Silgan Holdings Inc. (NYSE:SLGN) Q1 2023 Earnings Call Transcript

Silgan Holdings Inc. (NYSE:SLGN) Q1 2023 Earnings Call Transcript April 26, 2023

Silgan Holdings Inc. beats earnings expectations. Reported EPS is $0.78, expectations were $0.77.

Operator: Good day, everyone, and welcome to the Silgan Holdings First Quarter 2023 Earnings Call. Today’s call is being recorded. I would now like to turn the conference over to Alex Hutter, Vice President, Investor Relations. Please go ahead.

Alex Hutter: 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, CFO and Treasurer. Before we begin the call today, we’d like to make it clear that certain statements made today 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 2022 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. With that, let me turn it over to Adam.

Adam Greenlee: Thank you, Alex, and we’d like to welcome everyone to Silgan’s First Quarter of 2023 Earnings Call. I’d like to start today’s call by congratulating both Kim Ulmer and Bob Lewis on their new roles at the company. One of the hallmarks of the Silgan culture is rewarding the performance of our people, and I am incredibly proud of their accomplishments and look forward to their continued successes at Silgan. Now moving back to the first quarter performance. Once again, good the year with strong operating performance in each of our businesses and continue to leverage and advance the strong momentum generated through the pandemic as we enter the second quarter of 2023. Our businesses remain highly focused on executing our near-term and long-term strategic priorities, which continues to drive our outperformance in the markets we serve and significant value creation for our shareholders.

Our teams did an excellent job navigating the market challenges alongside our customers, again in the first quarter. Overall, we believe that our resilient consumer staple end markets, our customer intimacy and market positioning, combined with the agility and expertise in our operations continue to set us apart from our competition. The strategic portfolio evolution were advancing since 2017 continues to perform as we envisioned, and we remain confident with the prospects for our business in 2023 and beyond. In the first quarter, our Dispensing and Specialty Closures segment delivered solid results despite significant headwinds in the quarter from resin and foreign currency. With our Dispensing products, building on the momentum we saw early in the year and volumes improving as we exited the quarter.

Our products for high-end fragrance and beauty end markets continue to win in the marketplace, posting double-digit volume growth in the first quarter and many of the Dispensing products that had experienced headwinds from inventory management in 2022 began to see year-over-year improvement in the first quarter with the trend accelerating as we exited the quarter. While these positive impacts were offset by the timing of customer orders for food and beverage closures in the first quarter, trends in April are strong, and we are expecting volumes for the segment to impact positively in the second quarter. Our metal containers business continues to execute extremely well, posting record net sales and adjusted EBIT. With the impact of the pandemic now behind us, our efficient operating platform, combined with organic volume growth is driving our performance.

The challenges that several customers experienced in 2022 in our pet food markets appear to be largely behind us. And as a result, volumes for our pet food containers were up mid-single digits in the quarter. Our operating performance in the quarter continued to drive strong profit improvement in the segment and our early indications for the vegetable pack are consistent with our preliminary expectations. In our Custom Containers segment, our teams continue to take actions to mitigate the impact of our decision not to renew a contract that did not meet reinvestment hurdles in the timing mismatch of the commercialization of new business awards in the year as well as unanticipated headwinds from rapidly rising resin costs in the quarter. That said, as we look forward, we are expecting these items to also impact the second quarter comparisons as we’ve recovered cost associated with the nonrenewal and we’re winding down shipments and operating activities in the second quarter of 2022.

The second quarter of 2023 is also expected to continue to experience higher resin costs. Therefore, second quarter profit in Custom Containers is expected to be slightly below first quarter levels. We believe this business remains well positioned in the market and continues to win new business based on our unique customer-focused operating model, which will be more evident as we exit 2023. Overall, we’re off to a very strong start in 2023 and feel confident in our outlook for the remainder of the year. Before I turn it over to Kim to cover the specifics of our financial results for the quarter and to provide additional color around our earnings estimates, I want to take a moment to recognize the impact and lasting legacy of our 2 founders, Phil Silver and Greg Oregon.

So Phil and Greg started this company 36 years ago with a clear vision and purpose to create a company unlike any other that was purely focused on competing and winning in the markets served by being the best at what they do. Proving the enduring wisdom and success of that vision, Silgan has grown to become a global leader in the packaging industry with 2022 sales of $6.4 billion and nearly 16,000 employees around the world who all embrace the principles Phil and Greg envisioned. On behalf of our shareholders, customers and the entire Silgan team, thank you for creating such a special company for your lifelong devotion to its success and for your personal contributions to our development. We are all incredibly proud and honored to be part of the past, present and future of Silgan.

With that, Kim will take you through the financials for the quarter and our estimates for the second quarter and full year.

Copyright: maridav / 123RF Stock Photo

Kim Ulmer: Thank you, Adam. As Adam highlighted, the business continued to execute at a high level in the first quarter of 2023, delivering strong first quarter sales and adjusted EBIT and adjusted earnings per diluted share. Net sales for the first quarter of 2023 were approximately $1.4 billion. Sales were comparable to the prior year quarter, excluding sales associated with Russia of $9.5 million in the first quarter of 2022 and a foreign currency headwind of approximately 1% in the first quarter of 2023. First quarter 2023 sales performance was driven by strong volumes in Metal Containers, which was offset by expected lower volumes in the Dispensing and Specialty Closures and Custom Container segment. Total adjusted EBIT for the quarter of $149.4 million increased over 2% on a year-over-year basis with higher adjusted EBIT in the Metal Container segment offsetting lower adjusted EBIT in the Dispensing and Specialty Closures and Custom Container segments.

Adjusted net income per diluted share declined $0.01 from the first quarter of 2022 with nonoperating headwinds from higher interest expense and foreign currency and the lag pass-through of resin costs driving approximately $0.15 of earnings headwind in the quarter, of which we would expect to recover $0.05 in the second half related to resin. Excluding these items, our strong operating performance would have driven adjusted EPS higher by a double-digit percentage. Turning to our segments. Dispensing and Specialty Closures segment sales were comparable to the prior year, excluding a 2% headwind from foreign currency and a 1% impact from Russia versus the prior year. As a 2% improvement in price was offset by lower volume/mix. First quarter 2023 Dispensing and Specialty Closures adjusted EBIT decreased $13.6 million versus the prior year period, with improving but lower year-over-year volume mix trends and difficult year-over-year cost comparisons as a result of comparative changes resulting from the lagged pass-through of resin costs and the prior year benefit from an inventory management program.

Volume/mix improved throughout the quarter with growth in our dispensing products strengthening in the latter part of the quarter. While this trend was overshadowed by the timing of customer orders in the food and beverage markets in the first quarter, we are expecting those products to revert to a more normal trend in the second quarter of 2023. Relative to our expectations, the Dispensing and Specialty Closures segment delivered strong operating performance but did not offset the significant headwinds from higher resin costs during the quarter and unfavorable foreign currency. As our contracts in the Dispensing and Specialty Closures segment generally contain a longer lag contractual pass-through of resin costs in our other businesses, we expect this impact will likely continue to weigh on results in the second quarter, but ultimately recovering the impact later in the year as resin costs are expected to abate.

In our Metal Containers segment, our team’s performance was exceptional in the quarter with volume growth of 3%, driven by strong demand for pet food, and vegetable containers, excluding impacts associated with Russia and foreign currency, sales grew 5% from the prior year quarter. While the first quarter is seasonally one of our smaller quarters, adjusted EBIT increased nearly 60% from the prior year quarter as the business continued to contractually recover cost inflation and the operating leverage of higher volumes drove strong incremental margins. The business started the year strong and is well positioned to deliver low single-digit volume growth and mid-single-digit adjusted EBIT growth for 2023. In Custom Containers are nonrenewal of a piece of contractual business in the segment Joe volumes are lower by 10% year-over-year in the first quarter of 2023, which, coupled with lower resin costs on a year-over-year basis and unfavorable foreign currency translation drove sales 13% below the prior year period.

Despite these top line challenges, our business is able to partially offset the impact of lower volumes through operational performance, but the timing and pace of resin cost increases impacted adjusted EBIT in the first quarter. We expect the headwind from resin costs to continue to weigh on adjusted EBIT in the first half of 2023, but recover in the back half of the year. In the second quarter, we are expecting lower sales on a year-over-year basis as we commercialize new business later in the second half of the year to offset the business we exited in 2022. As a result, we are expecting Custom Containers adjusted EBIT will be slightly below first quarter 2023 levels in the second quarter due also in part to the impact of the lag pass-through of resin cost escalation.

As we move into the second half of the year, we expect the year-over-year volume trend to improve in each quarter on a sequential basis. Looking ahead, we are estimating adjusted net income per diluted share in the range of $0.85 to $0.95 in the second quarter of 2023. We are expecting higher interest expense of $0.10 per share and a $0.06 per share impact associated with Russia. And coupled with the continued impact of the lag pass-through of higher resin costs from the first quarter, this accounts for nearly all of the $0.19 year-over-year decline from the record $1.09 in the second quarter of 2022. On a segment level, adjusted EBIT is expected to be higher than the prior year in Metal Containers, comparable to the prior year in Dispensing and Specialty Closures and lower than the prior year in Custom Containers.

For the full year 2023, we continue to expect total adjusted EBIT to increase by mid- to high single digits as compared to the prior year. As a result, we are confirming our outlook of adjusted net income per diluted share of $3.95 to $4.15, which includes a year-over-year headwind of $0.20 per share for interest expense, which we continue to expect to be approximately $155 million and a tax rate of approximately 24% to 25%. These estimates exclude the impact from certain adjustments outlined in Table C of our press release. Based on our current earnings outlook for 2023, we are also confirming our estimate of free cash flow of approximately $425 million and CapEx of approximately $250 million in 2023. That concludes our prepared remarks, and we’ll open the call for questions.

Operator, would you kindly provide the directions for the question-and-answer session.

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Q&A Session

Operator: We’ll take our first question from George Staphos with Bank of America.

George Staphos : I guess I’ll try to keep it to 2 or 3 questions and turn it over, go back to queue. So can we dig in a little bit more into 2Q. Kim, you mentioned on a segment basis, you expect earnings, if I heard you correctly, for Metal to be up DSC to be flat and Custom Containers to be lower relative and you obviously gave us the earnings per share guide for the quarter. Relative to what you would have expected, say, in January or February, whenever you gave your guidance for the year, where are you seeing underperformance, if at all? Or are these really right on where you would have expected 3 months ago? And in particular, where might you be seeing weakness and strength? And then I had a couple of follow-ons.

Adam Greenlee: George, it’s Adam. Maybe I’ll just — I’ll jump in first and let Kim and Bob come in with any additional comments. But really, for us, it was a strong quarter, and we feel good about the operational performance really in all 3 segments versus our expectations. So when you go around each operating segment, Dispensing and Specialty Closures, it’s obviously a tough comp versus the prior year for the reasons that Kim had outlined in her previous comments. But really, it was right in line with our expectations. Metal Containers and fairness is probably just a little bit above our expectations as we sat here coming into the year. And then Custom Containers is very close to what we expected as well, maybe just slightly behind.

And really, that’s just some of the inventory that’s still working through the bottle side of our business through distribution, through lawn and garden, et cetera. So we’re feeling pretty good about things. As we look at our Q2 guide, I think it’s really right in line with our expectations. So I’ll start with Dispensing and Specialty again. We mentioned the first quarter timing of food and beverage closures, really, George, 2023 looks a lot like our history of food and beverage order book because of the filling season for those products back to sports drinks, et cetera, ready-to-drink iced teas, really does start early in the second quarter, and that’s what we’ve seen. So we’re still expecting food and beverage closures to be up for the year.

So it’s much more normal than maybe what we had seen through the pandemic from a timing perspective. Metal containers for the second quarter I’ll just finish with the segments real quick, George. Metal Containers, look, it’s right in line with expectations. What we’ve been talking about really now for maybe 3 or 4 years that our growing markets in pet food and protein are driving category growth for the entire segment. We’ve seen stability in vegetables. We’ve seen good, strong volumes in our soup business as well. So Metal Containers is roughly right in line. You get the Custom Containers, and it’s the one I wanted to finish on, George, specifically because a year ago, we did have the business that we chose to not renew in 2022. So at the end of Q2 last year, not only did we have the normal volume of requirements contract, we did sell through the inventory.

We did have some costs that were associated with the exit that we were fully reimbursed for. So as we look at Q2 now, as we did 30, 60, 90 days ago, we think the profit of Q2 should look a lot like the profit in Q1. In addition, now we’ve got a little bit of resin headwind, that’s really the difference in Custom Containers. So as we sit here today, I think this is roughly in line. Interest expense was known. The Russia year-over-year comparison was known and our businesses are performing really well. So I think George maybe back in.

George Staphos : Yes. No, I appreciate it, Adam. Maybe just a follow-on to what you just said. So I took your comments that in Dispensing and Specialty Closures, you should be up in volume 2Q versus 2Q yet you’re guiding sort of a flat earnings outlook. So if that’s a correct statement, both of those are correct, then where is the if you will, the lost operating leverage if, in fact, the business is performing as you like? And then just quickly, can you go through what the effect of resin was in 1Q and 2Q and why you expect to get it back? And how much is your guidance a risk if resin doesn’t come down in the back half?

Adam Greenlee: Okay. Thanks, George. So a couple of things there. Number one, again, volumes in the second quarter. I want to be really clear, Dispensing volumes are really strong in the first quarter. Certainly on the fragrance and beauty side of the business. We’ve talked a lot about trigger sprayers. We saw sequential improvement through the quarter with our trigger sprayers. And really, as we enter Q2, we fully recover the inventory correction and kind of the lawn and garden market and the home care markets in our Dispensing business. And then now we’ve got strong volume in our food and beverage closure business as we typically would have this time of year. So you’ve got that right. Volume is good in both sides of the business.

And then you think about what’s different, it’s really about resin. So it was the timing and the pace of resin escalation through the first quarter. No secret. The highest increase was in the month of March. That creates the longest lag for us in this business where, again, typically, we have a slightly longer lag than the other Silgan businesses. So it’s really mostly around resin. And I think you’re right. If you think about the Q1 impact, what I’d tell you, the Q1 impact of what occurred in the first quarter with escalating resin costs was about $0.03 a share of profit. And as we turn to Q2, the discrete Q2 impact of those increases from Q1 is, call it $0.02 to $0.03 as well. And we do, in our forecast, George, expect to recover that in the back half of the year.

I would say, Silgan’s tried and true with the pass-through mechanisms that we have to protect our business, that we do recover the inflation that we experienced certainly in raw materials, and I really can’t remember a time where we haven’t done that.

Operator: We’ll take our next question from Gabe Hajde with Wells Fargo Securities.

Gabe Hajde : One on Metal Container. I was curious, Adam, you talked about things actually performing a little bit better and not to put too finer point out, but I don’t know if that — it seems like it might be on the cost recovery side, maybe volumes coming in a tick better than what you’re thinking, maybe that’s just maybe sooner in Q1 or earlier in the year than what you might have expected?

Adam Greenlee: Yes. Great question, Gabe. Really, for us, volume is really right where we’ve been talking about for the last couple of years. So really no surprise there. I think where we exceeded our own expectation was really on the cost side. So as you think about the cost standpoint year-over-year, number one, a year ago, we still had some inefficiencies. We were dealing with the Omicron variant a year ago in the first quarter. As you’ll recall, through the course of the last 3 quarters last year, we really got at the inefficiencies that the pandemic had created as we were doing our best to get containers out to the world for nutrition and for consumers around the world. So really, you have the continuation of that terrific cost performance that we had the last 9 months of the year last year that drove performance in the first quarter of this year.

On top of that, as you’ll recall, one of our pass-through mechanisms in the Metal Container business is kind of the other manufacturing costs. It is on a lag basis. So as a reminder, we’re passing through 2022 and inflation and other manufacturing costs that we experienced and we’re in the P&L last year against 2023’s inflation that we’re experiencing. So there is a cost recovery of the inflation. Again, our cost is lower this year as we’ve driven those inefficiencies out of the business. And that’s really what’s driving our outperformance in Metal Containers in the first quarter and really a bit in the second quarter as well.

Gabe Hajde : Okay. And then I guess in DSC, you talked about double-digit growth in the what I’ll call value add or higher-end Dispensing for fragrance and beauty and then seemingly, the destock having worked through for trigger sprayers. Is there the potential that I know it’s tough, you don’t know exactly what’s sitting in maybe distributor channels, et cetera, but there’s a restock effect sometime during the year? And if so, is that embedded in your outlook? Or would it represent upside to what you’re guiding to today?