Silgan Holdings Inc (SLGN) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Silgan Holdings' Second Quarter Results Conference. My name is [Kaitlin][ph], and I will be your coordinator today. At this time, all lines are in a listen-only mode, with a question-and-answer session to follow. Should you require operator assistance while on this call, please key star zero on your telephone keypad, and we'll be happy to assist you. I would like to remind all participants that this call is being recorded for replay purposes.

From the company today we have Mr. Phil Silver, Chairman and Co-CEO, Mr. Tony Allott, CFO, and Mr. Malcolm Miller, Treasurer. At this time, I would like to turn the call over to Mr. Miller. Mr. Miller, sir, please go ahead.

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 10-K 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 expressed or implied in the forward-looking statement. With that, let me turn it over to Tony.

Thank you, Malcolm. Good morning, everyone, and thank you for joining us on what appears to be a pretty busy conference call morning. Welcome to Silgan Holdings' Second Quarter Earnings Conference Call. As always, what I'd like to do is make a few brief comments about the quarter, and then we'll discuss our outlook for the remainder of the year, and afterwards, Phil and I would be pleased to take any questions.

Let me start by saying that we are pleased with the results for the quarter from both of our operating businesses and believe the Company is well positioned to achieve expected results for the year.

For the second quarter of 2003, we earned net income of $13.5m, or 74 cents per diluted share. This was at the high end of our projected range and well in excess of the second quarter of 2002, where we earned 55 cents per share. The main driver of the results were the inclusion and the on-track integration of the three businesses that we acquired during the first quarter of the year; secondly, good demand levels in our plastic container business; and, finally, a relatively uneventful quarter in the metal food cans, excluding the recently acquired closure business with slight improvements in margins and operating profit in that business.

Sales for the Company in the second quarter of 2003 were $554.2m, an increase of $89m, or 19.5 percent, over the second quarter of 2002. While this increase in sales was across the board, it was primarily driven by the inclusion of the recently acquired Silgan Closures and Thatcher Tube businesses.

Operating profit for the quarter was $42.1m, an increase of $4.2m due to the inclusion of these acquired businesses and general strength in food cans and plastic containers.

For those interested in calculating EBITDA, depreciation and amortization for the quarter was $28.5m versus $24.2m in the second quarter of 2002.

In terms of the individual business segments, sales in the metal food container business were $397.9m, an increase of $70.3m, or 21.5 percent over the second quarter of 2002. This increase was primarily due to the inclusion of the closures business, which was acquired in March. Exclusive this business, the metal food container sales increased 1.2 percent due to slightly higher average selling prices and volumes.

Operating profit in the metal food container business increased by $3.6m, which, again, was largely due to the inclusion of the closures business and slightly higher sales and margins in the rest of the metal food container business.

Operating margin in the metal food container business decreased to 6.6 percent of sales from 6.9 percent in the second quarter of 2002. This margin decline was more than caused by lower operating margins in the closures business as the restructuring program initiated in 2002 enters the final stages. While the costs resulting from this restructuring have decreased significantly, much of the benefit has not yet been realized. Additionally, like many other companies, we are seeing significantly inflated employee health and welfare costs.

The plastic container business continued to experience strong results. Sales increased over the second quarter of '02 by $18.7m, or 14.5 percent, to $147.3m. This was due to the inclusion of the Thatcher Tube business for the quarter, higher average selling prices, and relatively strong general sales levels.

Excluding the Thatcher business, sales increased $10.2m, or 7.9 percent, driven primarily by higher average selling price, as compared with the second quarter of 2002, as we passed through significantly higher resin costs experienced during the quarter.

Operating profit in the plastics business increased $17.3m, or 11.7 percent of sales, due to the higher sales level, improved productivity, and partially offset by some price discounts, higher depreciation, and higher health and welfare costs.

As previously discussed, there has been some heightened competitive activity in the plastics industry, particularly evident last year, which has impacted the average selling prices. However, the strategy of our plastics business remains focused on selling a value-added solution rather than the lowest price. We believe the historical results of the business, as well as the 2003 year-to-date performance, continue to support the soundness of this strategy.

While the operating margin rate in plastics did decline during the quarter, as compared to the second quarter of 2002, from 13.1 percent to 11.7 percent, this decline was almost entirely due to the mathematical result of higher revenues associated with resin cost pass-through with no corresponding increase in operating profit.

Company-wide selling general and administrative expenses increased $8.6m for the second quarter of 2002, primarily as a result of the addition of the closures and Thatcher Tube business. Additionally, the Company has experienced higher insurance, employee health and welfare-related costs.

As expected, interest expense was up a bit, about $700,000, to $20.1m as a result of higher outstanding borrowings from the acquisitions completed earlier in '03, partly offset by lower average interest rates.

Now, as promised, I'd like to turn to the outlook for the remainder of 2003.

As indicated in the press release, we're confirming our estimate for the full-year results between $2.85 a share and $3.15 per diluted share. This estimate calls for the Company to earn as much as 24 percent more in the second half of 2003, as compared to the same period in 2002.

As we previously discussed in the first quarter call, the anticipated increase in profitability for the remainder of the year is driven by three main points.

First is the increased sales of convenience [ends][ph] for our metal food can business, as one major customer begins implementing a national rollout in the third quarter. This capacity's accounted for a considerable portion of the increased capital investment and start-up expense over the past few years and is expected to begin generating returns on this investment in the second half of 2003.

Second, as part of a major restructuring, the newly acquired closures business will be closing its highest-cost production facility in Chicago in the third quarter, and this is expected to significantly reduce the manufacturing costs. The closures business was accretive in the second quarter and is expected to be more so in the future as the benefits of this restructuring are realized.

Finally, the Thatcher Tube and PCP businesses are also expected to be accretive to earnings for the remainder of the year.

Slightly offsetting these points, we do expect higher interest costs for the remainder of the year, primarily due to higher outstanding debt balances resulting from the acquisitions.

As a result of these factors, we're currently estimating net income per diluted share to be in the range of $1.55 and $1.75 for the third quarter of 2003, which compares with $1.42 in the third quarter of 2002. We're expecting both the metal food container business and plastic container business to report increased sales and operating profits. At this time, we're also expecting a reasonably good fruit and vegetable pack, both in the Midwest and the West Coast, which would be similar to what we had experienced last year.

As discussed in our last conference call and press release, the Company remains committed to debt reduction in the absence of compelling strategic acquisition opportunities, which would be immediately accretive to earnings. We continue to estimate that the year-end debt balance will increase no more than $100m over 2002 levels despite spending approximately $175m in cash to complete three acquisitions early in the year.

To this end, debt balances in June were $1.28b, an increase over June of last year of $159.6m. That increase -- you know, despite that, we did do $175m in acquisitions and $35m in working capital ramp-up associated with those acquisitions. Since the majority of that working capital will be liquidated during the remainder of the year, we would say we're well on our way toward the year-end debt reduction goal. Over the next three years, being 2004 through 2006, we anticipate this focus will result in $200-300m further reduction in debt balances.

This concludes our prepared remarks. We'll now turn it over to Kaitlin to give any instructions and take questions.

[Caller instructions.]

Your first question comes from [Edding Stiebolt][ph] of Morgan Stanley.

Hi. It's actually [Kieth Wyle][ph]. Have two questions. The first one is I was wondering if you could quantify in a dollar figure the amount of savings that you expect from the Chicago facility being closed? And, second, I was wondering what your capex was in the second quarter and whether that should ramp down then in the second half of the year because you finished your capex program?

I'll start with the easiest one of that. The capex for the quarter was in the range of $28m. That is reasonably consistent; in other words, a reasonable quarter of what we said for the year, which would be somewhere in the range of $110m. So there's not a huge difference, kind of the run rate of that. A lot of the capital had already been spent associated against the program you're referring to. We have not specifically quantified the savings from the Chicago shutdown. What we have said is that after the results, we would expect that business to get closer to the container's level margin.

Okay. Thanks a lot and great quarter.

Thank you.

Your next question from [Albert Kabili][ph] of Deutsche Bank.

This is Albert Kabili sitting in for [Dan Kashaba][ph]. I was wondering if you could quantify what the Silgan Closures business added to operating profit this year? It sounds like it was modestly a positive this quarter.

Yeah, that's as far as we would go on that. It's part of the food container business. But it was -- as we had indicated, it was accretive in the period but modestly [indiscernible] way to characterize it.

Okay, so I guess another way of getting at it, was operating profit in metal containers, would that have been up year over year had you, you know, excluding the effects of the closure business?

Yes, it would've been.

Okay. And then how was pricing looking, and, you know, what are your expectations for next year in food cans?

In the food can business pricing environment -- this is Phil Silver speaking -- the pricing environment is much as it has been in the past few years. Our pricing is up a bit in the second quarter given the mix of our business and the pass-through of inflation under our contract. We anticipate that to continue to be the case for the year. So the outlook's about normal to the past, and our mix is going to be better than in past periods due to the value-added products, particularly [inaudible].

Okay. All right. That's it. Thanks a lot.

Thanks, Al.

The next question from [Galena Mochinski][ph] of [Simoto Trust][ph].

It's [inaudible] Trust. Hi. I just wanted to know if you can give me debt breakdown for the senior in total and the revolver outstanding, as well as depreciation amortization for the six months?

I didn't catch the second part of that. The debt --? Let's start with the debt one. Rather than break down all the debt, the working capital balance -- the revolver is, I think, what you'd most be interested in. At the end of the quarter, it was about $170m.

Okay.

And then what was your second part with depreciation?

D&A for the six months. I'm not sure if you mentioned it.

[Inaudible], but that's okay. I've given it in the two quarters. The year-to-date would be about $54m.

Fifty-four million. Okay, thank you.

Um-hmm.

The next question from [Christopher Miller][ph] of J.P. Morgan.

Good morning, guys. A couple quick questions. On the shutdown on the Chicago facility, you're not quantifying savings. Are there any cash costs associated with that this year that we should be taking into consideration?

The cash costs are virtually all spent at this point. We'll have just a bit of severance cash cost left, but it's kind of immaterial. Most of the cash cost was spent in the latter part of last year and the first quarter of this year.

Okay, great. And, secondly, as you kind of look forward through the rest of the year, when you talk about pulling some cash out of working capital, is there any way you can kind of quantify what you expect to get out of working capital through the rest of the year?

We had said that we had a program to reduce our inventories in the food can business that were at levels above what we thought they needed to be going into the season and had targeted a $20m reduction by the end of the year, actually, by the end of the first quarter. We're on track with that. In fact, we're a bit ahead of that program and expect to beat it for the year.

Okay, great. Thank you very much.

The next question from [Robert Kirkpatrick][ph] of [Cardinal Capital][ph].

Good morning. Could you talk about your shifting of long-term contracts that you operate under -- under two kind of employment-at-will or contract-at-will status?

Well, I think we have to take a look at both -- at the two businesses. In both of our businesses, we operate under a multi-year contract predominantly. I think in the plastics business, it's around 70 percent and in the containers business, it's over 80 percent. There's no particular shift in how we operate. We think that it's a good arrangement between us and our customers so that we can both invest into the partnership to get the best kind of container, the right kind of container, and at the most cost. So there's no change in our basic view, and that we can tell, there's no change in our customer's view on that.

Okay, so that as you come up for renewal in 2004 with certain of your customers, you would expect to continue under a long-term contract?

Well, certainly, as I said, that would be our intent. We have to be successful in negotiating that with our customer, and that usually happens unless the customer's had a change in their attitude about long-term contracts. As I said, we have not seen that. In fact, if anything, there's more of an appetite for multi-year contracts with our customers.

Okay. And, Tony, can you give me cash flow from operations for either the quarter or the six months?

No, you'll have to wait for the Q for that.

Okay. Thanks so much, guys.

Yeah.

The next question from [Cunie Chen][ph] of Banc of America.

Hi. Good morning. Cunie Chen with [George Staphos's][ph] group. Just another point of clarification on food can pricing. Can you just talk about some of the price skirmishes that happened in the upper Midwest earlier this year and just [inaudible]?

You're getting pretty specific there! I can simply say that we know of one price scrimmage. It was kind of a confused situation. The dust has settled. We have gained no volume in that instance, and as far as we know, it's all settled out. I'm not sure that there was much volume changing hands, and the final instance, we think was precipitated by the consolidation of a couple of the customers that necessarily changed in the circumstances, and there was a settling out if it was going to be a long-term supplier. We were not very important in that business, and we remain not very important in this business.

Okay, great. And then one more follow-up. Just on food can margins in the third quarter, you know -- and, obviously, profits will be up year over year, but can you comment on the delta in margins, please?

No, I don't think we want to be forecasting margins in the business, but I think you're right in expecting that the margins will certainly improve over the second quarter and should compare very favorably with last year.

Okay, thank you.

[Caller instructions.]

The next question from [James Clark][ph] of [Brandywine][ph].

Hi. Several questions here in food cans, specifically. Could you characterize your capacity utilization?

I think the best way to think about it is we're pretty well fully utilized. We certainly have some casting we could use if we wanted to produce cans in the fall of a year for sales the next summer, but that runs into the economics of storage and working capital. So we're basically at capacity in our food can business.

And how about your competitors? Do you -- is there spare capacity in the business?

We don't think so. We think all of us have -- first of all, it's a very expensive business to keep idle capacity available, and there have been a lot of plant closings in the food can business over the past 10 years and even particularly so in the last two or three, so we've actually closed -- we have 31 food can plants operating today. We've closed 17 plants over the past 15 years, so there've been a lot of plant closings. I think we all try to keep our capacity balanced with demand because it's very expensive to hold open capacity. You do that by closing plants rather than, say, alternating shifts and the like.

Now, what percentage of your food can business is on contract that expires in the next 12 months or so or could potentially be renegotiated?

Not very much. I wish I had a -- I don't have the number at the tip of my tongue, but 2004 is not a big year for us in terms of contract expirations.

Okay. On your debt balance, [indiscernible] billion or so --

Yes?

-- is there a chance for you to take advantage of the current, you know, very favorable interest rate environment to do anything there?

It's certainly something that we look at, as you'd expect that we do. Obviously, if we had anything specific in mind, we would've talked about it.

Okay. Thank you very much.

At this time, sir, there are no further questions.

Great. Thank you, everyone.

Ladies and gentlemen, this concludes your program for today. You may now disconnect.