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

So energy aside, in past recessions or say, 2008, 2009, which is obviously going back a little bit, I would imagine that food holds up, but maybe you'll see a little bit of decline on the Dispensing side. Is that a good way to think about it? I mean -- well, I guess, across the whole business, Metal -- Custom Containers, Metal Containers and Dispensing in a recession in Europe or global, how does that affect Silgan?

I think it's -- for us, it's more about the power of our entire portfolio. So when you talk about the 3 product segments, again, food cans, in particular, will be very defensive in a recession. And we have many experiences through different economic cycles where the food can does particularly well. I think when you focus in on our Dispensing and Specialty Closures segment, again, it's the breadth of the portfolio of products and markets we serve. So we do think we have some very defensive product lines and markets that we serve that will be very good in a recessionary environment. We also have other organic growth opportunities in that business that do well, I think, certainly in a more cyclical environment, but will be balanced out by the defensive nature of the balance of the portfolio and the business. And roughly the same thing for Custom Containers.

So thinking about a recession, how certain things will outperform the others, what levers would you pull? I mean, could you shift assets around to meet the demand or to kind of recalibrate the demand? Or what do you do, I guess, just in general when things are -- when there's a global slowdown?

Sure. One thing that we're very proud of at Silgan over time in history, we've had a relentless focus on managing the cost structure of our businesses, and that hasn't changed. And I think we did exceptionally well during the pandemic in putting assets and resources towards the markets that needed them. So we've got a blueprint already essentially with a dramatic change in portfolio dynamics of our products. So in many cases, we can reallocate capital and reallocate assets towards those markets that require volume. And in others, we've shown a tremendous ability to drive cost out of the system and take cost out of our cost structure.

Would you consider or are you considering if there is a downturn, you invest through the downturn just so that when things actually do you start to pick up at least in some of your cyclical segments, you can take more share than you would have before? Is that part of the process?

Well, I just think it's a disciplined approach across the board, whether in an up cycle or a downturn of economic circumstance across the world. So we feel like all of our businesses have significant moats around them, and we're consistently investing to increase the competitive advantage that each of those businesses have.

Okay. And then another topic that's always on investors' minds, I'm sure you get asked about a lot, is sustainability. Can you just talk a little bit about how sustainability is affecting you guys? What you're doing for your own footprint, and maybe how you can also -- you're helping your customers as well?

Sure. We've got a great portfolio of products for sustainability. We think we're at advantaged versus most of our competition. Again, you think about Dispensing and Specialty Closures, just the very nature of a dispensing product is a multi-use function for dispensing product for consumer use. So just the inherent nature of that product line says we're venturing deeper away from single-use product lines. We're working with our customers very closely on PCR alternatives to resins that we use today. And these are highly engineered products, and we've got a great portfolio of PCR products coming to market, some certainly already in the markets. And then the food container is an interesting item in Metal Containers. It's the most sustainable food packaging item available. It's got the highest recycling rate of any food or beverage package, including beverage cans. And it's got a recycled content of steel that includes 95% of the steel ever manufactured is still in the circular economy for steel products today. It may not come back as a food can, it may be rebar in a highway somewhere. But the important factor is that you're not starting with virgin raw materials every single time. And then finally, with our Custom Containers segment, again, primarily multi-use products. So very limited use of single-use plastics, highly engineered products for multi-use consumer goods.

Are you -- I mean, are you looking to increase the recycled content within the Customer Containers, or?

I would say within all 3 segments.

All 3 segments?

Yes. So we've got a vast array in Custom Containers, a vast array of PCR alternatives already with our customers.

Okay. Okay. And just -- so I mean, feel free to ask questions, guys. I mean we're just kind of rolling through things here. Again, if there's questions from the audience, please let me know. Okay. So you talked about your products and how they're helping customers reduce their footprint. Are there steps you're taking to reduce your own carbon footprint?

Always. And that's one item that is not new for Silgan is our effort and focus on sustainability. We used to call that operational efficiency once upon a time, and it's morphed into a more sustainable conversation. But we've been driving costs out. We've been driving weight out of our products for many, many, many years. And really, what's happened now is the customer engagement for more highly engineered solutions to get at their initiatives regarding sustainability. And we're working arm in arm with them to develop those products and commercialize those products.

Okay. You guys are -- have a large presence in North America, a sizable presence in Europe, but Asia seems to be less of a focus. I was wondering if that's changing or if it will change, or is there something about Asia that makes it less enticing?

Yes. It's an interesting question. We do have some exposure to Asia. Limited, largely in our Dispensing and Specialty Closures business. I think by definition, we've been cautious about the Asian markets, largely because if you look at most American companies that have invested there, the returns have not been great, getting cash back has been difficult, and I think we've had better investment opportunities as we see it. So it's as much about what the opportunities have been elsewhere as it has been a cautionary tale around the Asian markets. I think we'll be opportunistic, particularly around continued growth in Dispensing and Specialty Closures. I think other markets have been a bit more challenged, the food can market being one. On one side, you've got a large population that's going to need to continue to feed itself, so the food can would be a good choice for that. The flip side of that is it's traditionally been a much more fresh food-oriented market. And so until that processed food market develops or further develops, it's kind of the cart before the horse to make an investment there.

Okay. That makes sense. And then one thing that -- I mean, you've talked it, everyone has talked about it, is these costs. Obviously, it's on everyone's mind, logistical costs, raw material costs, labor issues. Just -- can you give us your near-term and medium-term expectations for the various cost buckets?

Sure. I think, again, it's important to look at where we are today, right? So we've done a really good job of managing our cost structure throughout what was a challenging time during the pandemic, and then as we've kind of exited the pandemic here in recent times in '22. So look, we're in an inflationary environment. The important thing about Silgan is our contracts, particularly in the Metal Container business, allow for the pass-through of our raw material costs. We have lag pass-throughs of labor and other. We also have raw material cost pass-through in Dispensing and Specialty Closures and Custom Containers as well. So those inflationary items, we've proven thus far year-to-date and in our history that we're able to recapture those back in the market.

Okay. And we have a few minutes left here, I guess we should focus in a little bit on your cash deployment strategy. How would you think about it, particularly, how would you think about it given your current valuation in the current inflationary environment? I guess, what are the focuses?

Sure. So we'll generate roughly $400 million of free cash flow on an ongoing basis. The forecast this year is at approximately $350 million, and that's largely just the impact of the inflation in raw materials hurting working capital. Our leverage will end up at somewhere right around 3x, maybe sub-3x to a small degree. We think that gives us great opportunity to continue to look at M&A opportunities. And just for reference, we've leveraged the balance sheet to kind of 4.25x, 4.3x for specific deals and deployed free cash flow back to delevering, which we've done successfully on a number of occasions within kind of 18 to 24 months. That's still our preference for capital deployment. If there is a situation or a market condition that sort of precludes M&A activity for some period of time and we get to the lower end of that range, that's clearly where we would start considering a capital deployment back to shareholders. We've done that on a number of occasions. I think we've bought back something close to $900 million worth of stock over the last 10 years. And it's not foreign to us, but our preferred use of capital is to continue to grow the company and build out the portfolio.

In terms of your leverage, you said 4.3x with a good deal and now, it's a little south -- it's going to be a little south of 3x. Is that the range we should think of between, I guess, 2.5x -- let's call 2.5x to 4.5x, depending where you are in your investment cycle, so to speak?

I think we would more specifically say 2.5x to 3.5x is the range, and I'm talking very directly toward the year-end metric, so we sort of ignore the seasonality of the business. So we're a net consumer of cash largely because of the food can seasonality, but that comes with a liquid asset. So for -- at least internally, we ignore that leverage during the season, and we would endeavor to keep the current business at that level. We would, in fact, lever up in the short-term nature for the right acquisitions.

Okay. And then you talked about the right acquisitions, you've done a few in the last 2 or 3 years. Can you just say what was attractive about them and what they brought to Silgan in the time frame? And if it's going, I guess, as you would have hoped?

Sure. So look, we've spent approximately $3 billion in our Dispensing and Specialty Closures segment over the last 5 years, and that was with intention. It's a growing segment of rigid packaging. It's a segment that we were offering partial solutions to our customers with a flat cap business that was more focused on food and beverage. So we wanted to get into dispensing in a larger way. And what we immediately learned was that as you take your first step into the dispensing market, it opens up other avenues. And I think each of the acquisitions subsequent to the original buyout of the home and beauty business from WestRock would allow us to say that we have ventured down a different path through the Dispensing and Specialty Closures segment. Those acquisitions are doing exceptionally well all the way back to the WestRock acquisition in 2017. So I think it's, for us, an area that we're going to continue to allocate capital towards. It's providing growth at a greater rate than the balance of our portfolio, and we think it's a great way for us to continue to offer more products to our consumers and customers.

Yes. I think if you look at the financial performance of those businesses from an operational standpoint, they're outpacing the M&A model. I think the one headwind, maybe two headwinds that we have, which it's still delivering on the bottom line level more than what we expected. But the headwind, obviously, on FX to some degree, impacting those acquisitions, and interest rates are obviously higher than what we were modeling. But still, the performance of the business is outperforming the model.

All right. Great. Thank you, guys. We're just about at the end of the time here. Thanks, everyone, for listening in.