Silgan Holdings Inc Q1 FY2022 Earnings Call

Thank you for joining today's Silgan Holdings First Quarter 2022 Earnings Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Kim Ulmer, Senior Vice President Finance and Treasurer. Please, go ahead, ma'am.

Thank you. Joining me from the company today, I have Adam Greenlee, President and CEO; and Bob Lewis, EVP and CFO. Before we begin the call today, we would 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 2021 and other filings with the SEC. 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, I'll turn it over to Adam.

Thank you, Kim, and welcome, everyone, to our first quarter 2022 earnings call. We trust you and your families are all doing well as we continue to cycle through the current stage of the COVID-19 pandemic and look forward to returning to a new normal. I'll make a few comments about the first quarter and share our thoughts regarding the remainder of the year. Bob will then review our financial performance and provide more details about the 2022 outlook, and then Bob and I will be happy to answer any questions. As you've seen in this morning's press release, we reported record adjusted earnings of $0.78 per diluted share, at the higher end of our earnings estimates and ahead of the prior record first quarter of 2021 of $0.75 per diluted share. We achieved this performance by leveraging the power of the Silgan portfolio, with outstanding operating performance across each of our business segments, as we were able to mitigate the impact of inflation and supply chain disruptions for the company and our customers. In addition, our strong commercial relationships helped ensure our ability to successfully pass through the unprecedented raw material inflation we are experiencing. These actions allowed us to overcome the known volume headwind we faced entering the first quarter in certain portions of our business, the impact from raw materials, and other manufacturing cost inflation and the negative impact of supply chain and production disruptions at several of our customers. Without these customer supply disruptions, volumes in each of our segments would have been even higher. As we anticipated, the year-over-year volume comparisons were difficult in the first quarter, but volumes across each of our businesses were in line with our expectations. Given our strong start to the year, our volume outlook for the remainder of the year, our deep customer relationships, the strong operational performance of each business, and our continued success in integrating the recent acquisitions, we are raising our full year guidance to $3.90 to $4.05 per diluted share for our new range, representing a 17% increase at the midpoint over record 2021 levels. With that, I'll turn it over to Bob.

Thank you, Adam. Good morning, everyone. As discussed in the press release, the power of Silgan's portfolio continued to deliver strong results owing to the discipline of our cost pass-through mechanisms, outstanding operational performance, and the benefits of the recent acquisitions. These gains were partially offset by anticipated lower volumes, largely as a result of the fourth quarter of 2021 prebuy, as well as ongoing supply chain challenges, primarily at our customers, and a less favorable mix of products sold. Each of our teams did an outstanding job improving operational efficiencies to offset significant inflation and volume shortfalls, as a result of supply chain disruptions at certain of our customers. Consolidated results for the first quarter of 2022 exceeded the prior year and were at the higher end of our estimate range. We delivered record adjusted earnings per diluted share of $0.78 versus $0.75 in the prior year period. On a consolidated basis, net sales for the first quarter of 2022 increased $203.8 million or 16.5% versus the prior year, to $1.44 billion as each of our businesses delivered top-line improvement. These increases were largely the result of the pass-through of higher raw material and other costs across each business, with higher volumes in the Dispensing and Specialty Closure segment, including from acquisitions, and a more favorable mix of products sold in the Custom Container segment. These benefits were partially offset by unfavorable foreign currency translation of approximately $22 million in the quarter, lower volumes, and a less favorable mix of products sold in the Metal Container segment, and lower volumes in the Custom Container segment. Acquisitions contributed sales of approximately $55 million in the quarter. We converted these sales to adjusted income before interest and taxes for the quarter of $144.8 million, after adjustments of $1.4 million for rationalization charges, versus $136.9 million after adjustments of $10.3 million for rationalization charges in the prior year quarter. Highlights of adjusted segment income for the segment are as follows: Adjusted segment income in the Dispensing and Specialty Closures segment increased $16.4 million to $87.3 million in the first quarter of 2022. The prior year quarter was adjusted by $5.2 million for rationalization charges. The increase in segment income was primarily due to the benefits of the lagged pass-through of lower raw material costs, as compared to the prior year unfavorable effects from the lagged pass-through of raw materials; higher unit volumes including from the Gateway and Unicep acquisitions; and improved operating efficiencies. The acquisitions contributed approximately $8 million. These benefits were partially offset by inflation and other manufacturing costs and foreign currency translation losses of approximately $2 million. Adjusted segment income in the Metal Container segment was $39.3 million, down $11.3 million versus the prior year after adjustments of $1.3 million in 2022 and $5 million in 2021, each for rationalization charges. This decrease was primarily attributable to lower unit volumes of nearly 14%, the impact from the higher percentage of smaller-sized containers sold, and ongoing inflation and manufacturing costs, partially offset by strong operating performance and income contribution from the Easytech acquisition of approximately $1 million. As expected, the decrease in volumes was largely related to the fourth quarter 2021 prebuy activity in advance of significant raw material price increases. The first quarter of 2022 volumes are well above pre-pandemic levels, up 10% as compared to 2019. Adjusted segment income in the Custom Container segment was $24.8 million for the quarter, slightly above the prior year quarter after adjustments for rationalization charges of $100,000 in each year. This increase was largely attributable to favorable impacts from the delayed pass-through of the lower resin costs in 2022 versus the unfavorable impact in the prior year from the higher resin costs and strong operating performance, partly offset by the impact of volume declines of approximately 8% versus a very strong pandemic-driven prior year quarter. Turning now to our outlook for 2022. As expected, we are off to a good start as we delivered first quarter results to the higher end of our earnings estimates. Our acquisition integration is going well. Our businesses continue to deliver strong operating performance and we anticipate our customers' volumes will improve as they cycle over difficult supply chain issues. As a result, we have raised our full-year earnings estimate to a range of $3.90 to $4.05, which at the midpoint, represents a 17% increase over the record 2021 performance. We're also providing a second quarter 2022 estimate of adjusted earnings in the range of $0.90 to $1 per diluted share, the midpoint representing a 12% increase as compared to the record adjusted net income of $0.85 in the prior year quarter. Based on our current outlook for 2022, we are maintaining our free cash flow guidance of approximately $350 million, as we manage the impact of significant inflation in raw material and other operating costs on our working capital. That concludes our prepared comments. Before I turn it over, I’d like to remind everyone to limit their time to one question, in order to allow everyone an opportunity to have their question asked. Alan, I'll now turn it over to you for the Q&A session.

We'll take our first question from George Staphos with Bank of America.

Hi, thank you very much for taking my question and for all the details. Congratulations on the progress so far. My question is about margin. Could you break down the 300 basis point drop we observed compared to the first quarter of 2021? There are some changes in mix, and we are also seeing the effects of inflation. It has been a long time since metal margins were at 6%, probably not since 2005 or 2006. Additionally, could you discuss the mix and margin trends you experienced in Custom Containers? There wasn't much growth in incremental margin, but there were some shifts in business and tougher comparisons following the hygiene boom. Thank you.

Hey George. This is Bob. I'll address the metal part of that question. If you look at the year-over-year drop, it decreased from around 9% to about 6%. The main factor contributing to this is the significant inflation we are currently experiencing. When considering that metal prices have risen by over 80%, it accounts for a substantial portion of that change, around 200 basis points. The remainder can be attributed to a less favorable mix and some changes on the volume side as well. This explains the shift to the 6%. It's not surprising that the last time we observed this was around 2005, which was another period marked by a similar, albeit not as severe, inflationary environment concerning raw materials.

And then George when you move over to Custom Containers really the mix change there was some of our customers in our Custom Container segment having difficulties securing ingredients and other packaging raw materials to fill products. So those are typically in some of our smaller packages. So, we did have a greater mix of larger packages that we sold from Custom Containers in Q1 generating us a more favorable mix.

I will turn it over.

All right. Your next question will come from the line of Mark Wilde with Bank of Montreal.

Good morning, Adam, Bob, Kim. I'd like to just talk a little bit about tinplate. There's discussion of tinplate prices moving up even further in 2023. And I wondered if you can just address that issue? And then also touch on any sources of incremental supply that might be available and also whether these continued increases in tinplate are having any impact on demand or maybe prompting people to look at further substitution?

Good morning, Mark. Maybe just to start out, with 2023 I think we are starting to have those conversations with our suppliers of tinplate as we continue to look really around the world for sourcing opportunities for our tinplate products. As you would understand, we essentially buy more tinplate in packaging than anybody else combined in North America with the size of our Metal Container business. So, we think we've got a pretty good insight into what's happening. We also think we are a pretty valued customer in that chain as we've been able to secure all of the raw materials that we've needed to support our customers' growth over the last several years. So, as we look at '23, I think it's too early to really comment. I think price stability is where our thoughts are at this point, and there's going to be a bit of ask spread between the suppliers and the buyers of those products. But I would not anticipate significant inflation given what’s happened in 2022. And the incremental supply question clearly, we like to source within the regions in which we manufacture. We supplement those sourcing strategies with strategic opportunities and opportunistic buys around the world as they present themselves and as we uncover them. And then your final question, just what we think it's doing to demand? What I'd tell you right now is our data that we look at for the retail movement of product of canned goods is still pretty good. What is evident to us is our customers are taking price to retail, and that is being pushed on to the consumer. So that is happening. It has happened. And we see demand holding up quite well in that environment and feel pretty good in talking with our customers about their outlook for the year as well, that they've got more clarity into the demand function even with the higher prices that have been implemented.

Super. That’s helpful. Thank you, Adam.

All right. Next question will come from the line of Adam Josephson with KeyBanc.

Thanks. Good morning, everyone. I hope you are doing well. Bob or Adam, good morning, Bob. Regarding the increase in EPS guidance, can you clarify how you exceeded your guidance by a few cents? You previously projected lower than consensus by a few cents in the second quarter, which seems to balance things out, yet you are raising the full-year guidance. Could you explain what has changed in your perspective compared to three months ago? Is it tied to last year's acquisitions, the product mix, or something else? What exactly has changed?

Yes. Good question. And I think you got it just about right. If you look at the front half of the year generally, we're expected to come in pretty well in line with what our original forecast was. Obviously, there's a little bit of difference between the two quarters. But in aggregate, pretty well in line. I think what's changed is the acquisitions continue to perform very well. We think there's probably a little bit of upside relative to where we came into the year, as we think about the acquisition. Our operating performance has been really good across all three segments of the business, and we see no reason why that should change. Our cost recovery has also been good. So that's positive as well. And then, I think as Adam just indicated, we've got good line of sight with our customers in terms of what the volume outlook looks like for the rest of the year. So all of that kind of gives us pretty good confidence that we're in the right spot moving earnings up a bit as we sit here today.

I appreciate that. But just for either you or Adam, Bob, regarding your food can end markets, I believe pet food is still performing strongly, while soup might be experiencing a bit of a decline as people dine out more. Can you share any expectations about the impact of fertilizer this year or in the future? Also, can you discuss what you're observing in your food can end market and if there's likely to be any effect from the developing global fertilizer shortage on that market, either this year or beyond?

Sure. Maybe starting with pet food. Obviously, pet food has been a market that we've talked about for several years that has continued to grow and grown well in advance of either the food can market or GDP rates, and just about anything that you'd want to talk about, Adam. So it's been a really good segment for our portfolio. And as we sit here today, our full year estimate of 2022 includes pet food being almost 50% of the total unit volume for our Metal Container segment. So it has grown. We've planned for this growth for many years. That's all organic growth and we see that continuing well into the future. And to Bob's point, we've got pretty good line of sight not only into 2022 but well beyond 2022 with our strategic pet food customers and what they're doing in their market. So we feel really good about it. I'd tell you right now, there are stock-outs on store shelves because one of the items that we talked about in our Q1 volume performance for the container segment is that pet food came in slightly below our expectations. It's very simple. Our customers invested in new capacity. And as they brought that capacity online, they had trouble supporting the new capacity with labor and with additional ingredients and other packaging materials. We had our cans ready for them. They just were not able to fill those cans. The good news, those issues are being addressed and we'll see clarity through Q2, as those items are resolved, but the capacity is already installed. So that capacity will be filled in the back half of the year and we feel really good about it. You'd mentioned soup, Adam. I'd tell you soup had a very strong first quarter for us. It's sort of the end of the soup season right now. And I would say all of the discussions with our customers, not only about their business but what they're seeing at retail is very favorable on soup. And the new consumers that were reached during the pandemic are continuing to purchase soup products and cooking with soup products at home. We'll see how mobility plays through that as we get back into soup season again in the fall. And then, the final question you had was on pack and fertilizer increases and cost increases, how that's going to affect. I'd tell you that, our pack customers at least in the US market right now are fairly bullish. They saw a tremendous increase in the pull-through of packed product last year. Again, last year was really the first time they had the opportunity to increase their volumes due to the pandemic because of the planting season. So, our customers are coming through with stronger pack plans than we had 30 days ago when we came out with our original guidance for the year. So, to Bob's point that is part of the answer as to how we're feeling more confident about the year today than we did on the last call.

Thanks so much, Adam.

All right. Your next question will come from the line of Ghansham Panjabi with Baird.

Hi, good morning everyone. This is actually Matt Krueger sitting in for Ghansham. I guess I wanted to focus in on the volume outlook for the year. So, can you provide some added detail around your embedded volume assumptions by business for 2022? And then can you specifically break out kind of organic volume performance in the Dispensing business versus what acquisitions are adding to that business as well? That would be great. Thanks.

Sure. We'll start with the full year volume expectations. For the most part, our outlook for the Dispensing and Specialty Closures segment hasn't changed since the beginning of the year. The risks have been largely mitigated, so we feel confident about our volume situation. One area where we continue to see strong performance is in our fragrance markets. We're also observing positive signs of recovery in health and hygiene starting in late Q2, and we expect that to stabilize for the rest of the year. Additionally, our sports drinks business is performing well and we anticipate good growth from that segment this year. In Metal Containers, our estimates remain roughly unchanged from what we communicated in the year-end call. We expect a slight decline on a full year basis, primarily due to the record pack volumes we had last year. While we have seen some improvement, we will wait until Q3 to fully assess the pack volumes. Regarding Custom Containers, we are also witnessing a recovery in some health and hygiene products that experienced pandemic-driven demand, and purchasing of those products is normalizing again. We expect a similar growth rate of around two and a half percent for our Custom Container segment, with more clarity on those volumes to come. For your last question on the organic growth rates of Dispensing and Specialty Closures, it's important to remember that our 8% volume growth is on top of the 9% volume growth we achieved in the first quarter of last year. This segment is quite diversified, making it a tough comparison due to the health and hygiene products we sold last year. There was also a pre-buy impact related to metal closures in our Dispensing and Specialty Closures segment, which essentially balanced each other out. Therefore, we saw only slight organic volume growth in this segment, with the remaining growth attributed to acquisitions.

Got it. That's helpful. So, high single-digit acquisition contribution during the first quarter. Great. Thanks.

Yes. The bulk of the 8% was through acquisition and then you've got some organic growth being offset by the metal pre-buy for metal closures.

All right. Next question will come from the line of Gabe Hajde with Wells Fargo.

Good morning Adam and Bob. I apologize if I missed this as I joined a couple of minutes late. I wanted to ask about the margins in the Dispensing and Specialty Closures business being in the high teens, even around 20%. This has been sustainable for the past five years. I'm curious about what you think is driving that. I appreciate your efficiency from a manufacturing standpoint, but could it be related to product mix or other factors? Additionally, Adam, you mentioned that you feel risks are mitigated for the volume outlook in that segment. However, with the potential for re-lockdown measures in China, I understand there are supply chain considerations, especially with upcoming events like Mother's Day, which haven't occurred for two years, and the holiday selling season. It's important that DUCs are in order, but it seems there could be some risk in Asia. Lastly, regarding that segment, I believe you're adding some capacity. Could you remind us of the scale of that investment, its progress, and when it is expected to start contributing?

Sure. A lot to that, so I'll see if I can hit them all and Bob will clean up from anything that I missed. So first of all the margin rate in the segment itself again, we this segment has evolved certainly over the last five years, as we've gotten bigger and bigger into the dispensing closures and dispensing systems area of the segment. So the balance of the portfolio continues to perform really well. But essentially, it's favorable mix any time we sell an additional dispensing closure or dispensing system. So, we've seen terrific organic growth in that business since we've acquired the first step of that business in 2017, and expect continued growth organically going forward as well. So, we feel good about the margins. We think they'll continue to expand, our most recent acquisitions add to the margin profile of the business. And as we've talked before the wet edges of what we do in the Dispensing and Specialty Closures segment will provide additional margin expansion opportunities not only with organic growth but through acquisition as well. And then, your comment on China, I'll just remind you, China is a relatively small part of what we do and it's Silgan in total but certainly in the segment as well. So yes there are lockdown measures going on in China. But I think that the fact that, we do source materials locally in the geography where we manufacture and we typically manufacture our products in the geography in which we sell them, largely based in the U.S. and largely based in Western Europe. And then, you've got some exposure down in South America as well. So, I think we feel like we've got a pretty good handle on what those exposures look like and the impact to the company. And then, from a new capacity standpoint those projects are underway broadly speaking for Dispensing and Specialty Closures. And we hope to have new capacity online by the end of the year and that's going to be ramping up at the end of the year. So we will get the full run rate increments until 2023.

Yeah. Gabe the only thing I would add to what Adam said, if I go back to the dispensing systems' margin question is that remember too if your question is more about the increase on a year-over-year basis, you've got a little bit of price carry-in where we're recovering the resin lag from the prior year that benefits the quarter. But that's a relatively small piece of the margin profile. It really is the leverage of everything that we've done around dispensing systems which is a higher-margin business than the traditional flat cap business. And add to that the more recent acquisitions and you're seeing the benefit on the margin line.

Great. Thank you guys and good luck.

All right. Your next question will come from the line of Arun Viswanathan with RBC Capital Markets.

Great. Thanks for taking my question. I guess, I'm just curious on a couple of different things. So first off within Custom Containers could you just discuss what you're seeing maybe on the resin side and maybe also on the demand side? Just curious, we have seen some improvement on some of the drinks categories like energy drinks and everything. So just wondering if that's benefiting you and maybe offsetting some of the weakness you're seeing on the cleaning side.

Sure Arun. And I may actually talk a little bit about Dispensing and Specialty Closures as well just as we talk resin and demand for some of the products I mentioned. But for our Custom Containers business, this is a business that's been with Silgan since the very beginning. We've been very focused on a tight pass-through mechanism of resin. So, resin doesn't have that much of an impact on this segment of our business portfolio. And so yes, resin did increase at the end of the quarter. It looks like, Q2 is going to have a higher resin run rate as well. But we're able to quickly pass those costs through to our customers in this segment and have for some time now. From a demand perspective for our business, what I would tell you the one hurdle that we're looking at right now is more on the food products and ingredients for food back to kind of the global economy. You're talking about proteins and starches. There's an egg shortage right now. So we've got a decent amount of business in food products such as mayonnaise, such as salad dressing, et cetera. The ingredients are hard to come by right now, and they're very expensive. So we're just working through our customers on that. But from a demand perspective, our trajectory has been very good. We were at a higher run rate than we were in the second half of last year, and we're expecting that to continue to improve as we go forward in Q2. And then to your question on kind of energy drinks and sports drinks et cetera, back in our Dispensing and Specialty Closures segment that's really where our exposure to the beverage market exists. And we're seeing good demand, almost across the board, and in most of our categories. There is a shortage of certain bottles to support the beverage market. But for the most part, we're seeing very strong demand and we're just now approaching kind of the peak filling point for our customers as they support their customers and their markets for the summer of 2022.

Great. Thanks. And then maybe I could ask about free cash flow. It looks like you are guiding a little bit below us for the second quarter on an EPS basis, but you did take up the full year. So how would you think about free cash flow? Is there a little bit more working capital running through the system just given that resin price increases and the tinplate inflation as well? And so that's a drag on free cash flow, or what would you say on free cash flow? Thanks.

Yeah. That's certainly where we were when we came into the year, right? We were expecting that working capital would be a drag as would cash tax, and that's why we're down on a year-over-year basis. As we think about going forward, I think we've spoken to the confidence that we hold relative to the earnings outlook. To scale that for you right now that increase is roughly $10 million of after-tax profit, if you use that as a proxy of cash. And so I think right now, we're just a little bit cautious in wanting to basically make sure that we've got everything in order around working capital as we continue to see the inflation. And so we thought it prudent to stay stand pat with our free cash flow guidance of approximately $350 million, as we sit here today. But as we go through the second quarter and into the back half of the year, we're obviously optimistic that there's opportunity here.

And then if I could just ask one more on Metal Containers. So, one of your peers in the business has more self-make capacity now. Is that a drag on you guys? And would you offer any comments on your own footprint? I know that there was comments about rationalization of capacity before, and then that was put on hold for example. And where do you stand right now with your footprint? And again, is there any negative impact from peers bringing on their own self-make capacity?

Well, I'd go back a little bit to what we talked about at the end of the year. And when you think about our manufacturing platform, where we have capacity is kind of in the shoulders of the year the first quarter and the fourth quarter of the year. So, as we were all working through the pandemic a year ago, there was a very tight market for cans. So we did do our best to support those in the industry with cans. And so we did sell a few cans to others in the industry as well, while also making sure we met all of our customer requirements as well. As we think about our capacity, we like the footprint that we have. We're always looking at cost-reduction efforts and how to make our system more efficient. And I think as we talk about volumes normalizing at call it 10% above pre-pandemic levels, we are definitely looking at our footprint to make sure that we have the right footprint to support those ongoing volume levels.

Great. Thanks.

All right. Next question will come from the line of Anthony Pettinari with Citi.

Good morning. I had a quick question on Russia. I think you had two metal container plants there. I was wondering if you could talk about the status. And is there any sort of direct impact versus the original full year guidance? And if not are there any kind of secondary impacts, I don't know maybe trade flows into Europe, or metal availability or just anything you'd flag?

Sure. I will begin by stating that Silgan has halted all new investments in Russia, which we initiated immediately following the invasion of Ukraine. On a very limited basis, we are still selling a small range of packaging products, specifically for essential humanitarian and healthcare-related needs. These include baby food, canned vegetables, and an over-the-counter nasal spray that we consider an essential healthcare product. Once the invasion occurred, we stopped importing any additional raw materials into Russia, as well as the materials necessary for producing our products. Most of our products are manufactured for local consumption within Russia. We have two small facilities, and we have started the process of winding down both of these operations. However, our intention is to continue sales in the essential humanitarian and healthcare categories that I mentioned.

Anthony, to put that into perspective, if we consider 2021 as a reference point, sales and profits from Russia were both less than 1% of our total profit. Our total investment in Russia and Ukraine is approximately $70 million, primarily in fixed assets, along with some inventory, which we are trying to reduce, and a small amount of accounts receivable. As long as we continue to receive payments, we will maintain that situation, but that summarizes our position regarding Russia.

Okay. That's very helpful.

If we consider 2021 as a reference point, sales and profits from Russia were under 1% of our total profit. Our total investment in Russia, or Russia/Ukraine, is approximately $70 million, primarily tied to fixed assets, along with some inventory that we are trying to reduce and a small amount of accounts receivable. As long as we continue to receive payments, we will maintain this situation, and that summarizes our position regarding Russia.

All right. It looks like we have no further questions at this time.

Great. Thanks Alan. And thanks everyone for your interest in the company and we look forward to reviewing the second quarter results in July. Thank you.

That does conclude today's call. We thank you all for your participation. You may now disconnect.