Silgan Holdings Inc (SLGN) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Silgan Holdings First Quarter Results Conference Call. My name is Rachel, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will be facilitating our question-and-answer session toward the end of today's conference. If at any time during the call you do require assistance, please press *, followed by 0, and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

Joining us today from Silgan Holdings is Mr. Phil Silver, Chairman and Co-CEO. Mr. Greg Horrigan, President and co-CEO, and Mr. Tony Allott, CFO. I'd now like to turn the presentation over to your host for today's call, Mr. Malcolm Miller, Treasurer. 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'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 2003, and other filings with the SEC. Therefore, the actual results of operations or financial conditions of the Company could differ materially from those expressed or implied in the forward-looking statements.

With that, let me turn it over to Tony.

Thanks, Malcolm. And welcome, everyone, to our first quarterly conference call of 2004. As always, the plan today is we'll review the financial results for the quarter, make a few comments about our outlook for the coming quarter and the full year, and then Phil, Greg and I will be pleased to take any questions.

As you've probably seen by now, this was a very strong quarter for the company. Our net income was $11.1m, or $0.60 per diluted share. As compared with $4.2m or $0.23 per share in the first quarter of 2003. The results this quarter were even a bit better when you consider the inclusion of $1m or $0.03 in continued costs incurred for rationalization [of program]. The key drivers of the increase were a strong performance in the metal food container business -- both in food cans and in closures. I'll discuss this more in a moment. And, [low renter]'s cost.

Sales increased $63.9m, or 14.1 percent, to $518.3m for the quarter. Primarily, due to the inclusion for the entire quarter of Silgan Closures, which was acquired early in 2003, and strong volumes across the board. Sales in the metal food container business were $372.9m -- an increase of $57.5m, or 18.2 percent over the first quarter of 2003. This increase results both from a 5.9 percent increase in food can volumes, and the inclusion of Silgan Closures for the full quarter in 2004.

The volume increase was principally the result of unusually-low levels of pet food can sales in the first quarter of 2003, which we attribute to inventory corrections at that time. Operating income in metal food containers increased by $9.3m over the 2003 level, to $21.1m. And operating margin increased from 3.7 percent to 5.7 percent.

Part of the explanation for this improvement is that profitability in the first quarter of 2003 was unusually low due to the reduced volumes that I just discussed, and the higher absorption of fixed costs, due to inventory reduction programs implemented last year.

Relatively more of the important, however, was due to the impact this year of increased spending on capital that we've been making over the past few years -- particularly on Quick Top convenience-end capacity. As well as the inclusion of Silgan Closures and PCP for the full quarter.

Last year, Closures was included for only one month, and had virtually no impact on operating profit. This year, the business was included for the full quarter, and experienced stronger-than-anticipated sales and good operating results. Part of the rationalization program of the Closures business was closing a Chicago facility. This was completed by the end of the quarter.

In the plastic container business, sales increased $6.4m, to $145.4 m, representing a 4.6 percent increase over the first quarter of 2003. This increase resulted from higher average selling prices, due to pass through of higher resin costs, as well as increases in unit volumes.

Operating income was $13.9m in the first quarter -- a decrease of $1.6m, or 10.3 percent over the first quarter of 2003 -- but was in line with our expectations. Despite increases in volume, operating income decreased as the result of certain price concessions, higher depreciation, and inflation of employee costs. Additionally, operating margin also declined, due to the mathematical result of higher sales associated with passing through resin increases without a corresponding increase in operating profits.

While the business did experience some heightened competitive activity over the past couple of years, our plastics business has been and we expect it will continue to be, quite successful in focusing on those segments of the market where customers desire greater custom solutions and capability, which are strengths of Silgan.

[Selling] General Administrative Expenses increased $4.1m, primarily as the result of the inclusion of Silgan Closures for the full quarter, and remained relatively constant as a percentage of sales at 5.3 percent, as compared to 5.2 percent in the first quarter of 2003.

As anticipated, interest expense decreased significantly in the quarter, down $3.6m, as a result of the refinancing completed late in 2003. As you may recall, we redeemed the entire $500m of 9 percent senior subordinated debentures, with a combination of 200 million of new 6.75 percent senior sub notes, additional bank borrowings and free cash flow. This refinancing resulted in a significantly lower borrowing rate, and more prepayable debt on the balance sheet.

For those interested in calculating EBITDA or other cash flow metrics, our depreciation for the quarter was $28.6m, as compared with $25.7m in the first quarter of 2003. As indicated in the press release, we remain committed to our debt-reduction goals. Our target of $200-300m of paydowns by the end of 2006 remains intact, as does the goal for this year of at least $75m of debt-reduction. Due to the seasonality of our working capital requirements, you should expect to see this paydown as late in the fourth quarter.

Now, turning your attention to our outlook for the year, as indicated in the press release, we've increased our earnings estimates to a range of $3.80-4.10 per diluted share. This compares with $2.28 per share in 2003, although that year included rationalization charges and losses associated with early retirement of debt.

While the first quarter was an excellent start to the year, it's important to remember that this is a seasonally less-important quarter, and much of the year is still ahead of us. As a result, we've increased the full-year estimate sufficiently, to cover our strong performance in the first quarter.

For the second quarter, we provide an estimated range of $0.60 to $0.80 per share, as compared to $0.74 per share in the second quarter off 2003. This was a relatively strong quarter of 2003, so the comparisons are more challenging than they were in the first quarter. Also, we're assuming at this point that some of the strong volume we experienced in the metal food container business in the first quarter maybe balance out somewhat in the second quarter. While interest expense is expected to increase somewhat from the first quarter, it will still be well-below the second quarter 2003 levels.

Before we turn the call over to questions, I want to cover one more topic, which we assume may get raised. That deals with the steel surcharges and the impact of metal food can prices. Let me start by saying that we do not discuss the specifics of any business terms with our steel suppliers, including pricing. What is important to know, however, is that approximately 90 percent of our metal food can business is under multiyear contracts, which allow for the pass through of our metal costs. Therefore we do have the right to pass through to our customers any surcharges that we either have or might experience.

For the remaining 10 percent of the business, which is not under contract, we have the right to increase our prices. A non-contract customer then has the right to decide whether or not to buy from us. We would assume that decision would be based in significant part on what else is happening in the overall pricing environment, at that time. While there may be other questions you'd like to ask related to the steel situation, this is all we intend to say, at this time. This concludes our prepared remarks.

We'll now turn it over for questions. Rachel, if you don't mind giving the instructions on that?

Ladies and gentlemen, if you do wish to ask a question at this time, please press * followed by 1 on your touchtone telephone. If our question ahs been answered, or you do with to withdraw your question, please press *, followed by 2. Questions will be taken in the order received. Please press *1 to begin. Your first question comes from Edings Thibault of Morgan Stanley. Please proceed, sir.

Great. Thanks very much, and good morning, guys.

Good morning, Edings.

Your first question comes from Edings Thibault of Morgan Stanley. Please proceed, sir.

Tony, I was hoping you could just walk through on some of these businesses -- the metal food containers and the plastics. You sort of referenced the impact of the sales. I was wondering if you could be more specific on the top line. Just sort of walking through the impact of the acquisitions, quarter-over-quarter or year-over-year, as well as the volume and to some degree, price.

Well price, as you know, we don't get into. On the volume question, I did say in the prepared comments that on the metal food can side, volumes were up 5.9 percent.

5.9 percent.

I think that's the biggest of what you're probably curious about. As you get into profitability, these businesses are getting more and more integrated every day, so the idea of a separate profitability number becomes impossible for us to deal with.

What did they record last year in sales, before you guys?

We didn't do it. We never mentioned that. But in the [white cat] case, they were only included for one month.

Right. Okay. And on the plastics side?

Actually, the [Thatcher II] business was included for the entire year. It was in for the entire quarter.

Okay.

So that is a true comp number.

And what's the sense on the plastic side? Should we expect that once you're through some of these step-downs in price that you'd referenced due to contractual renegotiations, should we expect that improving volumes here will lead to bits in better profitability on a like-like basis?

Edings, this is Phil Silver. Certainly, we would hope that. I think we can give a perspective that in the past couple or three years, it's been a challenging environment for us in the plastics business. Having to deal with the increased, competitive activity. We are still suffering some of the effects of that in this quarter, as the price concessions that we chose to grant last year to maintain business are being annualized into this year -- particularly first quarter.

I would say, though, that clearly that pricing pressure has abated. Whether that's a trend I think is too early to say. However, if in fact it does turn into a trend, I think it does bode well for some acceleration of our top line. We have been fairly careful here, as we've worked our way through this, to make decisions with financial discipline. We have walked away from a fair amount of business because we didn't' think it was the place to tie up our assets.

While we have worked through this and maintained our profit and our profitability as a return on assets, we have sacrificed some top line growth. if this environment gets better, then I think it would have some effect on that top line.

Right. Just a question on the metal can volumes. I know you don't want to go into specifics of price, but can you talk about the timing? Is there a seasonal timing of metal price increases? For example, on the beverage can side? Do you get that end-of-March price increase? Or the pass through of whatever change there'd been in aluminum? Is there something that you would suggest on that 5.9 percent? Or how do you analyze that volume number? It sounds as if you're not confident that it reflects underlying demand. Are there price pass throughs moving through the market? And can you talk a little bit about the timing of that on your contractual business?

This is Greg Horrigan, Edings. Good morning.

Good morning.

The food can business, as you know, hits a seasonal peak in our third quarter. The first quarter is relatively lighter. As Tony said up front, we were running against a relatively easy, comparable 2003 - 2004. In particular, there was one segment where there was some adjustment inventory last year that was to the negative, and it was normalized this year. I don't have three-month data for the CMI, but two-month data would indicate that they're up three points -- 4 percent. So we're up not quite twice that. But you would expect that, because of this kind of normalizing some inventory adjustment that had gone on in 2003.

The position we're in, we have over half of the business, and over a 50 percent share in the market. We're ultimately going to move with the market, unless we have the good fortune of being with customers who are going to gain share. Then we indirectly gain share, and that's how we like to do it.

There's historically not been much demand pattern in our industry. The steel companies have announced increases usually in the first quarter effective early in the year, and we've made FOB price adjustment announcements around the December-January timeframe. That's what we did again, this year.

Okay. Then, inventory adjustment. Was that related to the California customer that you guys picked up I think about 18 months ago?

No. It was in really another segment of the business.

Okay. Great. Thanks.

Your next question comes from George Staphos of Bank of America Securities.

Hey, guys. Good morning.

Good morning, George.

Congrats on the quarter.

Thank you.

I want to get into surcharges, even though you've said what you're going say. Just one last shot. How would you define the word, "right," as you relate it? Is it a mechanical "right" to pass along surcharges? Or is it an elective "right?"

I'm not sure I understand the distinction.

Well you're saying you have the right. But is it formulaically built in, such that if you do take a cost increase, automatically...?

Yes. On the contracts, George, it's a contractual right. On the FOB business, I think the section is that we are not prevented from passing or changing our prices any time. Whether it would be for material costs or any other reasons. But as Tony said, if we do that, we have to go out and collect, then. We don't have the "right" to collect those prices. That's a function of what the competitive market's like.

That's great. You answered my question, then. In terms of your caution -- maybe that's not quite the term you'd used -- but your caution, heading into the second quarter, relative to a good first quarter. It's commendable, but have you actually seen volumes slow down in April, or have they continued at a relatively good clip?

I think what we want to get across here is that last year, our first quarter as a weak first quarter.

Sure.

So the improvement in volumes from the first quarter to the second quarter of last year was pretty significant.

Yes.

This year, because we did not have that unusual first quarter, the movement of volumes between this quarter and next quarter are not going to be nearly as significant. The caution was really to try to advise people listening here to try not to take the first quarter volume and project it into the second quarter, because of this anomaly of what happened in the first quarter of 2003.

No, Phil, that's clear. You do say in the release that volumes in sales of metal food are not expected to match the strong levels in the second quarter of 2003. That would mean it should be down a bit. But my sense and my takeaway is that that's probably more conservatism than actuality. Would that be a fair assessment of how April's running?

Well, for actuality, you a have to have the experience of the outlook. But as we look at the business, certainly the second quarter's closer to us than the rest of the year. There's nothing in the second quarter that's causing us to feel one way or another about the normal pattern, here.

The fact is, as you know, third quarter's our big quarter for us. It is driven a lot off of seasonal pack. A lot of things come into play there that certainly we and no one else have control over. We have tried to always be cautious about our forecasts of our results, and for that matter, of our food can volumes, until we have a much-clearer picture of what that third-quarter volume's going to look like. We will just naturally be there 'til we get probably much closer to the quarter, and even into it. But there's nothing looming out there that's unusual.

Gotcha. Last question. I think Thaïs was raised last quarter by Edings. We were talking about pet food cans in other markets -- you were -- relative to new technologies, like pouches. I think your comment at the time was you really hadn't seen it, and the drop in CMI numbers for last year in that category was really the inventory correction perhaps that you'd referenced.

That's our best shot at it. The data we have on the pouches, particularly in the pet food business, is that it has from our perspective and the market data that we have, has not been any great success. But it is there, and it has taken a bit of share. But it hasn't developed into an important trend, at this point in time, and we don't foresee that.

If we had picked up that others are relatively more concerned about that trend, would that be more reflective, do you think, of customer mix than actuality? It sounds like you're still reasonably calm about that trend.

We are.

Okay. Thanks, guys.

Thanks, George.

Gentlemen, your next question comes from Bala Ramakrishnan of Morgan Stanley. Please proceed, sir.

Yes. Hi. Good morning. This is Bala Ramakrishnan from Morgan Stanley High Yield. I wish you could spend a little bit more time on the plastics side of the business. I'm looking at the fourth quarter versus first quarter performance. Clearly, things have improved. The language in the press release is what I don't quite understand. They say the decrease was the result of certain price concessions made last year, but impact in the first quarter in response to heightened competitive activity. Also, you talked about the mathematical effect, and I'm assuming that some of the other producers were able to raise prices this year to pass through higher costs. Assuming that the costs have generally stayed the same between last year and this year, it should have led to a margin expansion, as we've seen with some of the other producers.

I think referring to the first question, the price concessions affecting this quarter that related to last year -- essentially, when we are in these negotiations, you're negotiating forward one, two or three years on future prices. So negotiations that took place last year reflecting the competitive environment then as opposed to now -- we made agreements on pricing that resulted in the pricing in the first quarter of this year being lower than the first quarter of the previous year. So there is some impact, still flowing out of the environment last year, that is affecting us in the first quarter.

Is that going to continue for the rest of the year?

No. It'll dampen as we go through the year, because the annualization will be not as great. I can't peg it to a particular quarter. I'll just say it'll dampen, going through the year.

Okay.

Before we go to the other question, Val, your point is as we look at Q4 of last year to Q1 of this year?

Yes. Because the plastics business has gotten better.

That's right. A lot of that comment doesn't relate. We were really trying to speak to Q1 of last year.

Okay.

Q1 of this year. You're absolutely right. A lot of that is already reflected by Q4 of last year.

Okay. Just a second on the competitive nature -- has the competitive nature improved now, so your negotiations now for prices for the next two or three years -- has it gotten better? And what is the reason for that if it's gotten better?

Well it think we can say that the competitive pressure has lessened. So yes, it has gotten better. But as I said earlier, it does not, in our view -- we're not prepared to say that's a trend. We're just glad to see it lessened. To the extent that it holds a place, it means generally that we and others would be able to negotiate with our customers for forward pricing of our business that would show up as some restoration of the margins that have been affected by the very intense competition of the past couple of years.

Okay. Then just on the mathematical result of higher sales by passing through. If costs were to have stayed the same between last year and this year, passing through price increases should have led to a margin expansion.

The reference there is to resin costs. In our business, we have the right, and it's certainly the custom, that resin price changes are passed through immediately to the customer, on a dollar-for-dollar basis. So if you have an increase in resin prices, it inflates the top line, but it does not inflate the operating income line. Therefore, your margin rate goes down.

Okay. Just one last question. For the quarter, do you have the details on the depreciation of the Capex numbers?

Yes. The depreciation for the quarter, as I said, was 28.6m. Capex was just under $25m.

Okay. Thanks very much.

Ladies and gentlemen, again, if you do wish to ask a question at this time, please key *1 on your touchtone telephone. Gentlemen, your next question comes from George Jonas of David L. Babson. Please proceed, sir.

Good morning. Actually, my questions have been answered. So thank you very much.

Thanks, George.

Thank you. You do have a follow-up question from George Staphos, with Bank of America Securities.

Hey, guys. Tony, you may have mentioned this, but I've been playing conference call ping-pong, today. What's your free cash flow guidance for the year? Or, if you can't discuss that for whatever reasons, Reg G, et cetera, whatever you can share?

Yes. George, as you know, what we do is talk about the more important one. That's debt-reduction. Our target for the year is $75m of debt reduction.

Okay. Could I ask then, what would your cash built be for the rest of the year, on top of that? Or would you just assume that cash balance would stay pretty flat, then?

With that, I wouldn't' make any other assumption about cash balances moving.

Okay. All right, guys. Thanks again.

Thanks, George.

And by the way, just to repeat on that. That all happens, as you know, in the fourth quarter.

Yes.

We obviously consume cash and working capital between here and there.

Fair enough. Good luck.

Thanks, George.

You do have another follow-up question from Edings Thibault of Morgan Stanley. Please proceed, sir.

Thanks. Just a few follow-up questions, as well. Given the little bit different nature of the business here, can you update us on some cost elements in your guidance for the year, Tony? Perhaps your sense of SG&A for the year? And to the extent most of your paydown of debt would occur in the fourth quarter. Could you give us a sense of where you'd expect a range of interest expense for the year, as well?

I'd be more than happy to talk to the concepts. Rather than getting into the elements of the P&L. Conceptually speaking, on SG&A as an example, as you know, what we've been doing is that the SG&A's higher at first, as we climb over the acquisition. The Closures business and the [Thatcher] business, for that matter, had higher SG&A levels. The first thing that's happening is we're just kind of coming over that. Once we get through that, the expectation is that we are doing some rationalization of our administrative effort around the Closures business. So at some kind of modest level, we'd expect to see some further improvement on the SG&A, over a period of time.

Would that be offset by normal cost inflation? If you're looking at your SG&A levels for third and fourth quarter, when you're finished and had fully closed the acquisitions, looking at those acquisitions, would you expect your ability to basically hold that type of level constant, within a few million?

Yes. What you're saying, I expect pretty well. Yes. Clearly, I was speaking outside of the basic inflation of SG&A.

Okay. Then maybe any change at all in seasonal working capital build in terms of how it relates to your projected change in interest expense? And if we were to get a 50-[bit] increase, I know you guys finance the working capital from credit. If we were to see a 50-[bit] increase from Fed funds, would you want to comment on what that would do to interest expense on a quarterly basis?

Yes. I don't want to go into detail to answer that, although I think you'll be able to figure it out when I'm done. The first thing is that when we make our forward estimate, we obviously make our own assumptions about interest. We have assumed a certain amount of increase on the interest side during the course of the year. Secondly, what we already said. That is that the debt reduction will happen primarily at the back end of the year. So that's not a meaningful point on the interest side, for this year.

But we are assuming some increase of interest as we go through the year. With that said, I think it's worth noting, as I think everyone knows, that we did the refinancing. We ended up with more term debt than we had previously had. But we've also increased the amount of [SWAB] activity in that time. So as we sit here at the end of March, we had nearly 80 percent of our total debt at the end of March that was in some form of fixed instrumented. That'll be 75 percent by the end of the year, as our estimate.

As we look forward, that holds above 60 percent, really all the way through to 2007. I'm talking about year-end balance. I'm not talking bout the seasonal needs, in-between. Again, we've swapped out a fair portion of the total debt. Our estimate and therefore our full-year estimate does assume, as I said, some increase in rates against what it left as a variable portion of interest.

Right. And your strategy there is to via the use of [swaps], effectively step down your fixed portion as rates go up, in an attempt to try to balance that number, or offset it? So you move down from fixed to variable, which we presumed theoretically should move from relatively higher-cost debt to lower-cost debt to offset the rise in interest expense, do to fed actions.

I don't think so, Edings. We have the high-yield, which we can't really get at. And on the bank debt, it's all floating, except to the extent that we swap it out, which is what Tony was talking about. So we fixed out a fair amount of that bank debt, because one, we wanted to get our ratio of floating-to-fixed to a certain level, and then we [didn't] look at the interest rate prospects. So as we move forward, the fixed rate portion of our total debt in a true sense -- the sub-debt -- will be a higher percentage of our total debt. So we'll have a higher rate -- a higher percentage of fixed versus floating, as we move out on debt reduction.

Because you're paying down the variable.

Right.

Right.

Okay. That should pretty much do it. Thanks very much.

Ladies and gentlemen, this does conclude the question-and-answer portion of today's call. And for now, concludes the Silgan Holdings First Quarter Results Conference Call. Thank you for your participation in today's presentation. You may now disconnect.