Silgan Holdings Inc. (SLGN) Earnings Call Transcript & Summary

Hi. Good afternoon, everyone. This is the session for Silgan Holdings. We have Executive Vice President and CFO, Bob Lewis, with us today. Bob is with the company, I think, over 15 years now. Silgan is a producer of metal food cans, closures, dispensing products and plastic packaging, and recently acquired Albea, a dispensing and packaging company. This is going to be a fireside chat format. I'm going to go through a number of questions. [Operator Instructions]

I'm going to start. Bob, I wanted to see if you could give us an update on how trends have been kind of coming out of Q1 and through May, although thank you, by the way, first, thank you for participating. But that would be how we're going to start. In fact, we are going to walk around with trends that we've had since the first quarter.

Okay. Perfect. Thanks, everyone. Good afternoon. So I'll start with the food can business. As we came into the year, we were expecting that food cans were going to do pretty well for the year. Remember that we did beat in Q1, and that was expected, largely because we had year-over-year comps that were favorable against some prior year pre buys. We thought we would see continued growth in pet food. And I'll point out that, that was not based on pantry stuffing because we didn't quite understand that coronavirus outbreak was going to have the impact that it did. We started to really see the pantry stuffings begin in March. Soup has continued to do well, and as a category that, quite frankly, began turning the corner even prior to the outbreak as well, attributable largely to, I think, kind of leadership changes and a refocus of their energy on their core business. Obviously, the coronavirus outbreak has helped that. So as we've moved into the early part of the second quarter, there's really nothing that has changed about that. We continue, and I'm sure you see it on your own store shelves that there are still stock outs. Our customers that have reported have reported good sustainable volumes there. I think it's unclear where it goes post outbreak. I think it's early days, but there are some signs that the consumer is responding well to canned foods. The Campbell's commentary would support that. I think what we're seeing is folks are cooking more at home. They're experiencing what I'll call the nostalgia of family recipes. And I think they're also finding good value in the quality of the meals they're cooking at home using cans. And in many ways, they're being reintroduced or perhaps even introduced for the first time to the can. So too early to make a call on what it really means, but we still see continued positive momentum for the back part of the year around the food can. So really no change from what we talked about in the first quarter earnings call. On the plastic side, continues to do well for the same kind of reasons. A lot of hand sanitizer and soaps and disinfecting products. So that product lines continued to do well. The operating performance of that business has continued to do well over a long period of time and it's been a nice turnaround, and that continues. And then on the closure side, it's a little bit of a -- obviously, it's the most diverse in terms of the product lines that we've produced. So the metal side of the closures business kind of in line with food can. Volume, it's mostly food, both in Europe and the U.S. So that's been favorable. The flat cap side, particularly of the hot fill, that's a product category that generally does well when it's warm and when there's a lot of outdoor activity. And as you probably all have seen and experienced that there hasn't been a lot of outdoor activity nor has the weather been very warm. So that will have some impact on the volumes in that category. And then on the dispensing side, we've seen really strong volumes on sprayers and pumps and likewise some weakness in some of the other product lines. So the net of all that is we kind of -- some changes in the puts and takes that are up across the business. But overall, the business continues to do well and volume should net-net be pretty good.

Okay. And realizing that we don't have a crystal ball here, kind of putting it all together, are you optimistic that coming out of COVID, we could potentially see a different growth rate for the food can as people are kind of reintroducing this into their homes?

Yes. Look, I think the good news is what we didn't seem to have had happened is just a onetime pantry stocking and then no consumption. I think by virtue of the fact that we continue to see limited availability on the shelf that, that means that the consumer is continuing to buy. And I think the more that the consumer gets acquainted with the product line and what it is and what it means to use it, then I'm hopeful that there is at least an opportunity. Again, you said it right. There's no crystal ball, and time will tell here, but I think it does hit a lot of the positive attributes once the consumer gets accustomed to using the product.

Okay. And then just sticking with food. Any insight you can give us to the pack season this year? And any kind of considerations that we have to make along the way around labor, weather, customers having issues with production? What are the things that you're focused on right now?

Yes. All of the above, quite frankly. But look, the acreage is up as we would have expected it to be. All of our customers are trying to get as many cans as they can, particularly leading into the pack season. So I think they fully intend to pack everything that they can. Weather has been cooperating thus far. We'll see where it goes from here. You touched on labor. For at least a portion of the products, that was something that we and customers were focused on early on. At least, it feels like they'll get the labor that they require to pack product. So again, still ways to go to get to pack season, but everything looks like it's pointing in the right direction.

Okay. And then if we kind of look at the industry overall right now, what is your sense of where we are from a supply/demand perspective? Where is the excess supply? And kind of how should we think about the risk to pricing for the industry overall over the next year or so?

Yes. That's a great question. I think at the moment, I would sort of put it at least at a pause. And I say that because I think everyone at this point is producing and selling just about every can that they can right now. And I would say that that's certainly where our thought process is. Right down to the fact that, as we talked about on the first quarter call, we were going to take a pause on the footprint optimization that we had laid out for that part of our business to at least understand what our customer requirements were going to be in the short term and how much of any of that was sticky. So I think the real answer is we're going to have to let this play out and understand what the underlying demand is going to be post-outbreak. And then we can all sort of make decisions about whether or not the capacity has been naturally rightsized because of volume or whether there are things to do, and we will then continue with our own internal footprint optimization. But I think for the moment, at least from our perspective, we are focused on providing every can that our customers are asking for so as not to put them or the consumer on harm's way.

Okay. Actually, a couple of more questions on the business. Where is kind of the stress point in the supply chain right now for the food can business either in Europe or in the U.S.?

Actually, it's been relatively okay. We've been very conscious about making sure we've got the right kind of protocols in our plants to make sure that we're keeping the plant workers safe, to make sure that we're keeping the plants operational and that we're not having unnecessary shutdowns and having employees in harm's way. So that's been a big part of our focus. Sort of extending that into the logistics side as we have truckers from the outside entering plants to move product around as well. So it's knock wood, so far, it's been good. Not to say that we haven't had any issues to deal with, but we've dealt with them accordingly and haven't had any significant disruptions. And I know there's been a fair bit of news around certain, particularly on the meat packing side where there's been some plant shutdowns, but we haven't really had any customers that were significantly disrupted either. So that's been good. And our access to raw materials has been good. So things have gone okay.

That's helpful. And then just a last question and I'll move on to another segment. As you are seeing newer customers coming back -- or not coming back but going to the food can or maybe people coming back, are you getting any interesting feedback or ideas around product's innovation that maybe you would not have considered pursuing before?

Yes. That's an interesting question. And I would say, actually, it's been a little bit of the opposite right now. Many of our customers have sort of -- they've scaled back on the number of SKUs that they're packing in order to limit the number of changeovers so that they can push as much volume to the market as the market demands. So we haven't seen a lot of that what you described as innovation. What I would say though is that we're actively engaged through the Can Manufacturers Institute with a program called Cans Get You Cooking, which is more getting to the consumer orientation around the food can. And it's something that we've done for a while and it's sort of -- it got a lot more traction recently. And it basically surveys social media and online discussion around the food can. And I would say that we're seeing more and more activity in those formats, which is encouraging. Again, I can't really -- other than anecdotally, I don't have evidence to say that that's going to translate to X volume, but it is at least there's ongoing dialogue amongst the consumers around the product.

Okay. I thought we'd shift over to talking about Albea a little bit. I know there's not a lot that we can talk about since the deal just closed. But first, I thought we could have you just kind of summarize why this business was attractive to you and why you pushed forward with acquiring more on the dispensing closure side.

Yes. Sure. It's -- to me, it's a natural progression for our overall closures business, which is, quite frankly, a part of our portfolio that has grown in its entirety from an acquisition standpoint. And back in 2017, when we acquired the business from West Rock, that was our first deep entry into the dispensing side of the closures business. And I think even as far back as pre that acquisition, we had interest in the business that we ultimately bought from Albea, but there wasn't a willing seller for just that asset. It was all or nothing and there were other parts of that business that we didn't think fit us as well. So when we kind of got to a situation with the owner of this Albea business that was open to the idea of carving it out, it sort of made a lot of sense to us. And it fits really well with our existing business. There's a lot of overlap with customers and bringing strength where there's weakness on the other side in terms of product line. I think when we put out the initial announcement, we call it the hand in glove fit. And that is a really nice complement across the business for us to bring good quality closures to the breadth of our customer base. So that was really the idea behind it. And the fact that it comes with a fair bit of synergy, we believe it still -- even in the face of what hopefully is a temporary impact here as a result of corona, it still will make a very nice acquisition over the long term at what should be a good return over the longer term.

Okay. And without getting super specific, how -- I mean that you just recently closed the business. A lot has changed since you announced that you were acquiring Albea. How have you been able to kind of stay in touch with how the business is performing, getting prepared for a situation that maybe you weren't quite expecting when you first started looking at the company?

Yes. Sure. We continued sort of along, what I'll call, diligence effort, right? So we were generally aware of what was happening in terms of broad macro issues with the business. We were experiencing some of that in our existing business, so we were coming from a position of knowledge anyway. I would say where the lines kind of got drawn for obvious reasons is around very detailed customer activity, particularly until we cleared any trust and there was no threat of the deal not closing. So we were somewhat limited on the detail on a customer level basis. But yes, we -- I think we know and understand what we're getting with the business. And I think we've done a nice job of making sure that we've got the right kind of transition plan, and ultimately, the right plan of attack to get after the synergies that we outlined. So I think we're not -- other than -- I think probably what happens is you end up getting a little bit of an unfavorable mix versus what we anticipated in the near term, but that should revert to the mean over time. And to put a little meat on the bone there, I think one of the areas that this business is strong in is buying fragrance, and that obviously has a travel-related element to it. And we saw a bit of weakness, or I should say, they were seeing a little bit of weakness in that part of the market late in the first quarter, particularly in Asia first, that kind of migrated to Europe and then to the U.S. as the outbreak continued. I think what's encouraging here is that it seems as though as Asia started to reopen, we -- they started to see a little bit of a reversion there. So if that's the way the rest of the geographies play out, this ought to just be transitory, and we ought to be able to get back to normal, so to speak, at some point. So that's about the extent of what we really know from a commercial side.

Okay. That's helpful. And then when you add Albea into the portfolio here, you increased your footprint a bit in Europe. And I'm just curious, I realize your leverage is a little higher than you normally have it, but you generated a lot of cash. Is this make it easier for you to continue to look to that part of the world as you kind of continue to pursue growing the company? Or is that really not something that you would be considering?

No. Look, I don't think that -- there's not necessarily a strategy at play that says we will not broaden our geographic footprint. I think we'll do that as it makes sense, right? And so this is clearly one where it gave us good overlap of product lines. It fit where we already had resources in that region from a management perspective. They bring with them pretty strong resources, so it's a good opportunity for us to pick the top talent, if you will, and end up with a stronger combined management team and workforce throughout. So yes, I don't think you should be surprised if over time it goes either way, right? If the opportunities happen to be more domestic, we would take advantage of those if there's a appropriate return. And if the opportunities skew toward more global markets, that's okay as well.

Okay. And I think it's just interesting now that RPC isn't out there buying up a lot of Europe. There's not that many publicly traded companies looking, I think, to expand more aggressively. So it'll be interesting to see how that goes over time. I want to segue into plastic packaging, and maybe we can do that by talking about what you're seeing in the resin market. And if you could maybe contrast kind of the way costs are passed through in your dispensing business versus your plastic packaging business, and what you're seeing, that would be helpful.

Yes. I would say the dispensing business is -- it does generally try and pass through resin price change. It's probably not as stringent about it as our plastic bottle business is. And I think the why from that perspective is that the resin component as a cost component to the overall value of the product is a lot less significant because of the sort of the intellectual property and the technology around the dispensing side of the business. But make no mistake, we endeavor to pass through cost changes where it's possible. It's just it's a lot less contractually oriented in the dispensing systems business than it is in the plastics business. On the plastics business, about 65-or-so percent of our business is under a long-term contract or under contract. And those contracts have the direct pass-through. Again, it's on a lag of -- think about it in terms of 60 days or so. So there is some profit and loss depending upon which way resin is moving in our plastic business as we move through the cycle. But generally, we're made pretty whole as we get through cycle.

Okay. And I want to talk about trends in the plastics business. But first, I just wanted to highlight, you made a lot of improvement in that business. Could you walk us through kind of what worked as you look to kind of make improvements in that business? What didn't work? What you learned from it? Because you're already at your target here. And then maybe just talk about if there's anything else you might be doing going forward.

Yes. Look, I think the what didn't work really stems back from how we got into the initial shortcoming that we had when the margins really eroded in that business. And that was we endeavored to undertake a fairly sizable, if not insurmountable, footprint optimization program where we were building new plants, closing some existing plants and moving an inordinate number of lines around the system all kind of simultaneously. And I don't -- I think it's safe to say we didn't have a very robust engineering plan as it turned out. And I think the takeaway was, if we were to undertake something that significant again, we probably would have been more inclined to do a little more capital investment in new equipment as opposed to trying to rebuild and move a bunch of equipment, and we probably would have been better off as a consequence of that. I think what we did learn was that if you treat customers well and you overcommunicate with them as to what's happening and what your plan is, they generally respond well. And essentially, that was the saving grace of the business. As we changed the management team, the overwhelming focus was to, one, get the engineering plan in order and make sure that we are operating efficiently, but to really make the customer experience one that was a top shelf experience for the customer. And I think that that's what's played out because really, the market fundamentals have not really changed all that much. We've gotten our operating house in order and we've taken care of the customer. And as a consequent of that, we've been rewarded with numerous new business wins, and that seems to be gaining momentum as we continue to deploy that strategy. And so yes, I think you got it right. We're sort of right at where we thought the margin profile of the business made some sense and kind of got returns to what were acceptable. I don't think that we sit here today saying, look, we think we can make another step change in moving the margin percent. But I do think that we can continue to add to the platform through incremental volume and drive incremental margin dollars is certainly within the realm of possibility.

Okay. And then 2 questions on growth. One, if you could talk a bit broadly what are the categories that are driving growth for you in plastic containers? And then if you could just touch on the comment you made about winning new business. Is this from existing customers giving you more? Or are you attracting new categories, existing categories, just new customers? Can you just give us some color around that? That would be helpful.

It's a bit of both. So where we're seeing growth is in pet food, in plastic as well as in metal. We're seeing growth on the food side, particularly around salad dressings and marmalades. And we continue to see new volumes on sort of the personal care and disinfectant side, so -- and it's coming both from existing customers as well as new customers. I think early on, it was existing customers that we kind of protected through the downturn through our -- the impact of our downturn. I don't mean the economic downturn, but the impact that we would have had, we protected them by basically taking it on the chin and either shipping out of orbit or running in overtime positions to -- so as not to run them out of bottles. And I think they recognized that and rewarded that with new opportunities. And then obviously, as we've gotten our cost structure in order and we've deployed the new go-to-market strategy and the customer experience, that's been rewarded with new customers as well.

Okay. All right. I wanted to -- well, actually, sustainability and the Plastics Packagings segment. In my opinion, in order for the plastic packaging business to be really part of the circular economy, the recycling rate needs to improve pretty significantly. If you could talk about that statement. And then talk about who ultimately you think is going to be responsible for that and drive change, whether it be on the consumer, on the packager, on the customer, it's buying your packaging, the government? How should we think about what's possibly going to move that recycling rate higher?

Yes. Sure. There's a lot to that question for sure. I don't necessarily disagree with the premise that I think recycling will play a big part in the success of plastics. I think from our perspective, we think that there -- in certain markets, there is a place for plastic packaging, right? I think if you look, we've been reasonably cautious about single-serve plastic exposure. Our plastic business generally has no single-serve exposure. We do have a little bit in the closure side on the isotonic drink side. But generally, our plastic bottle business is multi-serve. And it tends to be for products that are generally used in a, what I'll call a more hostile environment. So things where you would take them into the bathroom or into the shower, where there isn't necessarily a good alternative, if you will. But that doesn't mean that we can't do a better job of getting to recycling rates, whether it's the amount of PCR content that goes into a package. And I think the who there is multiple constituents, right? As you think about PCR, we can't -- as the bottle provider, we can use it, and there's nothing about the technology that would prevent us from manufacturing with it. The problem is that there are at least some regulatory and consumer hurdles, things like taste and odor or skin-tact, skin contact as examples, that somebody else is going to have to weigh in on. And then there's the whole access. How do you capture the recycling stream? Where does it get recycled? How does it get back into? And at what cost does it come back into the manufacturing side? So it's not an easy answer as to say, look, it's this one constituent's responsibility. I think it's much broader than that. And it's got to be everybody doing their part to get there. So a lot of the petrochemical companies are going to have to figure out if and how there's going to have to be government involvement as to what the infrastructure is going to look like, either a government or privatization in terms of how the infrastructure to capture it is and then what happens. So not an easy answer for sure, but there are a host of organizations out there that are looking at it. And certainly, our customers are making a lot of commitments over the mid to longer term. And so I think they're putting a stake in the ground that they are vested in it as well. And so I think there is a place for plastics as we migrate through that or navigate through that.

Okay. I just want to remind people that if they do want to ask a question, they can submit it through the portal, and we have a couple of minutes left. I am going to shift to capital allocation. Just a couple of questions. And I think they're important around now that you've closed the business with Albea, could you just give us a sense of what type of CapEx levels we'll see with the combined business for Silgan or anything as you look into the next couple of years that may be different than the way you've kind of run the business in the past from a capital allocation perspective?

Yes. I won't speak to specifics about the Albea part of that just yet. I'll wait until we get to the second quarter call to provide guidance. But I will say that I think we're getting a business that has been reasonably well capitalized. And it's coming with an adequate layer of working capital that we're getting with the business. So there isn't an incremental investment that's going to have to be made here beyond where we might find some growth opportunities. So I think other than that, it sort of fits within the strategy that we've always deployed that will lever up for the acquisition. And then the intent is to focus on deleveraging in the near term to get us back into what we would historically say is the normalized range of 2.5x to 3.5x, and that's the net debt-to-EBITDA range at year-end. So I think the target would be to get back into that range in the next 18 to 24 months. And I think that's -- given everything we know about that business and our existing business, that should be doable in that time frame.

Okay. And you -- I think that you said that you're roughly at around 4.5x right now coming out of the deal?

Yes. Well, that's probably a bit of a high watermark because of where we are seasonally, and then we'll come down from there. So we'll be probably a little bit over 4x at year-end.

Over 4x by year-end. Okay. All right. Well, it looks like we don't have any questions in the queue. I think we are almost out of time, so I'm going to end it here. Bob, thank you very much for doing this with us again this year. We really appreciate it, and we'll see you at the next session. Thanks.

Great. Thanks, Debbie. Take care, everyone.