Silgan Holdings Inc (SLGN) 2003 Q1 法說會逐字稿

Welcome to Silgan Holdings first quarter financial results conference call. At this time all participants are on a listen only with a question and answer session to follow at the end. If you do anticipate asking a question at this time please key star followed by 1. If you do need assistance at any time during the call please key star followed by zero. From the company today we have with us Phil Silver, Chairman and Co-CEO, Greg Horrigan, President and Co-CEO, Tony Allott, Chief Financial Officer and Malcolm Miller, Treasurer. And at this time I would like to hand the call over to Mr. Miller. Please go ahead sir.

Thank you. 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 10K for 2002, 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 express or implied in the forward-looking statements with that let me turn it over to Tony.

Good morning everyone. Welcome to our first quarter earnings conference call. Hopefully you've all had a chance to see the press release earlier this morning. I plan to make a few brief comments about the quarter, then to discuss our outlook for the remainder of the year. Afterwards, Phil, Greg and I would be pleased to take questions.

For the 1st quarter of 2003 Silgan earned $4.2m or .23 cents per diluted share. This was in line with our projected range and as expected, was well below the 1st quarter of 2002 of .62 cents per diluted share. As a reminder there were several factors impacting the 1st quarter results that led us to originally project lower earnings. These were-first-interest costs would be higher due to the refinancing of our credit facility, completed in the 2nd quarter of 2002. Second-that we would implement an inventory reduction program in the 1st quarter of 2003 to improve our cash position, but which would also result in unfavorable absorption of fixed costs as it was implemented. Third-we would still be in the process of ramping up our new convenience end capacity, and therefore would incur start-up costs in advance of associated revenue. Fourth-the 1st quarter of 2002 had benefited from the inclusion of a rationalization credit for assets placed back in service at that time. Finally we had anticipated certain inflationary pressures would impact the business throughout 2003, including health and welfare, higher depreciation and insurance expense. Therefore, due to these factors, the first quarter results were expected to be well below the 2002 levels.

But more importantly, earnings are expected to increase significantly for the remainder of the year as the business begins to experience the favorable impact of these efforts, and the acquired businesses begin generating favorable results.

With that said, let's review what actually happened in the quarter. Sales for the company in the 1st quarter of 2003 were $454.4m, an increase of just over $30m, or 7.1%. This increase is primarily the result of the Silgan closures business being included for the month of March, the Thatcher Tube business being included for the full 1st quarter, as well as strong sales growth in the plastics business. Operating profit was $26m, a reduction of $10m due primarily to the impact on the metal food container business of the anticipated factors just mentioned. The plastic container business had a solid quarter with increases in sales and operating profit over the 1st quarter of 2002.

For those interested in calculating EBITDA, depreciation and amortization for the quarter was $25.7m vs. $22.6m in the 1st quarter of 2002. In terms of the individual business segments, sales in the metal food container business were $315.4m, an increase of $16m or 5.3% over the 1st quarter of 2002. This increase was due to the inclusion of the closures business for the month of March. Exclusive of this business, metal food container sales declined by 1.3% and were generally in line with our expectations.

Operating profit in the metal container business declined by $10.7m dollars. This decline was due to, first of all, approximately $3m in unfavorable absorption of fixed costs from the inventory reduction program I have just mentioned. Secondly, a $2.3m rationalization credit which had been recorded in 2002 for assets placed back in service to meet business activity at that time. Additionally there were increased start-up costs related to the new convenience end capacity, higher depreciation, freight and health and welfare expenses in the quarter.

Finally, the 1st quarter of 2002 was a comparatively strong period for the metal containers business, with operating profit having increased 31% over the 2001 1st quarter. In terms of the impact on the inventory reduction program, inventory levels in the base metal container business were reduced by $20.1m at March 2003 versus 2002. The plastics business had a strong 1st quarter. Sales increased by $14.1m or 11.3%, partly as a result of the addition of the Thatcher Tube business for the quarter, and partly due to strong general sales levels. The Thatcher Tube business achieved our target results for the 1st quarter.

The increase in sales was driven by volume increases for plastic containers of 3% excluding tubes, with the remaining increase largely due to higher selling prices, as rapidly increasing resin costs were passed on to customers. Operating profit in the plastic business increased to $15.5m and the operating margin was 11.2%, due to the higher sales levels, the improved productivity, partially offset by certain price declines and higher depreciation, health and welfare costs. While the industry did experience some heightened competitive activity, we believe the increase in volume and operating profit in the plastics business reflects the merits of our focus on more value-added business opportunities.

Company wide, SG&A expenses increased by $4.8m from the 1st quarter of last year primarily as a result of the addition of the closures business for the month, and the Thatcher's business for the quarter, as well as increases in insurance and employee related costs. Also as expected interest increased by $2.3m to $18.8m as a result of the $200m of additional 9% bonds that we issued in the 2nd quarter of 2002, and the higher spreads over rates in the new bank deal, finalized during the 2nd quarter of 2002.

These factors more than offset the lower general interest rate environment. As you know the first quarter was active for the company in terms of acquisitions with 3 excellent opportunities now completed. We discussed the closures and Thatcher Tube business during our year end conference call, and would only add that so far both businesses have met our targets and we're pleased with their integration and progress.

We also completed the acquisition of Pacific Coast Producers can making assets earlier this month. PCP is a tomato and fruit coop based in Lodi California. With this transaction, we've acquired 100% of PCP's can making equipment, and entered into a 10-year supply agreement. Silgan had previously supplied PCP's external can requirements. We do anticipate sales under the agreement will approximate $55m and we expect the transaction to be slightly accretive in 2003.

In order to finance these acquisitions, the company completed $150m incremental term loan borrowing under the current senior secured credit facility. The terms and interest rate for this incremental borrowing are the same as the existing [B] term loans currently at 200 basis points over [inaudible].

Now I'd like to turn our discussion to the outlook for the remainder of 2003. As indicated in the press release, we are confirming our estimate for the full year results of between $2.85 and $3.15 per diluted share. As previously discussed by the company, and as certainly evidenced by the 1st quarter, these results will be skewed to the last half of the year. As a result we're currently estimating the 2nd quarter 2003 earnings to be between .55 and .75 cents per diluted share. This compares to .55 cents in the 2nd quarter of 2002, and is mostly due to the rationalization charge that had been taken in the second quarter, and an extraordinary charge related to the refinancing of the senior credit facility. Together those items aggregate at .10 cents per diluted share.

This annual estimate that we are confirming, calls for the company to earn between $2.62 and $2.92 per share in the last 9 months of the year. This represents an increase of between 13% and 26% over the same 9-month period of 2002. The main drivers for this anticipated increase in profitability for the remainder of the year are as follows: first, increased sales of convenience ends for the metal food cans. This capacity has accounted for a considerable portion of the increased capital investment that we've made over the past few years, and is expected to begin generating returns on investment late in 2003. Secondly, the newly acquired closures business is nearing completion of a major restructuring program which will significantly reduce manufacturing costs for that business.

This project is scheduled to be completed by the end of the 2nd quarter at which time the business will no longer incur the cost of restructuring, and should more fully realize the benefits. This business is therefore expected to be accretive in the 2nd quarter. Last year the metal food container business incurred higher than expected conversion costs as it absorbed new volume awarded on the West Coast. The business is now better situated to handle this volume and should therefore improve conversion costs of this predominantly 3rd quarter business.

With the addition of the closures business, Thatcher Tubes and PCP, revenue is expected to grow by over 18% in the next 9 months as compared with the same period in 2002, with a corresponding growth in operating profit. Slightly offsetting these points, we do estimate that interest costs for the remainder of the year will be higher than in 2002, primarily due to higher outstanding debt balances resulting from the acquisitions and the refinancing completed last year.

However, the company does remain committed to debt reduction in the absence of compelling strategic acquisitions which are immediately accretive to earnings. Therefore, despite spending slightly more than $170m in cash to complete the 3 acquisitions in the 1st quarter, we currently anticipate year-end debt balances increasing only approximately $100m over the 2002 year-end balance.

Over the next 3 years we anticipate this focus will result in a $200-300m further reduction in debt balances. While this approach is consistent with our historical strategies, it does represent a shift in emphasis towards debt reduction. We believe this shift in emphasis is consistent with the new reality of the equity market and the fact that our 2 businesses are very solidly positioned without any strategic need for additional acquisitions.

That concludes our prepared remarks, we'll now turn it over to questions. Patrick, if you'll do your thing?

Thank you. Ladies and gentlemen, at this time, if you do have any questions or comments please key star one on your keypad. Star two will withdraw that question, and all questions will be taken in the order in which they were received. So once again that's star one for questions. Thank you. One moment for the first question please. And our first question comes from Albert Kabili. Please go ahead sir.

Hi, it's Albert Kabili, I'm sitting in for Dan Khoshaba at Deutsche Bank.

Good morning, Al.

Good morning. Quick question. SG&A was a little bit higher than what we were forecasting. I'm kind of wondering if that's all healthcare related costs, or if there's some unusual items this quarter, and what's the outlook for the full year?

Well the biggest thing is the acquisition of the closures business, which will obviously bring up the SG & A for the year. So therefore I would expect there is a percentage of revenue-for instance-we are anticipating it will be higher as a percentage of revenue as we look forward. And it does certainly get impacted by things like insurance to some degree employment costs, health and welfare etc.

Both the tube business and the closures business have a higher SG &A as a percentage of sales than the base business. It's just the nature of how they run their business.

Ok. And do you have an outlook as to where it's going to go for the full year?

Well, I think the relationship in the 1st quarter of SG&A to sales shouldn't be far different for the rest of the year.

Ok, great. Thanks.

Our next question comes from Edings Thibault. Please go ahead sir.

Thanks and good morning gentlemen.

Hello Edings.

A quick question for you. IF we could just run through some of these expectations. One of the key takeaways I saw was some of the debt pay down, I think, over the next three years that you talked about, was higher than I had been looking for. Or I'd been at the low end, so it's potentially to be significantly higher than I'd been looking for. And as part of that, it makes sense to just run through the margin profile of these acquisitions, or the potential accretion. If you could just talk to whether or not each of the 3 acquisitions you've made in the first quarter is going to be additive to the operating margins, general operating margins of the segment. So, in other words is Thatcher Tubes going to be higher or lower than what your experience has been in the plastics container business.

Look, in terms of Thatcher Tube's business, its operating margins are very similar to our base plastics business. So we should see very little impact on the margins from that. In the case of the closures business and containers area, those margins are not at the same level-a bit lower than the containers margins. Although they'll be improving as the rationalization program kicks in fully. And then the PCP business that we bought is a kind of standard margin business in our food can business.

Than in margins. And, focusing on the White Cap rationalization program, what is the timing for that to be wrapped up and for those costs to be more normalized?

The end of Q2. The end of Q2, the restructuring program and the costs are behind us. And the benefits should begin to affect Q3.

Ok. And then, final question and I'll turn it over to the rest of the queue. You noted that ex the acquisition of White Cap, revenues were actually lower in the food can, or metal containers portion of the business. Just wondering if you can talk about, with some additional granularity what areas of weakness you saw. Was that all volume, was it price? If you could just touch on those it would be great.

Nothing particular there Edings, it's a smallish quarter in terms of the volume across our system. We tend to peak much more into the 2nd and particularly 3rd quarter now. And we'll do that a bit more given our California fruit and vegetable business that we picked up, and now PCP will add that to that a bit more. But, nothing particularly unusual there, just kind of noise level.

And just to add to that, Q1 of 2002 was a pretty strong quarter, as well.

We were still getting some-I don't know if you all recall-but, on the heels of 911, 2001, we got some pickup in food can sales into the 4th quarter, and they were replenishing inventories into the 1st quarter of 2002. And then it leveled off a bit, and was not sustaining, in that sense. So, we did have a sort of a bump in the 1st quarter last year.

Thanks very much, I'll get back in the queue.

The next question comes from Andrew O'Connor please go ahead sir.

Good morning, Phil, Greg, Tony.

Good morning Andrew.

Wanted to know, Tony, I think I heard you say that ex-Thatcher Tubes, not including Thatcher Tubes, that sales growth for your plant and container business in the quarter was 3%?

That's correct.

Ok. So, can we dissect that. How much from unit growth, and then how much from an increase in pricing.

That was a unit growth number.

Ok. Your average selling price went up in the quarter?

Yes, certainly. Because for one thing you had raw materials spikes during the quarter, which we did cover.

Understood. How much?

That's not information we typically give in that level of detail.

Okay, and then, I'm wondering, has Silgan announced additional price increases for the 2nd quarter again for your plastic container business?

We do it, as it happens, with us, in terms of the plastics, or the resins increases, it happens as we get them. So, it's not a quarterly event, it's a 'as incurred' event.

Ok. So, maybe on a continuum then, how do you see Silgan's resin costs trending through the 2nd quarter. You had a big spike here in the 1st quarter, related to higher energy costs-how are things trending at the moment? Have resin costs peaked?

We think they've peaked. We think they've peaked-in the 2nd quarter they will probably hang around that peak during the quarter, then we're expecting in the second half of the year to see some decay.

Ok. And then I'm wondering, just further, because we are almost through the month of April. Can you make a comparison between April and March, say, sequentially, in terms of your resin cost and how things are trending at this moment?

It's not much different. There was the surcharge put into effect by the high-density producers in February, March it stuck and then didn't stick. And actually, I'm not sure I can sort it out in that narrow time frame, but in general, we think it's peaked and headed down.

All right guys, thanks very much.

The next question comes from Martha Tuttle, please go ahead ma'am. Miss Martha Tuttle from Prudential?

I'm sorry. Hi. Can you hear me now?

Yes I can.

Ok. Just two quick questions. One, can you just confirm what the translation is in your earnings guide and EBITDA for the full year of '03?

(Laugh) Not under the new regulations, we can't. That's not a GAAP number. Sorry.

We gave you the depreciation, so we gave you some insight!

Ok. The other question concerns the recent acquisition of PCP. You said that they were previously a customer of yours right?

Right.

And they generated $55m of sales?

Well, not previously.

We supplied them a smallish quantity of cans. The incremental change is around $50m.

Oh, ok. There will be a margin on that $55m over and above what you previously sold to them?

There will be a margin on 50 of the 55, effectively when we get everything fully integrated, into 2004. We'll realize part of it this year, and perhaps a bit more in 2004.

So what portion of the 50 can we expect a margin on in 2003?

(Laugh.) Given the accounting treatment here it will not be on the full amount as Greg was saying. It will be fully evident in 2004. But it will be significant in this-I think we said-we expect the acquisition will be accretive in this year.

Ok. Thank you.

And the next question comes from Vincent Rivers Rivers please go ahead sir.

Hey guys. A question on the plastics business. [inaudible]'s results were a little weak today and you guys talk about it being competitive. Could you give us a feel for what's going on in that business? It seems like it's been kind of weak for a little bit now, and competition is heating up. And what do you expect going forward?

Well, we have spoken now for some time that there's some competitive activity in the business that-generated by some--particularly one new entrant-we've been dealing with that now for some time. The impact on us is significant but not dramatic. The customer mix and the product segments we supply are the more complicated, value-added [products to supply]. And I think that's shielded us to some degree, perhaps more than others. That level of activity was in place-I can't say that it's changed in terms of going one way or the other in the last 6 months. It's sort of embedded, I'd say right now, in terms of it's effect, and I wouldn't have any way to predict whether it has more or less effect going forward than it already has.

So it sounds kind of like, the first degree-or a large portion of the effect was kind of in and we're in a new state. And your concern whether it's better of worse from here is kind of up in the air. But you've kind of stabilized at least, in the near term.

Yeah, we think so. The way our operation is set up, and the type of equipment, and for that matter, organization we have, we have the ability to shift equipment and focus in a pretty quick period of time. So our opportunity is to simply move from one business base to another pretty quickly and fill in where we had in fact, walked away from some business at [inaudible] levels that didn't make sense to us.

Ok, thanks guys.

And our next question comes from Christopher Miller. Please go ahead sir.

Good morning guys. Most of my questions have been answered but I wanted to touch on just a few things. In the metal food can business, can you talk a little bit about what you see for the pricing environment for the rest of the year? And along with that your initial outlook on what the perishable food pack is going to look like this year?

Well, let me answer the second question first. We anticipate the fruit and vegetable packs to be pretty much in line with what we experienced last year. The packs represent 40% of total food cans and with the PCP acquisition, we're a bit below that because we're higher represented in things like soup and pet food. But, it's about a third of our volume, roughly 33% of what we do is in the fruit and vegetable pack. So, we're expecting very much a normal year, Chris.

Ok.

In terms of the pricing environment-we see a very stable environment. We put through a price increase the first of the year. [It came] off of the steel price increase that was announced. And that went into place. It affects a smaller fraction of our customer base because much of our business, I think as you are aware, is under long-term contract, and we pass through the costs as we experience them, across the board. So we have a price change for material as it occurs, and then labor and all other mechanisms that are priced unique to each contract, and that's all going along pretty much on course. I don't think there's much of note to report about that.

Ok. Great. And, on your last quarter call you indicated you thought that for the year you'd be looking somewhere around $50m free cash flow. Are you still pretty comfortable with that number for the full year?

Yeah, I think we're very comfortable if you look at what Tony said earlier about our debt levels at the end of the year, that would indicate something well in excess of $50m.

Ok. And then one last housekeeping issue. Balance outstanding on the revolver at the end of the quarter?

Round about $80m.

Great. Thanks so much.

The next question is a follow-up from Edings Thibault. Please go ahead sir.

Thanks, my question has been answered.

Patrick does that take us through it?

Sir, we have two further questions if you'd like to take them?

Ok.

The next one is from Mr. David Sacks, please go ahead sir.

A couple of questions. Your investment on the convenience ends, if you could quantify at this point how much you've invested in-so how do you see the timeline for the roll out until we get to reasonable levels of capacity utilization. My second question, Capex outlook for the balance of this year and how that ties to your $200-300m of debt reduction over the next two to three years. Does Capex reduce itself off the '03 level over the next couple of years? And also, the last question, White Cap-kind of back of the envelope-maybe mid-twenties, normalized EBITDA levels?

David, you sound like a reporter at a presidential conference! I'm stringing these questions together! The first question in terms of the capital spending for this year, as we said earlier, we expect it will be below last year's level of $119m, but not dramatically below. Looking forward we expect the capital spending to drop back as the fixed spending on the convenience ends, we think is largely behind us. I think there's more in the future, but it won't come in a lump as it has in the last 3-4 years. We've never disclosed the exact amount of capital spending on Easy Open Ends, and we won't. But, suffice to say that in the last 3 years it's been very significant. It's represented a large part of the increase in capital spending above normal levels before that period. The spending is pretty much complete for this year, and we'll be fully utilizing that capacity or up to the intended demand by the end of the 3rd quarter this year.

And when will you get to representative profit levels? Is there a yield issue with that or-?

I think you have to go to the year to get there, but it will be 2004. Because we're only getting part year utilization this year.

So we should achieve-whatever your targeted level of performance for that business-we'll see it in '04.

Well, I'm not sure I'd describe Easy Open End business as a business. It's the food can business.

Right.

I think that's a good way to put it. Particularly given that our [inaudible]. Our White Cap business also will be at a full run rate in 2004 after the rationalisation is complete.

And mid-twenties EBIDTA for White Cap, is that what you would guess a stabilized level of cash flow for that business or-?

Again, we've never disclosed the exact numbers-I think you can take what we said about the margins in the White Cap business-we've disclosed the sales at around $250m, and we've said the margins are somewhat below, but not dramatically-our normal food can business-and will be improving to some degree going forward because of the rationalisation.

Ok. So, and then last, are the components of the $200-300m of debt reduction-one we've got the Capex coming down, so that should help. Are there any elements of working capital you foresee going forward, or-?

No, there's nothing in terms of working capital reduction plans in the period after this year, in which we are making some strides. It's earnings, it's deferred taxes-a significant element in-as I say lower capital spending will-we'll be at a lower level, we expect in those years than we've experienced in the last 3 years.

Well, hopefully the strategy works to improve the equity valuation, since you're going to be paying off $10-17 a share worth of debt. Hopefully there's some correlation.

Yeah - (laughter).

Thank you very much.

You bet. I think there was one more Patrick?

Yes sir, we do have two more questions, we have one from [Mike]. Please go ahead sir.

Hi guys. Can you just give us the first quarter balance for inventory and accounts receivable?

That will be in the Q.

Thanks.

The final question for today comes from Glen Murray. Please go ahead sir.

Hi guys. With free cash flow guidance kind of higher than what I think most people were expecting, and strong credit ratios, and the strong balance sheet considering the amount of free cash you guys are throwing off, do you guys have any plans to buy back stock with the price at these levels?

We have an authorization for $10m left to buy back stock, but that's not a central part of our financial strategy right now.

I think that, Patrick, that took us through the list, right?

Yes, sir, there are no further questions on the queue.

Great, thank you everyone.

Thank you ladies and gentlemen this concludes your call for today. You may now disconnect.