Silgan Holdings Inc. (NYSE:SLGN) Q4 2023 Earnings Call Transcript

Silgan Holdings Inc. (NYSE:SLGN) Q4 2023 Earnings Call Transcript January 31, 2024

Silgan Holdings Inc. beats earnings expectations. Reported EPS is $0.63, expectations were $0.58. SLGN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Silgan Holdings Fourth Quarter 2023 Earnings Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Alex Hutter, Vice President of Investor Relations. Please go ahead, sir.

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 and CFO. Before we begin the call today, we’d like to make it clear that certain statements made on this call may be forward-looking statements. These forward-looking statements are 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.

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 adjusted net income per diluted share. A reconciliation of these metrics, which should not be considered as substitutes for similar GAAP metrics can be found in today’s press release and under non-GAAP financial information available in the Investor Relations section of our website at silgonholdings.com. With that, let me turn it over to Adam.

Adam Greenlee: Thank you, Alex, and we’d like to welcome everyone to Silgan’s Fourth Quarter and Full Year 2023 Earnings Call. Our team delivered another year of strong performance in 2023 amid an unprecedented and rapidly changing market backdrop, proving once again that our businesses and our company are resilient regardless of the broader economic circumstances. We delivered our second highest adjusted EPS and adjusted EBIT in the history of the company and our robust free cash flow and strong balance sheet allowed us to return over $250 million to our shareholders through buybacks and dividends. Our disciplined approach to everything we do, including our customer partnerships, our contractual arrangements and our capital deployment has positioned the company to continue to perform for years to come.

During the year, we embarked upon a multiyear $50 million cost improvement program, which is the largest in our company’s history to strengthen our already market-leading cost positions across each of our businesses. To achieve these savings, we made several difficult decisions beginning in late 2023 and have announced the consolidation of 5 of our manufacturing facilities to date. These actions will position the company to continue to meet the unique needs of our customers and compete and win in the markets we serve with an even lower cost operating footprint. Volume trends in 2023 were mixed among the end markets we serve and the products we produce. Our strategic growth products for dispensing and pet food continue to see success and performance to outpace broader market trends and products that had experienced post-pandemic destocking in 2022 delivered strong recovery and growth in 2023.

While consumer demand for our essential food and beverage products remains resilient, midway through the year, it became apparent that our volumes would be adversely impacted across the segments by our customers’ decisions to focus on destocking initiatives in the food, beverage and pet food markets as a result of the impact of inflation throughout the supply chain. At the segment level, our Dispensing and Specialty Closures segment delivered another year of strong organic growth and new business wins for our high-value dispensing products, particularly in the high-end fragrance market. This growth drove margin improvement and a more favorable mix that partially offset the impact of lower volumes in food and beverage products from customer destocking.

We successfully recovered our cost in the marketplace and mitigated the impact of a unique situation at one of our U.S. operating facilities that presented discrete labor challenges and drove incremental costs in the operating system during the year. In Metal Containers, we reported our sixth consecutive year of record adjusted EBIT. Our long-term contractual arrangements and disciplined pass-through mechanisms helped our business to offset lower volumes and the impact of our own inventory management program in the prior year to grow adjusted earnings. In Custom Containers, our volumes fell short of the prior year due to continued customer destocking, primarily in the second half of the year and the delay of commercializing new business wins into 2024.

As we now turn our focus to 2024, we believe the business is positioned to deliver volume growth and with the benefit of our cost-savings initiatives beginning to impact profitability, we expect to meet or exceed our prior record for adjusted EBITDA. We have seen early signs of recovery in certain end markets for the customer destocking activities that we experienced in 2023 and expect these favorable trends to continue to improve through the first half of 2024. We are expecting Dispensing and Specialty Closures volumes to grow by a mid-single-digit rate driven by another year of high single-digit growth in our dispensing products and low single-digit growth in our closures products, resulting in an improved mix for the segment. Metal Containers volumes are expected to grow by a low single-digit percentage driven primarily by mid-single-digit growth in pet food.

Custom Container volumes are expected to be comparable to prior year levels with more pronounced destocking in the first quarter, offset by growth driven by new business wins in the subsequent quarters of the year. As we enter 2024, we continue to make progress and execute our strategic priorities. We have taken strong actions to effectively manage the factors within our control and believe the company is positioned for earnings and free cash flow growth in ’24 and beyond. Our customer partnerships remain strong. 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. With that, I’ll turn it to Kim, who will take you through the financials for the quarter and our estimates for the first quarter and full year of 2024.

Kim Ulmer: Thank you, Adam. As Adam highlighted, our business continued to deliver strong financial results despite several headwinds in 2023 as we achieved our second highest adjusted EPS in the history of the company and once again showed that our business performs well despite challenging economic circumstances. We continue to convert our profits into strong cash generation in 2023 and used our cash to return over $250 million to shareholders including $175 million through share repurchases. We used our remaining cash to delever to near the midpoint of our target leverage range, and our balance sheet remains strong as we enter 2024. Turning to the fourth quarter 2023 results. Net sales of approximately $1.3 billion declined 8% from the prior year period, driven primarily by lower volumes in each of our segments.

Total adjusted EBIT for the quarter of $135.9 million decreased by 9% on a year-over-year basis, with record adjusted EBIT in Dispensing and Specialty Closures and higher adjusted EBIT in Custom Containers, offset by expected lower adjusted EBIT in the Metal Container segment. Adjusted net income per diluted share declined $0.22 from the record achieved in the fourth quarter of 2022, with lower volumes and higher interest expense of $0.06 driving the year-over-year decline. Turning to our segment sales. Sales in our Dispensing and Specialty Closures segment declined 3% versus the prior year, primarily as a result of lower volume mix of 5%. The decline in volume was driven primarily by customer destocking activities in domestic food and beverage markets and double-digit declines for higher-volume meadow closures for international food and beverage markets.

Record fourth quarter 2023 Dispensing and Specialty Closures adjusted EBIT increased $12.4 million versus the record achieved in the prior year period as a result of strong cost recovery and lower manufacturing costs which were partially offset by the impact of lower volume. In our Metal Container segment, sales declined 10% versus the prior year, excluding a 2% impact from Russia sales in 2022. Lower volume in several product categories drove a 7% decrease as customer destocking priorities continued to weigh on order patterns throughout the quarter, but showed improved trends relative to the year-over-year declines in the third quarter of 2023. Price mix was negative 4% in the quarter, which was partially offset by a 1% improvement in foreign currency translation.

As expected, Metal Containers adjusted EBIT was below the record level in the prior year quarter primarily due to the prior year benefit of inventory management, which did not repeat in 2023 and lower volumes as a result of customer destocking. In Custom Containers, sales declined 5% compared to the prior year quarter, driven by a 2% decline in volumes, the pass-through of lower resin costs and a less favorable mix of products sold. Custom Containers adjusted EBIT increased $1.8 million as compared to the fourth quarter of 2022, primarily due to improved cost management, which more than offset the impact of lower volume. Looking ahead to 2024, we are estimating adjusted net income per diluted share in the range of $3.55 to $3.75, a 7% increase at the midpoint of the range as compared to $3.40 in 2023.

This estimate includes corporate expense of approximately $25 million, interest expense of approximately $170 million, a tax rate of 24% to 25% and a weighted average share count of approximately 107 million shares. Depreciation is expected to increase $15 million to $20 million on a year-over-year basis and be in the range of $225 million to $230 million. At the midpoint of our 2024 adjusted EPS range, we expect to meet or exceed the record levels of adjusted EBITDA achieved in 2022. From a segment perspective, a mid-single-digit percentage total adjusted EBIT growth in 2024 is expected to be driven primarily by the Dispensing and Specialty Closures segment with slightly higher adjusted EBIT in the Metal Containers and Custom Container segments relative to 2023 levels due to the impact of anticipated customer destocking in the first half of 2024.

Based on our current earnings outlook for 2024, we are providing an estimate of free cash flow of approximately $375 million, a 5% increase from 2023 as earnings growth in 2024 will be partly offset by higher CapEx, which we expect to be approximately $240 million and by approximately $30 million of cash cost to support our cost reduction program, including additional working capital to facilitate the program. Turning to our outlook for the first quarter of 2024, we are providing an estimate of adjusted earnings in the range of $0.60 to $0.70 per diluted share as compared to adjusted net income per diluted share of $0.78 in the prior year period. The year-over-year decline in adjusted earnings in the first quarter is driven primarily by lower volumes, the impact of the sell-through of higher cost inventory from the prior year in our European metals operations and higher interest expense.

First quarter 2024 adjusted EBIT is expected to be above prior year levels in Dispensing and Specialty Closures, with a low single-digit decline in volumes driven by customer destocking more than offset by improved profitability and stronger mix. First quarter 2024 Metal Containers adjusted EBIT is expected to be slightly higher on a sequential basis from the fourth quarter of 2023 but down approximately $10 million year-over-year due to a low single-digit percentage decrease in volumes as a result of continued destocking and the sell-through of higher cost inventory from the prior year due to a double-digit percentage decline in steel cost in Europe in 2024. Adjusted EBIT in the Custom Container segment is expected to be stable on a sequential basis but below prior year levels due to continued destocking trends as sequential volumes remain stable but year-over-year comparisons become more difficult in the first quarter.

Volumes in the Custom Container segment are expected to improve throughout the year as new business wins ramp up and destocking is expected to abate. That concludes our prepared comments, and we’ll open up the call for questions. Anna, would you kindly provide the directions for the question-and-answer session?

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

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Q&A Session

George Leon: Congratulations on the progress in the year. I guess the question I had first on destocking, I think you said you expect it to continue through the first half of the year. Destocking has been going on for a long time now. How should we think about — if I heard that correctly, how that will vary across the segments? What gives you confidence, after towards an extended period of destocking that we’re getting close to the end of it. And then a related volume question, what are you seeing in soup for metal? We’ve heard that things have seen some pickup there. If you have some thoughts around that, that would be great. One other follow-on.

Adam Greenlee: So destocking, I know we talked about it a little bit on the last call, but let’s just try to put destocking in a few buckets. So the COVID items that saw a significant surge during the COVID pandemic period, created a destocking item as we came out of the pandemic. And those are things like lawn and garden, some of our hard surface cleaners, our health products and sanitizers, those types of products. Those went through a destocking phase post pandemic and essentially, those products have now fully recovered as we exit 2023. So some of the early signs of recovery that we’re going to talk about, I’m sure at some point on the call, are the items like our trigger sprayers, we did see sustained double-digit recovery later in 2023 and are expecting that growth to continue in 2024 as well.

So that’s the first part of destocking. Then we ran into a bit of food and beverage destocking, some challenges in Europe with inflation, et cetera. So it expanded to other categories once we got through the pandemic. I think for the most part, we’re seeing those now dwindle. And really, it’s just some — a few dribs and drabs that are carrying into 2024. The last item I would call destocking, George, is the pet food item that we talked about on the last call. And it occurred later in the cycle. Really, the fourth quarter played out almost exactly like we thought it was going to with pet food. And as we look forward into 2024, we’ll have some continued destocking in pet food for sure. Some other categories, again, the trends are improving. And what I would say about pet food, we’re going to see nice growth in the full year of 2024.

When destocking ends for pet food is somewhere between the end of first quarter, into the second quarter. So we’re saying through the first half of the year, and we should be beyond destocking at that point. So I think as — to answer your question, how should you think about it? I think it’s dwindling in Q1. You’ve got the impact of pet food that we talked about. And as we cycle out of the second quarter, we think we’ll be beyond the destocking activities.

George Leon: And so the related question I had was just what are you seeing in soup. And then my follow-on, and I’ll turn it over. So as we think about 2024, and the discrete items, the things that are relatively in your control, however you want to define it in terms of earnings gains you have, the cost out program, you have some new wins. What should we bake in for this year, not that it’s ever easy, relative to ’23. And I’ll turn it over there.

Adam Greenlee: Okay. Good question on soup. Sorry, I missed that on the first round there. We had talked on the last call that we were not only anticipating but seeing some further promotional activity in our food markets, particularly in soup. Soup did have a good quarter in the fourth quarter, CMI data showed nice recovery and growth in soup. And I think from our perspective, George, soup sort of played out exactly like we thought it was going to for the course of the year. We knew that — or we anticipated that soup was going to have a more normal soup-filling season than maybe what we had seen in 2022, and that’s really what happened. So for the year-on-year comps, it was difficult through the summer when soup isn’t typically filled.

But as we now get into call it, Q4, we’re seeing a normal soup season. We’re also seeing, I think, the positive impact of some of the promotional activity that our customers have done, and it seems to be resonating with consumers. So part of that is what also gives us confidence back to your original question in ’24. There are actions that our customers have taken from a promotional standpoint to begin to refocus on returning value to consumers and potentially driving volume, and we’re seeing some green shoots as we sit here today. And maybe the last question, George, just how you should think about all the items that come together. Obviously, they’re all encompassed in our guidance as we think about 2024. And you go across the segment, sure, we had the 1 plant in the U.S. Dispensing and Specialty Closure segment.

That’s fully recovered, those costs as we expected. We’re going to be reduced as we got through the end of the year and each quarter, we made progress. And really, those costs have now been driven out of the system as we sit here for 2024. Maybe the last one, and I can move on. But — the new wins in the Custom Container business, we talked about the first 1 coming on sometime in Q1. We’re right on track. That will be commercialized. We are fully qualified just in the final stages of commercializing right now and the second large item is kind of a midyear qualification and commercialization. So we’re feeling very good that those are on track and on time. And then finally, the first piece of our $50 million 2-year program, those savings are expected to hit in ’24.