Operator: Our next question comes from Scott Davis from Melius Research.
Scott Davis: Hey good morning guys.
Richard Tobin: Good morning, Scott.
Scott Davis: The — I probably asked this a couple of quarters ago, but the M&A markets, Richard, they come down to kind of more realistic levels for you guys and expect to be a little bit more active in 2023?
Richard Tobin: Well, I guess taking on any leverage to do a deal has not been well received by anybody. So I guess we’d have to be careful with a larger deal presently for whatever reason, the capital markets are not looking kindly on leverage for, I guess, the reasons we can understand about unsurety of the macro going forward. But yes, I think that what we’ve seen so far is that a realistic multiples are now becoming — are reflective of what’s going on in the capital markets. So you always have — most of our deals are private, as you know, private companies. There’s always a lag between the public capital markets at a private valuation. I think that, that has narrowed towards to the public capital markets.
Scott Davis: Okay. And I don’t like the traffic of minutia , but is there such a thing as a can-making cycle? I mean what — it seems like we’ve had pretty high demand year for several years in a row. What — what’s in the other side of it? Is there a big investment cycle now and that it’s just kind of air pockets after that? Or is there some new dynamic involved in that world?
Richard Tobin: Yes, I’m not allowed to say that the AP, right because the CTAs love to pick up on that step. But yes, look, I mean, it is a cyclical business and there are investment cycles and part and parcel is to not over capacitize yourself as the cycle goes up and the recapture on the spare parts, which are margin accretive on the way down. So that’s the way that we look at the business. Now having said that, it will be interesting to see what happens with PET in drinks going forward. I know that there’s been a little bit of a pushback on ESG lately. But the fact of the matter is that PET from an environmental point of view is not a preferred option. So to the extent that the cost plus ESG aspect of PET over time make aluminum more attractive, then we could — that is by far the largest portion of the market. So even if a recapture rate of 15% of PET market would drive another cycle. So that’s kind of where we are right now.
Scott Davis: All right. Good luck guys in 2023.
Richard Tobin: Thanks.
Operator: Our next question comes from Josh Pokrzywinski from Morgan Stanley.
Joshua Pokrzywinski: Hey good morning guys.
Richard Tobin: Good morning.
Joshua Pokrzywinski: Rich, so you’ve been sort of holographing what’s happened with orders and backlog and kind of watching the Fed movements for a while now and been more concerned about them we’re doing it. Does your view of kind of downturn management look different because of some of the scarcity that we’ve had the last 2 years in terms of hiring folks, looking for new suppliers, maybe honoring existing agreements? Does any of that look different with the recovery on the other side we kind of have more of the same scarcity that we’ve had in the past.
Richard Tobin: Yes. I wouldn’t expect to run into the logistics constraints that we’ve seen. I think that was a one-off. I mean, you had just such a collapse of the macro and then a restart and then add a lot of the energy markets went haywire which drove the logistics market say, well, I don’t expect that to happen. I mean I think that capacity was brought on. And if you look at logistics costs and the forward curves there, I don’t expect that to repeat under any reasonable macro scenario from here. I think there is a lot of liquidity that’s being taken from the general market. I think that lending is very low right now. It’s very difficult to get loans and secure loans — secure liquidity to run businesses out there. I’m not making it a Dover comment.
I’m talking in total. So I’m concerned about that. And if that’s the case, and there’s the only way that if you’re a private company, the only way you can generate liquidity in order to continue to fund yourself is to draw down inventory balances to extremely low levels, and that’s negative to orders and revenue going forward. So that’s our overall concern of — I don’t see the point of bringing out another 50 basis points only to turn around and give the 50 basis points back into Q4. Why bother? Why can’t we just sit where we’re standing right here because liquidity in the market is incredibly tight right now. So that’s the fear. At the end of the day is that you have a delayed CapEx cycle, which we ascribe to the fact that there is a CapEx need out there because of productivity to offset higher labor costs, and then you’ve got all the stimulus money out there.
But fact of the matter is there’s no liquidity to accompany that I think that you have a delay effect that could be problematic.
Joshua Pokrzywinski: Got it. That’s helpful. And then just thinking about the 4Q orders, any sense from you guys as lead times have improved that this is sort of the quarter where customers kind of squeeze the accordion on, hey, we don’t need things 16 weeks earlier than normal anymore. So let’s get back to maybe more normal ordering pace. Like — is there an artificial low that you go through on orders as lead times normalize? Or is that something that’s kind of barely perceptible over the medium term?
Richard Tobin: No, that’s exactly what we think, and we think it’s going to continue through Q1. And then from there, we expect based on our view of the demand cycle that it will inflect positively from there. But I think you’re going to get another quarter of exactly how you described it, right? I know I can get the product. I have enough inventory to carry me through the quarter. I’m going to take the chance of depleting it because I know you can deliver into Q2.
Joshua Pokrzywinski: Very helpful. Thanks. Best of luck guys.
Richard Tobin: Thanks.
