Silgan Holdings Inc (SLGN) 2005 Q2 法說會逐字稿

Good day and thank you for joining Silgan Holdings Second Quarter Earnings Conference Call. Today's call is being recorded. From the company today, we have Mr. Phil Silver and Mr. Greg Horrigan, Co-Chairmen and CEOs; Mr. Tony Allott, President; Mr. Bob Lewis, CFO; and Mr. Malcolm Miller, Treasurer. At this time, I will turn the call over to Mr. Miller. Please go ahead, sir.

Thank you. Before we begin the call today, we'd 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 reports on Form 10-K for 2004 and other filings with the Securities and Exchange Commission. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements.

With that, let me turn it over to Tony.

Thanks Malcolm. Good morning everyone and welcome to Silgan's Second Quarter 2005 Earnings Conference Call. Our agenda for the morning's call is to provide a brief overview of the quarter, a little bit more discussion on the financial performance of the quarter and the 6 months, make a few comments about our outlook for the remainder of 2005. Afterwards, we'd be pleased to take any questions. I'll open with a few comments about the second quarter performance. First, those of you that are familiar with Silgan and the food can industry in general, you know that our business is seasonally stronger in the back half of the year.

However, with that said, we are off to a strong start and pleased with our second quarter and year-to-date performance. As you've seen in this morning's press release, Silgan earned 82 cents per diluted share for the second quarter, which included a non-cash charge of 36 cents per diluted share resulting from the recent refinancing of a credit facility. More importantly, operating income was up $4.3 million or 9.5% versus the same quarter last year. Our metal food container business again performed well, exceeding the prior year as we continue to benefit from investments made over the past several years and as we realize continued benefits of a major rationalization program in our metal closure facilities.

The plastic business performed better in the second quarter versus the last several quarters. As a result of our overall performance and recent refinancing, we feel positive about our consolidated outlook and have raised our earnings estimates by $0.20 per share and increased our debt reduction target to approximately $125 million.

With that said, I'd like to turn it over to Bob to review the financial results in more detail, and discuss our earnings estimates for 2005.

Thank you Tony. Good morning everyone. The second quarter of 2005 built on the momentum from the first quarter as consolidated net sales increased 5.4% or 29.9 million, to 581.2 million for the quarter. Net sales in both the metal food container and the plastic container business increased primarily due to higher average selling prices relating to the pass through of increased raw material costs.

Net income for the quarter was 15.4 million compared to net income of 18.2 million in the same quarter last year. The net income for this quarter is negatively impacted by an after-tax amount of 6.8 million to record the loss on early extinguishment of debt, to write off unamortized debt issuance cost, resulting from the Company's refinancing of the senior secured credit facility which closed on June 30, 2005. Interest expense before loss on early extinguishment of debt decreased 1.4 million versus the same quarter in 2004, primarily a result of lower average outstanding borrowings directly attributable to our debt reduction program.

As our business is seasonal, we utilize our revolving credit facility to fund working capital requirements during the first 3 quarters of the year. In addition, as we refinanced the senior credit facility on June 30th, we held approximately $55 million of incremental cash at quarter end that would have otherwise been utilized to repay the revolving loan. As a result, we closed the second quarter of 2005 with outstanding debt on the balance sheet of $1.1 billion compared to $1.2 billion in June of 2004.

Based on the structure of this debt, as well as applicable swaps that are in place, we have approximately 52% of our debt in fixed rates after adjusting for the excess cash on hand. Based on our debt reduction target for 2005, we expect the year end fixed portion of our debt to be above 70%. For those looking at cash liquidity metrics, depreciation and amortization for the quarter was 30.1 million versus 29.3 million in the second quarter of 2004. On a year-to-date basis, depreciation and amortization totaled 59.9 million versus 57.9 million a year ago. For the full year, we expect depreciation and amortization in 2005 to be roughly in line with the prior year.

Investments in capital expenditures for the second quarter were 21.1 million compared with 20.5 million in the same quarter last year. Capital expenditures for the first 6 months of 2005 were $44 million compared to 44.5 million for the same period in 2004. We also expect our full year capital expenditures to be relatively consistent with the prior year. Additionally, we paid a quarterly cash dividend of 20 cents per share in June. The total cash cost of this dividend was $3.7 million.

Also of note, the Board of Directors declared the next quarterly cash dividend of $0.20 per share payable in September. I'll now provide some specifics regarding the financial performance of each of our 2 franchises. In the second quarter of 2005, net sales in the metal food container business increased 15.4 million or 3.8% versus the same quarter a year ago. The impact of the pass through of higher material cost and a favorable product mix in the food can business benefited net sales for the quarter.

Offsetting these benefits were volume declines, which were primarily attributable to the impact of certain business that was not retained upon a contract renewal in late 2004, as we discussed in prior earnings calls. Operating margin in the metal food container business increased to 9.2% in the second quarter of 2005, versus 8.2% in the prior year quarter. Income from operations in the metal food container business increased 5.7 million or 17.2% to 38.9 million for the quarter.

Improved product mix, continued rationalization and integration benefits at our manufacturing facilities, and benefits from relatively higher capital spending over the last few years positively impacted income from operations, while being slightly offset by lower volume and higher manufacturing costs. The plastic container business delivered net sales of 158.7 million, an increase of 10.1% versus net sales of 144.2 million in 2004. The increase was principally due to the pass through of higher resin costs. The plastic container business produced operating income of 12.9 million for the second quarter versus 14.1 million in the prior year quarter, resulting from increased employee benefit and other manufacturing costs.

As outlined in this morning's press release, we are increasing our earnings estimate for 2005 by $0.20 per diluted share. We now expect full year earnings per diluted share to be in the range of $4.34 to $4.64. This represents an increase from our previous estimate for diluted share of $4.14 to $4.44 after adjusting for the 36 cent per diluted share for the loss on early extinguishment of debt. This estimate includes the benefit from the lower average across the borrowings resulting from the recent refinancing. We are also providing third quarter 2005 earnings estimates in the range of $2.15 to $2.35 per diluted share. These estimates do not include the impact of potential rationalization charges.

We continue to have potential rationalization plans that are under review. To date, we have not reached a final decision on these plans. Should we choose to move forward on a plan, it would be expected to yield attractive cash on cash returns. We continue to focus on our goal of optimizing our capital structure and thereby completing our debt reduction initiative. Based on our expected cash generation, we have raised our debt reduction target for 2005. We now anticipate that in the absence of compelling acquisitions, we will be able to pay down approximately $125 million during 2005, versus our previous target of approximately 100 million.

That concludes our prepared comments, so we can open it up for Q&A. Jennifer, please provide the directions for the Q&A session.

Thank you sir.

[Operator Instructions].

Again, for any questions at this time, please press star, one. We'll pause a moment to assemble our roster. Our first question comes from Amanda Tepper, JP Morgan.

Hi, good morning. Actually, it's Angela Levy for Amanda.

Good morning Angela.

How are you?

Good thanks.

Good. First question is your guidance for '05, if we use the top end of the range, it seems are relatively like Q4. Is this conservatism or is there something in there that you expect to hit in Q4 that we're not aware of?

No. It's basically, you know, we've had -- this is a very typical Q2 kind of a question. For us, the trick is always the last half of the year. What happens is the tax shift between Q3 and Q4. So what you're seeing effectively in there is we're looking for a reasonably solid Q3 of the pack and less in the Q4. There clearly can be shift in that, and that's very typical for us.So, I remember saying this in the same quarter last year, I would look at it as more of a 6 month kind of an outlook.

Okay. And then the second question is, we've been hearing that the tuna can business has been relatively weak. What -- do you have large exposure to that business?

We have basically no exposure to that business.

Okay. And I think that's it for right now.

Okay, thank you.

Thanks.

Our next question comes from George Staphos, Bank of America Securities.

Hi guys. Good morning. It's Aroon (ph) for George.

Good morning Aroon.

Just a couple of quick questions. I guess first off, you know, just more of a retailer question. What are the consumers saying about, you know, supermarket shelf space? Are steel price hikes, you know, just kind of continuing to make it more difficult for them to justify canned product? Is there any momentum on SKE consolidations?

I'll start with that. It's Tony. You know, basically what we're hearing from the consumer side, and I assume your question is more around cans?

Yes, yes, absolutely.

Basically what we're hearing and understand is that our customers are beginning to be able to pass through some of the cost inflations they've experienced, and so they are getting some price as they go forward to the market. This has not traditionally been the kind of market where you see the package substitutions result of the kind of a short time move in cost.

And I would remind you also that most of the alternative materials have also inflated during this time period. So we're not hearing really any kind of a shift around pricing or frankly, you know, if you take the broader question of substitution, I would say even that is kind of a same old, same old conversation.

You know, that's really from the beginning when we got into the business, there had been a concern about substitution away from cans and effectively, as you know, what has happened in that time is, we lost share of stomach, but actually seen growth in cans during that time. So really, no change I would note there.

Okay, because I think we had heard, you know, some encroachment by aseptic in certain categories, but you know, obviously I guess it hasn't been borne out. You know, the next question I guess is just on plastics. Your margins were down year on year and, you know, you commented that most of the gain was on pass throughs.

Is that all there was or are we kind of seeing some return of some competition that we had seen earlier?

No. I would -- frankly, if you look at the plastic business, effectively what's happened there is you had a very slight downtick in volume, nothing to speak of, and then higher employee benefit and other manufacturing costs in that marketplace. I think frankly, the more interesting point is if you look at the Q2 versus the last 3 quarters, it's significantly better than that period of time. So I think, on a relative basis, I think you'd say that we're seeing now is a little bit of improvement in mix in that business and fairly solid operating performance.

So directionally, it's positive, and as soon as I say that, I'm a caveat and point out that none in the last week. We remain cautiously positioned as to the volume numbers for the remainder of the year, and so basically, I would say that we don't view any change to our previous conversations on the plastic business. You know, we expect to be a little bit down on the year, but that on a long-term basis, it's been -- we still think it comparatively has performed well and on an absolute basis, in terms of returns, performed well. And so that's kind of our ...

...In the employee benefits, is that going to continue? The higher employee benefits cost?

I wouldn't -- I have no reason to say it shouldn't. I mean, you're talking about things likes Worker's Comp, healthcare, et cetera, so it may not be to the level of what's in the second quarter, but those are certainly areas that we experience inflation over some period of time.

Okay, and just my last one is just on uses. So, you upped the debt pay down target and congratulations on doing that. You know, has the board and you guys talked about other uses of cash and, you know, what would possibly come up on that front?

Well, this is Phil Silver. We review that at the board level all the time. We've taken into account the debt pay down level we've said. In doing that, there is a point pass switch. We think it would be inefficient capital structure to have too low a level of debt, so we're starting to actively think about the options of alternatives to paying down more debt, it's obviously the default option after this year, but our prime motivation are to find good acquisitions to use that cash flow.

Okay, thanks a lot.

Our next question comes from Chris Manuel, Key Bank Capital Markets.

Good morning gentlemen. This is the real Chris Manuel.

Hi Chris.

Good morning.

Hey, a couple of questions for you. First of all, on the volume front, you mentioned a slight downtick in plastics. Can you kind of give us a little more color on where food and where closures were?

Sure. On the food business, we were, as we had said we would be, down on volume in the quarter and year to date. If you -- let me go back to the CMI data, so kind of what the market has done. If you look at CMI through May, the cans for sale basically are down about 4.3% and what -- we're basically consistent with that in the quarter.

So that kind of level of a decline, and the drivers of that basically, you'll recall, and in the first quarter, we had talked about some business that had been lost in the prior year that we didn't renew at the time of the contract. And then secondly, if you look at the second quarter, what we've seen is just some push of our tax season, so a portion of that, we do expect to be turning later in the year.

Okay, so actually, the pack may be running a little later?

That is correct.

To help pick up in the backend, okay. And on the closure side?

Yes. Closures basically we were off, a bit on volume.

Okay. And then, let's see, on the plastic side of the business, you know, you guys have done good work here over the past couple of quarters working to bring the margin back up. Where are you at now with the capacity utilization front? I know you were putting some new machines on line, I think some new Sipa machines in Langhorne in particular. Do you have those all operational right now or could there continue to be some, you know, pick up there as those machines come on line to help margins?

Well, that's a big question. Those new machines we're referring to are absolutely, are on line and running well. But I think your broader question, is capacity part of the issue in plastics, and I would say, really, it's not been. But you know, our capacity is pretty well run out. You know, we're running at high volume utilization and most of our capacity is kind of dedicated individual customers at a point in time. So what happened in the market really has not been so much that we had too much capacity.

The longer-term story as you'll recall had been a new competitor that had come into the plastic market several years ago and it had moved into certain of the kind of high volume parts of the market. But really, on that end, that's been fairly quiet of late and so I would describe it as much as the plastic container market can be, it's been fairly quiet. We do go through contract renewals on an every couple of year basis, so you're always in negotiations, et cetera. But there is not major capacity rattling around that we've seen.

Okay. Well, let me follow up with one last question on that. Along the lines of, competitors with Graham buying a large business. You know, I continually have asked you guys this question a few times, but any update as to changes or any structural changes in the industry?

No, we'd give you the exact same answer we gave last time, which is that, basically, what we hear and understand from Graham is that they are in the process of consolidating some of their operations, those on the molded side that we compete with and there's really been no change in that.

Okay. Thank you very much gentlemen.

Yes. Thanks Chris.

Our next question comes from Edings Thibault, Morgan Stanley.

Continuing the trend, this is (inaudible) for Edings. Good morning gentlemen.

Good morning.

I have a couple of housekeeping questions and one question regarding end market. You said that the after tax restructuring charges were about 6.8 million. I was wondering if the pre-tax number had been totaled?

Yes, the pre-tax, that's actually the loss on the early extinguishment of debt that you're referring to. The pre-tax number is $11 million.

Is 11 million, thank you. Also, I know we've talked about this perhaps once or twice, the 15.4 million increase in the metal food business. Is there any indication of what percentage of that was attributable to higher prices versus lower volumes?

Well, only what I've already said, which is that the year to date CMI was down 4.3% and that's, basically what we've experienced so far. And so you can that and compare it to the revenue and you'll see that the revenue is up a fair amount. There are basically 2 components affecting the revenues. One obviously is the pass through of higher steel costs in the marketplace, and then secondly has been a better mix in the business (ph).

Okay. And then perhaps in the metal food containers business, sort of, you may want to -- if you could elaborate on sort of what kind of trends you're seeing for the second half with regard the end markets, you know, pet food and crop cycle, et cetera, sort of where you might see some advantages and perhaps some challenges?

Sure. I think the big part of the answer to that for us, obviously is what's going on in the pack because that drives so much of the second half of the year. And, what we would say with the pack basically is it's shaped to be a reasonable pack year, fairly consistent with what we saw last year, Kind of the general crop story has been -- and this is true almost across the country, has been wet early and then it got quite hot during growing season. So, if you look kind of in the individual markets, the pea market had late planning because it was so wet at the time of planning. There was some hope that they were going to make that up on the yield, but in fact, it was so hot that the yield was down as well. And so, the pea harvest we already have a pretty good feel for and it's going to be down.

Green beans -- heat has been a bit of a concern as well. So, our view is that it will be modestly down for the year. One of the big ones for us is the corn side. And frankly, corn has been sort of all over the map this season. Planting was initially delayed because it was so wet. And we were thinking that we were going to go kind of later into the year. And then, there has certainly been more heat since that time. Particularly, in kind of the Minnesota area, that's helped bring back some of the timing there. But it's been very dry in other parts. So -- and in corn, just to remind you, the big issue is if you delay, ultimately, the concern is it increases the risk that you'll run up against a frost. So, that's why delays are -- generally introduce a little bit more risk for the pack.

So, we were thinking delayed and that is still -- we're still running a bit behind on that. But I would say the reason has been kind of good in that there's been a little bit more moisture in the Midwest of late. The peach harvest does look like it's going to be a down year. Initially, it was too wet again, which was getting some brown spotting on the peaches. And then it got too hot and hot both in the day and, interestingly, at night. And I want to tell you, I don't make this stuff up that peaches actually need rest at night, it turns out. And if it's too hot, they can't rest and what can happen is they'll mature too quickly and ultimately fall off the tree early. And that's what we're seeing on the peach side.

Tomatoes are the other big crop for us, if you will. And really, with tomatoes, the key here is, again, it's about timing and what happens during the actual harvest season. And the reason for that is if it's a slow - low-yielding tomato harvest, what tends to happen is the fluctuation in that is in the bulk paste market. And so, what's going to get canned -- as long as it's there during the harvest season, will get canned. And what we've basically seen there is, again, it was kind of wet early on, but the thermal units have been very good since then and so we're, right now, we're kind of expecting a typical tomato harvest, as this point in time.

So, that's kind of the update and the major driver in the last half of the year on volume. I think the -- to finish a point, the soup market, it's a little early to know kind of what the temperature will be coming into it. But certainly, looks to have been pretty solid for -- said last year, I think you know that there's been a lot of movement towards our quick top ends.

Yes.

And that seems to be driving some unit growth, one with other changes are happening. So, it looks like the soup's been a pretty solid category. It's actually up on CMI so far, year to date. So, we would view that as being pretty positive. I could say basically the same about the pet food side, that again, it's up year to date and right now we would expect that pet food ought to be reasonable as we go forward.

Excellent. Thank you very much, gentlemen.

Thank you.

Our next question comes from Ashwin Krishnan, Morgan Stanley.

Hi, guys. Sorry if I missed this, but did you give CapEx guidance for 2006?

Yes. What we said is we expected CapEx to be roughly in line with where we were at the prior year. Through 2004, we spent about $100 million and, for the first six months, we're at about 40. But we would expect that to be roughly consistent with the 100. The one thing that could impact that, obviously, is if we had more demand for quick top capacity or other attractive growth opportunities, it may impact that. But right now, our forecast is consistent.

Okay. And the second question was the outstanding balance on the revolver at the end of the quarter.

Yes, our outstanding balance on the revolver at the end of the quarter was 352 on the revolver.

Okay. Thanks very much.

Our next question will come from Brandon Holt (ph), Deutsche Bank.

Good morning, guys.

Good morning, Brandon.

Kind of going back to the situation, you guys have done a wonderful job of getting at EBITDA from the mid-200s, well into the 300s. And at this point, as you kind of look at the portfolio, what I'm wondering on the acquisition front is when you look at the opportunities out there, do you really only look at or think about things domestically or would you be interested or entertain something with some international exposure? And by international, I mean likely across the pond in Europe?

Well, I think you probably know us well enough that, first and foremost, what we're thinking about is our markets and how we can enhance our position in our markets. And so, that leads us, naturally, initially, to look domestically. And so, I would say if I was asked to prioritize the opportunities, we would -- domestic would certainly be at the front end of that. But that's different than saying we would not look internationally. I think if we saw opportunities to strengthen a franchise or a real franchise position, then we would have to look at that and certainly would look at that.

For instance, if you were able to pick up something that had a very strong marked position in something that you're not currently involved in, that's something you would think about?

Well, I think that's a different extension of what I was trying to convey. I think the - what I meant more is if we have kind of a franchise position here and can somehow marry that to a benefit, internationally, that's something we would think about. I -- it's very hard for me, personally, and anybody here can jump in if they disagree. But it's hard to envision that we would think about something entirely new in an entirely new geographic region where there's kind of the sovereign risk of going into those markets.

I'd call that remote.

Well, we all know Europe hasn't been very friendly to most packaging companies. Okay. That's very helpful, guys. Thank you.

And we'll now take a follow-up question from Amanda Tepper, JP Morgan.

Hi. It's Angie again. Just a quick question in regards to franchise. Can you remind us again how you define a plastic franchise and what exactly that entails?

Yes. Basically, the way we define that is around the -- those markets that are looking for a custom, highly decorated-type container. So, it's not just personal care. What's happened, of course, that's drifted us over many years into personal care because that's an area where the price point is high enough in the end consumer product that differentiating on the shelf is an important attribute. But that's not the only place.

Certainly, there are examples of household chemicals and food, pet food, et cetera, where that also has been an important attribute. And so, that is sort of our franchise. And I think we talked before. But I mean, if you look at the capability to handle diverse types of materials, diverse kind of technologies to make containers and decorating, that's really where we kind of stand out as unique to the marketplace.

And by market, you define it as individual -- or like product line versus geographic?

Yes, yes, yes.

Okay. Thank you.

Thank you, Angela.

[Operator Instructions].

We'll now take a follow-up question from George Staphos, Banc of America Securities.

Hey, guys, sorry. This is just a follow-up on what you guys had addressed earlier on the revenue change for the quarter. You said it was mainly pass through and mix. Can you break that down a little bit further? I mean, are we done with the pass through? And then, as a follow-up on the mix issue.

I'm not sure we can break, numerically, any more for you, but are we done on the pass through, the answer to that's no. And that continues on. We have higher costs in all of our businesses that are being passed through compared to prior years. So, you'll continue to see a top-line impact from that.

Okay. And on the easy open, you guys have done a great job there. What do you think -- is there any other categories, big categories that we'd expect a conversion on? I mean, soup and pet food, you say, is possibly driving some volume there. What else is coming next, fruits or vegetables or -?

Great question. Where we stand today is we're not solidly over 50% of the cans we sell are sold with a convenience end on it or what we call quick top ends. And for us, the family of quick top ends covers aluminum, easy open ends to steel to our Dot Top and pop-and-pour-type. So, it covers -- it's a pretty broad family that is a quick top end. And so, now it's more than 50% of what we do. What we have seen clearly is that consumers do value convenience. And we've seen -- initially, we had done consumer studies that had found, gotten a pretty strong read on that. Interestingly, we used that to help design some of our products as well.

But much more recently, what we've seen is that markets that have moved into a quick top end have -- the first player that goes in has seen fairly significant market share gains. And then, even the second player who goes in also has seen market share gains. And ultimately, what we've seen is the market that has moved thus far is a change in the trend of that market, an increase in demand, if you will, to that marketplace. So, as a result of that, we continue to believe other markets will look at this and certainly that seems to be the body language out there. Timing is the tricky part. It's very hard to figure out when that will happen, but we're confident enough about this that we've actually decided to move forward on other unit of capacity in support of further transitions.

And you said that that could affect your CapEx. I mean, how much is the conversion of that line?

Well, moving one more unit of capacity is something like 5% of an annual CapEx.

Okay. And what's the margin bump you guys get for a quick top -- can with a quick top versus not?

Yes, we're not going to go there, but the point of it is, basically, that the return you get on the asset ...

...Right.

... Is very consistent with the return we get. So, you've got to spend a lot more capital and you get a return. Obviously, I mean, there is some margin, if you will, but it's just, in many ways it's paying the capital. And so, on a return base, it's consistent with the rest of our business.

Got it. Thanks.

And our next question comes from Craig Hoagland, Anderson, Hoagland & Co.

Yes. My question was on the easy open, so I'm good. Thanks.

Thanks, Craig. Is that ...

...That's it. Yes.

Okay. Great. It sounds like that's all we have?

Yes. At this time, we have no other questions, so I'd like to turn it back over for any additional or closing remarks.

I just want to thank everyone for the time. We obviously think it was a good quarter and we look forward to talking at the end of our third quarter. Thank you.

Thank you.

And once again, ladies and gentlemen, that does conclude today's conference call. We do appreciate your participation. You may now disconnect.