably will be to some extent. But as we sit here and think about a more mobile consumer in those parts of the world, again, fragrance and beauty, there is an element of fragrance and beauty that goes through our kind of duty-free international airport locations and the more people are moving around, frankly the better that will be for the product lines that we’re talking about.
So I think it will be good. Likely you’ll get an outsized — you won’t get an outsized benefit from Silgan related to the broader Chinese reopening. So it will be a bit impactful for travelers but for the market itself, we don’t see a big impact for our business.
Gabe Hajde: Okay. Now the inflection comment was actually — it sounded like you — a little bit more increased conviction and optimism on the business in your opening remarks. yes, all good. The second one…
Adam Greenlee: Yes. Got it.
Gabe Hajde: Yes. No. Bob, maybe or Adam, talk about just sort of what you’re seeing across the M&A landscape. That’s been obviously in Silgan’s DNA for a long time. Just in terms of assets coming to the market or expectations for sellers, etcetera, with rising interest rates and how that is evolving?
Robert Lewis: Yes. Look, I think there’s a lot to that point, right? I mean we’re coming through the year-end being kind of right where we expected we would be from a leverage standpoint. So we’ll be kind of right around the 3x leverage mark with improving free cash flow going into next year up to the — to a level above what we delivered in 2022. That’s probably just under another half a turn of deleveraging. So that will put us back kind of to the lower end of our range. I think the capital markets continue to evolve, still higher rates than maybe we’ve seen over the last decade or so but continuing to evolve. I think as we talked about on the last call, there was a bit of a pause in M&A opportunities coming to market as they sort of just wanted to get through year-end and see where the markets were heading.
I think what we’re seeing in the early part of the year that there’s a lot of activity that started to generate businesses wanting to come to market. We’ll see how that ultimately plays out but that’s encouraging because there are certainly a few that we would have interest in. I think we’re well positioned to take advantage of that on 2 fronts. One, not only is our leverage in the right spot but we’ve got a fair bit of available capacity on our revolver that puts us in a pretty good competitive position against other potential buyers of assets that we could move quickly and with some surety. So that’s obviously favorable as well. So we’ll see where that all goes. But the fact that we’ve got the most recent round of acquisitions fully integrated, we feel like we’ve got management bandwidth across our businesses to be able to integrate something new if and when we find it.
So it’s the same playbook really. It’s been a core competency and one where we think we have and will continue to generate good value and good returns for shareholders. So hopefully, we get some opportunities here during the year.
Gabe Hajde: Good luck.
