Silgan Holdings Inc. (NYSE:SLGN) Q3 2023 Earnings Call Transcript

Silgan Holdings Inc. (NYSE:SLGN) Q3 2023 Earnings Call Transcript October 25, 2023

Operator: Good day, and welcome to the Silgan Holdings Third 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, CFO and Treasurer. 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 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 the 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 substitutes for similar GAAP metrics can be found in today’s press release available in the Investor Relations section of our website at silganholdings.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 third quarter 2023 earnings call. The third quarter delivered strong performance that was consistent with our expectations despite continually challenging market conditions, and we reported our second highest quarterly earnings as our businesses manage their cost proactively to offset softer than expected volumes in the quarter. During the quarter, we finalized our previously discussed plans to improve our cost structure and have announced a $50 million cost reduction program through the end of 2025. We expect to achieve these cost reductions through a combination of footprint rationalizations and other cost reduction actions with benefits in each of our reporting segments over the next two years.

Additionally, we believe these cost improvements will help position the company to continue to meet the unique needs of our customers and compete and win in the markets we serve. Through our disciplined and balanced capital allocation process, we’ve repurchased $155 million worth of Silgan stock during the quarter, bringing our year-to-date repurchases to $175 million and putting the company on track to return over $250 million to shareholders through a combination of buybacks and dividends in 2023. Turning to trends in the business. Demand for our high-value dispensing products remained strong with mid single digit growth for these products during the quarter that drove significant mix improvement for the company overall in the Dispensing and Specialty Closures segment.

We continue to see recovery in products that experienced post-pandemic destocking last year, and benefited from strong organic growth in our fragrance dispensing products for prestige market. The consumer destocking we saw developed near the end of the second quarter across all three segments expanded during the third quarter, as these plans deepened in the food and beverage markets and grew to include adjacent categories. Importantly, all market indications we have continue to show that consumer level demand for our products remains robust. And our customers’ inventory unit levels are trending below historic levels and their focus remains on the absolute dollar value levels of inventory in their systems at year-end. Turning to our third quarter results.

Performance in each of our segments was consistent with our expectations, with mid single-digit adjusted EBIT growth driving record results in Dispensing & Specialty Closures, and with Metal Containers adjusted EBIT comparable to the prior year record levels. In Dispensing & Specialty Closures, our high-value dispensing products were a highlight for the quarter with mid single-digit volume growth and a significant mix benefit that more than offset the headwinds we’ve talked about in food and beverage end markets. Domestic food and beverage volumes were flat year-over-year as customer destocking in the United States had a more pronounced impact on our volume than we anticipated in our guidance. International food and beverage volumes remained challenged as a result of the increased levels of inflation on premium products, in particular, for Metal Closures on glass packages.

Despite these headwinds on volume, the growth in Dispensing products, mix benefit and strong cost management drove record performance for this segment in the quarter. In Metal Containers, we again delivered strong results despite softer-than-expected volumes, customer destocking priorities appear to have expanded to include adjacent categories, including pet food, and many customers are targeting further inventory reductions in categories that we were already anticipating these trends. The North American fruit and vegetable pack was delayed to late planting and volumes in Europe were below our expectations due to lower fruit yields and the impact of flooding from Greece. Overall, the 2023 crop will be below our expectations as only a small amount of volume will be packed in the fourth quarter despite the late start.

Despite these headwinds, our team offset volume shortfall from a profit perspective with effective cost management and drove results that were consistent with our expectations. In Custom Containers, results were below prior year, but consistent with our expectations due to the impact of customer destocking, including the delay in commercialization of new business wins. Turning now to our expectations for the fourth quarter and the full year. We have revised our estimate for full year earnings to reflect deeper and more pervasive customer destocking priorities in the fourth quarter, which has resulted in a lower volume outlook in our Metal Containers in Dispensing & Specialty Closures segments. We believe the continued progress we have made with regard to our strategic priorities in the actions we’ve taken to effectively manage the factors that are within our control, position the company to return to earnings growth in 2024.

We see positive signs in our customers’ promotional activity, inventory unit levels trending below historic norms. And while we expect market volumes to improve in 2024, we are not dependent upon it to deliver earnings growth. We’ll continue to manage the business in a disciplined manner, focusing on meeting the unique needs of our customers, while delivering a compelling value proposition for our shareholders. With that, Kim will take you through the financials for the quarter and our estimates for the fourth quarter and full year.

Kim Ulmer: Thank you, Adam. Net sales for the third quarter of 2023 were approximately $1.8 billion. Excluding non-recurring sales associated with Russia in the third quarter of 2022, third quarter 2023 sales declined 7% from the record prior year period driven primarily by lower volumes in each of our segments, partially offset by the pass-through of cost inflation. Total adjusted EBIT for the quarter of $214.4 million decreased by 4% on a year-over-year basis, with record adjusted EBIT in the Dispensing and Specialty Closures segment offset by lower adjusted EBIT in the Custom Containers and Metal Container segment. Adjusted net income per diluted share declined $0.12 from the record achieved in the third quarter of 2022 with higher interest expense of $0.09, non-recurring sales associated with Russia of $0.03, and lower volumes driving the year-over-year decline.

Turning to our segments. Dispensing and Specialty Closures segment sales declined 2% versus the prior year, excluding a 1% impact from Russia sales, primarily as a result of lower volume mix of 3%. The decline in volume was driven by double-digit declines for higher volume closures for international food and beverage markets, which more than offset record volume and higher value dispensing products, which grew by a mid-single-digit percentage compared to the prior year. Record third quarter 2023 Dispensing and Specialty Closures adjusted EBIT increased $5.4 million versus the record achieved in the prior year period as a result of improvements in mix in the segment due to a higher volume and high-value dispensing products and lower sales in high-volume closures for food and beverage markets as well as effective cost management, including SG&A.

In our Metal Container segment, sales declined 8% versus the prior year, excluding a 2% impact from Russia sales due to lower volumes across all product categories as customer destocking priorities were more pervasive and impacted adjacent categories with the largest year-over-year decline in the soup category. Fruit and vegetable volumes were below our expectations. Metal Containers adjusted EBIT was slightly below the record level in the prior year quarter despite the shortfall in volumes as the business continued to successfully pass through labor and other manufacturing costs, while actively managing our cost structure. In Custom Containers, lower volume in most categories drove volumes 10% below the third quarter of 2022, which, coupled with lower resin costs on a year-over-year basis resulted in sales 18% below the prior year period.

As expected, Custom Containers adjusted EBIT declined $11 million as compared to the third quarter of 2022, primarily as a result of lower volumes due to customer destocking and a less favorable mix of products sold. Looking ahead to the fourth quarter, we are estimating adjusted net income per diluted share in the range of $0.55 to $0.65, which includes higher interest expense of $0.06 per share and a fourth quarter weighted average share count of approximately $107 million. On a segment level, fourth quarter adjusted EBIT is expected to be higher than the prior year period in Dispensing and Specialty Closures, comparable to the prior year period in Custom Containers and lower than the prior year period in Metal Containers, primarily due to the timing of previously discussed benefits from inventory management in the prior year.

As a result, we are revising our outlook of adjusted net income per diluted share from a range of $3.40 to $3.60 to a range of $3.30 to $3.40 primarily due to a more pervasive customer destocking in food and beverage and adjacent markets. This revised estimate includes a year-over-year headwind of $0.33 per share for interest expense, which we now expect to be approximately $175 million, a tax rate of approximately 24%, and weighted average shares outstanding of approximately $109 million. These estimates exclude the impact from certain adjustments outlined in Table C of our press release. Based on our current earnings outlook, we are also revising our estimate of free cash flow in 2023 from $375 million to $340 million, which incorporates CapEx of $230 million.

Revised outlook for free cash flow reflects the revision in estimated earnings for the year as well as estimated cash costs in 2023 associated with the announced cost reduction program, including additional working capital to facilitate the program. That concludes our prepared remarks, and we’ll open the call for questions. Anna, would you kindly provide the directions for the question-and-answer session?

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Q&A Session

Operator: Yes, thank you. [Operator Instructions] And we’ll take our first question from Ghansham Panjabi with Baird.

Ghansham Panjabi: Hey, guys. Good morning. Adam, I guess, first half, maybe you can just give us more color on the cadence of destocking and how that unfolded during the third quarter. You mentioned adjacent categories, and I think you called out Pet food as well. But just based on what you’re seeing at this point, I guess, related to that, do you think this ends in the fourth quarter, or will there be a residual tail into the first quarter of next year as well?

Adam Greenlee: Yes, sure. Good questions, Ghansham. And look, I think we are as frustrated with destocking as anybody else’s at this point. And for us, we anticipated it in the third quarter based upon all the conversations we were having with our customers and their new priorities at the end of the second quarter. So in fairness, we had the year-end details. What actually happened during Q3 is that those programs accelerated and the inventory destocking that our customers were working on actually happened earlier in Q3 than we anticipated, and that’s what’s reflected in our numbers. So that’s one part of the destocking. The second piece of it is late in the quarter our — several of our Pet food customers indicated that they would also endeavor on a destocking program by the end of the year.

So, a little bit of impact late in the quarter, but more of an impact in Q4 as we include Pet food now and the destocking conversation. And so, I think from a broad standpoint, the destocking that happened post pandemic, we feel pretty confident that we have the timing of that correct. And those products have worked their way through the system. The inventory cleanse it sells through the system. We’re seeing the recovery of those markets for the most part. These new items that we’re talking about in Food and Beverage and now in Pet food, we’re anticipating they’re going to be done by year-end, Ghansham, but at this point, I’d just say we need to continue to work with our customers and understand what their programs are. The last piece of it is, we know for a fact that unit level inventory across our Food and Beverage and certainly our Pet food markets is lower than historic norms.

And a lot of the dialogue with our customers right now is about the absolute dollar value of that inventory, not the unit volume level. So, at some point, it does have to stop in order to service the market and consumers. And at this point, we’re anticipating that, that is at year-end.

Ghansham Panjabi: Got it. And then just my second question, as it relates to the 2024 outlook and your confidence on earnings being up year-over-year. Obviously, volumes are a moving target, but you have cost savings. It’s a two-year program, it sounds like. Just curious as to help us with the variances as it relates to how much you think in terms of cost savings will flow through in 2024. Any other variances we should keep in mind, apart from a lower share count?

Adam Greenlee: Sure. And I think, first off, a lot of the dialogue we just had on destocking will influence the actual guidance that we’ll get for 2024 on our next call. As we sit here today, what we have done is as we decided to proactively and aggressively manage the things within our control, and that is part of the $50 million cost reduction program. And really from a P&L savings standpoint, you should think about call it, 40% of that to be impacting in 2024. So, we’ll just round about $20 million of the $50 million cost savings program. So that is in large part what is going to drive our earnings growth next year irrespective of what happens with market recovery and volume. So that’s one input Ghansham. The other big input is what’s not being talked about a lot right now is our Dispensing and Specialty Closures segment, the mix benefit we’re getting from our high-value dispensing products and frankly, the growth that that’s generated and has been generating all year long.

Those trends will continue next year in 2024, and we anticipate continued growth and mix benefit from the high-value dispensing products, again, irrespective of recovery in food and beverage markets and our other aspects of the business. So really, we believe we can control what’s immediately in front of us, but cost savings program will drive earnings growth for next year irrespective of market recovery.

Ghansham Panjabi: Okay. Thanks so much.

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

George Staphos: Hi, everyone. Good morning. Thanks for the time, the details. Adam, I assume the pets aren’t on GLP-1 yet, so that’s probably not a reason why you’re seeing destocking there. But in terms of the adjacencies that you’re seeing destocking in food and beverage, is it — was it soup? What else is going on? And what are your customers saying in terms of why they’re doing this. Relatedly, you said they’re accelerating their destocking, and that’s great. But wouldn’t that then mean a pickup in volume in the fourth quarter or soon thereafter, you’re just pulling forward the destocking that would have occurred. And related to that, what was the volume in metal for the quarter? And then I had a couple of follow-ons.

Adam Greenlee: Sure. Thanks, George. And again, half of our volume in the metal container segment roughly is in pet food. So you’re right, that is not part of the GLP-1 conversation at this point, which is more than meaningful part of our business. So fundamentally, George, you’re right with your destocking thought and question. So it’s great that it’s accelerated. At some point, that will mean that there is volume recovery to replenish inventory levels. And again, it’s not about the unit volume of inventory for our customers at this point. It is about the year-end absolute dollars of inventory that they hold on their balance sheet. So even though it’s accelerated, I don’t think it’s going to be a favorable upside for Q4 because they are targeting the year-end value.

It should be for 2024, but that’s not what we’re factoring into our ability to drive earnings growth for next year. So I think that’s an important component to what we’re thinking about for the fourth quarter and for next year. And then…

George Staphos: Adam, you keep saying Food & Beverage, so where in Food & Beverage was it, where you had this additional destocking?

Adam Greenlee: Sure. So think about our in the metal container segment, we’ll start there. So additional destocking really in our pack volume, a little bit of destocking in soup, but really, it’s the adjacency that got included now for the pet food market. So that’s the biggest change were last time we talked. Food & Beverage also applies to Dispensing and Specialty Closures as well, particularly in the US market. So it is impacting our traditional hot fill and cold fill closure market in the US business.

George Staphos: Okay. And the volume in metal overall for the quarter, what was it?

Adam Greenlee: Down about 10%.

George Staphos: Okay. Understood. Thanks for going through all of that. I want to go to the cost reduction program. You mentioned its footprint, we can summarize what that means and other cost reduction activities. But can you — and you gave us some delineation in terms of the cadence to Ghanshams question. But what’s going to change at Silgan as a result of this? So give us a bit more tiles in the Mosaic here in terms of what capability you get, why it doesn’t disrupt your service, why it actually makes you more competitive company going forward. Aside from the fact, yes, we’ll try to build in $50 million of cost reduction into our models over time. What is Silgan get out of it? What do your shareholders get out of it?