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

Beverage, healthcare, home and garden, personal care and beauty products, metal Containers produces and sells. Steel and aluminum containers for food products and Custom Containers, manufacturers themselves, custom and stock plastic containers and caps for use in a wide range of end markets. The company was founded in 1987 and is headquartered in Stamford, Connecticut. It has around 110 million shares closed at around $48 yesterday day for a $5.3 billion equity market cap, $3.7 billion of net debt for a total enterprise value of around $9 billion. I'm pleased to introduce Silgan's Vice President of Investor Relations, Alexander Hutter. He will be running through a brief presentation on the company before we move into Q&A. Thank you so much for coming.

Thanks, Hannah, and thanks for that warm introduction. Thank you all for sticking with us here before you get to lunch. So diving right into Silgan. I think there's a few important aspects of Silgan that it's good for investors to recognize right off the bat first. Silgan is a company that's based on competing in defensive end markets. So consumer staple type end markets, about 3/4 of our revenue comes from food and beverage packaging. And over time, that portfolio has evolved into one that now contains organic growth through some of the acquisitions that we've made in our Dispensing and Specialty Closures business as well as the portfolio evolution within Metal Containers towards more pet food, which is growing. Second, capital deployment has been a central part of the growth of this company over time, both through organic and inorganic investments as well as returning capital back to shareholders. All of our capital goes through the same very returns disciplined model such that whatever will return the greatest return to shareholders is what will win the day on capital. We've been able to grow the company through M&A by finding higher return acquisitions over time. And then maybe more pertinent to this group, we believe that our product offering, whether it's in Metal Containers or in Dispensing and Specialty Closures, important Custom Containers is uniquely positioned to benefit from mega trends around sustainability, and we can get through into some of those aspects later in the presentation. Taking a step back, our strategy is really around building and enhancing franchise positions and franchise positions for us really means sustainable competitive advantage. And what that is can vary based on our business. It can be a proximity to customers, it can be capital investment, it can be a number of different things, but what it will always encompass is high free cash flow conversion and strong cash flow generation. And then what we do with that cash flow is again back to that returns-based model where we can grow if we find higher return on acquisitions or deploy capital back to shareholders. We deployed about $3 billion to our Dispensing and Specialty Closures business over the last 5 or 6 years, returned about $1 billion to shareholders through buybacks and dividends over the last 10 years. And what that's driven for Silgan and for our shareholders is really top decile earnings growth and value creation, TSR, all metrics. We kind of tend to perform at the top end of the peer group. So who Silgan is today? Again, from an end market perspective, about 75% food and beverage packaging. The remainder is within beauty, fragrance and personal care products, again, mostly consumer staple products and then the balance is made up of home care, lawn and garden and some health care products. We operate in 3 segments, as Hannah mentioned. So about half of our EBITDA comes from our Dispensing and specialty Closures segment. That's our highest margin segment. It's our highest growth rate segment as well. Our Metal Containers business produces mostly food cans for the United States market. So we're the market leader there with north of 50% market share. And then our Custom Containers business is a resin-based business that makes plastic bottles for high utility, multi-serve applications. From a geographic perspective, we're focused on mature markets, so mostly in the United States with about 3/4 of our revenue from the U.S., about 20% from Europe and then the balance from mostly Latin America and Asia. We've completed 40 acquisitions over 35 years. So it's a core competency of the management team. It's something that the whole team is deeply involved in. And then from a sustainability perspective, about 95% of the products that we produce are recyclable. This is really important for our customers. The metal cans that we make are 100% recyclable. They're infinitely recyclable. They're very high recycled rate products as well. On the closure side, these are products that have a high utility relative to the value that they provide to the package. It's a product that the customer, the end consumer interacts with to have their experience with the product generally. And those products are again made of resin-based and metal-based products. We've been a market leader here in terms of introducing PCR, post-consumer resin products as well as increasing the recyclability of some of those products. From an environmental perspective, our focus has been around reducing waste to landfill, reducing our greenhouse gas emissions and the like. And then maybe just diving into Dispensing and Specialty Closures briefly. As I mentioned, this business is our largest business by profit as our fastest-growing business. About half of the products we make are for the food and beverage industry. The other half of the business would be the higher growth rate of products that we make for dispensing products. So these are anything from fine fragrance sprayers, mist sprayers to trigger sprayers for things like Windex and 409 where we found that we're able to gain market share by deploying our strategy of kind of focusing on the customer, keeping decision, making closer to the customer and meeting the unique needs of those customers. This segment is our most international segment. So it's about half, U.S., about 40% Europe and the rest is within Latin America and Asia. From a sustainability standpoint, I'll just touch on a couple of examples here. The first 2 on the left that you'll see here, fully recyclable pumps and sprayers. So those products are made up of about 14 different components. One of the functional parts of that product is a metal spring historically. And so what that means is when you put all those resin-based products with a mixed substrate in metal, it makes our product now recyclable. So we've led the market in terms of developing a full line of products that are actually using a plastic spring. So that's an innovation that we brought to the market that's seeing good traction, makes the product recyclable, our product as well as the entire package. And then the other area where we've seen a lot of focus from customers is on increasing PCR content within our packages. So again, we offer a full line of PCR content up to 50%, I think. And it's been an area of a lot of interest from our customers that's been a differentiating factor for us. Metal Containers business, as I mentioned, is predominantly made up of our U.S. food can business, which is the market leader. We built this business over about a 20-year span by acquiring mostly assets from our customers. So as a self-make takeout type business. What we -- the way we built it essentially was to pay for the assets and exchange got long-term contracts from our customers, which had pass-through of raw materials and gave certainty on cash flow over a long period of time. This business has transitioned from one that, it was probably stable for us for a long period of time to one that's now growing with pet food now, half of the end markets that we serve and that business is growing at kind of a mid-single-digit rate within pet food and driving kind of low single-digit growth for the segment overall. We do have a small European business as well that's mostly Eastern facing, also mostly pet food-based as well. A lot of sustainability benefits from the metal containers business, again, as I mentioned, infinitely recyclable, the most highly recycled food or beverage package, high recycled content. We're working closely with our suppliers to increase recycled content as it's important for our customers, moving towards using more electric arc furnace steel, which has higher recycled content. But importantly, also, there's greenhouse gas benefits to consuming food from a can relative to fresh food. And that you don't require refrigeration, right, which uses a lot of greenhouse gas. And then we find that our co-location with our customers also provides many benefits from a sustainability standpoint as well. Our Custom Containers business is our smallest business. This is a resin-based package that provides unique utility to being resin. So think of multiuse packages for see food applications, a lot of consumer health care, things like that, where you're getting multi-use out of the package, and it's providing unique benefits that can't be achieved from another substrate. Where we've differentiated ourselves with this business is around customer service. So new product launches is kind of a big topic for this year as well and has been for the past several years. This is a business that we think can grow kind of low single digits over the longer term. And then again, this business, a big focus has been around increasing post-consumer resin content within the packages. So we've been a leader in terms of increasing that rate with our customers. One of the biggest hurdles there is cost, right, PCR is double the cost of a virgin resin. And so we found that many customers are not willing to pay for that. Consumers aren't willing to pay for that. But we've joined many coalitions and organizations to try to increase recycling rates, to bring the cost of resins down. Just briefly financial overview. Some of the key attributes here. Consistency of purpose, growth are important to us. Strong free cash flow is one of the hallmarks of our business is something you'll find in every acquisition that we make. We're focused on returns, balanced view of capital, allocation and shareholder value creation. You see our growth rates in terms of adjusted EBITDA, net income per share, free cash flow and dividends are all in the double-digit range. We've grown an income at close to 20% clip over the last 5 years. So the future we think at Silgan, we like to say, is just as bright as the past and past is prologue. So as we look forward, we think that this is a business that can continue to grow both inorganically and organically. Again, back to free cash flow. This is -- we've been able to convert cash flow at a rate of about 50% of EBITDA over time. We don't think anything changes as you look out over the future, have grown EBITDA at 70% over the last 5 years and CapEx is relatively in line with [indiscernible]. I mentioned some of these statistics, but about $3 billion in acquisitions over the last 10 years, most of that in the last 5 or 6 years, focused around our Dispensing and Specialty Closures segment. And then we deployed over $1 billion in terms of dividends and share buybacks over the period as well. From a leverage perspective, we think the optimal range to run the business is in kind of the 2.5% to 3.5% range. Now just given kind of the macro environment, it's likely that in the absence of synergistic accretive M&A that we'd probably lift drift towards the lower end of that range or potentially below just given investors' appetite for leverage has probably decreased currently. But we think that this, this business could run with significantly more, but just understand the appetite is lower.

Thank you so much for that overview. It was very helpful. And I'm going to jump into some Q&A and then we can see if anyone from the audience has anything as well. So appreciate all the detail around, the sustainability aspects of Silgan parent offerings. Can you talk a little bit about the positioning of the company's products from a sustainability perspective versus the other offerings out there, substrates and that sort of thing. Are there any areas that you feel particularly good about and where Silgan is driving innovation or that might feel more competitive.

Sure. Great question. Thank you, Hannah. So in terms of substrate substitution, I think this is one of those kind of franchise hallmarks within Silgan that was built into the business from the beginning. So if we just go across the segments, within the Metal Container business it's important to understand that the food that's in the food can is cooked in the can. So switching to another substrate like a plastic pouch, right, is extremely costly for our customers, and they don't make a lot of money when they do right? So there's a fully depreciated filling and cooking asset base that many of these customers that we have really all of them have within their own operations. It's highly efficient for them to run through their -- through their current thermal assets. And I think what you've seen in some areas like soup over the past 5 years is that when those customers recognize that, that's where they generate most of their cash and where they make their profits and refocus on them, that those companies tend to do very well as well. In our Dispensing and Specialty Closures business, so those products are predominantly metal and plastic, but mostly on the plastic side within dispensing, there's not really a substrate that can replicate the attributes that those products make in terms of product dispersion, if you think about something like a fragrance spray, right, you're not going to be able to do that with something that's made out of metal. Now you can bring metal components into that. But the issue there is that, that makes that product then not recyclable. So I think it's more about getting to a mono substrate within those products. The metal closures that we make within the Dispensing and Specialty Closures business, which is about 1/4 of the revenue in the segment. Those have all the same attributes that our metal cans have in terms of recyclability and recycling rate. And then as we look to some of our some Custom Containers products, Those, again, we've stayed away from across our portfolio, doing things that are single serve. So we don't do water or carbonated soft drink, closures or bottles. What we focus on really are multi-serve applications. So if you think about like a shampoo bottle, right? It's unlikely that consumers are going to take a glass bottle back into the shower anytime soon. So those are the types of products that we focused on driving kind of our growth on. So from a substitution standpoint, don't think that there's much risk there. In terms of innovation and growth, I mean, I think that that's an area which is kind of new to Silgan, right? So it's an area where we've driven growth more recently. If you looked at Silgan 10 or 15 years ago, right, we were predominantly a food can business. The end market was probably -- the market itself was probably flat to down slightly, and our volumes were probably flat to up slightly just based on our bias towards pet food. But I think more recently, metal packaging, obviously, has taken off as a sustainable package. And so we've been spending more resources in terms of investing in R&D and bringing new packages for things that haven't been in metal packaging before things like K-Cups for coffee or metal yogurt cups and things like that. So bringing those solutions to customers again, there's always a cost element that goes with that for customers. But I think it's maybe reinvigorated some of the growth in the business as well. On the Dispensing and Specialty Closure side, we talked about some of those aspects that are driving conversations with customers in terms of more PCR content and recyclability.

That was really helpful. In terms of just sticking with the metal can business, for a little bit longer. We've seen some of the other key can players in North America primarily and other regions, decide to exit that business and focus on higher growth areas. What opportunity does that create for Silgan? And kind of what's your view on that business longer term?

Yes. So I think we've picked our spot within the metal food can business very well, right? So we are fairly concentrated in some markets like pet food where some of those other players you've seen exit maybe don't have the growth that we now have in the portfolio. . In Europe, we've consciously tend to take a smaller position there, and some of those assets have traded at hand. The European market is kind of different from North America. North America, it's a very strong free cash flow generation business. It's one that's got really tight pass-throughs on raw materials and other costs. So for instance, last year, there was 80% inflation in the steel that really had no impact on our bottom line. That's not the case in Europe. It's an annual contract business. It's much more susceptible to supply-demand imbalances. And so we picked our spot there, I think, and we like that business a lot, right? It's -- it generates a ton of cash. It's enabled us to continue to grow and create a lot of shareholder -- value for shareholders. And so I think as we look out across the landscape, we continue to like our spot there.

Thanks. And then just on the pet food market. I know that, that's been a significant driver for Silgan. And I think that there's been some confusion just listening on earnings calls and that sort of thing that with increasing costs that might be impacting pet food market as people spend less on their pets and that sort of thing. So can you just talk a little bit about the specific areas in which Silgan operates for pet food and the dynamics that you're seeing there?

Sure. Great question. So yes, that is true. I think that you are seeing some shifts in trends with regards to what people are spending on pets. I think that's mostly impacting things like treats and ultra premium type food. So people are less willing to spend on fresh pet food. What we do predominantly within our metal containers business is it's about 75% cat food. So it's a lower price point. It's wet pet food. But I think what makes our position a bit more defensible than some of those other products that we just talked about is that cats don't generally like to shift between wet and dry food, where you have seen, I think, some shift back to wet is if you think about an 80-pound lab, typically, owners will supplement a dry food with a wet can once a day. And in times of economic difficulty some of those consumers will just stop supplementing the wet food, right? And it's a higher price point item. It's a couple of bucks on the shelf versus if you think about a cat food can at $0.50 a share, it's less impactful to the consumer's bottom line. So I think from our perspective, we've seen really good growth trends there. The category for us has grown at kind of a 5% CAGR over the last 10 years. We're seeing similar kind of mid-single-digit growth this year. It's driven by, one, kind of premiumization. So on the cat side, people buying more wet pet food relative to dry. And that conversion usually happens from shelter to home, right? So the consumer adopts a cat and pet shelter, the cat was being fed dry food at the home, it now gets wet food. And then the other one is on just general pet population growth, which there have been a lot of stories about the boom in pets before COVID. We didn't really actually even see that on the cat side so much. I think that was more of an adoption side, impact on the dog side, so it didn't really impact us that much on the way up. And I think if there is a way down there, it probably will impact us particularly.

Can you just comment on what happened during the last recessionary period with pet food and kind of the markets that you played in before any one?

Yes, sure. So if you went back to kind of financial crisis time, we did far less kind of wet pet food at that point. So that market has been growing for us for a long time, but it was probably 25% of our portfolio. And a bigger part of that was going to be on the wet dog side, so the larger cans. So what you saw, I think, was pet food did decline then mostly because of what happened on the dog side. And then at the same time, you saw increases for vegetable and increases for soup because those are low-cost means for nutrition, right? So consumers don't have the dollars at the register to spend, you can get a full meal for $1 or $2 with can of soup. So that's been our experience in the past with food cans through recessionary periods. I think what's different now is that we are more cat focused on the pet side, so unlikely to see as much of a decline. And soup has stabilized for us and has been kind of a growth market. Volumes there are still well above prepandemic levels. So we reach new consumers throughout the pandemic that have been repurchasing soup.

Great. And shifting back to more of the sustainability side of things. Can you talk a little bit about what you're hearing in conversations with customers around these topics. Have you seen a shift in tone or focus more recently, are there differences between end markets, regions, just since Silgan has such broad exposure to end markets and geographies?

Sure. Yes. I mean it's pretty consistent, I think, across our customers. We deal with a lot of the big global CPGs as our customer base. And so they've all made commitments with regards to their packaging. And most of those commitments are around one, recyclability, and two, recycled content. And so if I just start with Metal Containers, we talked about increasing the recycled rate -- sorry, the recycled content of those packages. Increasing the recycle rate is obviously something that's hard for us to impact, but it's already the highest kind of recycled rate package for food and beverage in the world because it's important to remember metal containers are made out of steel mostly on the food side. And so when you go to an MRF, the first thing that everything goes through is a magnet, and steel food cans are picked up there, right? So a little less so on the aluminum side, but those tend to have a very high recycling rate as well. Again, I think I touched on the presentation, but PCR content is a big topic with customers. I think as you get to larger format packages, so like on the cusp of container side, think of a shampoo bottle, there's a lot of resin in that package, right? So I think that conversation is probably a bit easier when it's on the closure side. because the impact is less to the bottom line of the customer. But there's going to need to be a point where the supply of PCR matches what the demand is going to be. And I think there's a number of ways that it's going to get there, right, through different recycling methods and the like. But it's going to take some time, and it's going to take a lot of investment.