Silgan Holdings Inc (SLGN) 2011 Q1 法說會逐字稿

Thank you for joining Silgan Holdings first quarter 2011 earnings conference call. Today's call is being recorded. I'll now turn the conference over to Mr. Miller, Vice President and Treasurer.

Thank you. Joining me from the Company today, I have Tony Allott, President and CEO; Bob Lewis, EVP and CFO and Adam Greenlee, EVP AND COO. 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, included but not limited to those described in the Company's annual report on Form 10-K for 2010 and other filings with the Securities & 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.

Thank you, Malcolm. Welcome everyone to our first quarter 2011 earnings call. Well it has certainly been an interesting quarter for us as we have made significant strides on the strategic front to deploy capital and grow our businesses. Our agenda this morning, however, will focus on the financial performance for the first quarter and a review of our outlook for 2011. After our prepared remarks, Bob, Adam and I will be pleased to answer any questions.

As you saw in the press release, we had a solid first quarter versus a very strong first quarter of prior year, delivering adjusted earnings per diluted share of $0.41, which exceeded the high-end of our estimated range of $0.35 to $0.40, and was slightly ahead of analysts' expectations and the prior year. While it's early days, we're pleased with the performance of the newly acquired IPEC and Vogel & Noot operations, with each delivering earnings in line with our acquisition plan.

Earnings from the North American food can business were down from the prior year due primarily to the anticipated volume decline resulting from the December 2010 buy-ahead, and the delayed pass-through of steel increases this year as compared with decreases last year. Our vacuums closures business saw very favorable volumes, but was partially offset on the plastic side as a result of the delayed pass-through of rapidly escalating resin costs. Our plastics business also suffered the negative impact of escalating resin costs during the quarter, but did show improving operating performance during the quarter.

As a result of the strength of our first quarter performance and our positive out look for the rest of the year, we have increased our full-year guidance by $0.05 per share to a range of $2.60 to $2.70 adjusted earnings per diluted share which at the high-end represents a 21.6% increase over our very strong 2010 results. With that I'll now turn it over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimates for 2011.

Thank you, Tony. Good morning, everyone. As Tony highlighted, 2011 is slightly ahead of expectations. As our recent efforts to deploy capital are beginning to yield fruit. We now have both the IPEC business and Vogel & Noot incorporated into our numbers for the first quarter.

Unit volumes were strong in the closures operations and stable in the plastic segment while the metal containers business was in line with expectations. As anticipated the first quarter also experienced continued resin volatility negatively impacting both plastics operations and the plastic portion of our closures operation.

On a consolidated basis, net sales for the quarter of 2011 were $703.1 million, an increase of $39.1 million or 5.9% primarily as a result of higher average selling prices due to the pass-through of higher raw material costs, the inclusion of net sales from Vogel & Noot and IPEC and stronger unit volumes in the closures operations partially offset by lower domestic unit volumes in metal containers.

Net income for the first quarter was $26.1 million or $0.37 per diluted share compared to first quarter of 2010 net income of $26.8 million or $0.35 per diluted share. Results for 2011 included rationalization charges of $1.7 million or $0.02 per diluted share and $1.8 million or $0.02 per diluted share for costs related to the recently completed or announced acquisitions. Results for 2010 included $2.1 million or $0.01 per diluted share for rationalization charges and $3.2 million or $0.04 per diluted share for the impact of the Venezuela remeasurement of net assets. As a result we delivered adjusted income per diluted share of $0.41 in 2011 versus $0.40 in 2010. Foreign currency had very little impact on net income as we remain effectively hedged having financed the international businesses in their local currencies and maintaining a business practice of balancing out cross-border activity to help mitigate the effects of currency on our earnings.

Interest expense increased $1.4 million to $13.9 million for the quarter as a result of higher average outstanding borrowings primarily attributable to the refinancing of the senior secured credit facility in July 2010, and the occurrence of euro revolving loans to fund the acquisition of Vogel & Noot in the first quarter of 2011.

Our effective tax rate of 34.2% in the first quarter of 2011 is in line with expectations, but considerably lower than prior year which included the negative impact of the remeasurement of net assets in Venezuela which was non-deductible for tax purposes.

Capital expenditures for the first quarter of 2011 totaled $33.5 million compared with $24.1 million in the prior year quarter. We continue to anticipate capital spending for the full year to be in the range of $120 million to $160 million. Additionally we paid a quarterly dividend of $0.11 per share in March with a total cash cost of $7.8 million. I'll now provide some specifics regarding the financial performance of the three businesses.

The metal container business recorded net sales of $390.5 million for the first quarter of 2011, an increase of $15.4 million versus the prior year quarter. As expected, the first quarter of 2011 suffered the negative impact of unfavorable volume comparisons versus the first quarter of 2010 as a result of the customer buy-ahead during the fourth quarter of 2010. Additionally, we have a large customer who is working to reduce inventories in the supply chain. The volume declines were offset by the inclusion of net sales from Vogel & Noot and higher average selling prices due to the pass-through of higher steel costs.

Income from operations in the metal container business decreased to $38.4 million for the first quarter 2011 versus $46.4 million in the same period a year ago. The decrease in operating income was a result of lower unit volumes in the domestic operations, and the negative year-over-year comparison resulting from the delayed contractual pass-through of manufacturing cost changes partially offset by continued improves in operating efficiencies. The Vogel & Noot business was essentially a net neutral to operating income as purchase accounting adjustments offset the operating profit generated for the month of March.

Net sales in the closures business increased $16 million to $160 million for the quarter, primarily due to the inclusion of net sales from IPEC, strong unit volumes and higher average selling prices as a result of the pass-through of rising raw material costs. Foreign currency was unfavorable $800,000 for the quarter 2011. Income from operations in the closures business for the first quarter of 2011 increased $4.7 million to $15.8 million. The first quarter of 2011 benefited from lower net charges associated with the remeasurement of net assets in Venezuela and rationalization charges, the inclusion of the IPEC business, significantly stronger volumes and ongoing cost savings from rationalization programs. These benefits were partly offset by the impact of the delayed pass-through of significant resin inflation during the quarter.

Net sales in the plastic container business increased 5.3% or $7.7 million to $152.6 million in the first quarter of 2011, primarily as a result of the pass-through of higher raw material costs. Foreign currency also benefited the revenue line by $1.7 million in the quarter. Operating income increased $3.4 million to $6.3 million for the first quarter 2011. The plastic business experienced better manufacturing performance and lower rationalization charges during the quarter. Both the first quarter of 2011 and 2010 experienced significant resin volatility, both resulting in a negative earnings headwind as a result of the delayed pass-through of escalating resin costs.

Turning now to our outlook for the remainder of 2011. Despite significant volatility in the first quarter we have performed slightly ahead of expectations. Based on this quarter performance and a positive outlook for the remainder of 2011, we are raising our full-year estimate of adjusted net income per diluted share by $0.05 to a range of $2.60 to $2.70 per share which excludes the impact of rationalization charges and the cost attributable to announced acquisitions.

Similar to last year, we expect the recent volatility in resin costs for our plastic container business, and the plastic portion of our closers business to create significant headwind through the second quarter of 2011 as a result of the lag pass-through of resin price increases. As a consequence, we are providing a second quarter 2011 estimate of adjusted earnings in the range of $0.50 to $0.55 per diluted share, also excluding rationalization charges and fees related to recently announced acquisitions as compared to $0.48 in the second quarter of 2010.

We continue to forecast strong cash generation from the business as outlined during our year-end call. On a stand-alone basis we are leaving our free cash flow guidance unchanged at a $180 million to $220 million. That concludes our prepared comments, so we can now open it up for questions and answers. And I'll turn it over to you to provide directions for the Q&A session.

Thank you. (Operator Instructions). And we'll begin with Ghansham Panjabi with Robert W. Baird.

Hey, guys. Good morning.

Good morning.

Good morning, Ghansham.

Hey, I understand the tough comp in North American food cans during the first quarter. Can you give us a sense as to what volumes you expecting on a full year basis for North America?

Sure. Maybe just to start in the quarter, our volumes were down roughly in line with the [CMI] volume data, Ghansham. As we project out for the year, we continue to think with the normal pack in 2011 that those volumes that were short in Q1, that we'll work out way back to a flat-ish volume for 2011 versus prior year.

Okay. That's helpful. And also the purchase accounting adjustment for the quarter for Vogel & Noot, can you isolate that impact and also is there any residual impact in to the second quarter as well?

Yes, Essentially on a profit basis, on an EBIT basis, it was neutral for the quarter because of purchase accounting. It's probably negative $0.01 to $0.02 for the quarter because of purchase accounting, and that we would expect there will be incremental purchase accounting drag as we move in to Q2. Because the deal closed, we really only had one month in giving the inventory turn. Some of that will fall into Q2 as well. Probably pretty close to a similar effect in Q2.

Okay. Bob, and just one modeling question on D&A for the full year?

I think it's somewhere in the neighborhood of -- bear with me one second -- I'm going to say it's like $145 million. Sorry a little bit higher than that. It's about $158 million.

Okay. Great. Thank you very much.

We'll go next to Chip Dillon with Credit Suisse.

Yes. Good morning.

Good morning, Chip.

Hey, Chip.

When I look at the closures business is it fair to say that the revenue was probably up closer to say 5%, if you don't include the IPEC business?

Yes, it is. The IPEC business performed about as we expected, but the organic business was up in that mid single-digit range in the quarter.

Would you differentiate, just as a quick follow-up, between how much of that could have been volume and how much was price? Was that basically even, or did it favor one or the other?

A little bit more on the volume side. And I guess to go one [area] more, where you are seeing that is on the single-serve plastic primarily is where we are getting that which is US as well. But volume is the larger piece of that.

Got you. Okay. And now that you have owned Vogel & Noot for say a month and a half or so, I know it's early days, but with the euro moving the way it is, do you think we might get a little bit of a kick more than you thought you would have? Maybe not so much in the second quarter, but in the second half or 2012?

Well, on the operating profit line, you might. That would make some sense. We're perfectly satisfied where we are so far in the business. It's running at our expectations, so you get some pop there. Remember that we kind of do a natural hedge where we finance it in euro as well. So on the EPS line, the answer to that is, not so much, because your debt is going to get more expensive too.

Got you. Thank you.

Yes.

Our next question is from Chris Manuel with KeyBanc Capital Markets.

Good morning, gentlemen.

Good morning, Chris.

Good morning, Chris.

Congratulations on a good start to the year.

Thank you.

A couple of questions along these lines that have already been asked, but I wanted to get to what you felt your organic volumes were through the quarter and the different businesses, and I realize it is tough to think about that in the European food business, already. But if you can give us a sense of how that is starting, and what is embedded in to your assumptions or your thought process for the full year this year as well.

That's a big question. Well, we talked about metal containers already at least on the US side that we were in line with the market which was down mid-single digits. Adam already said that our expectations -- that ought to get back kind of flat-ish. Remember that part of that is driven by buy-forward last year that essentially doesn't repeat itself. So in fact, there's a little bit of growth in getting back to a flat number there.

Yes.

The closures side is where I talked about is if you isolate out IPEC on it you are up mid single-digits. The expectation over the course of the year is that might -- it will be something like that, maybe a little bit less by the time the year is done. Q2 won't be quite that way, it will be a little bit more -- probably down a little bit. The comp there is a little bit tougher as I recall. But on balance, we're expecting growth on the closures side even excluding the IPEC acquisition, of course.

If I can stop here for one second before we go to the rest. For example, one of your competitors when they'd reported their metal vacuum business being very, very strong, I know that's a good slug in the business. Is there a lot of differentiation between your metal piece and your plastic piece? And maybe what you're seeing domestically and abroad.

Well, I think I already said. What we saw was a little bit stronger on the plastic side which we're kind of unique in that we cover both sides of that in the vacuum closures. So we saw more of the growth on the plastic side in that case.

Okay.

To finish off on the plastic side, remember that volume wasn't our problem last year, in fact some ways it was reacting to volume that was our problem. Our guess is that volume won't be the big story in plastic, either way this year. It is going to be more about our operating ability.

Okay.

I think I answered your comprehensive question.

Well you are a pretty sharp guy. I knew you could handle it.

I don't know.

The second component that I wanted to ask a little bit about is as we look at some data in the marketplace it suggests that private-label is resuming its march to pick up more and more and more, an increasing amount of share. And as I remember, at least on the plastics side, you are much more skewed towards branded product. Could you maybe give us a sense as to -- is that something that makes you a bit nervous? And as I look at the new business that's going to come in at some point with Graham, it seems to be somewhat skewed the same way. Can you maybe talk about -- is that something that makes you nervous? Is that something that you feel you can chip away at, or expectations there?

Sure. I would say it's not something that makes us terribly nervous. We're represented in the private-label group. We are probably slightly under weighted as we've said before, particularly on the plastic side. So I think what we talked about is differentiated plastic packaging for the rigid packaging market. And when we think about that, we do think there is a spot for private-label in that core franchise position that we have. So we think that we have made in-roads in private-label, our business continues to grow with private-label and I think we feel pretty good about our position with private-label going forward.

I think that's important. And historically, Chris, that was less the case. Private-label was the last differentiated package early on. But that is becoming less and less true.

Great.

And so we think we sit in a good spot as they want a more differentiated package.

All right. Well, I'll ask one more question for Bob, because I don't want him to feel left out. Normally at this time of the year, you aren't raising your assumptions. It's early in the year you like to tell us. What is behind -- I'm not complaining -- but what is behind the $0.05 raise as we sit here today?

Well, I think it just goes to everything we talked about as feeling better about the volume outlook. We did see some better performance. Still not where we want it to be on the plastic side, but we saw some better performance coming through the quarter. I think now having IPEC in the stable, and feeling pretty positive about how that is operating as well as the Vogel & Noot business. That all just leads to a slightly better feel for the year.

Okay. Thank you.

Thanks, Chris.

And we'll go to George Staphos with Bank of America.

Hi, guys. This is Benjamin Wong, George is traveling.

Hi, Ben.

Hi, Ben.

Can you provide any additional details about the inventory reduction pertaining to the customer, or how long do you anticipate that playing through? And then the second question. Have you seen any impact from higher gasoline prices on the closures business, perhaps in the convenience store channel?

I'll take part of it and Adam can take part.

Sure.

Why don't you hit the convenience store --

Yes, let me hit the convenience store part of that first. At this point we have not seen a reduction. And again, I think our timing on this is probably a little bit delayed simply because of -- we sell a closure, it goes on the bottle and it is sold. That is going out in the market throughout the course of the summer, so this is typically a very busy time for us in our closures segment as we are in the pre-season filling market right now.

So it's something that we watch closely, a good percentage of our sales go through convenience stores, and we do have experience from a couple of years ago where high gasoline prices did impact singles or beverage consumption out of c-stores. So at this point we don't have clarity on it. It's something we'll be tracking in future months as well.

On the customer and inventory. Obviously there is not a lot we can say there. We can say a particular customer seems to be going through a rigorous channel-wide effort to reduce working capital. We see this from time to time. My guess is that it will play-through. Probably most of the year they'll work on it, and then I would think it would not have lasting impact past that.

Okay. Great. And can you share any trends, as we exit the first quarter and entering the second quarter, any early trends you can share with us?

More of the same. I mean, there's nothing particularly different. I think across the businesses, with the one obvious exception, that the -- if you think about resin costs, mostly effecting our plastic business, we knew, as Bob said, that we were going to have higher resin costs in the quarter. The surprise for us, if you will, was that rather than abating in the tail end of the quarter, it accelerated, so there's no question that the Q2 -- and you can see it in our guidance, Q2 is going to have a lot more resin costs in it than we anticipated. So I think other than that the trends are moving as we had expected so far.

Thanks.

Yes.

And we'll go to Al Kabili with Macquarie Capital.

Hi, good morning, thanks.

Hi, Al.

I guess, Tony, first question is Vogel & Noot. If you could just talk a little bit about the volumes that you are seeing in Europe and how the integration is going, thus far. Any meaningful surprises, thus far?

Okay. Sure. First of all I would just -- as we have said, so far it is as we had hoped and expected. The volumes look in line with what had been experienced last year, as a pretty a good indication. Remember that business is focused Central and Eastern Europe. I would say that there's noise coming out of Western Europe that doesn't effect us a lot, but I think obviously, there has been some change in Western Europe. So we are hoping that stabilizes. Again, that doesn't come directly at us, but it's not unimportant as we go forward.

On the integration side, we continue to feel really good about the team in place. The entrepreneurial focus that they have, the opportunities over time, and we were pretty clear saying this was going to be a longer-term strategy here, but the way they look at the Central and Eastern part of the world in opportunities, we continue to feel good about.

The integration with our -- at the complement between our US can business and their business, I would say has been the most pleasant surprise out of this. The pace at which the two businesses have worked together and have really tried to seek opportunities -- again, that goes largely through the entrepreneurial spirit of the team in Vogel & Noot, because they are reaching so hard at anything that our US can team can offer them. So I would say that has gone a little bit better than we had expected at this point in time.

Okay. And also I guess given the resin volatility, any thoughts on ability to shorten lag time on pass-throughs as contracts come up, is there industry support for it? How much of a priority are you putting on trying to shorten up the pass-throughs?

I think we have talked on this call before that is it a priority of ours to shorten those pass-through mechanisms, and it's something we've been working on for some time now. I think you touch on a good point. That doesn't happen overnight, and as business is renewed, as new business is out there, it is a priority for us, so it's a clear focus for our plastics business?

Okay. And have you had any early successes, or is it still early to tell? Any updates there?

I guess how I would answer that, we're very disciplined in our thought process, so we have had some success to this point, but again, it's going to take some time to get that full implementation out there.

Okay. Understood. And then I guess question for Bob is in the guidance, the tax rate. Can you help us with how you are thinking about the tax rate for the year again, given I think it was a little lower on an adjusted basis than I was looking at?

Yes, I think we came in to the year thinking that we would be in the high 34%, 35% range. Obviously we came in a little bit lower than that. There's some noise in the numbers around deductibility, around some of the acquisition costs as well as tax jurisdictions and where some profit was made. I think right now we would say that the tax rate probably comes down a little bit from what our original expectations were, so I would think something in the mid 34% and up is probably about the right spot to be thinking about the full year now.

I appreciate it. And final question. I guess Graham Packaging if you can talk to it a little bit. As you looked at it further, any updates to how we should be thinking about first year EPS accretion? I know you've stated $500 million of free cash flow, but any thoughts on what you are looking for first year EPS accretion on Graham? And timing, are you still looking for sometime in the third quarter? Thanks.

I would say we really don't have much new to say around Graham in general. What we had said is, we thought it would be modestly accretive at first, and more so as time went on as we used that cash flow to pay down debt. And really nothing new has come to surface around that at this point. Timing holds the same. We're off working towards all of the conditions to close as we speak, and we're at this point thinking it's a Q3 event.

Okay. Thank you. Very good. Good luck. Thanks.

(Operator Instructions). We'll go next to Alex Ovshey with Goldman Sachs.

Thanks, good morning.

Good morning.

Good morning, Alex.

Couple of questions. First, in the past you have been quite successful on being able to improve profits and margins by executing on productivity cost savings that has been above and beyond inflation. In 2011, can you just talk about how you see that productivity cost saving relative to inflation spread playing out?

Sure. If you look at each base business that's still our intention to be able to do that. The first quarter is in that direction.

There's good operating performance on the can side, obviously that's muted by the volume decline that we talked about, the buy-forward and the pass-through timing of steel. So if look at a margin rate in Q1, you don't see that, but that was all expected. Behind that is continued good progress on the cost side.

Same is true on the closures side. They continue to make very positive headway on the cost, et cetera.

And then plastic side is sort of in its own unique camp because it was sort of a rough operating performance, last year. So in that case, we absolutely expect to make headway against last year's performance. So we do expect to do in each of the businesses.

Okay. And as you think about your 2011 EPS guidance and the underlying growth, can you help us calibrate what part of that growth is going to be driven by the acquisitions of Vogel & Noot and IPEC versus organic?

Well most of it is going to be organic because what we have said is that your are going to get a modest accretion coming out of Vogel & Noot. IPEC is relatively small. You'll get some accretion, but it's going to be even more modest in that regard. So a lot of it comes out of the organic business, and obviously on an EPS basis, it's also the deployment of cash to buy back shares, although that's only a piece of the equation. So we are expecting improvement across our whole business portfolio aside from the inclusion of the acquisitions.

Okay. And just last question. Any of your larger customers cautioned you around what their volumes may look like in the second half given escalating gasoline prices and potential impact on the consumer?

No, we have not had that conversation with our large customers. Again, If you think about the food can business, for our second half it's really pack driven. The plastic side, we have not had those conversations, in closures, again, we're right in the heart of our pre-season filling as we sit here today, so not at this point.

Great. Thank you.

Thanks.

Thank you. And Mr. Miller, there are no further questions.

Great. Well we want to thank everybody for your time today, and we'll look forward to talking about our second quarter. Thank you all.

And that concludes today's conference call. We thank you for your participation.