Silgan Holdings Inc. (NASDAQ:SLGN) Q4 2022 Earnings Call Transcript

Silgan Holdings Inc. (NASDAQ:SLGN) Q4 2022 Earnings Call Transcript January 25, 2023

Operator: Good morning, ladies and gentlemen. Welcome to the Silgan Holdings Fourth Quarter 2022 Earnings Conference Call. And please be advised that this call is being recorded. And now at this time, I’ll turn things over to Ms. Kim Ulmer, Senior Vice President, Finance and Treasurer. Please go ahead, ma’am.

Kim Ulmer: Thank you. Joining me from the company today are Adam Greenlee, President and CEO; Bob Lewis, EVP and CFO; and Alex Hutter, Vice President of Investor Relations. 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 and 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.

Adam Greenlee: Thank you, Kim and welcome, everyone, to Silgan’s fourth quarter and full year 2022 earnings call. On the call today, we will review the highlights of our full year performance and provide details around our fourth quarter results and our outlook for continued growth in 2023. 2022 was another exceptional year for Silgan, posting our sixth consecutive year of record sales and delivering yet another year of record double-digit growth in adjusted EPS as the momentum we’ve built in the business continues to show in our results. I’m incredibly proud of the entire Silgan team and the accomplishments that we’ve achieved together, proving that through a variety of economic environments, Silgan remains a steadfast partner to our customers, employees and shareholders.

Day in and day out, our teams prove that our founding principles of competing and winning in the marketplace by being the best at what we do continues to translate into meaningful value creation for all of our stakeholders. Our ongoing and unwavering focused yielded significant adjusted earnings growth in 2022 despite difficult volume comparisons as our business overcame, known challenges from the prior year pre-buy activity ahead of significant raw material inflation. Ongoing supply chain disruptions and customer and retail inventory destocking throughout the year. In combination with our outstanding operational performance, our long-term contractual arrangements and focused discipline on passing through inflationary costs helped our business to grow adjusted earnings in a period of unprecedented inflation in raw materials, labor, energy and other costs.

A few highlights we delivered in 2022 are as follows; record sales of $6.4 billion, up 13% versus the prior year. Record adjusted earnings per diluted share of $3.98 which increased 17% versus the record prior year. Free cash flow of $368 million while continuing to make investments in future growth opportunities; and finally, record revenue, volume and segment income in our high margin Dispensing and Specialty Closures business. As we exit 2022 with unit volumes well ahead of pre-pandemic levels and our businesses executing at an exceptionally high level, we remain confident in our ability to build on our momentum in 2023 and beyond. More specifically, as we look to 2023, we believe the business will continue to drive at least mid-single-digit improvement in total adjusted segment income organically which will be partially offset by higher interest expense due to higher interest rates expected in 2023.

In addition and as outlined in the press release, beginning in 2023, we have adjusted the prior year results — the prior year periods for pension income and the amortization of acquired intangibles. From a segment perspective, we expect our Dispensing and Specialty Closure segment to produce high single-digit adjusted segment income growth driven by mid-single-digit volume growth and improved mix, including double-digit volume growth in our higher-value dispensing products. In our Metal Container segment, we see low single-digit volume and low to mid-single-digit adjusted segment income growth in 2023, primarily as a result of mid-single-digit volume growth in our pet food markets which represent roughly half of our total volume in the segment and continued operational improvements in the business.

In our Custom Containers segment, we expect adjusted segment income to grow in the low single digits, with low single digit volume growth as volume trends are expected to improve throughout the year as we continue to cycle over a previously discussed decision to not renew a long-term piece of business and to replace that volume with new higher-margin contractual business later in the year. We’re excited about what the future has in store for Silgan and the opportunity to continue to showcase the unique nature and continued success of our business in 2023 and beyond. With that, Bob will take you through the specifics of our financial results for the quarter and provide additional color around our earnings estimates for 2023.

Robert Lewis: Thank you, Adam. Good morning, everyone. As Adam highlighted, the business continues to execute at a high level, delivering record fourth quarter and full year sales and adjusted earnings per share. Our businesses did an outstanding job managing through a complex volume backdrop, ongoing supply chain disruptions and significant cost inflation. This is a testament to our contractual pass-throughs, cost recovery discipline and analyst pursuit of operational excellence to mitigate inflation. Net sales for the fourth quarter of 2022 were $1.46 billion, up $16 million or just over 1% versus the prior year. as net organic revenue growth was partially offset by unfavorable foreign currency of approximately $39 million.

Our organic growth was driven by favorable price/mix resulting from inflationary cost pass-throughs which more than offset expected volume declines in each of our segments. Total segment income for the quarter of $81 million declined on a year-over-year basis, primarily as a result of rationalization charges of $67 million in the fourth quarter of 2022. During the quarter, we recorded a restructuring charge of $74 million to write down assets which were used to service the Russian market as we will no longer produce the limited humanitarian products sold in 2022 for this market. Highlights of our segment income for the quarter are as follows: Our Dispensing and Specialty Closure segment income increased from the prior year, driven by strong pricing and cost recovery disciplines and better operating performance.

These benefits more than offset a foreign currency headwind of approximately $3 million and an 8% volume decline. The volume decline in the quarter was primarily the result of lower demand for steel closures in the food and beverage end markets as compared to the prior year period which benefited from pre-buy activity ahead of significant steel inflation in 2022. Our Metal Container segment decreased from the prior year as a result of $66 million of rationalization charges in the quarter. Excluding the impact of rationalization charges, segment income increased 28% versus the prior year, with strong operating efficiency as a result of lower volumes which allowed us to better utilize our footprint and more efficiently manage our inventory levels.

These benefits, combined with inflationary costs recovered more than overcame a 13% volume decline. The decline in volumes in the quarter was primarily due to difficult volume comparisons from the pre-buy activity in the prior year quarter ahead of approximately 80% steel inflation in 2022. Segment income in our Custom Container segment decreased as a result of an expected 11% decline in volumes, overshadowing improvements in price pass-through and cost recovery. As we previously discussed, the decline in volumes in the quarter was primarily the result of not renewing a customer contract that did not meet our reinvestment return hurdles as well as the delayed recovery in lawn and garden, home and personal care products. The decision not to renew the expiring contract will continue to have an unfavorable impact on volumes through the first half of 2023 as we expect to commercialize new business awards later in the year.

Turning to the outlook for 2023. As we leverage the momentum of delivering 6 consecutive years of record adjusting earnings, we are expecting further growth in 2023 as we estimate adjusted earnings per diluted share for 2023 in the range of $3.95 to $4.15. To align our external reporting more closely with the internal metrics by which we manage our businesses, we are excluding the impact of U.S. pension income and amortization of acquired intangible assets from our definition of adjusted segment income and adjusted earnings per diluted share. Our domestic pension plans ended 2022 at approximately 130% funded and are close to new participants. Therefore, we have elected to deploy a liability-driven investment portfolio which we believe will satisfy the cash requirements of the plan.

As to the amortization of acquired intangibles, our view is this is a non-cash expense that is not reflective of the ongoing performance of the acquired business. Furthermore, this will align us on a comparison basis with our peers. For comparative purposes, a reconciliation of prior periods to remove these adjustments has been posted to our website on the Investor Relations section. We expect total adjusted segment income to increase by mid- to high single digits in 2023 as compared to the prior year. The midpoint of our range of adjusted earnings per share represents a year-over-year increase of $0.04 per share which includes full year interest expense of approximately $155 million, a year-over-year headwind of $0.20 per share and a tax rate of between 24% and 25%.

These estimates exclude the impact from certain adjustments as outlined in Table B of our press release. Based on our current earnings outlook for 2023, we are providing an estimate of free cash flow of approximately $425 million in ’23, a 16% increase from 2022 as earnings growth and lower use of cash for working capital as compared to ’22 is partially offset by higher CapEx which we expect to be approximately $250 million in 2023 as we invest alongside our core and new customers. Turning to our outlook for the first quarter of 2023, we are providing an estimate of adjusted earnings in the range of $0.75 to $0.85 per diluted share as compared to adjusted net income per diluted share of $0.79 in the prior year period. Included in the first quarter of 2023 estimate is incremental interest expense of approximately $0.05 per share as a result of higher interest rates while the first quarter of ’22 included approximately $0.01 per share from earnings from our Russian operations.

Adjusted segment income in Dispensing and Specialty Closures is expected to be flat as the benefit in the first quarter of 2022 from the lag pass-through of resin price declines in the prior year is not expected to repeat. We anticipate higher adjusted segment income in our Metal Containers business as a result of the negative impact in the first quarter of 2022 from the customer pre-buy activities during the fourth quarter of 2021. We also expect slightly lower volumes and adjusted segment income in the Custom Containers business as a result of the previously discussed exit of a customer that did not meet return hurdles. Volumes in this segment are expected to improve throughout the year. That concludes our prepared comments and we’re happy to open the question — the call for questions.

I’d like to ask everyone to limit your questions to 1 question and 1 follow-up. And if time allows, we’ll take further questions from the queue. So Bill, I’ll finally turn it back to you to give directions for the Q&A.

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Q&A Session

Operator: We’ll take our first question this morning from Adam Josephson of KeyBanc.

Adam Josephson: Adam, can you help me with the closures volume performance in the fourth quarter? I know a year ago, you called out the impact of the pre-buy in the metal cans business from rising tinplate costs. But I don’t think you said anything about closures along similar lines but then you mentioned it this quarter as having been a very difficult comparison versus last period. Were you expecting your closures lines to be down as much as they were? Can you just talk about that segment’s performance, both in terms of volume and profitability compared to what your expectations were and how that might affect your outlook for ’23?

Adam Greenlee: Okay. Sure. So a couple of things. We did expect the pre-buy to have a negative impact just like it had in our Metal Containers business on our Dispensing and Specialty Closures. As a reminder, included within that segment is our kind of long-time legacy Silgan closures business that really supports the food and beverage industry. Combination of metal closures and plastic closures in that business. So we did anticipate that. What I’d tell you, Adam, is that as we sit here and look at the pre-buy impact it accounted for about 95% of the shortfall from a volume perspective in the quarter for Dispensing and Specialty Closures segment. So it just — it was food and beverage, primarily, it’s metal closures that go on glass jars that we typically supply for many, many years.

So no real surprise for us. Then I think from a profit standpoint, we had a good quarter. We were really overcoming the volume shortfalls within the quarter, again, with good operating performance as we had. Resin was slightly favorable. We expected that. So in my words, Adam I’d say the quarter for DSC was really roughly just in line with expectations that we had.

Adam Josephson: Okay. Got it. And Bob, when we — I know we’re the ones who come up with the consensus earnings estimate for ’23, not you. But when I’m trying to compare your guidance to the estimate that was out there, obviously, versus 3 months ago, interest expense is $0.05 higher than what you and we were expecting. And then you chose to exclude amortization of intangibles and pension income or expense which added, I think, $0.03 to last year’s earnings. So all else equal, consensus, I guess, should have been $0.03 higher in ’23 as a consequence. But can you help me reconcile your guidance to what you think consensus was or was expecting, etcetera, if you catch my drift.

Robert Lewis: Yes. I think you basically have it right. The 2 adjustments that we made for very different reasons, obviously but they basically offset. So if you think about where consensus would have been, it’s roughly in line with what we’re suggesting now. So there’s really no more broader details to that than those 2 main points.

Adam Josephson: So it’s really just that interest went up by $0.05 and that’s pretty much it from your vantage point?

Robert Lewis: Yes. That’s right. As interest rates continue to affect the later part of the year.

Operator: We’ll go next now to Ghansham Panjabi at Baird.

Ghansham Panjabi: I guess first off, on the destocking question, Adam. I mean, so many end market verticals have called out destocking all the way from the retail channel all the way down. You yourself have experienced that to some extent. What’s your best guess in terms of where we are relative to — with inventories relative to sort of the end market demand of the consumer uptake, if you will.

Adam Greenlee: Yes, sure. It’s the great question. And I think maybe I’ll go back to Q4 and give you some insight there. Just what we saw through Q4 was really a pretty good early part of Q4, October, November and that was, I’ll just say, both in our North American markets and in Europe as well. What we saw also at the end of Q4 was that our large CPG customers essentially sort of shut down in the last couple of weeks. So a little bit unexpected for us but that was a bit of the volume shortfall for the quarter as well as sort of the abrupt end of the year. I think the better news is that we were also seeing some good signs of recovery in some of the markets and product lines that have been challenged due to the destocking effort a little bit earlier in the year.

And most importantly, Ghansham, I’d tell you that January has started on a pretty strong note for us and all of those same customers. So we are seeing recovery. We’ve talked about trigger sprayers on this call or the last, I think, 2 calls. We’ve seen almost a full recovery in Europe at this point which typically is a precursor to what happens in North America for many of our product lines. So we’re feeling better about the recovery of the destocking than we were, I think, as we entered the last call. And we’ve certainly seen more positive signs from our customers. And then we’re having a really good start to the year so far here in January.

Ghansham Panjabi: Okay, terrific. That’s very helpful. And then in terms of the inflation dynamics that you’ve been experiencing, maybe just lay out for us what your embedded assumptions are for the big — substrates that you’re exposed to? And then also on the variable cost side with transportation, etcetera, what are you seeing at this point in real time?

Adam Greenlee: Sure. So I guess we’ll start with steel first that affects a couple of our segments. So look, we have — as Bob mentioned in the prepared remarks, we passed through approximately 80% tinplate increase onto the market. It does appear that our customers were able to successfully pass that through at retail and to their customers. As we turn the page to ’23, we do see stability in the prices of tinplate right now. So probably not a whole lot of change as we sit here in ’23. I think there’s some capacity availability challenges for the supply side of tinplate. I’ll remind you, we are the largest tinplate buyer in the world and feel like we’ve got good relationships and partnerships with our supply base that we’re going to get the tinplate that we need in the geographies in which we need it.

Moving over to resin as we go forward, there’s a very small benefit in resin built into our Q1 guidance. For the most part, I would tell you, as volatile as resin has been over the course of the last couple of years, it looks like there’s stability in the price forecast going forward. We’ll see what happens here. But as we typically do, Ghansham, we take the changes that we’ve got that are known right now for Q1 and we basically hold that rate for the balance of the year. So I think there are times where we’ve been conservative with that outlook. I think this year based upon the forecast it seems to be about right. Then your other question is kind of moving to some of the other categories like freight. We are seeing, again, some increased rate costs.

I think the fuel surcharges have been down, rates and availability of freight have been challenging, certainly the last couple of years. I don’t know that that’s seem kind of the relief valve with some of that pressure that we’ve seen in other categories. I think we’ll still experience inflation to some degree, not nearly to the extent that we had over, really, the course of the last 18 months. And again, as I think you all know and understand, most of our contractual agreements allow for the pass-through of that inflation onto the market. So a lot there, Ghansham. I hope that answered all your questions.

Ghansham Panjabi: Yes, it does.