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

Good day, and welcome to the Silgan Holdings Acquisition of Weener Packaging Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Alexander Hutter, Vice President of Investor Relations of Silgan Holdings. Please go ahead, sir.

Thank you, and good morning. Joining me on the call today to discuss our announced agreement to acquire Weener Packaging are Adam Greenlee, President and CEO; Bob Lewis, EVP Corporate Development and Administration; and Kim Ulmer, SVP and CFO. Before we begin the call today, we would like to make it clear that certain statements made on this call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore, involve a number of uncertainties and risks, including, but not limited to, those described in the company's annual report on Form 10-K for 2023 and other filings with the Securities and Exchange Commission. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements. In addition, commentary on today's call may contain references to certain non-GAAP financial metrics, including among others, adjusted EBIT and adjusted EBITDA. A reconciliation of these metrics, which should not be considered substitutes for similar GAAP metrics, can be found in today's presentation and under non-GAAP financial information available in the Investor Relations section of our website at silganholdings.com. During today's call, we will be referencing slides that have been posted to the Investors section of our website at silganholdings.com. Finally, we would like to remind those attending today's call that given the proximity to our second quarter earnings call release on July 31, 2024, we will be limiting our remarks on today's call to the Weener transaction and we'll not be discussing topics related to our current quarter or the fiscal year for the company. With that, let me turn it over to Adam.

Thank you, Alex, and we'd like to welcome everyone to our call today to discuss our announced agreement to acquire Weener Packaging. To start today's discussion, I think it will be useful to remind everyone of our strategy, our culture and how we at Silgan think about creating value for our shareholders. On Page 4 of the presentation, you'll see that our strategy starts with building and enhancing what we refer to as franchise positions, which consists of businesses with long-term sustainable competitive advantages and often translates into market leadership or the ability to become a market leader. Culturally, we view our focus on meeting the unique needs of our customers, and as an extension, our ability to provide best value to our customers as one of our key competitive advantages across all of our franchises. From a financial perspective, these competitive advantages have resulted in stable and predictable cash flows, margin improvement and organic growth opportunities for the company. The Weener acquisition we announced this morning has all the hallmarks we look for in a franchise business with market-leading positions in its product categories, long-term customer relationships, strong margins and demonstrated organic growth. In addition, and as importantly, Weener is an excellent cultural fit within our company. Next, we look to deploy the strong free cash flow generation that our franchise businesses generate through our highly disciplined capital deployment process. This process takes a long-term view on value creation and factors in all potential opportunities for our capital, including M&A, organic investment, debt repayment and returning capital to shareholders to determine the best use of capital to drive the most value for the company and our shareholders. We believe the acquisition of Weener, which is a best-in-class asset with organic growth at a valuation that is below our current trading multiple and significantly below the closest publicly traded comp for this business, represents clear value for our shareholders. As a result of the success of our strategy, we have delivered consistent, long-term value creation for our shareholders with top-tier earnings growth and returns. The Weener transaction is no exception with approximately 10% post-synergy earnings accretion expected and presents a meaningful opportunity to continue to enhance the growth and margin profile of our business. Turning now to Slide 5. Today's announcement is another key milestone in our strategy to evolve our portfolio and expand our Dispensing and Specialty Closures product offering towards higher-margin, higher organic growth products and end markets in a journey that we began nearly a decade ago. Taking a step back and looking at the company 10 years ago, Silgan was the market-leading food can producer in North America with 2 smaller but very strong businesses in closures and plastic containers with approximately $500 million in total adjusted EBITDA. Fast-forward to today, Silgan is still the market-leading food can producer in North America with the strongest mix of customers, markets and products in that business. Including the acquisition of Weener, our pro forma EBITDA of over $1 billion is more than double what it was in 2013. Our Dispensing and Specialty Closures business is now the global leader in the market, generating more pro forma EBITDA than our entire company did just a decade ago. We've accomplished this by investing over $3.5 billion on 5 best-in-class dispensing acquisitions over the past 8 years, all at compelling valuations each delivering attractive returns and earnings accretion for our shareholders. Our portfolio of businesses is more diverse while maintaining our focus on consumer end markets and developed geographies. Our margins have expanded and our organic growth outlook, which was plus or minus 1% a decade ago is now squarely in the low to mid-single-digit range. We have both growth and margin mix opportunities in the business, and our addressable markets continue to expand. Kim will now walk you through the particulars of the transaction and Bob will give some more details on the business. And then I'll provide final remarks before opening the call to Q&A.

Thank you, Adam. Turning to Slide 6. As of May 2024, Weener generated last 12-month sales of approximately EUR 450 million and adjusted EBITDA of EUR 96 million, representing a 21% adjusted EBITDA margin. As a result of the integration of this transaction, we expect to achieve approximately EUR 20 million of cost synergies within 18 months of closing with the majority of those synergies from procurement and supply chain optimization and the balance coming from footprint and other operational opportunities. On a fully synergized basis, adjusted EBITDA margin of 26% is above the levels of our WestRock and Albea acquisitions, represents world-class profitability in this business and is above those of the publicly traded comps in this industry. The enterprise value of EUR 838 million for this transaction represents a multiple of 8.7x trailing 12-month adjusted EBITDA and a multiple of 7.2x trailing 12-month adjusted EBITDA post synergies. As you can see on the bottom of the slide, we believe the transaction price for this business represents compelling value for a best-in-class franchise business with post-synergy valuation below both our current trading multiple and that of the public comp in this industry. In a moment, Bob will walk you through some of the dynamics that have enabled us to achieve such an attractive valuation for this asset. The Weener transaction is expected to be highly accretive to our earnings with adjusted EPS and free cash flow accretion in 2025 and approximately 10% adjusted EPS accretion once fully integrated. The transaction is expected to close late in the fourth quarter, and we expect to finance this acquisition under our existing credit agreement and with cash on hand. Pro forma for the transaction, including synergies, our year-end 2024 net debt-to-adjusted EBITDA is expected to be below the high end of our target leverage range of 2.5 to 3.5x adjusted EBITDA and we expect to exit 2025 with year-end leverage below 3x. And with that, I'll turn it over to Bob.

Thank you, Kim. Picking up on Kim's prior comments on valuation and the chart on the bottom of Slide 6. The economics of this deal represents Silgan's ability to use speed and certainty to our competitive advantage in the M&A market. That advantage has expanded in the current environment as a result of our market-leading position in dispensing products and our ability to generate synergies and deliver strong free cash flow. Our ready access to capital has further advanced Silgan versus financial buyers relative to the cost of capital and return profiles and should continue to allow us to execute on our M&A priorities to acquire similar high-quality businesses. Turning to Slide 7. We believe Weener is a compelling fit with our Dispensing and Specialty Closures business, which will drive incremental mix benefits as this business continues to grow. Looking at the performance of the Weener business from pre-pandemic through 2023, the business has grown sales at an organic CAGR of 6% and adjusted EBITDA at an organic CAGR of 8%, which we believe is repeatable as we look forward. Weener operates a global network of 19 well-capitalized facilities in 12 countries with more than 4,000 employees. Competitively, Weener commands a leading market position in the products they produce for personal and health care and food markets predominantly in Europe and the Americas. Weener also brings new technology in adjacent end markets with significant clean room capabilities for health care manufacturing and a robust innovation pipeline of differentiated high-value products. Like our business, Weener has long-term contractual relationships with blue chip customers that allow for the pass-through of raw material and other costs. Many of these customers are long-term partners of Silgan. On Slide 8, you can see some of the highly recognizable products that Weener brings to the Silgan portfolio to help broaden that portfolio, including global leadership and roll-on ball technology advanced capabilities in aerosol actuation, nasal and ophthalmic dispensing products and innovative recyclable elastomer valve technology with a broad range of applications. We believe the addition of this innovative product and technology profile to our global scale in dispensing combined with our deep customer relationships will provide significant opportunities to accelerate the growth profile of this business going forward. From an end market perspective, you can see our outlook for each category in the upper part of the page. And on a blended basis, we believe end market growth for Weener is in the mid-single-digit range. That said, as the mix of business continues to improve with higher growth in health care markets, coupled with the potential to outperform in the market as we have done in our own Dispensing business, there is opportunity to drive higher organic growth rates in this business. As you see on the bottom of Slide 8, the addition of the Weener business increases both our company, and more specifically, our DSC exposure to higher-growth end markets like personal care and health care. This acquisition increases the segment's exposure to higher-growth dispensing products to approximately 65% of pro forma sales and approximately 75% pro forma adjusted EBITDA. With that, I'll turn it back to Adam.

Thanks, Bob. Turning now to Slide 9 and ending where I began earlier on the call. As we reflect on the progress we've made in our Dispensing and Specialty Closures segment over the last 10 years, we've grown segment sales at a compounded annual growth rate of 12% and adjusted EBITDA at a compounded annual growth rate of 16%. We have expanded the margins of this segment by 550 basis points, and including the Weener acquisition and the associated synergies, we'll add another 100 basis points of margin to this segment. Our best-in-class margins are driven by our franchise positions, differentiated product portfolio, innovation and focus on meeting the unique needs of our customers, our capital discipline and our core competency in M&A. We have been able to identify attractive acquisitions in our industry at value- and earnings-accretive multiples with strong earnings and free cash flow accretion. When we compare our growth and margins to our peers in this space, we believe our business compares very favorably and offers significant value opportunity to shareholders. To wrap up the presentation, today's announcement marks a continuation of the strategy we've been executing for nearly a decade with our portfolio evolving with higher-margin, higher-organic growth products and end markets and Dispensing and Specialty Closures at very attractive returns with strong earnings accretion. Importantly, this milestone is far from the end of this journey as we believe today's announcement confirms our advantaged position in the market and our ability to execute our strategy to build the leading global Dispensing and Specialty Closures franchise and drive value for our shareholders. As always, we will continue to be guided by our founding principles, which include our constancy of purpose, commercial and capital discipline and long-term focus on being the best at what we do by competing and winning in the markets we serve and always focusing on meeting the unique needs of our customers. At this time, we'll open the call for questions and ask Melinda to please kindly provide the directions for the Q&A session.

[Operator Instructions] And we'll take our first question from George Staphos with Bank of America.

This is actually [indiscernible] on for George. We had [ competing ] calls this morning. First off, I was hoping you could just help us a little bit more in terms of the volume growth for this business? What does it look like more recently in total and by end market? And then perhaps your expectations moving forward. Would you expect this business to grow in line with those market growth that you outlined here?

Yes. Look, as we look at the business, maybe we should go back just kind of to pre-pandemic. And I think this is a business much like our Dispensing and Specialty Closure segment that probably volume mix is the right way to think about it. So they've seen nice growth in volume mix since the pandemic. And really, it's two things. It's volume has been stable in their core markets. What they've done is a very nice job with innovation and launching new products that are mix -- enhancing the mix of the overall business. So I think a good example for you would be the innovation they have. They've got a fully recyclable elastomer valve technology that Bob had mentioned in his remarks. And that's a new product that was launched within that same window. So margin-enhancing volume growth, it's a really nice combination. And when we think about how it fits into our business, we think it's going to grow at roughly the same rate as our DSC business has been growing and is expected to grow kind of on a long-term basis.

Got it. Okay. And then if I could just ask another one. In your view, what have been the key parts of this business' moat and business approach in your view? And then moving forward, will you be keeping the current management there in place or any changes on that front?

Sure. Look, I think as we talked about in the prior remarks, I mean, this is a franchise business, much like our Silgan businesses. So you think about the moat, it's innovation, it's differentiated product line, it's long-term customers, it's raw material pass-throughs. It's all the same things that we talk about in our business. And in fairness, they've grown at a very nice rate in the markets that they serve. So we think the moat is very defensible, and we like the forward look of that.

Got it. And just in terms of management...

Yes. Well, just quickly management team clearly a talented team coming with the business, the business for some time and has done a really nice job running the business. So we're excited to work with all of them.

Next, we'll go to Matt Roberts with Raymond James.

Thank you for the constructive detail here. Kim, if I may, could you discuss the financing on the deal, the available borrowings you have under that credit facility and the anticipated borrowing rate for the transaction under that? And also, I believe I missed the comment or might have not heard it entirely in the opening remarks, but did you say a path towards getting to 3x leverage? And when was that again?

Sure. So we are planning on financing it under our credit agreement. We will probably close this transaction in the fourth quarter-ish. So we'll have capacity under our revolver. In addition, we can look to do an additional borrowing under the credit agreement with the consortium of banks. The rate we would expect on a euro basis is probably between 5% and 6% on that. And I can't remember what the other question was.

When we get below 3x for leverage.

Okay. So yes, we do expect that our leverage ratio will be around the upper end of that as we move through this transaction. We'll look to continue to move that down to the 2.5 lower range. I mean, historically, when we've been at the lower end of the range, we have looked to return capital or obviously we'll continue to be acquisitive.

And will be -- I think the target is below 3x at the end of '25 after we get our synergies.

Yes.

We'll go next to Ghansham Panjabi with Baird.

Congrats on the deal. I guess, first off, on the health care piece and the growth rates of mid- to high single digits, how does -- are any of these products sort of -- do they go through the FDA approval process? Or are these off-the-shelf products as it relates to the health care business?

It's a good combination of both. And we're really interested in this part of the business because it's a nice complement to what we do already at Silgan. And it's not something we talk a lot about, Ghansham, but we've got a very nice health care business that is growing probably ahead of the market rates that you see on the slide there. So we think there's a really interesting opportunity between the 2 businesses because, frankly, we were having trouble justifying a clean room investment in more mature markets on top of what we've already got and so were they. When you put those 2 technologies together, we think there's an interesting platform for continued and maybe accelerated growth in the health care market with the existing portfolio of products that we have between the 2 entities.

Ghansham, I would just add to that. If you look at the 2 businesses combined on a pro forma basis, we'll have nearly $200 million worth of revenue in health care space. So it's not something that we talk a lot about, but we are continuing to grow that part of the portfolio.

Perfect. And then could you give us a bit more detail on how you get to the 10% EPS accretion? Just based on the math, maybe we're missing something, but we're having a tough time getting there. And then, Adam, for you, you're obviously taking on a leveraging transaction in context of a very tough set of fundamentals for the packaging industry, probably the toughest since the financial crisis. So with this transaction, do you feel like the worst is behind the industry at this point that gives you comfort in the deal of this size apart from just the assets available when it's available?

Well, again, we're continuing on the path of our strategy, right? And so this is a very logical addition to what we've been doing. We've known the business for an awfully long time. I'd love to tell you that the packaging world is great and everything is rosy on the outlook going forward, I'm not quite sure we're there yet. But as far as the flexibility we have with our balance sheet, the core competency in M&A that we have to continue to mine these kind of opportunities that we've always said when we have the right opportunity at the right time, and is the right fit for Silgan, we're going to execute that strategy. And I think this is just another example of that.

And on the earnings accretion.

Yes. Look, I think it's really just its continued growth in the business. It's the synergies that we expect to achieve. And for the most part, the synergies should be in -- we said 18 months. So you're getting a vast majority of those by the end of '25 when we've got the 10% EPS accretion.

And you've got a fairly sizable free cash flow accretion that happens that helps reduce that debt load as well.

Our next question or comment comes from Gabe Hajde with Wells Fargo.

This is Alex on for Gabe. So I guess I was wondering if you could provide some color on how the margin profile trended for the business between 2019 and '23?

Can you just repeat that question? Were you asking about the volume trends from '19 to '23?

Yes, volume terms and the margins?

Okay. Great. So look, we've seen nice margin growth since that period of time. Again, it's back to sort of the previous commentary that they have innovation, they've launched new products -- differentiated new products that had growth in health care. So we've seen nice margin expansion and something like 200 basis points probably over that period of time for their business. And then on volume, again, I think I'd go back to the same comment on it's more of a volume mix story that they're enhancing their mix with every new product that they're taking to market, and volume mix has been favorable over the same period of time.

I think the other thing that has benefited this business, they've done a really nice job of managing their cost structure and putting in operational excellence programs. So that they've seen a pretty nice turn in the performance of their businesses as well over that period of time.

Okay. And if I could ask another question. What has been the free cash flow conversion for this business, I guess, if you go back from the similar periods.

I think the real issue with the free cash flow there, as we talked about, is they have carried some leverage and they have invested pretty heavily in advancing the business. We think as you combine this business with ours, we'll be able to moderate that capital spend by managing or utilizing the combined footprint. And that should allow the free cash -- or sorry, allow the CapEx spend to be more in our traditional run rate for that business as opposed to the run rate that they've been attaining over the last several years.

Next, we'll go to Anthony Pettinari with Citi.

This is actually Bryan Burgmeier sitting in for Anthony. Maybe just a question on synergies. Do you anticipate any cash costs to achieve those synergies? And is it possible to maybe put it in maybe a couple of different buckets and where the synergies are going to come from? Any detail there would be great.

Yes, sure. We said that there's roughly EUR 20 million of synergy coming. We think we'll have that completed in the first 18 months. I wouldn't expect a lot of cash flow implication to that or a lot of cash spend to achieve them because the way they bucket out is the majority of it is coming from procurement and supply chain opportunities. We think that there are some footprint opportunities here between the 2 businesses. And the kind of the remaining part of that is, I'll call it, from general operations and that will be everything from a little bit of administrative spend around things like audit fees and the like that we can wring out as well as just becoming a bit more efficient between the 2 businesses. A pretty straightforward set of synergies here from our perspective and from our historical achievement in these types of deals.