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

Go ahead and get started. Good morning, everybody. My name is Ghansham Panjabi, the packaging and coatings equity research analyst at Baird. Welcome again to our conference in Chicago. We have a full C-suite of companies between yesterday and Thursday. And the next one will be Silgan Holdings, which has had a remarkable couple of years under the leadership team. From Silgan, we have Adam Greenlee. Adam's been CEO since 2021. Joined the company in 2005, previously was Chief Operating Officer; Kim Ulmer, SVP of Finance and Treasurer since January, joined the company in 2004. And then we have Alex Hutter from Investor Relations and Corporate Development, and he was a sell-side analyst where -- at Silgan. So, welcome Alex and Adam and Kim. So with that, Adam is going to start off with a brief introduction and the questions, you can either just raise your hand, getting the room so small or just e-mail the questions to us.

Great. Thank you, Ghansham. And welcome, everyone. Excited to talk about Silgan and give anyone an introduction who maybe doesn't know much about the company and also an overview for those that may not understand exactly how much has actually changed at Silgan over the last several years as well. So we're going to start just with a standard safe harbor. Any details you would like to understand about the safe harbor statement. Just please visit our website. We do have some non-GAAP financials that we'll be going through as well. And with that as an intro to the company, we're very proud to be a $5.7 billion sustainable rigid packaging company. We primarily serve the food and beverage market. So about 75% of our business is in kind of consumer staples in food, pet food and beverage. We've got a nice position in home care, lawn care and personal care businesses and a growing fragrance and beauty business as well. We go to market through 3 of our operating segments. The largest by profit is our Dispensing and Specialty Closure segment. This is what has changed at Silgan. Since 2016, we've deployed about $3 billion of capital really building out this franchise position, which is now our largest again, segment by profit. The metal container segment is our second largest. That's the traditional Silgan metal food can business and custom containers rounds out the product portfolio. We really enjoy participating in a mature market. So about 93% of our revenue comes from the U.S. and Europe. So we enjoy mature markets. And while we're represented globally, we really focus on the core markets in Europe and the U.S. From the very beginning of the company, 35 years now as a public company -- or 25 years as a public company, 35 since our founding a core strategy that we've had is to build and enhance our franchise positions and what we believe is building businesses with a competitive advantage and where we have competitive advantage, we want to invest and grow that competitive advantage and share that with our customers so they can then in turn win in the markets that they serve. Our businesses also are typically very free cash flow generative. So good franchise positions, generate a lot of cash and then the business model is to deploy that cash in a manner to create the most shareholder value. And what we're very proud of at Silgan, is we tend to look back and say past is prologue. Our 10-year CAGR of EPS growth is a little over 10%. And we think that's top tier for not only the packaging industry, but broadly as we think about the overall space. Back to free cash flow conversion. Again, I mean, the one thing I would tell you on this chart that I think is most striking is the 83% adjusted EBITDA growth versus 2016. Again, invested $3 billion into that Dispensing and Specialty closures segment that's driving a lot of this growth, but we're seeing good organic profit growth in each of our segments back versus 2016. And from a conversion standpoint, we've taken about 47% on average of the adjusted EBITDA converted that to free cash flow over that same period of time. And then we think our balance sheet is in great shape. We think it's one of the competitive advantages that we have, particularly in a rising rate environment. So our typical financial discipline is that our target range for leverage is 2.5 to 3.5x. As you'll see on this chart, we have gone above that for the right acquisition. Whether it be a strategic acquisition or just an extension of our products into new categories where we have gone above our target leverage, we've quickly been able to take that free cash flow generation, deploy that back to paying down debt and getting right back into our target range. So here at the end of last year, we finished at 3.4x leverage. That's after spending $800 million of capital deployment on new acquisitions in 2021 and think that we're going to be slightly below 3x as we end the year of 2022. So kind of right back into the middle of our range. Balance sheet is in great shape. Again, we think we've got access to low-cost capital to deploy in whichever manner that we see fit. And really, as we deploy capital, it's in those 4 areas of: number one, through imminent strategic M&A; two invest in our own businesses through capital deployment; three, we can pay down debt; and four which typically is a focus of what we do is our share repurchases in the open market or through a tender that we've done in the past. So with that, that's the brief overview of the company. I think you should -- what I'd like you to walk away with is what you've known about Silgan historically still is very much in place. We've got our defensive end markets and now a path of growth, not only in Dispensing and Specialty Closures, but also in the metal food can business as well, given our portfolio evolution to a higher percentage of pet food cans. We've got a great opportunity to continue to deploy capital. We've got teams in place that we've got a proven track record of integrating acquisitions and delivering upon the synergy estimates that we put forward. And finally, we do think that from a sustainability standpoint, metal packaging, less than 2% of our revenues come from single-serve plastics so mostly multi-use products and then our Dispensing and Specialty Closures segment as well. I think they're sustainably advantaged versus other products in the marketplace. So with that, Ghansham, I think I'll pass it back to you.

Nicely done. Thank you, Adam. Audience again [email protected], or just simply raise your hand, don't be shy, okay.

Adam, maybe we could start off with let's unpack a lot of this things you've highlighted. So earnings base, roughly $2.07 in 2018, $4-ish for 2023. A lot of investors look at this and say, okay, well, that coincided with the pandemic, you were advantaged with the pandemic. How would you answer that?

Well, sure. I think for us, the pandemic was helpful to earnings. But I think a lot of the strategic actions that we had taken prior to the pandemic were already -- those wheels were in motion prior to the pandemic. So the earnings growth, the investments in Dispensing and Specialty Closures that we've made drive a lot of that growth. The pandemic, the biggest beneficiary of that would be the food can. And we saw it in other areas of our business as well. But I think it's really important to note that during the pandemic, we had already had plans in place pre-pandemic with our food can customers to outreach to new consumers. The pandemic drove that outreach. And consumers were stuck at home essentially and having new experiences with the food can. So it's important for us to state again that our third quarter volumes, which were terrific for us, are up 13% versus pre-pandemic levels, and we're back to kind of a normalized rate now in what we think from a consumption pattern standpoint. We've reached new consumers. We think that's all in the baseline of our business now going forward. So it was an opportunity to reach new consumers for the products.

Okay. And if we focus on metal food cans in terms of the various categories because I'm not sure a lot of people recognize that Pet food is so large for you. Right. Let me just take us through the big categories...

Sure. And I think that's part of the evolution as well as we sat here, let's call it, in 2016, pet food was a much smaller percentage of our overall unit volume. And in 2022, it will be half of our unit volume. And again, for clarity, that's a market that has been growing in wet pet food kind of in that mid- to upper single-digit kind of range for the last decade. So we've invested heavily to support our customers. All of those agreements are long-term contractual arrangements with our customers in a very typical Silgan standard contract arrangement. But 50% of our volume growing at kind of a mid- to upper single-digit rate. It does change the dynamic and the conversation about food cans. Our next biggest market is going to be vegetable and Soup our 2 biggest markets, roughly the same size for us. Through the pandemic, vegetables an interesting story to the pandemic because when the pandemic occurred, our customers had already contracted their acreage and done their pack plans for 2020. So really, the pandemic influence on food cans was all about 2021 for the fruit and vegetable pack. So we're sort of cycling over that a bit this year. That's why I think an important reference for the overall business is how we were doing pre-pandemic. Soup, back to working with our customers in 2019, we were seeing good progress in Soup and actually unit volume growth pre-pandemic that I think just accelerated with the outreach to new customers. And finally, we're kind of protein is, call it, 10% of the overall business, ready-to-eat meat, fish, potted meats, et cetera. So -- and a small all other category.

On the metal food can side, just given the evolution, here we are looking at the consumer and it's all sorts of inflation stresses and consumers have started to trade down pretty much in real time. We're seeing so many different announcements at this point. How does that impact you at all versus maybe your historical resilience specific to metal food. I know pet's bigger, but premium product that those can sell into? Or is it not?

So for the pet food market, it's really important to understand where those products go. So this is really in small dog and cat are the 2 primary categories for wet pet food. And we have a long track record, 10 to 15 years of solid growth in the pet food market. And so we've seen economic -- different economic cycles that we've kind of gone through -- and what we've seen and what our customers continue to see is that in that category, people continue to treat small dogs and cats much more like family members. It's predominantly wet pet food that they consume, and they are very reticent to change that diet pattern for those animals. We do see historically on the larger dog side, and now you're into bigger cans. That moves to dry and kibble in difficult economic times, but it's a nonmaterial volume component of the Pet Food segment for us. There are stock-outs today on the shelves. So even in today's environment, our customers are not able to fill enough product that they could actually be selling into the marketplace gives us great confidence as we go to '23 because there is a -- it's the one area of food cans that the restocking has not happened yet and needs to happen.

I want to come back to that, but here we are talking about transformation, I won't spend too much in metal food. In terms of the portfolio, why did these 3 operating segments make sense together?

Sure. We believe in a broad portfolio of products. I mean it's a consistent customer base, consistent market served, different solutions for our large multinational customers. Again, a big part of what we do is long-term customer agreements. And we work really hard in that customer intimacy side of our consumer -- our commercial relationships to find other ways to provide more products for our -- and services for our customers. And so part of our expansion over time in those core markets is that we wanted to provide more products to our customers in those core markets.

And the economic sensitivity of the Closures business?

Yes. It's within the Dispensing and Specialty coated, it's a very diverse market. So a large portion of that business is in food and -- consumer staples and food and in beverage. So we do like that part of it. There's certainly a middle area that's a little more discretionary, but a small portion of what we do. And then when we get to fragrance and beauty, I think this is the most important thing to talk about. It's providing significant growth for the company. We're winning in those markets. We continue to offer new solutions to our customers and have a very engaging conversation about the future. But we're seeing less price sensitivity at the very high end of those markets. And that's where we excel. We're in that ultra premium prestige luxury portion of the portfolio that, historically, again, we've got a decade worth of market intelligence that says, it's less sensitive to the economic times than some of the mid-market categories where we are underrepresented.

Okay. On the Fragrance side, I mean, it seems like having covering companies like IFF that provides ingredients and so on. It seems like this is the year where you have channel restock for fragrance just because we were traveling a little bit more than they were. And so that's helped mask some of the, obviously, economic deterioration in Europe and China and so on. So do you see that as a risk for next year for that category?

I think when you focus on where we participate in those segments in that kind of luxury premium side, it's less of an impact. So we never really saw the slowdown. We do think the limited product launches during the pandemic are an interesting thing to think about as we go forward in '23 because they're ramping through right now to the holidays, which is a big component for the Fragrance and Beauty segment. And then we've got all the new product launches for next year. So we think that we have really good line of sight, call it, through the first half of next year at this point with our customers and what their operating plans are. The other thing I would say is during the pandemic, we worked very closely with our customers and actually help them develop an e-commerce strategy, where, to your point, most of our products were sold at duty-free for travel, right? We're sold at a high-end premium retail location. And we created a sampler platform for our largest fragrance houses that they were able to reach their customers in a new way. And essentially, you think about buying one bottle of fragrance. We've now sent our ultimate consumer 7 different samples of the fragrance houses product line. And what they found is not only were they selling the one bottle that the consumer wanted, they're selling an additional bottle as well. So we're very proud of that customer intimacy that we had with our customers to help reach consumers in a new way, and it's driving growth for their business.

And if you step back in Dispensing Closures, how did you approach the evolution from a capital allocation standpoint because you made some sizable acquisitions. And this is a category that's relatively niche, right? So there's not a lot of familiarity from an investment community standpoint as to how large it really is. So maybe take us through your platforms, where do you see the opportunity for future M&A? And also going back to what I asked, how did you approach the directionality of the acquisitions that you did?

Sure. I think we'll go all the way back to 2017 when we really first set into the Dispensing business. And I think we like the free cash flow characteristics of Silgan back in 2016 and prior times and wanted to focus on a new investment that was with kind of our core customers and our core markets in a different product line, and that's when dispensing the opportunity came to us. It was a business that we had looked at many, many times. This is the WestRock divestiture that we acquired in 2017, and it was the right opportunity at the right time. And again, I think we're very strategic and thoughtful about our acquisitions. And it provided an organic growth avenue for that free cash flow deployment that we talked about earlier. What's really interesting then is when we did the Albéa acquisition in 2019, we would not have been able to do that business or that acquisition had we not already acquired the WestRock business. So we like to say each opportunity -- or each acquisition brings new opportunities along the wet edges of the business. So fragrance and beauty was a far cry actually from the standard Silgan business. But with our Dispensing Systems business, it was a perfectly logical fit. And we're thrilled with the acquisition returns. We're far exceeding our models that we had. It's a higher growth, higher-margin business for us than we typically had at Silgan. And therefore, as we think about capital allocation going forward, it's getting a disproportionate amount of capital because the returns are outpacing the balance of our businesses. It doesn't mean we're not spending in the other business. It doesn't mean we're not continuing to look at opportunities. It's just they're outweighed by the performance and the opportunities in Dispensing and Specialty.

We switched to plastic containers, custom containers, this used to be a work in progress for many years. Maybe take us through what drove that operational change out of the [indiscernible].

Sure. It's been about 6 years now that we've kind of been on this path, and I think we're in a really good spot. We had come out and talked about an EBITDA margin profile for that particular segment at 15% EBITDA margins. We were well below that at the time that we started and really kind of took a 3-step approach to it. And again, at Silgan, we're good operators. It's what we do. It's in our DNA. And the first step was to drive cost out of the business, and we did that closing facilities, investing in a couple of facilities to grow into. The second thing we were going to do was exit nonstrategic and low-margin business and really work to increase the opportunity to get to 15% organically within the business. And then the third step was take that new low-cost footprint and fill it. And that's the hardest part of this whole model. But that's where we've seen the most impact in the last 5 years as we've seen significant organic profit growth in that business. So I think as we talk about custom containers going forward, it's all about finding new business. We're winning with our customer intimacy model. I think we are now very well known in the industry, helping our customers launch their products into the market at a time when a lot of people have struggled, whether it's labor, whether it's equipment delays, we deliver on our promises. And I think we are standing very tall in the custom container space and are a trusted resource as our customers look to launch new products. That's where we're winning. And we're winning at EBITDA margins either at 15% or above. So I think it's -- as you look forward for the segment, it's much more about winning more business at the 15% margin level.

Okay. In terms of sensitivity from an elasticity standpoint for the end markets that they sell into. How would you characterize that?

Yes, it's mixed. I think we've got a good balance to the portfolio. Again, the largest -- one of the largest segments that we serve is food. So I think as everybody's discretionary spending is getting a little bit tighter, folks are getting more focused on the center of the store where our products reside. And so we're seeing good traction there. I think from our perspective, you've got the lawn and garden market, which we're a significant supplier to going through a reasonably sized destocking here in late 2022 that's probably going to carry us through the first half of next year. So that's the one item where I think consumers have elected not to spend as we come out of '22 and head into '23 and our customers and the retailers both have inventory that they're going to be working off of. But I think it's very balanced from an exposure standpoint.

Any questions in the audience? I'm not sure the iPod is actually working [indiscernible].

Any other side Lawn and Garden [indiscernible].

Well, in '23, I think we've normalized the rest of the inventory positions and the destocking happened by the end of the year. So we're still going through it in some of our health and sanitary hygiene products right now in Q4, but we think we've got pretty good visibility that should be done by the end of the year. Lawn and Garden is the only item for '23.

Okay. Let's continue. In terms of the supply chain, you had all sorts of issues everybody did, right, over the last few quarters. Any lingering issues that you see at this point?

Well, I think, again, Silgan as our operating DNA, we're pretty good at what we do. I think we had managed through that very successfully. If you think about the significant volume growth that we were able to support in the marketplace, we essentially got everything that we needed to support our customers' growth, and we essentially got everything that we also wanted to support maintaining inventory levels as well. I think the real supply chain challenge for us was at our customers' level. So I think we did a good job within our 4 walls. We're now taking our learnings and engaging with our customers on a much more dynamic real-time basis to help them kind of solve some of the problems that they're continuing to have. And I'll talk specifically about pet food. Our customers have made significant investments in filling capacity that they've not been able to commercialize at this point. So think about those stock outs. The capacity is there. We've just got to be able to fill products in our customers' plants, the cans are ready and will support that growth, and it should happen in '23. That's part of our confidence in the food can unit volume growth next year is we'll see a restocking at some point of pet food, but they've got to continue to meet the demand of the market, which is outpacing their supply at this point.

Okay. Maybe if we switch to competitive dynamics and let's just start with metal food. There's been some asset changes in terms of ownership. Does that change anything in the industry?

It really hasn't. We've got -- we keep a close eye on that. But I would just say, through a pandemic at Silgan, getting consumers nutritional products was the most important thing. So we did, we made cans. We sold cans for really anybody who wanted to put something in a can certainly in North America. So we sold cans into the market in chains that we typically didn't sell to previously, whether it be other can makers, other customers that don't typically buy from Silgan. So I think it was all about getting cans and filling them for customers for the last 2 years. And we'll see what goes forward. I don't think the market is out of balance from a capacity standpoint. We had previously announced some rationalization plans taking out some of our higher-cost assets and replacing those with lower cost footprint manufacturing equipment on our side. We think it's really relatively in balance from a supply and demand standpoint.

In terms of the European exposure, you have in metal food, I know it's not large, but thoughts on the scale that you have in that region?

Yes. It's interesting. When we acquired that business back in 2011, 2012, our idea was -- the thesis was kind of a Central and Eastern European footprint as our large multinational customers may be moving from Western Europe to fill product in Eastern or Central Europe. As it turns out, that really didn't materialize the way that we envisioned it, and most of the filling is stated in the Western European region. So the growth didn't materialize as we had originally envisioned. We did change our thought process and strategy in that business to much more align with our U.S.-based multinational customers. And our single largest growing market in Europe to no one's surprise, is now pet food. And we've got our large multinational customers making significant investments in Europe to increase their capacity, and we've got the cans under contract ready for them when they're rolling out that capacity. So it's a smaller footprint for us, but it's kind of the Silgan model, that it's how do we provide additional services and products to our customers really around the world to help them grow their brands.

In the last few minutes, Adam, in terms of capital allocation and the current interest rate environment that we have, which we may have for a while. How does it influence your thoughts in terms of terminal balance sheet leverage?

Yes. Well, a couple of things. One, I think it's going to provide a competitive advantage to Silgan through the acquisition lens, right?

Versus Private equity?

Yes, versus private equity. I think those leverage models gets a little more challenging when you think about putting that much leverage at these kind of rates on a product portfolio. And we are competing in large part versus private equity. We've got access to low-cost capital, certainly through our revolver and our accordion feature of our term loan. So we think we're advantaged. I think in the longer term, I think our business certainly could take on more leverage. Now is not the right time to do that, I don't think. So as we look forward in the absence of a good strategic acquisition, I think debt pay down, reducing that leverage even further and a combination of share buybacks or the right deployment of capital in the absence of an acquisition.

As we look out in 2023, a lot of companies just went through earnings season, estimates have been lowered across the board. What can you share with us in terms of the variances specific to silicon for next year?

Sure. Well, maybe I want to start with this year first, and just say, we just had our all-time record third quarter earnings -- record quarterly earnings of any quarter in the company's history, beating the prior record by 25%. So I think we're very proud of the performance. We feel great about where our businesses sit, the moats that surround each of our franchises, and we continue to deliver at the end of the day. So our 10-year CAGR of greater than 10% EPS growth for the last decade, very proud of that. As we roll forward, we think most of our businesses, as we talked about, have already cycled through the restocking or destocking segments. And we think we've got organic growth really in each of the operating segments. And that's going to drive EBITDA growth. That's going to drive free cash flow. The Custom Container segment is the one that we talked about on the last call that there's a little lumpiness and exiting one piece of business that we chose not to renew a contract with new business awards that are coming in the second half of '23. So our run rate exit at the end of '23 in that segment will also show year-over-year growth. So we've got good line of sight, a really good degree of confidence and an execution level in all of our segments that I think is standing out well above the crowd today.

Okay. Maybe just to close out. Your stock has been a relative outperformer this year. And clearly, this is sort of your showtime, right? Defensive end market profile, you have the cash flow conversion that you have, as this audience looks at different opportunities as they think about next year and the complexity they weave in the world. What do you think -- with your conversations with others, what do you think is most in this sector underappreciated if you will, on Silgan?

Well, I think that the single largest segment by profit is our Dispensing and Specialty Closures Group, which continues to provide organic growth opportunities, continues to provide new M&A opportunities as well for capital deployment. So it's all the great things about who Silgan has historically been those defensive markets that always perform regardless of economic cycle, that's evolved as well. That's now a growing business for us because of the 50% weight of pet food and good volumes in Soup, resilient, kind of core vegetables and corn peas and tomatoes. And really, it's just the free cash flow generation that we have, we're going to be deploying that capital. And it's our job to put that capital to work in a way that benefits the shareholder and the most advantageous way. And that's what we are going to continue to do, and I think we've done that with the $3 billion that we've allocated to our Dispensing and Specialty Closures group over the last 5 years.

Okay. In the interest of time, we'll just leave it there. The breakout session will be on the -- in the Oak room. The next presenter will be Snap-on Incorporated. Adam, nice job.

Thanks, Ghansham.

And thanks again for joining us, to Silgan.

Thanks, everyone.