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

Good day and welcome to the Silgan Holdings Fourth Quarter 2024 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Alex Hutter. Please go ahead.

Thank you and good morning. Joining me on the call today 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 conference 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 adjusted EBIT, adjusted EBITDA, free cash flow and net income per diluted share or adjusted EPS. A reconciliation of these metrics, which should not be considered substitutes for similar GAAP metrics, can be found in today's press release and under the Non-GAAP Financial Information portion of the Investor Relations section of our website at silganholdings.com. With that, let me turn it over to Adam.

Thank you, Alex, and we'd like to welcome everyone to Silgan's Fourth Quarter and Full Year 2024 Earnings Call. Our team delivered another year of strong performance in 2024 as the success of our winning strategy, the power of our portfolio, the strength of our team and our disciplined approach to capital deployment continued to set us apart from our competition and drive value for our shareholders. Normalizing end-market conditions in most of our businesses showcased the organic growth potential of our strategic initiatives, and we delivered mid-single-digit organic adjusted EPS growth and double-digit free cash flow growth in 2024 despite customer destocking activities that impacted the first half of the year. We made significant progress towards achieving our multiyear $50 million cost-savings initiative while continuing to invest organically in our businesses to drive growth into the future. Our disciplined capital deployment model continued to create value for our shareholders as we announced and closed the acquisition of Weener Packaging during the year. We are pleased to add another high-margin, strong organic growth business to the Silgan portfolio and believe this to be a logical next step in the evolution of our capabilities in the attractive dispensing markets as we continue to evolve our portfolio. Its advanced product and manufacturing technologies and strong innovation pipeline will bolster the organic growth and enhance the profile mix of the company for years to come. At the segment level, our Dispensing and Specialty Closures segment continued to perform exceptionally well in 2024 and delivered 3 consecutive quarters of double-digit organic growth in dispensing products to close out the year. Our adjusted EBITDA margins in the segment expanded almost 75 basis points during the year and reached new record levels as the margin-enhancing mix and higher growth rate of our dispensing products continues to deliver meaningful upside to our bottom line. We drove operational improvement in the segment and continued to make progress against our multiyear cost-savings initiative. In Metal Containers, our pet food markets, which represents a strategic growth category and approximately half of our segment volume, showed improving trends throughout the year with high single-digit growth in the second half of the year and double-digit growth in the fourth quarter as volumes normalized. We once again validated our leadership in the market and the strength of our customer relationships by extending our decades-long supply partnership with our largest customer. Our team navigated dynamic volume conditions in the fruit and vegetable market with the impact of a large customer reducing their inventories to drive working capital during the year, compounded by severe weather that drove the worst fruit and vegetable pack in many years. In Custom Containers, our business delivered strong operating performance and experienced continued success in the marketplace as the commercialization of new contractual business wins and more normalized market conditions drove mid-single-digit volume growth and over 200 basis points of adjusted EBIT margin improvement. As we now turn our focus to 2025, with our strategic initiatives yielding strong organic growth, the contribution of the Weener acquisition and first year synergies, the full benefit of our cost-savings program and a partial recovery in the fruit and vegetable market, our business exits 2024 with strong momentum and is positioned to deliver record performance in 2025 with double-digit increases to both earned and free cash flow. At the segment level, we are expecting Dispensing and Specialty Closures organic volumes to grow by a mid-single-digit rate in 2025 driven by another year of high single-digit growth in our dispensing products and low single-digit growth in our closure products, resulting in an improved mix. Metal Containers volumes are expected to grow by a mid-single-digit percentage driven primarily by mid-single-digit growth in pet food and a partial recovery in the fruit and vegetable volumes. Custom Containers volumes are expected to grow by a mid-single-digit percentage driven by the annualization of the new business wins that ramped up in 2024 as well as additional new business awards in 2025. As we enter 2025, we are excited about the opportunities that lie ahead for the company and our ability to execute upon them. Our customer partnerships remain strong, and our teams remain focused on meeting the unique needs of our customers. We continue to compete and win in the markets we serve. Our strategic growth initiatives continue to shape the company's future, and our disciplined capital deployment model continues to create significant value for shareholders. Before I turn it over to Kim, I'd also like to highlight that earlier this week, we announced that Philippe Chevrier will join our team as Executive Vice President and Chief Operating Officer as part of our executive office in Stanford. We look forward to Philippe fully participating in the collaborative management process that has proven to be so successful since the founding of our company. He brings additional strong leadership capabilities to our team, a broad operational skill set, significant international experience and a deep understanding of the importance of commercial relationships, all of which will help him be successful at Silgan. With that, Kim will take you through the financials for the quarter and our estimates for the first quarter and full year 2025.

Thank you, Adam. As Adam highlighted, our business continued to deliver strong financial results and converted our profits into double-digit free cash flow growth in 2024. We closed on the Weener acquisition in October, which we financed using cash on hand, our revolver and a new EUR 700 million term loan, and we successfully amended and extended our credit agreement during the fourth quarter. Our balance sheet and access to capital markets remain very strong. And after completing the Weener transaction, we ended the year at 3.3x pro forma net debt to EBITDA, which is within our target leverage range. Turning to the fourth quarter 2024 results. Net sales of approximately $1.4 billion increased 5% from the prior year period driven primarily by the addition of Weener business, which closed on October 15, which was partially offset by less favorable mix in the Metal Containers segment as expected. Total adjusted EBIT for the quarter of $151.7 million increased by 12% on a year-over-year basis with record adjusted EBIT in Dispensing and Specialty Closures and higher adjusted EBIT in the Metal Containers and Custom Containers segments. Record adjusted EPS of $0.85 increased $0.22 or 35% from the prior year. Turning to our segments. Fourth quarter sales in our Dispensing and Specialty Closures segment increased 22% versus the prior year primarily as a result of the contribution from the Weener Packaging acquisition, which added approximately $100 million or 19% during the quarter and higher volume mix of 5%. The improvement in volume mix was driven primarily by a double-digit increase in organic volume of dispensing products during the quarter. Record fourth quarter 2024 Dispensing and Specialty Closures adjusted EBIT increased $13 million or 15% versus the record achieved in the prior year period as a result of the contribution from the Weener Packaging acquisition, which added approximately $11.1 million, and favorable volume mix. Late in the quarter, as a result of the announced restructuring program, we had the opportunity to further reduce inventories to more optimal levels, which cost us approximately $10 million in adjusted EBIT relative to our expectations entering the quarter as we sold through some higher-cost inventory. This inventory reduction contributed to the reduction in working capital for the company, which was the primary driver of free cash flow exceeding our prior estimate for the year. In our Metal Containers segment, sales declined 8% versus the prior year as a result of the lower price/mix due to less favorable mix driven by a double-digit increase in smaller cans for pet food and lower volumes for larger cans for the fruit and vegetable markets. Total volumes in the quarter were comparable to the prior year period. Metal Containers adjusted EBIT increased 3% primarily as a result of favorable price/cost and mix, including SG&A cost management. In Custom Containers, sales increased 6% compared to the prior year quarter driven by a 4% increase in volumes as a result of the commercialization of new business awards and more favorable price/mix. Custom Containers adjusted EBIT increased 40% as compared to the fourth quarter of 2023 primarily due to an improved mix of products sold and higher volumes. Looking ahead to 2025, we are estimating adjusted EPS in the range of $4 to $4.20, a 13% increase at the midpoint of the range as compared to $3.62 in 2024. This estimate includes interest expense of approximately $185 million, a tax rate of approximately 24%, corporate expense of approximately $40 million and a weighted average share count of approximately 107 million shares. Depreciation is expected to increase $40 million to $50 million on a year-over-year basis and be in the range of $265 million to $275 million. At the midpoint of our 2025 adjusted EPS range, we will exceed the prior record levels of adjusted EBIT, adjusted EBITDA and adjusted EPS achieved in 2022. From a segment perspective, mid-teen percentage total adjusted EBIT growth in 2025 is expected to be driven primarily by a greater than 20% increase in Dispensing and Specialty Closures adjusted EBIT. Custom Containers segment adjusted EBIT is expected to grow by a mid-teen percentage. And in the Metal Containers segment, we expect to recover approximately half of the $40 million decline in adjusted EBIT that we experienced in 2024. Based on our current earnings outlook for 2025, we are providing an estimate of free cash flow of approximately $450 million, a 15% increase from the prior year, as earnings growth will be partly offset by higher interest and tax with CapEx of approximately $300 million. This estimate also includes approximately $20 million of cash cost to support our cost-reduction program. Turning to our outlook for the first quarter of 2025. We are providing an estimate of adjusted earnings in the range of $0.74 to $0.84 per diluted share, a 14% increase as compared to adjusted EPS of $0.69 in the prior year period. The year-over-year improvement in adjusted earnings in the first quarter is driven primarily by the inclusion of Weener Packaging, higher volumes in each segment and operational improvements, including the benefits from our cost-savings program, partially offset by higher interest and corporate expense. First quarter volume and adjusted EBIT is expected to be above prior year levels in all 3 segments. That concludes our prepared comments, and we'll open the call for questions. Justin, would you kindly provide the directions for the question-and-answer session?

[Operator Instructions] Our first question today will come from George Staphos with Bank of America.

Two quick ones for me and then a follow-on. Can you talk a little bit about what the learnings with Weener have been so far? What did you learn since you've owned it that are additive or for that matter, maybe a little bit more challenging than you expected as you were closing the deal and relative to the deal model? Second question, can you talk about within the guidance for this year, what is discrete cost reduction and/or sort of built-in earnings gains, not that anything is ever guaranteed, relative to your initiatives from the last couple of years? And then, as I said, I had a quick follow-on.

Sure, George. Look, the Weener addition to our portfolio, it's gone really well. We closed in mid-October. To your point, there are always learnings as you bring 2 organizations together. And I think that process has been very good. One that I would tell you initially is that they probably had more commercial opportunities in the business than maybe what we had given them credit for through our diligent process. And it's a similar conversation that we've had in some other acquisitions that we've done that we actually did take the opportunity to approve some capital prior to the close of the acquisition for future growth. And this is contractual business. In fairness, these are primarily with customers that you can think about as both Silgan customers and Weener customers. But the capital opportunity was there, and we took advantage of it. So I think one learning is we're gaining confidence and even more confidence in the combined entities' ability to deliver the growth profile that we've projected. So feeling really good about it. I think outside of that, again, we anticipated a strong team coming over, a talented team, and that's exactly what we've got. So we're excited about the future. I think the teams are working well together and delivering on really the synergies and all the other integration activities that we get kind of into the process now with a full quarter. And then secondly, on the cost-reduction side of the portfolio, our second year of the $50 million cost-reduction program. Year 1, we did deliver the $20 million of cost savings in '24. So I feel really good about that. Teams did an excellent job executing against the programs that we established. And then for '25, it's really the second portion of the EBIT improvement, which will be about $20 million -- I'm sorry, $30 million of improvement to round out the $50 million cost-reduction program.

Okay. Adam, just on Weener, just a quick follow-on. So there's always going to be things that don't go as well. What have those been so far? And then where have the commercial opportunities been, where you've been may be able to invest a little bit ahead of the curve? And then just the tax rate was a little bit lower than we were expecting. What drove that?

Sure. Just back to Weener, right, clearly, not everything is seashells and balloons, George. So there's a lot of good stuff. There's a lot of stuff when you're bringing 2 organizations together that you have to work through. And I think it's just communication, but I'd tell you also, this is our 41st acquisition that we've done as a company. And I think it's just as you integrate an organization of this size, let's call it, 6,000 employees, communication is really important and just making sure you're speaking the same language and communicating effectively back and forth through the organization. So that's it. And just sometimes that's easier than not. And I'll just say it was pretty standard for us, but we've got a lot of experience in working through those issues. I'll let Kim answer the tax rate question.

Sure. So for the tax rate for the fourth quarter, it was about 8.8%, and that was a benefit from tax restructuring we did in foreign operations. We do not expect that to repeat in 2025. So we'll be back to our 24% average rate as we go through the year next year.

Yes, George, just to come back around to the question -- this is Bob -- come back around to the question you asked in terms of where the investments were. In typical markets that they have been operating in, very similar markets to where our Dispensing business plays as well. So nothing far afield from what good 2 organizations combined are very capable at doing. They are growthy markets. So we think there's good opportunity with those customers to not only launch these product lines, but to continue to grow with them on a go-forward basis.

And as is typical with us, George, you can just assume that those are kind of mid- to longer-term contracts that support the capital investment.

The next question will come from Ghansham Panjabi with Baird.

Adam, just sort of looking at our model from a volume metric standpoint, in '22, volumes were down, '23 as well and up a little bit in '24. And just based on your characterization of '25, it sounds like you're expecting sort of a mid-single-digit increase in terms of volume. So can you help us bridge the differential as it relates to your confidence in being able to achieve that and just in context of many of your customers that have reported so far, especially the off-cycle reporters that seem much more muted on the outlook for volumes?

Yes. Sure. It's -- you highlighted some challenging years with a lot of moving parts between '22 and '24 there. But what I would tell you, Ghansham, as we came into those years, there was a lot of noise around the market of what was going on with consumers and what was going on with our customer base. And I think what you see at the back half to certainly the fourth quarter of '24 is just a much more normal kind of business environment that we're dealing with, with our customers or sort of through the -- through all the destocking activities. And we're seeing, in many cases, our volumes are more indicative of what consumer demand is for our products. So we feel like as we turn the page now to '25, there's just a lot less noise around what's going on with our customers and what's going on with consumers. And I'll continue to say, through that window of time that you outlined, Ghansham, consumer demand for our products remains fairly strong through that entire process. And really, the disruption was more with our customers and what they were doing with their inventory, what they were doing with their commercial activities and pricing and promotional activities in the market. So as we sit here today, I think we've got a really good degree of confidence that the strategic initiatives that we've outlined that we're executing against them. They're delivering the value and creating value for our shareholders that we had outlined. And I think '25 is going to be a much more normal year than what we've seen the last several years.

Okay. Understood. And then can you help us also bridge the earnings between the $362 million you generated in 2024 in the midpoint of your guidance? How much of it is from the acquisition? And what sort of operating leverage are you assuming on the legacy silicon businesses excluding Weener?

Yes. A very good question. So a couple of things. One, just some of the big numbers right out of the gate, I'm just going to give you some adjusted EBIT numbers. So call it, $50 million from the Weener acquisition of additional adjusted EBIT. I mentioned the $30 million of the cost-savings program for year 2. And then you've really got organic growth that's driving the remainder of the improvement year-over-year. And then we're cycling over things. Some of the headwinds that we see, we've got some additional incremental interest expense. You've got some FX changes that have been taking place. And then our corporate line is a little more expensive next year, in '25 than it was in '24. But all of that gets us to double-digit adjusted EBIT, adjusted EPS growth, and as Kim said earlier, double-digit adjusted free cash flow growth as well.

And the next question comes from Matt Roberts with Raymond James.

Appreciate the bridge you just gave there on the total EBITDA expectations, but maybe if you could provide any additional color on how you're thinking about that by segment. I mean, DSC seems like high value. It continues to drive growth there. In metal, any impacts you're expecting as pet food continues to be a higher mix or as steel is a pass-through? But any margin considerations there as we look into 2025?

Yes. Good question. I mean maybe just going through the segments quickly for you. So DSC, obviously, with double-digit first quarter growth in Dispensing volumes, again, our fourth straight quarter with expected double-digit growth in dispensing products, kind of high single digit for the year. That's a very mix-enhancing portfolio growth, not only for the company but for the segment as well. So really, that's the driver for us in DSC. We'll see kind of low single-digit growth for our Specialty Closures business, non-Dispensing closures. And then you go over to some containers. It's really the story that we've been talking about, right? You've got mid-single-digit pet food growth through the course of the year in '25, partial recovery of fruit and vegetable. And all of that is driving kind of low- to mid-single-digit growth for the segment in 2025. And then lastly, you get to Custom Container. We continue to win in that market. We're looking at kind of mid-single-digit growth in '25 off of a really good year in '24. And I think maybe back to Ghansham's question, this is probably the market that's most clearly the one that normalized as we came through '24. And I think we've got really good momentum heading into '25 that's driving the confidence behind the volume growth expectations.

Certainly appreciate the additional color there. Secondly, if I think of your M&A strategy, so recently, undertook the Weener acquisition, now going through some deleveraging. As you look into 2025, I mean, it seems like there is some talk for potential competitors to sell parts of their portfolio. But specifically for Silgan, are there any certain end markets or areas of technology that you'd still be interested following Weener integration in 2025? And if so, kind of what size or time line are you all comfortable with? And relatedly on the cash, I don't know if I missed this somewhere, but I believe you saw the Eurobonds due in March. Any considerations in addressing those?

Yes, Matt, this is Bob. I'll take the first part of that question. Yes. Look, having closed Weener in October, we're feeling good, as Adam suggested, about the collective teams. While there's work to be done, we're well on our way to the integrating of the operations, identifying and capturing the synergies there. So we are actively looking at what's out there in the market from an M&A perspective. Our balance sheet would certainly support that. As Kim talked about, we're kind of right within our range with the free cash flow profile looking forward into '25 will be to the low end of that range by the time we're there. So there's nothing sort of getting in our way from an M&A perspective. We think that there's a good pipeline of potential opportunities out there, and very specifically, things that we think would be actionable in the near term and that would fit exactly where our investment thesis has been of late. So we're optimistic and hard at work to try to identify and get those next opportunities out in front of us.

And on the 3.25% notes, so we'll be opportunistic in the markets around those as well. But we do have capacity under our revolver. So we're not feeling like we're constrained or forced to do something.

The next question come from Anthony Pettinari with Citi.

This is actually Bryan Burgmeier sitting in for Anthony. First one, just kind of on Dispensing, you called out the $10 million impact from inventory reduction in December. Was that within beverage caps or trigger sprayers or within beauty? Any detail on that? And then just kind of broadly, maybe how much line of sight does Silgan usually have to these types of customer inventory actions?

Bryan, a couple of things. Maybe first off, just in our Dispensing and Specialty Closure segment, so this was actually a part of a restructuring program that we had initiated in our flat cap kind of Specialty Closures business. So what we had done is really streamline the operations and moved volume to more efficient facilities to more efficient manufacturing lines. And as we got through that process, in fairness, we got to it earlier than anticipated, in Q4. And it allowed us to make a conscious decision that we actually drove down our inventory. So in fairness, this didn't really have anything to do with our customers. This was us saying, "Geez, we have improved the operational footprint that we've been working on, and our optimal inventory levels can be much lower than what we anticipated." So we took the opportunity to go ahead and do that. Obviously, there was a benefit of free cash flow. That really wasn't why we did this. But this was an opportunity to optimize kind of our inventory management, realize the full benefits of the restructuring programs that we had initiated and move forward from there. So it was part of our flat cap closures business really as a result of the restructuring programs that we'd already initiated.

Got it. Got it. That makes a lot of sense. And then just on the guidance for high single-digit volume growth for your dispensing products this year. Are there more kind of new business wins being layered in, in 2025? Or are there -- is there may be a benefit from new business wins in 2024 that you haven't lapped yet? Just kind of following up on Matt's question. I'm just thinking about sort of the growth that Silgan is seeing versus sort of the underlying market growth.

Great. Good question. We are continuing to have a lot of success, particularly with the dispensing products portion of our portfolio and in the Dispensing and Specialty Closures segment. So many new wins in 2024, some of which we've talked about, many more new wins in 2025. And really, as we've talked previously, the thesis here is we're competitively advantaged in this marketplace. Our innovation, our design teams are meeting very unique needs from a variety of customers and markets in the space. And we're continuing to have tremendous success. So yes, we'll have additional new wins in '25. And that's a broad base across many, many markets that we serve. And then interestingly enough, we'll be preparing -- we've recently had a significant business award in our Specialty Closures segment that is more focused on 2026, but we'll be ramping up late in the year of '25. So that's included in our guidance. But really, as we think about the forward look of where we're going, we're taking that innovation, design, lightweighting for certain products. All of those elements are winning thesis -- or ideas in the market, let's say that. And we're driving growth through many, many of our markets.

The next question will come from Gabe Hajde with Wells Fargo Securities.

I'm going to use a saying I learned today: "Give a mouse a cookie, he will ask for some milk." If I start with $1.20 billion of EBITDA sort of at the midpoint and I build down to the $450 million of free cash flow, I have about $100 million in there for cash taxes, which would imply maybe a $35 million working capital benefit. And I think I heard $20 million of integration and savings spend in there. Are there other cash components that we should be thinking about? And really, the crux of the question is just trying to understand sort of what the baseline should look like and then maybe what that enables you all to do on the M&A side.

Yes. It's an interesting question, Gabe. I mean, I think some of the things that we're talking about that are working against free cash flow in 2025. Again, we talked about kind of higher interest expense, higher cash tax. I think you had most of the other components correct. So I think you're on the right line of thought. And I don't know if there was anything else that we can provide there that you didn't already have.

Some benefits from our rationalization programs as well. So we have lowered cash year-over-year on the rationalization programs.

And higher CapEx.

Yes. I've got the $300 million in there. I was really kind of walking from $1.20 billion of EBITDA to $450 million. And I had the $185 million of interest, et cetera. And that's where -- like I said, there was a little bit of a -- it looks like there's a working capital benefit this year.

And there will be, and maybe not quite as big as we had in 2024, but there will be a working capital benefit in 2025.

Got it. Okay. And then the other one, Adam, you guys have talked a little bit, and I feel like I missed part of what you answered to Anthony in the last question, being capacity-constrained in parts of DSC, and I'm thinking it's the high value-add dispensing systems. But you're adding some capacity this year explains the higher CapEx. But would you be incurring any sort of start-up expenses or frictional costs in the back half of this year to ramp for 2026? Or how should we think about that?