Silgan Holdings Inc (SLGN) 2003 Q3 法說會逐字稿

Good day ladies and gentleman and welcome to the Silgan Holdings Third Quarter Results Conference Call. My name is Carlo and I will be your coordinator for today. At this time, all participants are in a listen-only mode and we will be facilitating a question-and-answer session towards the end of this conference. If at any time, during this call, you require assistance, please press *0 and our coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. It is my pleasure to introduce to you today Phil Silver, Chairman and Co-CEO, Greg Horrigan, President and Co-CEO, Anthony Allott, CFO and Malcolm Miller, Treasurer. At this time, I would now turn the presentation over to your host, Mr. Malcolm Miller, please proceed 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 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 2002 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 statement. With that, let me turn it over to Anthony.

Thanks Malcolm. Good morning everyone. Welcome to Silgan Holdings Third Quarter Earnings Conference Call. As usual I will be making a few brief comment about the quarter and then we will discuss our outlook for the remainder of the year. Afterwards Phil, Greg and I will be pleased to take any questions.

I hope with that now you had a chance to see our earnings release. We are quite pleased with the results for the quarter with records sales and strong operating profit. Earning were art the high end of our estimated range and several important initiatives advanced during the quarter. We continue to believe the company is well positioned to achieve expected results for the year and that reduction targets for the next several year.

So the quarter of the company earned net income of $26.8 million dollars or $45 per diluted share. This compares with a $42 per share in the third quarter of 2002. However this year's result will reduce by rationalization charges of $7.7 million or 25 cents per share and last year's results benefited by rationalization credit of 2.6 million or 8 cents per diluted share for our combined impact of 33 cents per share. The third quarter of 2003 also included a million dollars of losses on early extinguishment of debt as we call $25 million of our 9% senior subordinated notes as part of our debt reduction program.

Excluding these amounts, the year to year increase in earnings was quite significant and was driven by the accretion from the three business acquired during the first quarter of 2003. The increase in our value-added product sales a solid improve in vegetable pack season in the metal food can market. The benefit of certain cost reduction and productivity enhancement in both business and good demand in profitability levels in the plastic container business.

Sales for the company in the third quarter of 2003 were at a record level of $761 million an increase of a 120.1 million or 18.7%. While this increase in sales was across the board, it was primarily driven by the inclusion of this three recently acquired businesses Silgan Closures, Pacific Cloth producers and Thatcher Tubes.

Operating process for the quarter was 66.4 million an increase of 2.9 million. This increase would have been significantly more except for the impact of the rationalization charges of this quarter and credits in the same quarter of last year with an average of impact between them of $10.3 million. Drivers have just increased were profit from the acquired business as well as general strength in both food cans and plastic containers. For those interested in calculating EBITDA, depreciation and amortization for the quarter was $29 million versus 24.3 million in the third quarter of 2002.

On a year to day basis, the company earned $2 and 42 cents per diluted share. As compared with $2 and 59 cents for the nine month of 2002. Again, this year earnings were negatively impacted by rationalization charges of 25 cents per share. While, 2002 benefited from rationalization credits of 16 cents per share for our combined impact of 41 cents per share.

Year to day sales of $1.8 billion were also at record levels for the company and exceeded last year by $239.2 million for 15.7%. Operating process of $134.5 million was below prior year due to the restricting charges this year versus credit loss. Otherwise operating profit increase due to constitution of the acquired business and increased productivity partially offset by higher depreciation in health and welfare cost.

Operating margin was also impacted by only initial margin in the acquired business and ramp up cost associated with new value added production capacity brought on stream during the third quarter. Year to date depreciation amortization expense was $83.2 million in 2003 as compared with $71.1 million in 2002.

In terms of the individual business segment, sales from the metal food container business was $621.7 million during the third quarter of 2003 increasing a 104.4 million or 20.2% over the same quarter of 2002. This increase was primarily due to the inclusion of a closure and PCP businesses. Exclusive of the closure stiffness metal food container sales increased by 7.2%. The fruit and vegetable packs were relatively strong and excluding PCP sales. Our sales in these markets were rather is consistent with last year, which was also a good pass year.

Operative profit of the metal food container business increased by $8.1 million, which again was largely due to the inclusion of the closures and PCP business. Operating margin of the metal container business decreased 10.2% of sales from 10.7% in the third quarter of 2002. As a result of the rationalization charge in 2003 that is compared with the credit in 2002.

Margins of the base business excluding the impact of the rationalization increased significantly that were in line with our expectations. The main drivers of this increase with the improved mix of sales has new convenient things capacity was commercialized. Partially offset by higher depreciation and inflation in health and welfare cost. As expected, the recently acquired PCP enclosure business negatively impacted margin for the closure. The closure business is continuing the implement a restructuring program initiated in 2002 in which the Chicago Facilities expected to be close in the fourth quarter. This program is a few months behind the original schedule, but its expected result in improved earnings during 2004.

We have also closed the Mexican manufacturing site and combined certain administrative function in this business. Over time we anticipated this business approaching margin levels for the rest of the metal food cans.

For PCP margins were overall (inaudible) due to the liquidation of inventory with his value that high levels as a result of purchase accounting. On the GAAP acquired finished inventory is valued based on selling prices versus cost of sale rather than on a cost basis. In this case, that resulted in lower than normal margins on the sale of the sizable initial inventory balance. In addition to starting down the Mexican Closures Plant, the metal container business have announces contentions to close the (inaudible) California and (inaudible) Harbor Michigan facilities over the next several months. The customer requirements from these plants will be consolidated into the order existing facilities.

The fact that container business continue to experience solid results. Sales increased over the third quarter 2002 by $15.7 million or 12.7% to 139.3 million due primarily with the inclusion of the Thatcher Tube business for the quarter and the pass through of higher level cost.

Operating profit in the plastic business was $4.3 decreasing 5.3 million due to the inclusion of 7.1 million of rationalization charges. Otherwise, operating profit would have increased due to higher sales levels and improved productivity partially offset by some price discounts higher depreciation and health and welfare (inaudible). The 7.1 million rationalization charge relate almost entire with the closure of the Novac (inaudible) facility. Nearly 5.1 million of this represent non-cash right down of after values. The plastic business also announces intention of close its manufacturing facility in Hennaing, California.

Over the past year, we have discussed the increase in capital level in the plastic containers market. While this is occurred in certain discrete parts of the market and had impacted the pricing and growth in our business in the current year. The strategy of our plastic container business of focussing on selling value added portions rather than at lowest price mitigates much of the impact.

The historical result of the business as well as 2003 year to date performance continue to support the soundness for this strategy. While operating margins in plastics have declined this year compared to 2002 from 10.9% to 8.7%. This decline was a result of the rationalization charges in the mathematical (inaudible) higher revenues associated with (inaudible) without corresponding increase in operating process.

Company wide SG&A expenses for the increase by 7.8 million from the third quarter 2002. Primarily the result of the addition of the closures and Thatcher Tube businesses. Additionally, the company has experienced higher insurance employee health and welfare costs. Interest expense increased by 1.6 million to $21.6 million as a result of the laws and early extinguishment of debt as we call $25 million of a 9% seniors coordinated notes.

Additionally, outstanding borrowing were higher as a result of the acquisitions completed in early 2003. Now I would like it to turn to outlook for the left for the year. As Indicated in the press release we have increased the bottom end of our ranch with a full year estimate of between $2.72 and $2.92 cents per diluted share, which translates into a fourth quarter of 30 cents to 50 cents per share.

This comparatively fourth quarter in 2002 was 34 cents per share. As already seen in the third quarter this potential increase in profitability is anticipated and come from the continued ramp up and show us the convenient ends for metal food cans. As one major cosmos began implementing (inaudible) this package enhancement. Also, the Thatcher Tube and PCP businesses will be acreeded during the fourth quarter.

Since this is the seasonally slower quarter for the closures business, it is not expected to have significant impact on earnings in the fourth quarter. Partially, offsetting of these things will be increased in interest expense due to higher outstanding borrowings. However, interest will be down from the third quarter. The assessment does not include impact to the potential further bond redemption's.

Finally, I want to reaffirm the company's commitment to debt reduction in the absence of compelling acquisition opportunities. In our estimate that the year ends debt balance will increase not more than a $100 million over 2002 level, despite spending approximately $175 million in cash to complete the three acquisitions early in the year. In fact, at September 30 that levels was only 107.4 million higher in 2003 that at the same point in 2002. Over the next three years, we continue to anticipate generating an additional 200 to 300 million of further reductions in debt balances.

We did not yet have specific earnings guidance for 2004. Both of our businesses are currently developing their operating plans and we expect to provide more information in our yearend earnings release. At this time, we are only prepared to say that we do anticipate improvement earnings from both our metal and plastic container businesses. That concludes our prepared remarks. We now turn it over to questions.

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Our first questions comes from Dan Khoshaba with Deutsche Bank

Good morning guys

Good morning.

Pretty good quarter.

Thank you.

I just want to understand a little bit that some of the things Tony that you said. I guess the metal container business you were up about little over 20%, but I guess 7% excluding acquisitions as well as the inclusion of the closures business or was it a flat excluding the closure than MPCP?

Its 7%of excluding the closures business, PCP is kind of interical part of that business, so that is in that 7%.

OK, so excluding both of those segments you were up about 7% or you your flat.

Dan, excluding closures only. PCPs volume is in the 7%.

OK, I think you say Tony that excluded PCPs volume you would have been of out flat.

I did not say that. Relatively that is true, but I did not say that.

OK relative to that is roughly true I guess.

Yes.

OK just I understand. If you exclude the closures and PCP business what is the kind of industry or perhaps your volumes look like in the quarter. Was your volume flat?

Essentially the published date on that Dan is the - I don't have it for the quarter, but to August that put up by the can manufacture incentive was the industry was down, the oil food cans were down 2.9%.

OK.

Our volumes looked in a pattern that fairly well

Right.

SPCP while we had going on what we had going on this year is that the pack came on later particular in tomatoes on the west coast and pushed in the September. So I would expect that we are going to see the CMI data in September, it is going to show our performance you know year on year.

Right.

And essentially - we experienced that as well.

What was the EBIDTA contribution of consolidated closures in the results. EBIDTA for the division was up by about, was about $8 million I think. Yes, so what was --

We are not segregating it Dan, I mean it becomes an integral part of the business and so red hard to that over the time. So we were just not doing that. You should read in that the margin in that business was significantly lower than the food can margin

Yes. For you Greg what do you hear about pricing for 04 in food cans, as such -- your two other competitors and I had recognized that 80% of your business in on the long-term contract in that division, but your two other primary competitors have been.

You know, relatively we will go about the need to improve selling prices in food cans and you know not very happy with the level of margin and profitability in that segment and what are your competitors on the conference call will crown a couple of weeks last - largely believe it was said that they are already in discussions with competitors of about next year pricing initiatives. Where do you get -- about that, what are you hearing.

I don't think you meant to say in discussion with competitors. You mean in this

Customers, I apologize.

First of all our view is that - it is not appropriate for us to comment on anything that any of our competitors might be saying or not saying we will speak for ourselves and we play our own point of view. Actually our business on the contract is closer to 85% to 90%.

OK.

Therefore the idea or notion of the moment of a annual increase is obviously significantly less for us. What we do is you know under contract, looked to recover inflation we have various formulas and use various contracts to accomplish that. We have had real inflation, as Tony mentioned (inaudible) in the opening remarks you know we look to cover the inflation we are finishing across the business.

We were reasonably confident that we will have an increase that will cover inflation on an open market that 10% to 15 % is not covered by contract. That is frankly where we have been for sometime it is a kind of product price increases that we have been going to market within and what we have been -- in realizing over the last few years and I don't see it how 2004 would be in a different force.

So what you say if I heard you correctly, that with you expect to recover in price increase on the 10% to 15% that is not under contract. The increase cost of health and warfare.

No. We are going to expect to recovery all inflation.

OK.

As we do, you know frankly as we have each of them.

Well some years - correct me if I am wrong some years the industry hasn't done a very good job. I may be I am wrong. This my own interpretation or perhaps of getting all of that inflation kind of covered You know, it seems like, you know, in 03 -- segments that was actually some price errosion. Is that not activating your mind or you know it is more of a - let just say intensity given the large increases in clause the last 12 months. I have to make sure that the industry executes better.

I must really thank that, I thought selling also in our conversation about what are others were setting we just won't bother. Our view again is that the market has been relatively stable for selling containers with the exception of taking up self manufacturing PCP. We had not showed gain in 2003.

Fully alluded debt clause believe in the second quarter I wasn't suer but heard that you know there was some commissioning in the upper, mid west early in the year and we neither gained or lost any business, you know what is going on there, but by and large there has been more stability in the market and for us and our contracts I think particularly provide - for that in our case and that its just not a lot of business, but is on the bubble each year. So in this more patient activity around that I think in terms of individual customer negotiations and they are all with any kind of general increase.

OK, good. Just a clarification, I was actually looking for your comment for your specific business not your comments about your competitors, but anyway, thanks a lot. I appreciate it.

Next question comes from Keith Wailey with Morgan Stanley.

Its actually Keith Larry here. I have a couple of questions. I just follow on Dan's comments just to clarify. It did not sound like you expect to get any price in next year that would fall in the bottom line - most kind of a cover inflation. The right way of read that?

I just think it is pre-mature for us to comment on precisely what our price plans are. We are still in discussions with the steel suppliers and any numbers suppliers determining, you know what kind of inflation, in fact we expect to incur. And this was all very much in block. A general view is that we like to cover inflation.

OK, regarding the plastic business in the third quarter, the press release mentioned higher average selling prices due to higher resin costs, but at least you mentioned some price discounting in your commentary and trying to reconcile had to interpret that.

Edings, this is Phil Silver. I think to deal with respective of resin in fact on prices and just the position that with the price discounting. Our revenues year to date are relatively flat, when you take into account the new acquisition of the two business and the impact of resin and paster, were all volume is up very slightly. So net debt is been some slight deterioration in our average pricing.

OK, and then lastly, do you have any, are you ready to give any sort of 04 CAPEX guidance or 04 earning guidance and/or the timing of the benefits you expect to get in low dye and from the closure of the Benton Harbor Facility.

On the whole we said so far, which is, you know basically that we are all working out of plans now, we do expect to see increased earnings next year in both businesses. We don't have anymore, on the capital side, we had said that we expect to see decreases in the capital spending, that is a part of our debt reductions strategies. So you know you should read that as a down number on capital so that we had not given any specific guidance on that, and we had already said that on the earnings for the next year.

OK, and the timing of the benefits from the closure of the low dyne and Benton Harbor what you expect on the first quarter of next year.

That will all be considered in the guidance we gave on the start -- next year.

OK, thanks a lot.

And the next question comes from George Staphos with Banc of America Securities.

Good morning.

Good morning.

Sorry, these questions may have been answered earlier we were (inaudible) to call once this morning. Did you comment on how your food can pricing has been in your spot business year to date up down. Could you put a percentage on it and had a follow on that.

Directly we had indicated on the lead in that margin was up in the base food cans business with a result of variety of things, but notably that addition of more value added products particularly food coffins we made fair amount of investment and productivity improvement and so and so. That contributed as well, and you know we would see that we had relative price stability in the market in 2003.

OK. So whatever has been in the market and discuss has been more of the one of nature from what you considering from your business nothing significant.

That's correct.

As we look, I mean these are in pretty good margins, which we were put in the third quarter in food can business and nice to start to see that the pickup in mix. If you are earning, you know, a wanted return in your food can business right now, are you happy with your margins and what are going to be the primary leverage to improving that as we go into 2004 and 2005 largely again the introduction of VZO.

Well, you said, actually quite and fine that the returns that we did on the capital we employ is not just in the food can business, then plastic as well. Had been quite good -- function lot of things and I pleased which the price we (inaudible) but we have been getting a good return on capital. I can imagine any management saying that they are going to be interested in findings ways to improve margin and at time -- now regard what we have on horizon is a function of the capital that we have been spending again in value added products and as well as in productivity improvements in the business. We have been spending a very high in depreciation in the last several years. We think that will come home to us impart it has this year.

There is some more to realize next year. We had some transition and realignment issues with closure business. We would expect to see some improvement there year on year and then we had some purchase accounting inventory issues on PCP that also represents some potential for next year. So there's somethings that just you know sitting out, therefore 2004 that should be beneficial. You know, we are also on the process of going through and surely ended all up over the point time there will be things going both way as there were always are. But we made progress this year and we on track and right on line to make progress again in 2004.

As the still company is come to the (inaudible) with any notification on increases on contemplate?

There's has been no public announcement this time, obviously we have been in discussions with and trying to understand where they are going and what we can expect for 2004. But nothing has been communicated publically.

Should that come through, there would be raise pricing potential?

Yes. Certainly the key components of what we have to consider on our price increase.

Fair enough, I'll turn it over here.

Thanks a lot.

Gentlemen, currently we have no questions.

Thank you everyone.

Ladies and gentlemen, we thank for your participation in today's conference. This thus conclude the presentation. You may now disconnect your line. Good day.