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

Well, welcome back, everybody. We're very happy to have Silgan Holdings as our next fireside chat. Here from the company are Adam Greenlee and Bob Lewis, we both know for a number of years. Bob is Senior Vice President and Chief Financial Officer, having come to the company, I think, in 2004, if my memory serves. And then Adam Greenlee is President and Chief Executive Officer, Adam. Welcome Adam has been with the company. I think since the White Cap acquisition in 2005.

2005.

And has been in a number of ascending senior leadership role. So again, welcome, Adam. Welcome, Bob. Happy to have you here. I guess, a lot of discussion off the last earnings call, a lot of fruitful dialogue all about stability in cans, the incremental growth in dispensing lots that we're going to cover today.

So I guess, first off, relative to your guidance, when you think about it, what we should take away, what are the biggest supports for the outlook this year, the $395 million to $415 million for this year and the, call it, $0.80 for the first quarter that you're guiding to? Do you think, as we sit here, we should consider perhaps that there are more headwinds or there's more support for your guidance range given what we know March 1, 2023. Whoever wants to take that to start?

Sure, I'll start, and Bob can help me out. So as we give our guidance for the full year, George, as always, we try to be balanced between risk and opportunities. So I think the forward guidance that we gave for '23 on a full year basis is reflective of that. I think the primary support as we kind of look around the business franchises that we have, our largest segment by profit, dispensing and specialty closures, continues to see very strong growth rates, particularly in the dispensing products. So as we said on our last earnings call, we're expecting low double-digit growth rates in some of those dispensing products. Our legacy business and food and beverage continues to show resiliency and has proven to be -- those markets have proven to be very consistent over the years. As we move to Metal Containers, I think one of the largest changes is our participation in the wet pet food market. It's not a change for us as we've been supplying really on a requirement basis that market for the last 20, 25 years. So we've got a long track record of really consistent growth rates in the kind of mid-single digits. What has changed is that now represents approximately 50% of our total unit volume for the segment. So 50% of our unit volume for the segment now is growing in kind of the mid-single-digit range. That is driving the overall growth for the entire segment. Seeing good growth in soup. Vegetables will be stable again next year. So we think that the metal food container business stands tall right now and the specific growth in wet pet food is what's driving the overall growth in the category. And then Custom Containers, we're cycling over the decision to not renew one contract that's creating some volume instability in that business. The new business wins that we've already achieved and have been awarded will commercialize late in the year, and we think we'll be exiting the year kind of in that low single-digit growth rate as we go forward.

Understood. And can you talk about the level of destocking you saw in '22 in some of your markets like cans and lawn and garden? And is there much left to do in '23? I'm not asking for a trajectory, but are we at least at bottom now on those trends, or on that trend for those markets?

Sure. And I think maybe we'll start with the end of the question. We do think we bottomed in '22, at the end of '22 in those markets. For clarity, this does not apply to the Metal Container segment. So really, this is our Dispensing and Specialty Closures and Custom Container segment. Midyear, we did see the inventory correction that started to take place in the marketplace. We worked with our customers. I think we've got great visibility with our customer intimacy that we have with our customers. We worked with them to get greater visibility through the retail channels as well. And so we have seen recovery in some areas already at the end of the year, already again in January, we had a solid January as we mentioned on the earnings call. We've seen good recovery of certain markets in Europe, which, for our business, is a precursor to the recovery in the U.S. So we do feel good that as we work through the balance of the first quarter, that the destocking will essentially be complete.

Adam, just on the -- and it's probably something obvious forgetting about why would Europe be a precursor here relative to what you've seen in the U.S.?

It's very simple. So we don't think -- even with this destocking, we don't think consumer behavior has changed, the underlying behavior of consumers in their home. So I don't know that you're not cleaning a countertop today versus cleaning it during the pandemic. You just might have an extra bottle of hard surface cleaner in your pantry. Pantries in Europe are much smaller. It's just that simple. So historically, as we've seen over time, they don't have the pantry load, nor do they have the deplete that the U.S. customers are able to execute upon.

Makes sense. Makes sense. So one question we're trying to ask of all of our companies, and you've heard me talk at this in the past in varying ways, right? Investors here, investors listening on the web, they have lots of choices, right? Packaging is currently 0.3% of the S&P 500. So yes, every company thinks it's great. It has wonderful people, wonderful businesses. Look, most -- every company we're talking today and tomorrow, will probably forecast some growth. But at the end of the day, why should everyone here and everyone listening say, you know what, I need to own more Silgan. What's the 1 or 2 things that make you differentiated and they should rush to a PM and say buy Silgan now or not.

Sure, a couple of things. They should. We'll be clear about that. But as we go forward and we project growth, I think one of the things that we're most proud of is, we can also look backwards and say that we've delivered it. So we do exactly what we say we're going to do. So our 10 years -- or I'm sorry, our sixth consecutive year of double-digit EPS growth this year in 2022. We're very proud of that. So we've got a very unique business model...

As you should be.

Thank you. And the unique business model does provide for very defensible positions in the markets that we serve. We've got blue chip customers. We've got a wonderful cash-generative business. We've also got vehicles of growth that we can deploy that capital. And then finally, we've been active in the M&A world, doing 35 acquisitions, in our 40-year history or -- and we've shown an ability to integrate and execute on those acquisitions and make them accretive for our shareholders.

Thanks, Adam. Any questions from the audience. Again, we'll try to make these interactive like all the others. And Linda is at-the-ready with a microphone in case anybody wants. So we'll keep forging ahead, Linda, we'll get you going at some point. So you have 113 factories in total, roughly 40% metal, 40% Dispensing balance, obviously, in custom. What opportunities do you have to further integrate [indiscernible] across the segments at attractive -- still going to ask cash-on-cash returns? Or have you pretty much tapped that out and that can't be a driver of EBIT and EBITDA growth for the company over time? However you want it?

Yes, I'll start and let Bob finish. I think it's just in our DNA that we've got a relentless focus on driving cost out of our system. And I think we've done a terrific job over the course of time in the history of the company. Today, for our Metal Containers business, for every 2 plants that we operate, we've closed 1 over time. So it's all about rightsizing our capacity and our footprint to support the needs of the market and the unique needs of our customers.

Yes. Look, I think that, that is past is prologue. It is what we do. Pre-pandemic, we talked about the 6 facilities that were at least being contemplated from a restructuring standpoint around the food can business. Obviously, with the incremental volume that we saw through COVID, we chose not to do that. We chose to be in a position where we could support the market. As we exit the COVID period and get to more normalized volume levels, albeit at growth levels on a relative basis, we do think that there are some opportunities there for us to take cost out of the system. Likewise, in the rest of the portfolio, we make a lot of those same decisions. And as we continue to be acquisitive, those opportunities will expand as well.

Understood. And on the subject of metal, and for that matter, let alone Dispensing and Custom, we frequently talk about, hey, when is the next contract up for renewal, where do you stand, et cetera, et cetera. And obviously, there's only so much that you can get into in that regard. But should we be cognizant of when you have any large renewals coming up? Or said differently, do you have any larger renewals coming up in the next year or 2? Is that largely kind of in the rearview?

Not in the next year or 2. I think, as a reminder, we did renew our largest steel can customer contract last year, and that extension was in for a total of 10 years, which is very consistent with our typical metal can contracts.

So they really kind of like you for 10 years.

Well, it's our third 10-year contract. So yes.

I think that's the important point, right, is that we've never lost a major contract customer. And we're in that unique position where at least in the food can business, where most of the contractual volume is, we're in close proximity, in some cases, passing cans through the wall. We've got a long experience with their filling operations in many cases, help them fine-tune those lines. So we're deeply embedded in their business. So that makes it difficult to be displaced. I don't say that lightly. It doesn't mean we're a guarantee from a renewal standpoint. But I think we understand what makes our customers tick and vice versa. So it's a good relationship all the way around.

So to be clear, again, you said for the next 2 years, you've got nothing big?

Next couple of years. So we have a normal churn but nothing significant in the 1 or 2...

Yes. Keep in mind, there's 90-plus percent of that business is under long-term contract, right? So theoretically, there's always some level of turnover on contracts, but there's no big step change hurdle that we've got coming at us.

Thank you, Bob. Thanks, Adam. Any questions from the audience? We'll keep forging ahead. So in Dispensing, what do you think your biggest challenge is versus your peer set? And/or what do you hear from your customers that they say, "Gee, we really wish Silgan was more blank in dispensing," what would it be? And similarly, what do you think is your greatest comparative strength in terms of technology or end markets or approach to management?

Sure. So maybe the ask from the market is our customers wish we would do more. We've grown into the Dispensing marketplace since 2017 with the acquisition of the dispensing business from WestRock, again with the Albea acquisition in 2019. Both acquisitions brought unique manufacturing and product capabilities to Silgan. We've done a really good job silganizing those businesses and putting our Silgan business model in place. And that has been very well received by the marketplace. So I think we find more opportunities that our customers would like us to expand our offering and support them in other areas. And that's a wonderful challenge to be working on every day.

When was Calmar again? 2017?

2017. Yes, 2017.

And so when you silganize a business, what is it that you're doing differently that the prior owner wasn't doing or couldn't do if they -- even if they wanted to?

Sure. Well, there's 2 things. One, I'll go all the way back to the founding of Silgan with Phil and Greg in 1987. The mission statement is very simple. It's compete and win, which we're not embarrassed that we like to compete and win and be the best at what you do. So with that being said, customer intimacy is a high priority for our business and something I think we're best-in-class at doing across our businesses. And then you think about our Dispensing and Specialty Closures segment, it's our highest margin, fastest growing business. It is a priority for us. And if you go back to where we bought the Calmar business in 2017, it was an $800 million revenue business, a resin-based revenue business, and a $10 billion paper business. It just didn't really fit, and I don't know that it got the capital allocation that, frankly, it gets at Silgan because it is a priority for us.

Makes sense. So when you said you're trying to target high-value in Dispensing, what does it actually mean? I mean, we kind of get it. What does that mean in practical terms? And why are you targeting double-digit growth in '23? Why is that reasonable as an objective here from what you know?

Sure. For the segment, when you get into the Dispensing products that we manufacture, we are targeting double-digit growth. And really, the entire Dispensing segment is value-added, high value for Silgan coming from our legacy flat cap business. But specifically, we'll talk about products like fragrance and beauty applications where, in fragrance, in particular, we're at the very high end of the marketplace, luxury, premium, and we've seen time and time again that is a very resilient customer who is a repeat buyer really regardless of the economic circumstance. And that has played out time and again. We've now enabled our customers to reach consumers in a new way with our sampler portfolio of products. And it's just -- it's a very simple math where they used to sell 1 bottle of high-end fragrance, they're now selling 7 samplers and 1 bottle of high-end fragrance. That experience from the sampler portfolio needs to be indicative of the consumer experience with the entire bottle. So we're selling 7 or 8 sprayers now for 1.

So why can't anybody else get into the sampler business and replicate what you're doing?

So I think innovation is -- maybe the second question ago. One thing that sets us apart from competition is our innovation and our capabilities of product portfolio enhancement from our team. We think we're doing a terrific job as a high-priority item for Silgan to continue to work with our customers to understand their very unique needs and innovate around those needs. And so whether it's dispersion, whether it's angle of spray, whether it's -- I think, I've even seen a note from you, George, the disappearing dip tube. That was a specific ask from a customer just saying they didn't like to see the dip tube in the bottle of fragrance. We innovated a solution to make the dip tube disappear. So I think it's just all the different attributes that we bring to the market from an innovation standpoint, provide a winning playbook that we're executing against.

So on that, in the Melodie product line, right, in terms of the disappearing tube, again, has anyone else replicated that yet to your knowledge? And why?

I think there are various versions of that out there. I clearly would say we think ours is the best. And we were first to market with that. So I do think that it's an enhanced product versus what else is out there in the marketplace. And Melodie in particular, I think as we integrated the acquisition from Albea, we had 2 very good solutions for different sets of the Dispensing market between our legacy Calmar business and the Albea business combined.

What kind of incremental margin should we expect in Dispensing this year? Can you talk to that?

Yes. Look, I think the majority of the growth is coming at the higher end development type projects. So that business in itself is higher margin. So the Dispensing side of the business would have been, call it, the low to mid-20s in a margin relative to the flat cap portion of the business being kind of in the mid- to high teens. And the growth is coming at the higher end margin. So I would expect that the incremental margins will rise accordingly.

And you said -- Bob, you said the flat cap would have been traditionally like a mid- to high teens.

Mid- to high teens.

Okay. Any questions from the audience for Bob or Adam? If there is a question. Just hang on for -- Thanks, Jim.

Why does it make sense to have a metal food can business along with plastic containers and closure segment. Those seem to kind of go hand-in-hand to me, but metal food can seems to kind of be often left field. I know you've always done it, but either how did it come about? Or how does it make sense to keep it together?

Sure. I think we'll start with the overlap of customers. So part of the Silgan solution is that we work with those customers, again, understand their unique needs, regardless of substrate. So you think about Metal Containers and the overlap with some of our resin-based plastic packaging, there is direct overlap. We are servicing many of the same markets, many of the same customers. So there's a broader customer relationship to consider. The second piece of that is you've got this cash generative engine in Metal Containers and now a growth platform, not only in Dispensing and Specialty Closures, we've been growing in our Custom Container business as well. it's another outlet for that cash to continue to grow the company and create value for shareholders.

If you look across the portfolio, some 70% to 75% of our business comes from food and beverage. So there is a broad customer overlap.

And that goes across all 3 segments, right?

Correct.

Any other questions from the audience? So why do you see metal well positioned versus other substrates within the food market for shelf stable go to the grocery store type of applications. We've seen -- well, it's interesting, maybe not with the same rate over a long enough period of time, you've seen plastics gaining share. Do you think that, that is now changing in that -- your business and metal is able to reclaim share. How should we think about it? And what do you think those share drivers and changes could look like over the next few years?

Sure. A couple of quick things. One, I think what remains in the food can today really does actually need to be in the food can for the most part. The food can is the cooking vessel for the thermal processing of the contents in the can. So we think that's a really important aspect of this. We don't really have fruit in a can anymore, that's converted to plastic. We don't really have coffee in a can anymore. Those products didn't need to be processed, if you will, in the can. So the packaging wasn't quite as critical to the end use as it is for what remains. So we think we're in a really good spot from that perspective. We don't feel like there's a substrate disadvantage for everything that's left in a can. We think there's a significant advantage from a sustainability standpoint. So the food can is the most recycled packaging product in the world. We're over 70% recycling rates in the U.S. market. It's got a high recycled content as well. So we think that we are absolutely helping our customers achieve their sustainability initiatives. And we are seeing, in some cases, migration from plastic and resin-based packaging to the food can. We're seeing some migration from cartons to the food can. And we think that's a really exciting opportunity because we know for certain that our customers thermal assets, how they actually process food in a can are the lowest cost food assets available to get product to consumers. So we think the food can is advantaged right now in the marketplace.

George, I think that's a fundamental point, right? There was a there was a period of time where there was conversion the other way, or at least discussion about conversion the other way, not so much that the consumer disliked the can, but the marketing folks wanted to refresh of the package, right? And so I think with sustainability coming into play, that's sort of gone the other way. And I think the focus of many of our customers recognizing the value of that installed base in their thermal assets, they recognize that by that package conversion to plastic, they were outsourcing a lot of that value proposition that they have internally. And they're refocusing efforts there on their own profitability, which is driving volume to the can.

So pick a side on this, are the customers where they're shifting back to metal from plastic? Assuming that's happening, are they doing it because of the recycled rate? Or are they doing it because the can gives them a really good carbon outcome because of logistics, it might be through the wall from your converting to their operation, which is it?

I think all of the above. I think they weren't seeing the sell through...

[Indiscernible] I'll give you 5-part questions.

No, I think they weren't seeing the conversion rates that they wanted in moving toward plastic. I think they are seeing the...

Conversion rate, what do you mean by that?

So the end consumer, I think, at the end of the day, prefers the can. And so the marketing play was to have a fresh perspective with a new package that didn't play as well as maybe they had hoped. Then from the sustainability standpoint, I think they're getting value in that chain relative to the sustainability efforts with the food can versus plastic, and their own ESG scores and their ability to hit their objectives gets jaded by a conversion going to plastic.

And I would just like to add the other thing that Bob said at the beginning. It's more profitable for them to manufacture products through their thermal assets in a can. So I actually think profitability drove part of this as well.

For sure.

And then you have the sustainability and ESG advantages on top of that.

So should that make me concerned about your dispensing business or Custom Containers business since they're more plastic-based? Why not?

For the most part, we are broadly in multi-serve applications. So single-use plastic is a very small part of what we do at Silgan. So we do think we're also meeting the unique needs of the consumers by providing multiuse, whether it's a multiuse dispenser or a large format Custom Container.

And I think, on the Dispensing side, in particular, there's a value proposition that, that product brings to the overall product that can't be replicated in a different substrate.

Understood. Any question from the audience. Mr. [indiscernible], you want to hang on a second.

So I'm going to ask you a question focused on e-commerce. We see 2 things here that are potentially problematic. One is the weight of cans, of course, in shipments. And the other is the difficulty with which the e-commerce distributors secure dispensers, caps, trigger sprayers, anything else that would be part of that portfolio. Have you seen e-commerce as a benefit, as a potential risk? Are you exposed to these kinds of things that I think pop up from time to time?

Sure. And starting on the Dispensing and Specialty Closures aspect of that, our dispensers, we absolutely have e-commerce solutions. We've worked with our customers to understand what those requirements are as those -- as their products work their way through e-commerce. So we do have solutions literally across the board. Those are being rolled out literally as we speak. There is a cost premium to those solutions. And so that has been, in some cases, a challenge for our customers to take on that cost premium because they are not raising the price of their product through e-commerce. So we're working through that with our customers, but we have multiple solutions that are -- I think, that pass all of the e-commerce shipping to us today. As far as the food can is concerned, there's not a whole lot of e-commerce with the food can. It is more on-site retail and kind of a big box retail kind of segment. We sort of laugh -- the food can was used as part of the testing requirement. It essentially was the item in the box that the dispenser had to survive shipping across the country with. So we do think -- look, the food can is the most efficient means of getting products safely to consumers in the lowest cost means. So how that happens through our retail channels, that's continued to prove to be a wonderful outlet for food cans. I'm not sure the e-commerce section of food cans is really the viable forward look.

Thanks, Ron. Actually, a question, I guess, probably about 10 years ago, your former company had an Analyst Day and they talked about -- MeadWestvaco, talked about shelf racking for food cans as being a growth driver. I don't know that it ever took off. Is -- where do we stand on that, if at all? And why did it not take off if it didn't take off?

So it did -- it was implemented in certain categories. I do think the slotting fees for those dispensers increased dramatically over the life and due to marketing budgets for our customers, they have moved away from them for the most part. Also, I think shelf size availability has shrunk to some of the canned products as the configuration of grocery stores has changed over time. But at the end of the day, our products are well represented in the market at grocery, at retail, and we feel like they're moving nicely through the channel as kind of indicated by our volumes that are high single digits above pre-pandemic levels.

Thanks, Adam. Do -- why should we not worry about the overweight you have in pet food? And does this, at some point, become a sword that cuts the other way, and why not?

Great question. I think I'd go back to our 25 years of history of supply and requirements contracts for the wet pet food segment. We've got a long history of growth. That CAGR that we've seen since the inception of kind of mid- to upper single digits has not changed over time. I think the pet population continues to migrate to the fastest-growing segment of cat and small dog, large dog is in decline. It's cat and small dog that are primary consumers of wet pet food. And then you have this whole, I think, population shift that's happened as well as far as pet ownership. You've got folks getting married later in life, you've got boomers that are bringing additional family member via an animal into their homes. And then during the pandemic, obviously, most of those pets because we were all locked in our homes or apartments or wherever you may live, were smaller animals. You didn't really see a whole lot of 100-pound labrador, retrievers going into apartments in New York City.

I have 120-pound of labrador [Indiscernible] apartment in the city.

So Hopefully, [Indiscernible] dry with a little wet topping on top of that.

I'd have to work nights if I was going to put them in wet pet food. So...

Well, and maybe that is one point. So if you think about our segment in cat and small dog, these are 3-ounce servings. Your 120-pound lab is going to eat probably at least 1 pound of food a day. We're talking about 6 ounces. So you think about the impact on the consumer, they treat these small dogs and cats much more like family members, they are very reticent to change the diet.

Okay. No, I appreciate that. We probably have time for one more question. And if not, I'm going to take it. So in Custom Containers -- actually, it's a 2-part, totally unrelated. So first of all, how strategic is Europe to you? And then second -- so Europe -- in terms of food cans. And then Custom, 15 years ago, you and another peer, who's no longer in the business, ran into difficulty as new entrant came in. We were hearing a lot of the same things, oh, that business wasn't at the returns we wanted, and slowly but surely Silgan lost momentum there. Why isn't this latest sort of renegotiation or decision not to go forward with this customer a forerunner of or repeat of that?

So I want to take your last question, and I'll let Bob take the European question. So I think what's different about Custom Containers today is we are actually winning in the markets right now. So not only did we elect to maintain our discipline about the return rate and profitability of that contract, but we've elected to deploy capital where we are getting the appropriate returns in the business. So we have 2 new business wins that will be coming in towards the end of the year that offset the decision that we made not to renew that contract. I think that is different than 15 years ago. We didn't necessarily have the other business to replace. And I'd say we've been winning, George, in that market for the last 6 or 7 years. And so I think we've done a really nice job securing our position that there are opportunities to deploy capital for growth in Custom Containers at our return thresholds. It just wasn't with this particular piece of business. That is a customer we continue to do business with in other areas. So great relationship. They understood the decision-making that we went through, and we supported them.

And Bob, quickly on Europe?

And that was -- that question was specifically to the European food can business?

Correct. Yes.

Yes. Look, I think that part of the portfolio has evolved over time since the acquisition, right? When we first bought the business, we were targeting the more Eastern European markets primarily because it was less competitive and it had slightly higher growth rates. And along the way, we hit some bumps in the road with some geopolitical issues and the like. I think, more recently, that business has started to evolve to multinational customers, the same customers that we're dealing with in our U.S. food can business. So that level of customer intimacy and stickiness is the driver there.

Got it. Thank you very much. Bob, Adam, everybody think -- please join me in thanking Silgan Holdings -- Thanks for the Q&A everybody.

Thanks, George. Great to see you.