Silgan Holdings Inc (SLGN) 2012 Q1 法說會逐字稿

Thank you for joining Silgan Holding's first quarter earnings call. Today's call is being recorded. At this time I would like to turn the call over to Kim Ulmer, Vice President and Controller of Silgan Holdings. Please go ahead.

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 including but not limited to those described in the Company's annual report on Form 10-K for 2011 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 statements. With that let me turn it over to Tony.

Thanks Kim. Welcome everyone to our first quarter 2012 earnings conference call. Our agenda for this morning is to focus on the financial performance for the first quarter and to review our outlook for 2012. After these prepared remarks Bob, Adam and I will be pleased to answer any questions.

As you saw in the press release we're off to a strong start in the first quarter, delivering adjusted earnings per diluted share of $0.50 which exceeded the high end of our estimated range of $0.42 to $0.47 and was well above the same quarter of the prior year which had previously been a record first quarter.

We also took the opportunity during the quarter to raise new money in the bond market to repay outstanding higher rate debt, extend our maturities and to make voluntary contributions to fully fund our Company-sponsored pension plans.

While it's early days and the first quarter is a seasonally slow quarter, we're pleased with the performance of our businesses, as they each exceeded the first quarter of 2011 results.

Volume was stable or growing across much of our business with benefits coming from our 2011 acquisitions and continued progress on operational improvements and certain overhead cost reductions. While we certainly have a ways to go, we're pleased with our plastic container performance with steady improvement in operating performance in the quarter, while also benefiting from a year-over-year resin pass-through comparison. Equally we view the sequential improvement in operating performance as a good sign, although we do expect future improvement will not occur in a straight line manner.

As a result of the strength of our first quarter performance and our positive outlook for the rest of the year, we have confirmed our full year guidance for adjusted earnings per diluted share in a range of $2.80 to $2.90.

With that I'll now turn it over to Bob to review the financial results in more detail and provide additional explanations around our earnings estimates for 2012.

Thank you Tony. Good morning everybody.

As Tony highlighted, 2012 is off to a strong start. Our 2011 acquisitions delivered results in line with expectations. We're making good headway with stabilizing our plastics operations and volumes for the quarter were as expected.

Unit volumes were strong in the closures operations driven by solid demand in the US operation and the benefit of the DGS acquisition in Europe. The metal container operations saw volume benefits as a result of the full quarter of Vogel & Noot and the addition of the Nestle Purina PetCare steel can assets in the US. Volumes in our plastic business were comparable to a solid first quarter 2011. The first quarter also benefited from a larger than anticipated comparative year-over-year resin change.

On a consolidated basis, net sales for the first quarter of 2012 were $768.4 million, an increase of $65.3 million, or 9.3%, primarily as a result of acquired businesses in containers and closures, higher average selling prices due to the pass-through of higher raw material costs and stronger unit volumes in the US closures operations, partially offset by unfavorable foreign currency translation.

Net income for the first quarter was $32.8 million, or $0.47 per diluted share, compared to first quarter of 2011 net income of $26.1 million, or $0.37 per diluted share. And results for 2012 included rationalization charges of $3.6 million, or $0.03 per diluted share, while 2011 included rationalization charges of $1.7 million and costs associated with announced acquisitions of $1.8 million for an aggregate impact of $0.04 per diluted share. As a result we delivered adjusted income per diluted share of $0.50 in 2012 versus $0.41 in 2011.

Foreign currency, once again, had very little impact on the net income as we continue to be effectively hedged, having financed the international businesses in their local currencies and we maintain a business practice of balancing out cross-border activity to help mitigate the effects of currency on our earnings.

Interest expense increased $1.7 million to $15.6 million for the quarter as a result of higher average outstanding borrowings, primarily attributable to the euro borrowings to fund the acquisition of Vogel & Noot, the refinancing of the senior secured credit facility in July of 2011 and the recent issuance of the $500 million of 5% senior notes partially offset by lower average borrowing rates.

Proceeds from the recent senior note issuance were used to redeem our outstanding 7.25% notes, including the make-whole payment and to make voluntary pension contributions of approximately $76 million.

Capital expenditures for the first quarter of 2012 totaled $26.3 million compared with $33.5 million in the prior year quarter. We continue to anticipate capital spending for the year to be in the lower end of our range of $125 million to $150 million as we compressed capital in 2011 to take advantage of the accelerated tax deduction.

Additionally we paid a quarterly dividend of $0.12 per share in March with a total cash cost of $8.5 million. Also during the quarter we repurchased 114,000 shares for an aggregate amount of $5 million through a series of open market transactions.

I'll now provide some specifics regarding the financial performance of the three businesses.

The metal container business recorded net sales of $444.9 million for the first quarter of 2012, an increase of $54.4 million versus the prior year quarter. This increase is primarily a result of the two acquisitions completed in 2011 and higher average selling prices as a result of the pass-through of higher raw material costs, partially offset by unfavorable foreign currency translation of $1.3 million.

Income from operations in the metal container business increased to $42 million for the first quarter of 2012 versus $38.4 million in the same period a year ago. The increase in operating income was a result of the inclusion of the acquisitions and continued improvement in manufacturing efficiencies, partly offset by an increase in depreciation expense.

Net sales in the closures business increased $3 million to $163 million for the quarter, primarily due to volume improvements in the US operation, the inclusion of the DGS acquisition in Europe and higher average selling prices as a result of the pass-through of higher raw material costs. Foreign currency was unfavorable to sales by $2.9 million in the first quarter of 2012.

Income from operations in the closures business for the quarter increased $2.2 million to $18 million as a result of higher unit volumes, continued efficiency gains and cost reductions associated with recent rationalization initiatives, partially offset by the rationalization charges themselves.

Net sales in the plastic container business increased 5.2%, or $7.9 million, to $160.5 million in the first quarter of 2012 primarily as a result of the pass-through of higher raw material costs. Foreign currency was essentially neutral in the plastics business.

Operating income increased $2.6 million to $8.9 million for the first quarter of 2012. This increase was primarily related to the comparative year-over-year benefit resulting from the lag pass-through of changes in resin costs and slightly better operating performance. As a consequence, excluding resin, the plastic business delivered earnings in line with expectations and showed significant sequential gains as a result of stable operating performance.

Turning now to our outlook for 2012, based on this first quarter performance and our outlook for the remainder of the year, we are confirming our full year estimate of adjusted net income per diluted share in a range of $2.80 to $2.90 per share, which does exclude the impact of rationalization charges, costs attributable to announced acquisitions and fees related to the early extinguishment of debt. This range takes into account the benefit of the voluntary pension funding offset by higher interest expense related to the upside senior note issuance and the timing of the redemption of the 7.25% notes.

While we were pleased with the performance in plastics and anticipate continued gradual improvement in operating performance, we expect resin volatility to return in the back half of the year and remain cautious about the European economic conditions and its potential impact on volumes. As a consequence, we are providing a second quarter 2012 estimate of adjusted earnings in the range of $0.55 to $0.60 per diluted share which also excludes rationalization charges and fees related to the early extinguishment of debt. And that compares to $0.53 in the second quarter of 2011.

Consistent with our year-end guidance we continue to forecast free cash flow to be in the range of $200 million to $250 million exclusive of the voluntary pension contribution and the premium paid on the early redemption of the 7.25% notes. As always we make capital deployment decisions directed at yielding the best possible return for our shareholders. As a consequence we continue to view acquisitions as the best use of our cash flow. In the absence of a meaningful opportunity we will make decisions regarding alternative uses through the end of 2012.

That concludes our prepared comments, so we can open it up for Q and A and I'll turn it over to Cameron who can provide direction for the Q and A session.

Thank you. (Operator Instructions). We'll pause for just a moment to allow everyone an opportunity to signal.

We'll take our first question from Chris Manuel with Wells Fargo Securities.

This is actually Gabe on for Chris. Something I noticed in the cash flow statement was a purchase of business $51 million. Am I missing something or didn't catch something in the news or is that carry-over from something or is it on wrong line that I can't line up here?

No, good question. That's actually -- with the Vogel& Noot acquisition there was a deferred payment of part of the purchase price. So that all relates to the payment that was made in March from the prior year acquisition of Vogel & Noot.

They must be knocking the cover off the ball relative to --

No, no, it was just all part of the purchase price that was just -- it was a deferred payment. It was all part of the negotiated purchase.

Okay, understood. I guess to that end, you did mention that acquisitions are the best use of capital. Can you talk a little bit more about any opportunities that you see, maybe geographically speaking or business line?

Yes, obviously there's not a lot of detail that we can provide here as we continue to comb through opportunities, but not much has really changed in our focus. Happy to invest pretty much in any of the platforms that we're currently doing business in. I think we're seeing a good breadth of opportunities across the business platform, both opportunities here in the US as well as in the international markets. So we're not really predisposed to any, as long as they marry up against our strategic vision for competitive advantage and that they provide the good kind of return that our shareholders have become accustomed to from us, so not much more to say than we continue to troll through a pretty robust pipeline.

Thank you. Good luck.

We'll go next to Ghansham Panjabi with Robert W. Baird.

Good morning, it's Matt Wooten sitting in for Ghansham today. How are you? Within the metal food business I believe that the volumes in the US were up about 3%. One of your competitors was talking about perhaps a pull forward in demand, and I was just wondering if you guys had seen similar trends?

Yes, no, I think you're on it. Industry data suggests that the industry's up something like 2.7%. We're up probably a little bit less than that, having gotten the benefit of the Nestle Alpo business that we brought into the fold in the middle of last year. So, you know, look, first quarter is a slow quarter. There's a lot of movement around as our customers kind of deal with their inventory levels, pre-pack season, but for us, you know, the volumes were pretty stable, as we expected.

Okay, thank you. And, as for plastics, acknowledging that profitability improvements aren't going to be linear, do you have a target for what profitability measures are sustainable, you know, over, perhaps like a 12 or 18-month time period?

Sure, again, I think the key one performance, I'd start out by saying it was a good first step towards where we want to get back to from a plastics standpoint. I think, as Bob had eluded to in some of his remarks earlier, that there was about a $3 million benefit from resin in the quarter. So, you know, when we think about the sustainable level of earnings for this business, again, it's a longer path that we're going down in our plastics business to recovery. But I think the performance in Q1 when you take out that resin impact, is a good indicator of where we are going forward.

Okay.

I think what we said in the last call, that we're -- we'd like to see through operational improvements getting back to where we were a couple of years ago. I think kind of getting back to where we were eight years ago, or so, is going to take something more than that. It's going to take more growth, more kind of market penetration in select markets, perhaps back to the acquisition cycle again before we move to those kinds of levels.

Understood. Thank you.

Thanks Matt.

We'll go next to Mark Wilde, Deutsche Bank.

Good morning. Any signs, Tony or Bob,that you're seeing over in Europe right now, with, kind of, particular weak spots over there?

Good question. I think we've been pretty open, as many have, that there's caution around Europe. I think that's that -- what we've experienced so far, it's definitely a little bit softer. I think that's definitely more to what Western Europe and even more intensely to Southern Europe. It's a little bit more -- I mean, as you know, our products tend to hold up well in tough economic times, and so that's generally true. So what we're talking about is very small amounts of volume weakness.

What that tends to whip up though is a little bit more competition around pricing, et cetera, and so, again, I'd say that's a little more to West Europe. It's a little more around discretionary products that we sell to, so things like single-serve beverage is going to feel that a little bit more than a food can is, for example. But just broadly I would say that there's no question Europe's not as strong as we're seeing in North America.

All right, and just to kind of follow on that, a couple of things around Vogel & Noot. As I recall, they had some plants under construction. So I'm assuming that you're ramping something up there. And then I thought that they were in Hungary, among other locations, and it seems like there's been a lot of turmoil over in Hungary and I'm just curious whether you see any effect from that in their business?

Well, no --first of all we are still building plants, and we did announce in the fourth quarter a plant in the [Krasnodar] region of Russia. We do still have a couple other plants that are under construction that we haven't been as open about what the locations are. We are not producing in Hungary, although we sell some there, but -- so that, I'm not sure exactly sure what you're referring to there, although I could guess some of it. But that's not as much impact to us.

Okay, all right. Just finally I noticed that you closed another plastics plant during the first quarter. Can you give us some sense of, kind of, where that process of restructuring the plastics business is right now?

Sure, and part of that restructuring, or rationalization, was the broader operation that we have in plastics to kind of further enhance our cost position and continue to make our products more competitive every day. So the Allentown rationalization has already begun. It will be closed here sometime in the third quarter, and, will, again, enhance our cost position, likely further opportunities to continue to improve the cost position of the business going forward, as well.

Okay, listen, good luck in the second quarter.

We'll take our next question from Chip Dillon with Vertical Research Partners.

When you look at the -- could you just update us on the buy-back situation? I know you bought a few shares back in the quarter, and what do you have authorized? And, you know, if we go through the year and there's not significant M&A activity opportunity for you, could we see the pace of that ramp up?

Yes, Chip. This is Bob. As you know I think we got a $300 million authorization from the Board at the tail end of last year. We have executed against that in aggregate about $27 million. So there was a little bit in Q4, a little bit in Q1 of this year, and then we bought a few shares here in Q2, kind of just, I'll call it nibbling when there's a little bit of a market dislocation around price. As to anything large, I think in my specific comments, I said that we're kind of focused here on trying to find opportunities to put money to work through the M&A environment. But I think you touched on it, in the absence of that, as we come through the back part of the year particularly where we would generate our free cash flow for the year, then we'll be faced with making alternative decisions just given potential inefficiency in the balance sheet. But I don't expect that we'll be making any of those decisions until we get closer to the end of the year.

Got you.

And even that may not happen this year.

Okay, and when you look at the -- I know in the earlier question about the expansions, the organic ones in Eastern Europe, and I believe some of those were kind of, at least designed at the acquisition of Vogel & Noot. When you look at the next couple, three years, do you feel that most of your expansions in Central and Eastern Europe will all be -- or not all of them, most of them, but will all of them be organic or are there still M&A possibilities in that part of the world?

Yes, there's actually quite a bit of opportunity, particularly as we look at some of those Eastern and growing markets where there's some local competition in many of those markets that would provide an opportunity for us to consolidate in that market. These are just particular initiatives that, A , had been identified by the team when we acquired the business and made pretty good fundamental sense about what was happening in those growth markets. So we continued with the strategic initiative to fund those acquisitions. So I think you could see it being a combination of both where appropriate, but by no means are we signaling that there's a lack of opportunity on the M&A

Got you. Thank you.

We'll take our next question from Adam Josephson with KeyBanc.

Thanks and good morning everyone. How would you compare your opportunities for future efficiency improvements in your metal food can business to the opportunities you had say five or ten years ago? I ask because I'd assume your domestic food can opportunities are more limited today than they were a few years ago, given that there are few self manufacturers left and fewer acquisitions could mean fewer opportunities to take volume from one plant and move it to another.

Well it's a good question. It's a -- you're right that a lot of the improvement that we've done over time -- I'm going to say except for over the last, let say, three years. But for longer history a lot of improvement did come through consolidation and taking plants out, et cetera. We always said during that time that because we were so focused on that that we were leaving a fair amount of productivity opportunities on the table for later.

In the last three years, I'm going to say, we've gotten a little more to that. We've brought in operations excellence, Lean programs, et cetera. So I would say that our operating team never fails to surprise me, personally, at the opportunities that they find. So I would not want to set any kind of a glass ceiling for them. My view is they'll keep finding ways to improve.

Now a lot of that offset's inflation. So I know your question is going a little bit more to what can we expect on the bottom line. But a big part of it is just inflation offset and we have been very successful there. But our view is that there are still pretty sizeable opportunities even in the US. Certainly as we look to the European operation, as well, there are opportunities as it grows and expands. But I wouldn't want to cap it.

Sure, and one other one. Have any recent trends led you to believe that volume in the metal food can industry in the US is likely to decline by more than 1% a year? I know volume was down 3% last year, but that was largely attributable to the lousy fruit and veggie pack.

Yes. No, no, I think we still view it as a kind of flattish type market. We are expecting some growth this year, because of what you pointed that, that you had a sort of unusually negative pack last year. But we view it as more or less a flattish market.

And any thoughts on the recent ruling on BPA?

No, you know, for everybody to catch up, the FDA was required, if you will, to come out with a question whether they would ban BPA at the end of March. They did come out and essentially declined any banning of BPA. They certainly said that they would continue to investigate and watch, as you would expect they would. I would say, for me, I was a little surprised by the -- how comprehensive a defense of science it was, if you actually read the entire document. I would say that they did more than I expected in terms of really planting a bit of a stake around where science was on this issue, rather than where sentiment was. But we've always said that, to a large degree, consumer sentiment will be the driver here. So I'm not sure much fundamentally changes here and that there probably will be a slow shift away from BPA put into the coatings of cans.

Thanks Tony.

We'll go to next to Albert Kabili with Credit Suisse.

Ernie Ortiz. Hi, this is actually Ernie Ortiz filling in for Al. I just wanted to confirm that you guys cited that $3 million benefit from resin in the quarter. I just wanted to get your outlook on the quarter for resin, and perhaps for the rest of the year.

Sure. So, the outlook for Q2 I assume?

Yes, correct.

Okay, sure. So the outlook for, we'll say first for Q2, is that resin continues to be volatile right now. If you expand out to the full year, I'd say that we're expecting further increases in our primary resins for the balance of the year. Those mostly are forecasted for the second half of the year, so the benefit that we had in Q1 will mostly go away in Q2. So, and then we're expecting that to reverse again and resin prices to go back up in the back half of the year.

Okay, and then just a -- I have another quick one. I think you've touched on it a little bit, but what are the initial indications on the food and vegetable pack that you've seen so far in the quarter?

Yes, it's obviously pretty early here to make pack predictions, but, you know, from everything we're hearing from our customers and from the way we planned the year, was that we'd see a return to a more normal pack. That's coming off what was an abnormally weak pack in the prior year. I think as we see it, acreage plantings right now are probably up year over year, but there's a yield decrease that's being planned there, so we'll see how that all plays out.

I think, obviously, weather always gets a lot of airplay here. We've had a kind of abnormally warm winter, and in many cases even a warm spring here, coming to this date. So I think the only import of that is that could ultimately lead, and this is very preliminary, but ultimately lead to some shift between quarters, as to when packs are actually being harvested and processed. So there could be some impact, not to the year but within the year, in the quarterly numbers. But as we sit here today feeling pretty good that we're in the right spot around the pack.

Okay, that's helpful. Good luck in the quarter.

We'll go next to Christopher Butler with Sidoti & Company.

Hi, good morning guys. Looking at the metal can business and the margins year over year I think since the Vogel & Noot acquisition you've been able to expand margins with product mix being a part of that. Could you talk to the first quarter? Is this just seasonality or is there other things that are factoring in here?

Yes, there are a couple of things there, nothing terribly surprising. You know, obviously, there's been some inflation coming through quarter over quarter, which has a negative impact on margins. The Vogel & Noot business Q1 is its seasonally low point so it's carrying, you know, a fair bit of overhead against the lower volume. Add to that, given some of the start-ups that it's going through with these new plants, there's some incremental cost coming through there that ultimately -- you know, all that combined has a modest impact on margins, but nothing that would be meaningful for the full year.

And what do you see coming up as far as tin-plated steel costs?

Yes, kind of where we are right now is tin-plate in the US is up, kind of mid-single digits. Europe is down -- is up less than that. Largely they've taken greater inflation over the last several years. That's kind of stabilized now, albeit at higher prices in Europe than in the US. I think as we look out right now, there's really nothing on the horizon that would cause us to think that there's any more price pressure from the steel side. So obviously we'll wait to see that. Keep in mind in the US that that is a pass-through mechanism for us. So, you know, that's kind of where we're shaking out right now.

The other thing I will point out, though, on the inflationary side, is we have seen pretty extensive inflation on the coating and compounds side. So while steel is moderating it's -- we still have some inflationary pressure out there.

And shifting gears to the restructuring and the plastic containers segment, you know, thus far I've viewed this as a cost cutting restructuring, but as you close more and more plants should I be thinking of this as, you know, walking away from some lower margin volumes as well? Is that going to be part of the story as things go along?

Sure, and I think we even maybe mentioned that as we try to better manage the mix of this business and understand what impacts certain pieces of business have on us, we are going through kind of a profitability analysis. While I wouldn't necessarily expect it to drive plant closures, we are going through that process, and as we improve the performance of the plastics business that will definitely play a role.

I appreciate your time.

(Operator Instructions) We'll take our next question from Alex Ovshey with Goldman Sachs.

Hi. This is actually Usha on behalf of Alex. Could you comment on your first quarter intra-quarter volume trends, or lead in to April specifically on Europe?

Yes, not really much to say. I'll speak to the food can business. Essentially, you know as Tony indicated we're seeing a little bit of softness in the European market. But you know, in general, where we're located, which is the Eastern part of the markets, volumes have been okay. So not much to really say there.

I would say on the closure side, the -- first of all monthly trends, you know, we don't talk about a lot. You've got to be careful because they bounce around a lot. But with that said if you think about what I said about where Europe is weakest, et cetera, that does affect our closure business a little bit more. I would say the trends in the quarter were a bit to the negative side. So we're expecting that it is plausible that volumes would be a little bit softer for closures in Europe in the second quarter.

(Multiple speakers)

-- and that is factored into our thinking on guidance.

And just like a quick follow-up. So is it similar to what you're hearing from your customers as well, or are they being more cautious in their outlook for the rest of the year?

I'd say that's similar. I mean we wouldn't be thinking about things that were different from our customers. That's all part of our thought process.

Okay, thank you.

We'll take our next question from Phil Gresh with JPMorgan.

This is actually Ariel filling in for Phil. I don't know if you mentioned this but on the closure side you mentioned very strong in the US. What was the overall closures volume number?

Closures were up about, well, low single-digits, so between 2% and 3%. And you have to keep in mind this is right at the kind of peak of the pre-fill season for our hot fill single serve beverage business in the US. So this is very normal that our volumes are strong this time of year. Secondly I would say that given the warm weather that we've had that both Bob and Tony alluded to, we have seen a little bit better pull of those products earlier in the year. So we're cautiously optimistic right now but this is really very normal for our business.

Sure. Can you break that out between US and European volumes?

It's pretty close between the two, but you've got to remember that Europe had the benefit of DGS in for the full quarter. So you're looking a little more organically on it than you'd -- call Europe a bit flatter and a little bit more organic growth in the US.

Okay, got it. And then for the first quarter you beat your guidance by a nickel, yet the full year guidance has stayed the same. I guess what's giving you pause on raising the guidance?

Fist of all it's a relatively smaller quarter and so it's kind of early days. Secondly you've got something like a 3 million benefit of resin in plastics which we weren't necessarily expecting and as Adam said, we're braced for that to reverse on us by the end of the year. So that's mostly it. It's, you know, this would be an odd time for us to change our guidance. We don't know that much more than we knew when we set the guidance to start with.

Sure, okay. Thank you.

And we'll take a follow up from Chris Manuel with Wells Fargo Securities.

Yes, this is probably more for Bob, but the decision to kind of pre-fund pension, can you remind us of what your pension contributions were expected to be for '12 and maybe directionally how we can think about expense going forward?

Sure, the incremental pension funding that we made is completely outside of what was required and/or forecasted for 2012. So it's all incremental and in this case, there was, in aggregate about $76 million split between Q3 and -- I'm sorry, Q1 and Q2. So what that will ultimately mean is that we'll keep our pension expense on a year-over-year basis about flat.

Okay, thank you.

Thanks.

It appears we have no further questions in the queue at this time. I'll turn it back to Tony Allott for any closing remarks.

Great. Thank you everyone for your attention today on what we know was a busy earnings announcement day. We look forward to talking to you about our second quarter in July. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation.