Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Silgan Holdings Inc. (NASDAQ:SLGN)

Q4 2007 Earnings Call

January 30, 2008 11:00 am ET

Executives

Tony Allott - President and CEO

Bob Lewis - EVP and CFO

Adam Greenlee - EVP of Operations

Malcolm Miller - VP and Treasurer

Analysts

George Staphos - Banc of America Securities

Chris Manuel - KeyBanc Capital Markets

Christopher Butler - Sidoti & Company

Phil - Wachovia Securities

Robert Kirkpatrick - Cardinal Capital

Richard Skidmore - Goldman Sachs

Roger Harris

Operator

Thank you for joining the Silgan Holdings fourth quarter and year end Earnings Call. Today's call is being recorded. From the company today, we have Tony Allott, President and Chief Executive Officer; Bob Lewis, Executive Vice President and Chief Financial Officer; Adam Greenlee, Executive Vice President of Operations; and Malcolm Miller, Vice President and Treasurer.

At this time, I would like to turn the call over to Mr. Miller. Please go ahead, sir.

Malcolm Miller

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 10-K for 2006 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.

Tony Allott

Thank you, Malcolm. And welcome everyone to our 2007 year end earnings conference call. I want to start by making a few comments about the achievements that we accomplished during the year. Bob will then review the financial performance for the fourth quarter and the year, and afterwards Bob, Adam and I will be pleased to take any questions.

As you've seen in the press release, 2007 was another strong year for Silgan, with record revenues and income. We again achieved double-digit earnings growth, with adjusted net income up 15.3% to $3.32 per diluted share.

As expected this earnings growth was front-end loaded as we incurred the overhead costs of reducing inventory late in 2007 as compared with building up late in 2006 and experienced lag issues associated with resin cost increases in late 2007.

Perhaps more importantly, we believe 2007 was another important year in achieving certain milestones, which further positioned the business for continued strong performance. Specifically, we increased income from operations in each of our business segments. We successfully integrated our worldwide closures operation into a third sustainable business segment, with sales of over $600 million and income from operations of $66.2 million in 2007.

We invested over $150 million in capital to support growth and productivity improvements and maintained attractive returns on segment assets. We increased the annual dividend by 33%. We continue to strengthen the balance sheet through positive cash flows and disciplined investment strategies. We renegotiated extensions on a variety of long-term contracts, representing more than 35% of our food container business, including one of its largest customers.

We successfully negotiated new labor agreements for several facilities, including our only multi-locational contract. We consolidated and focused our food can innovation activities into a new product development facility. And we continue to implement our management succession plans.

On the last point, I want to make a few more comments. Since 2004 we've been steadily working to ensure strong succession for each of our key executives. Evidence of that success and the effort is shown by having Adam Greenlee sitting here with us this morning.

Adam was recently promoted to Executive Vice President of Operations in our Corporate Office. He had preciously been very successful and leading the significant expansion of our domestic closures business as its president. Adam will work as part of the corporate teams as we pursue our strategy of enhancing Silgan's position as the leading manufacturer of consumer goods packaging products.

Our succession planning also extends into our operating businesses, as we have implemented a planned series of increasingly more responsible positions for certain executives.

Most recently in October this resulted in the promotion of Tom Snyder to President of our food container business, Alan Koblin as President of our plastic container business, and Peter Konieczny as President of our worldwide closures business.

Tom, Alan, and Peter, were each fulfilling significant leadership positions in their respective businesses. And this planned transition has been seamless to their organizations.

At the same time we continue to benefit from the efforts of the former presidents of these businesses Jim Beam and Russ Gervais in our important business development activities. I truly believe we are one of the strongest and most focused management teams in the industry, particularly when it comes to building sustainable competitive market positions and generating shareholder value.

So in summary, we believe the business continues to demonstrate the strength of its sustainable competitive position or what we call franchise positions in food cans, plastic bottles and vacuum closures. We are committed to strengthening these businesses by investing to enhance our capabilities, relentlessly working to build the best value products and services for our customers, and ultimately to deliver high returns on capitals to our shareholders. We believe we are well positioned to do so again in 2008 and beyond.

With that, I would like to turn it over to Bob.

Bob Lewis

Thank you, Tony. Good Morning, everyone. As Tony pointed out 2007 was a pretty solid year as adjusted earnings outpaced 2006 by 15.3%. As in any year each of our businesses experienced the certain choppiness in their respective business dynamics. The container's business saw complicated quarterly comparisons and a difficult year-over-year comparison, largely as a result of the decision last year to build inventory ahead of a significant union negotiation.

The plastics business experienced an escalating resin market which negatively impacted the last quarter and the closures business that tended to the integration of the European operations. We also experienced significant inflation across each of these businesses.

That said, each of our operating management teams rose to the challenge and proactively went about delivering very positive financial results for the year and positioning Silgan for future growth.

On a consolidated basis, net sales for the year were $2.920 billion, an increase of $255.5 million or 9.6%, largely as a result of the acquired businesses, the pass through of higher raw material and other costs, improved volumes and favorable foreign currency translation. Foreign currency benefited net sales by approximately $18 million for the year.

We converted these sales to net income for the year of a $122.8 million or $3.22 per diluted share, compared to 2006 net income of $104 million or $2.74 per diluted share.

After netting out rationalization charges and certain other one-time benefits which we believe provide the best comparison of the operating results. Comparable adjusted earnings per diluted share increased 15.3% from $2.88 to $3.32.

I would also point out that foreign currency translation had very little impact on net income, as we financed the international businesses in their local currencies.

Interest expense increased $6.6 million due to the impact of the acquisition borrowings and foreign currency translation.

Our 2007 effective tax rate of 36.5% is generally in line with expectations but 350 basis points higher than the previous year.

Keep in mind that 2006 benefited from tax initiatives related to research and development credits which were completed during the third quarter of 2006. The current year benefited from lower statutory rates in certain jurisdictions.

Capital expenditures for the forth quarter of 2007 totaled $42.3 million, compared with $34.5 million in the prior year quarter. Full year capital expenditures totaled a $155 million which is slightly higher than our previous forecast. Comparatively, we invested $121.7 million in 2006.

Our 2007 capital spend was distributed across each of our businesses, as we invested in the combination of growth opportunities and cost reduction initiatives.

Additionally, we paid a quarterly cash dividend of $0.16 per share in December, the total cost of which was $6.1 million.

In an effort to provide better detail and clarity around cash generation of the business, we have now included a statement of cash flows and reconciliation to free cash flow in the press release.

Despite a significant increase in capital expenditures, we had solid year-over-year improvement in our net cash provided from operating activities and our free cash flow. Our free cash flow for 2007 increased $25 million to $124.7 million before dividend. In fact, this increase would have been even more significant had we not used roughly $50 million more than previously forecasted in working capital.

The majority of this difference is attributable to inventory management, primarily as we decided to purchase raw materials ahead of price increases at year end.

In addition, we built inventory on response to mix changes in our can business, resulting from our customers' projected requirements for 2008, as well as we decided to keep running our plants despite slightly lower December sales.

In addition, we ended the year with a lower payables balance due to the timing of payments including decisions to take advantage of favorable payment term.

I will point out that the free cash flow that was not used to pay down debt or fund acquisitions was held on the balance sheet. As the balance sheet indicates we ended the year with $95.9 million of cash-on-hand.

Given the volatility and tightening of the credit markets, we took conservative view and chose not to permanently pay down low costs debt.

I will now provide some specifics regarding the financial performance of each of the three businesses.

The metal food container business recorded net sales of $1.680 billion, an increase of $55.5 million versus the prior year. This increase is primarily due to the effect of the pass through of higher raw material and other inflationary costs, as well as slightly higher unit volumes.

Income from operations in the metal food container business increased $17.9 million to a $151.3 million for the year. The increase in operating income was a result of lowered year-over-year rationalization charges, benefits from ongoing cost reduction initiatives, slightly higher unit volumes and improved manufacturing performance. These benefits were partially offset by negative cost impact, as we reduced provisional inventories built in the prior year.

Net sales in the plastic business increased 5.9% or $35.1 million to $627.4 million in 2007, primarily due to the effect of the Cousins-Currie acquisition, improved unit volumes and the pass through of higher raw material costs. We experienced the less favorable mix of products sold which offset the above benefits.

Operating income increased $7.7 million to $50.2 million for the year as the result of the Cousins-Currie acquisition, lower rationalization charges versus the prior year, volume improvements as well as productivity improvements and cost reductions.

Resin headwinds offset these benefits as the result of the timing of escalating resin costs and the timing of the corresponding customer pass through. A less favorable mix also negatively impacted income from operations.

Net sales in the closures business increased $164.9 million to $615.2 million, driven primarily from the inclusion of the international acquisition for the full year, favorable foreign currency translation of approximately $15 million, strong unit volumes, and the impact of higher average selling prices resulting from the pass through of higher raw material costs.

Income from operations in the closures business increased $16.4 million to $66.2 million in 2007, primarily due to the inclusion of the international acquisitions for the full year, solid volume improvement and continued cost reductions.

For the fourth quarter, the company reported earnings per diluted share of $0.52, as compared to $0.55 in the prior year quarter. Both the fourth quarter of 2007 and 2006 includes rationalization charges, which negatively impacted earnings per diluted share by $0.03 and $0.11 respectively. After excluding the effects of the rationalization charge, adjusted earnings per diluted share decreased $0.11 to $0.55 as compared to $0.66 in the fourth quarter of 2006.

Sales for each business were up for the quarter versus the prior year, driven primarily by the inclusion of acquisitions, the effect of higher raw material costs that were passed through in each business, favorable foreign currency translation of $10.4 million and increased volumes in each business. These benefits were partially offset by less favorable mix of products sold in the metal food container business.

Income from operations for the fourth quarter of 2007 declined $2.2 million, primarily as a result of income items in 2006, which did not recede. These include a favorable mix in metal food containers due to the delayed tomato pack in 2006. The benefits associated with the fourth quarter 2006 provisional inventory bill and a one time management fee related to delayed acquisitions of certain international closure operations.

Additionally, we suffered a negative lag effect related to rising resin costs in the fourth quarter of 2007. These items were somewhat offset by a reduction in rationalization charges versus the prior year period.

Turning now to our outlook for 2008, while it is early, we currently estimate adjusted earnings per diluted share for 2008 to be in the range of $3.45 to $3.65 per share, which does exclude the impact of rationalization charges. The mid-point of the range represents a 6.9% increase in adjusted earnings year-over-year.

Reflected in our estimate for 2008 are the following. We are forecasting a similar mix of products sold in the metal food container business with volume expected to be flat to slightly improving. Net sales in the plastic business are projected to increase as a result of the raw material pass through and modest volume gains.

The closures business should benefit from continued volume gains particularly in our domestic business. We expect continued benefits from cost reduction and productivity program across each of our businesses, which we expect to largely offset continued inflation in manufacturing and other costs.

In addition, we expect interest expense to decline modestly versus 2007 primarily as a result of lower interest rates. We currently expect our book tax to be consistent with 2007 and that our cash tax rate will generally be in parity with our book rate. Also we expect lower capital expenditures in 2007 as we will return to a more normal level of spending.

As you know we've previously indicated our normal range to be $110 million to $140 million. We are also providing a first quarter 2008 estimate of adjusted earnings in the range of $0.45 to $0.55 per diluted share also excluding our rationalization charges.

Keep in mind that the first quarter of 2007 derived significant benefit as we billed provisional inventory and we benefited from the favorable lag affecting resin cost, which briefly declined in early 2007.

Given our current outlook for 2008, we expect free cash flow to grow in 2008 versus 2007. The primary drivers are lower capital spending, a modest reduction of working capital and improved earnings. We continue to view reinvesting in the business through acquisition or capital expenditures as a preferred use of this free cash flow.

That concludes our prepared comments, so we can now open it for question and answers, Patrick would you please provide directions for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first question from George Staphos with Banc of America Securities.

George Staphos - Banc of America Securities

Thanks. Hi, everyone, good morning.

Tony Allott

Good morning George.

Bob Lewis

Good morning George.

George Staphos - Banc of America Securities.

I guess first question I had was, we appreciate (inaudible) the free cash for this year because it look a little bit lightest as well and looks like a lot of that was working capital. You mentioned you ran facility that sounded like in the fourth quarter a little bit ahead of what demand was running at and I guess the question is: why, but again, get ahead of some of the input the cost increases?

Tony Allott

Yeah. George, Tony. First of all that's kind of a smaller tone of the items Bob went through, so it's not a big item. The point there is that essentially December sales were a little bit softer and particularly in the can business. And so you face the decision, do you try to quickly make a reaction to your production or do you run more efficiently. And it really it would have been pretty inefficient for us to have done anything other than what we did.

George Staphos - Banc of America Securities.

Okay. And I realize January food can sales are not the well praised parameter for the whole of the year but: what's been the tone in business or from your customers early on in the first quarter?

Tony Allott

Well. The first quarter is a little tougher for us to talk about et cetera, et cetera. There is nothing really there that seems to interesting either way. I would say that in the third quarter we're talking a bit about the warm weather and soup et cetera. And so I would just comment that it definitely got colder as the fourth quarter went on, so the soup really kind of recovered a bit. So usually that's one we can talk about around Q4 and Q1. And again I'd say there is really nothing much interesting to say about that. So it seems, okay.

George Staphos - Banc of America Securities

Okay. Although, we can't help consumption?

Tony Allott

I appreciate that.

Bob Lewis

Margin disclosures in particular dropped more than we were expecting, that doesn't mean that it was below your expectations. But what was going on there in terms of margins and would expect that margin in closures in 2008 holding input cost, along with your assumption. What should they do in 2008 up or down?

Tony Allott

Well. I would say I would look to closures more as look at the full year performance of the business and think from that. First of all the fourth quarter tends to be kind of a weaker quarter and so small moves of various items really effect that. In this case we said in the release there were two of those, one was, and really both effected last year not this year.

Last year as a benefit of a management fee associated with the international operations that we had been running but didn't quite own until the very end of the year. And then we have gone through an inventory built also in that business, so it benefited it in the fourth quarter last year. So if you take…

George Staphos - Banc of America Securities

2006 fourth quarter?

Tony Allott

Excuse me.

George Staphos - Banc of America Securities

When you say last year you mean: 2006 fourth quarter.

Tony Allott

That's correct. Sorry that's correct. So our comparative base is yet a benefit in the fourth quarter of 2006 that you didn't have in 2007.

George Staphos - Banc of America Securities

Understand. And you do not see any signs of weakness in Europe at this juncture correct?

Tony Allott

Yeah, that's correct. I think what I would say that Europe, it was strong in the first half of 2007, it was more a norm less in the back half let say, with perhaps even a little bit choppier export business as we got to the end of the year. Nothing alarming out of any of that. So, I think everything I read about the economy in Europe it seems to kind jive with what we saw in the business, very strong front half, a little less so in the back half. But none of that leaves us concerned particularly about the business. Remember that again this is like most of our businesses is not terribly economically sensitive.

George Staphos - Banc of America Securities

Understand. If I could ask one more question on turnover, in terms of the use of cash flow for 2008, the stock to some degree has hit a bit ceiling here in the last couple of three quarters and I think may we talk about last quarter, it suggests that may be your investors are acquiring a higher return on your investments. I don't think that your returns have been very, very good over the years.

Do you think perhaps more than may be a quarter or two ago that, as you did say five years ago, when you had a similar period or may be its time to throttle back even more on the investments and try to generate bit more free cash flow to reduce invested capital. If not necessarily plan A: do you think its higher up on the priorities on a going forward basis may be would have been the case a couple of quarters ago? Thanks guys.

Tony Allott

Thanks George. Well, may be Bob and I will walk through this together, but you have asked a lot of questions. I would say that first of all, as you kind of heard in here we are throttling back CapEx a little bit, may be a little bit more than that. But I would say that has as much to do with the, we did so much in 2007, the businesses need to absorb that, and so it’s still a meaningful investment in capital but less. So that's part of it.

I think you know what is well enough to know that of course, we are always thinking about what's happening out in the market in terms of cost-to-capital et cetera, what's the best deployment of the cash to the business, its something that we think of all the time, we talk with our board about it all the time, so kind of broad answer to that question sure we are always looking at and thinking about it.

To the CapEx I have answered and to the others uses of cash, we will keep watching what our alternatives are. You know that we really believe the value gets created here where we can find smart acquisitions, that either build our franchises or perhaps in the case of closures they will help us build out a new franchise. That's when we think you really got, you know the biggest home run to shareholder value. But short of that, there definitely are things we can do to cash to help generate returns.

George Staphos - Banc of America Securities

Understand. I think you had some lessons in '02 and '03 though that again I know you guys reflect on. Thanks. I will turn it over.

Tony Allott

Great! Thanks George.

Operator

We'll go next to Chris Manuel from KeyBanc

Chris Manuel - KeyBanc Capital Markets

Good morning Gentlemen.

Tony Allott

Hey Chris

Bob Lewis

Good morning Chris

Chris Manuel - KeyBanc Capital Markets

Couple of questions for you: First, I think in response to George's question you talked through a little bit that the can build issue and how that impacted you from fourth quarter to first quarter. Could you touch a little bit on the resin side, the other thing you talked about that was going to essentially probably hurt the guidance a little into the first quarter and may be help us somehow quantify what the year-over-year swing might be?

Tony Allott

Sure, the year-over-year. So its the Q1, I guess the key here is to understand that if you look at what happened in resins in 2006 going to the beginning of 2007, essentially you had resins that had spiked early in the fourth quarter of 2006, we're already on the decline by the end of 2006.

So we had in our pricing to our customers if you will for a higher price and we were already beginning to experience the lower cost of resin coming in. So that gave us a sizable benefit in the first quarter of 2007. You have a magnitude that's something like $5 million of the impact. If you compare that to what's going on coming into this year, essentially we had meaningful inflation that started in mid fourth quarter. So we took that inflation of our cost really essentially none of that yet is passed through our lag mechanisms to our customers that's probably is slightly overstated but not much.

And then as you got, right around the beginning of the year there was sizable spikes again on increases of cost and so that further drives up our cost and there is a lag to pass that through. So if compare first quarter to first quarter, there is a sizable, probably roughly equal magnitude although we haven't played out yet for the first quarter of course. Positive in '07 to a negative in the first quarter of '08.

Chris Manuel - KeyBanc Capital Markets

Okay so probably five-ish from the too much through the first quarter of last year and what's your kind of incorporating the spread rates and increases in such probably five-ish for the year so, so directionally a ten-ish in total?

Tony Allott

As a first quarter.

Chris Manuel - KeyBanc Capital Markets

Yeah

Tony Allott

I think it is important that we know that this has a lot to do with the volatility around resins at the end of the year and how that effects the first quarter. I don't want anyone to get confused. We suffered and have for several years now on balance a negative of the general increase in costs of resins. I just want to be sure that they were correct.

Chris Manuel - KeyBanc Capital Markets

The cycle your mechanisms keep you whole its just short swing?

Tony Allott

That's right.

Bob Lewis

Chris the other thing that I would add to that and this is getting a little bit of the resin point, but it does speak right to the reconciliation year-over-year. You may recall we called out in the prior year that we had a benefit of a one-time equipment sales in the closures business. Remember that that business typically leases some of the equipments and we had customers buy it out so we had a one-time full ahead of that lease income if you will into the first quarter of last year and that's not repeating as well.

Chris Manuel - KeyBanc Capital Markets

Okay can you qualify that for us as well Bob?

Bob Lewis

Yeah, I think that's something like $0.02 or $0.03.

Chris Manuel - KeyBanc Capital Markets

Okay then the working capital swing you talked about towards the end of year and I think you also alluded to potentially some changes in mix that took place through the fourth quarter in both your food can business and your plastic's business. Will that also play out similarly in '08 that we may have a little change in the typical earnings pattern throughout 2008 versus '07. Essentially what I am saying is that your earnings appear kind of more backend loaded or versus first quarter than normal. Is there any other change as we go through the year that we need to think about as well?

Tony Allott

No. Chris, I think that's more about our comparative year-to-year. In fact if you look at first quarters, in 2005 we did $0.34 on an adjusted basis in the first quarter, in 2006 we did $0.48, and 2007 we expected to do our guidance was actually $0.40 to $0.50 we actually did $0.77. So, I would tell you that it has a lot more to do with what was unusual about the first quarter of 2007, by the way I can explain a little bit about '06 if you wanted to do. We had to do with the same kind of benefit of resin in '06. So I don't think the guidance we said about the first quarter is unusual.

Chris Manuel - KeyBanc Capital Markets

Okay.

Tony Allott

And therefore, I think if you look at the year, the expectation is that we had a very strong front half to the year primarily in the first quarter. We just got a cycle against that with what is a more typical 2008, as we believe.

Chris Manuel - KeyBanc Capital Markets

Okay. That's helpful. And then the last question I had is, when you talked about volumes being up modestly in the plastics and in the closure business. Are we talking kind of low-single digits, is that a fair assessment?

Tony Allott

You're talking in the fourth quarter now?

Chris Manuel - KeyBanc Capital Markets

No, no, when you talked about what's embedded into your guidance for 2008?

Tony Allott

Yeah. I think if you're talking on the food can business, you're talking about very modest. So, you're talking about 1% or so, in fact I think it’s kind of a bit flatish to up a little bit.

Chris Manuel - KeyBanc Capital Markets

Right, right, but primarily in your plastics and in your closures, when you said up modestly: are we talking kind of back to historic range for plastics is being up 2% to 5%?

Tony Allott

Yeah, yes.

Chris Manuel - KeyBanc Capital Markets

Okay, perfect. Thank you, gentlemen.

Tony Allott

Closures would be even a little bit stronger than that, because we've been making investments into the closures business, particularly in the US for growth of the -- what I would call kind of a new age non-carbonated beverage market. So, we would expect even higher than that on the closure side domestically.

Chris Manuel - KeyBanc Capital Markets

Thank you.

Bob lewis

By the way I just want to make one clarification. I think I said on resins $5 million first quarter and first quarter I kind of got $5 million. What I was really was thinking about is $0.05 a share. So that's a little bit less to the benefit we got in the first quarter of 2007 and the detriment in first quarter of 2008. Just clarifying.

Operator

We will go next Christopher Butler from Sidoti & Company.

Christopher Butler - Sidoti & Company

Hi, good morning guys.

Tony Allott

Good morning, Chris.

Bob lewis

Good morning, Chris.

Christopher Butler - Sidoti & Company

Just wanted to get back to the resin question a little bit and the 2008 guidance: Am I correct in saying that with the run up in resins here over last quarter or two that this lag factor is going to be more of a first maybe second quarter issue and possibly less of an issue later in the year? Is that sort of how you are looking at with your guidance?

Adam Greenlee

Yeah, Chris, this is Adam. We do see that as primarily a first quarter issue. As Tony had mentioned resin has been very volatile here in the last several months and some of the forecast that we've seen out there are for a potential of abetment of the volatility in the back half of the year. We have taken a very conservative approach at this point with our guidance in our view on resins. But we do view this as a first quarter activity.

Christopher Butler - Sidoti & Company

And touching on the inventory build in the fourth quarter: did you specify where the demand was a little bit soft? Did I miss that?

Tony Allott

We have just said in the food can business. We didn’t get any more details on that. But again that has more to do with just kind of the trailing half of the year. If you look at food cans for the quarter, they were actually up very modestly. I wouldn’t read a lot in that it’s sort of the timing when things came and then the choices we made about running our plans. In fact it even has to do a little bit with the schedule of when the holidays are at the end of the year, frankly.

Christopher Butler - Sidoti & Company

And then similarly looking at the harvest from the fourth quarter: was there anything unusual that we need to be aware of that?

Tony Allott

Yes, and we have been talking about this quite a bit. On a year-on-year comparative basis you had a tomato pack in 2006 fourth quarter, got pushed more later, some more into the fourth quarter. So when you compare the fourth quarter of 2007 to the fourth quarter 2006 you actually have a slightly worst mix, because as the tomato cans are going to be larger cans with higher dollar contributions. So there is that as head wind if you will against the Q4 2007 numbers.

Bob Lewis

But that Chris added to the 2007 pack related issues, we said '07 was kind of bit normal period.

Christopher Butler - Sidoti & Company

That was sort of what I was looking for. And finally you mentioned holding on to cash instead of paying down debt due to tightening credit markets. Just wondering: is there any impact there on your acquisition strategy as far as being able to do to line up the credit to make acquisitions?

Tony Allott

No, not at all, I think where we are is as you know that this business requires the use of working capital to build to it's peak demand and so we chose a view of why pay down in expensive or lower cost permanent debt in the phase of that add to our ability to gain access to capital. We feel that the strength of our balance sheet keeps us in the gain there from an acquisition standpoint and now it's a matter of finding an acquisition that meets our return hurdle and meets our strategic objectives here, but well positioned to be able to fund an acquisition when and if we find one.

Adam Greenlee

Yet to be clear that Bob's going there, but we view really the general credit situation in the kind of the broader market is an opportunity for us that we with our balance sheet, our cash generation capabilities, that really puts up in a much stronger position than we were against kind of private equity competitors, if you will, the properties in the past.

Christopher Butler - Sidoti & Company

Are you finding that the credit market is, sounds like you are saying the credit market is helping: Is that helping more than possibly a desire to get into more stable business and evaluations increasing from that standpoint?

Adam Greenlee

I believe so. I mean: I think if I understand your question, it's clear to me that packaging is good example of a fairly economic resistant industry. High cash generation has been very attractive to equity investors for the last couple of years. So if I understand your question, that had already happened to drive the valuations up in our sector. The only thing I think happened since then is that it gotten harden for those buyers to be able to get out cheap money and so the numbers get harder for them.

Christopher Butler - Sidoti & Company

You had my question, right. Thank you guys for your time.

Tony Allott

Thank you.

Operator

We'll go next to Ghansham Panjabi from Wachovia Securities.

Phil - Wachovia Securities

Good morning guys. This is actually Phil calling in for Ghansham. Quick question, I think we noticed in an 8-K filed by Del Monte, the contracts connection that they had Impress Packaging no longer had a minimum volume purchase requirement or guaranteed return clause. Are you seeing that trend pick up in your discussions with your customers?

Tony Allott

I am going to try to answer to our world and not try to answer too much to our competitors' world.

Phil - Wachovia Securities

Sure.

Tony Allott

But our contracts never had any kind of a guaranteed return.

Phil - Wachovia Securities

Okay.

Tony Allott

I think we have to really clearly about that. I think the way we always went about negotiating the contract as we look to the capital investment that we had to make in that end. We negotiated from position of we have to get a reasonable return on investment that we are making or attractive return on investment we are making.

Phil - Wachovia Securities

Sure.

Tony Allott

But that was never and it was never built in the contracts nor would have wanted it to be built into the contracts.

Phil - Wachovia Securities

Okay. But you would have a volume falls, right?

Tony Allott

If you mean by volume falls, that the price goes up, if volume falls off, the answer is: no we don't.

Phil - Wachovia Securities

But new volume purchase requirement, I would imagine there?

Tony Allott

No, our contracts tend to be requirement contract.

Phil - Wachovia Securities

Okay.

Tony Allott

So: what our customers need to buy.

Phil - Wachovia Securities

Okay. That's fair enough. And as for CapEx, I believe you built up some capacity last year in anticipation of for adoption of the easy-open end. Have you seen that demand materialize?

Tony Allott

We did invest in our easy open capacity last year in advance of potential market shift and well we did have significant testing in 2007. We'll see a continue testing in 2008 with products on the shelf. We have not seen a major category shift in 2007, nor do we expect one at this point for 2008.

Phil - Wachovia Securities

Okay. And in terms of given the easy-open ends are more common in use now. Are you seeing any pricing or margin pressure relative to when you first launch I guess?

Tony Allott

No, not particularly. I mean: I think like we do on all of our businesses where we are always looking to take cost out.

Phil - Wachovia Securities

Okay.

Tony Allott

You delivered a competitively advantage product to the market. So there is no difference there then there is across our kind of broad market that we sell. The other thing I'd just say as an add-on to Adam's point is that we always said, first of all we needed to put this capacity in place so that we could support any future growth.

Phil - Wachovia Securities

Okay.

Tony Allott

We continue to believe that that's going to happen. Consumers have a strong preference for it. And we also said that we could redeploy the asset and the capacity in a more efficient manner as we look across our systems. So some of the return can come just from being more efficient in the way we use the capacity. And again to be clear, we do see growth in easy-open ends as we go into 2008. It's just as Adam said, at this moment we can't tell you there is a major category shift happening which would have been the perfect combination event if we had actually got it in and had a full conversion the very next year. We weren’t necessarily banking on that.

Phil - Wachovia Securities

Okay. Thank you, guys.

Tony Allott

Thanks.

Operator

We will go next to Robert Kirkpatrick from Cardinal Capital.

Robert Kirkpatrick - Cardinal Capital

Thank you. Good Morning. Could you talk a little bit about what raw materials you see rising here early in '07 and the activity that you did to buy and advance that?

Tony Allott

Yeah, we have already keep resin pretty clearly right. So we have got a sizable increases happening at resin. It is a [broad trophy] for that as what is happening in oil which has been driving it up, but also there are capacity issues and a lot of demand drop from developing markets etcetera. So again, there are pretty sizable increases on the plastic resin category.

And then we have talked in previous calls about steel. Of course, there has been consolidation in steel market. There has also been a lot of inflation of late on some of the input costs to the steel industry. So there are sizable increases coming for steel, call it in U.S. kind of mid-teen type numbers of increases out there. It is a little bit less than Europe, may be single digits, but probably upper single digit. So a very meaningful increases in all of our primary raw materials.

Robert Kirkpatrick - Cardinal Capital

Okay. And then did Bob give a number for CapEx for '08 or not?

Bob Lewis

I did not give a specific number. I basically got to quote a more normal range.

Robert Kirkpatrick - Cardinal Capital

Okay. So somewhere around more close to $100 million.

Bob Lewis

That's probably a bit on the low side.

Robert Kirkpatrick - Cardinal Capital

Okay. Great! Thank you so much.

Bob Lewis

Thanks Rob.

Operator

We will take our next question from Richard Skidmore with Goldman Sachs.

Richard Skidmore - Goldman Sachs

Hi. Good Morning, guys. Just a couple of clarification questions if I might. Just your view specifically on resin, is your view that it stays flat from current levels through 2008, or do you anticipate that it comes off in the back half of '08?

Tony Allott

Essentially our view at this point is the back half of 2008 will be flat. So when we say we are taking somewhat conservative approach that's where the comment comes from.

Richard Skidmore - Goldman Sachs

Okay. And then just with regards to your pass-throughs on resin, is it 65% of your businesses on contractual pass-throughs with a one month lag: is that how we should think about it?

Tony Allott

No, I would say more than like 65% of our business is on contractual pass-throughs, but they have varied in terms on how they do it. Some might be a month, some might be something longer than that. And then don't get confused, even though [raft] isn't under contractual the market does pass-through, has traditionally pass-through raw material increases, but they are not all monthly, they vary in terms of the mechanism.

Richard Skidmore - Goldman Sachs

On that remaining 35% that's not contract: does that get repriced pretty quickly?

Tony Allott

No, but it varies. Some of them would happen very quickly and some of them would take a bit longer.

Richard Skidmore - Goldman Sachs

To that point with: is there any rethinking on how to re-price the pass-through such that you shorten the lag, given the volatility in resin? Or: do something different with how you are negotiating on the resin pass-through front?

Tony Allott

Well, I would say that it's always looked outside about considered, it's always hard when you suffered all the negatives as you go up, it's hard to when what to be the one you says okay now let's stop doing this, when you really owed all the money of that lag, that's happened to you in the past. Likewise if you flip that over, you get the same issue from customers. So I would say it's an ongoing dialogue. I don't know that there will be any kind of major change to it.

Richard Skidmore - Goldman Sachs

Okay. And then just to clarify the “inventory build” in the fourth quarter: was that just on finished can inventory or was that on tinplate inventory?

Tony Allott

Well, there is a combination. Basically what we said is the inventory was largely a result of buy ahead of raw material price increases and that both in the metal businesses and the plastic businesses and then the other piece of it was in the can business, so that component is tin essentially.

Richard Skidmore - Goldman Sachs

Right. So I think you made the comment that your steel prices are going up significantly: have they gone up in their fourth year? Your pricing is going up at the current time, or: does that lag into the second quarter? So, we see a big bump because you're selling lower priced inventory into higher price for your cans.

Tony Allott

No, it's not that easy. Essentially what we see happens as we pass through on the tinplate and by the way (inaudible) deals with more than just also deals with coding compounds etcetera. So if your question is specifically on the tin, what essentially happens there is we estimate what we believe will be the total inflation to can in the year, we passed that through to our customers and essentially that one ends up include out to what actually occurs.

Richard Skidmore - Goldman Sachs

Okay. Thank you.

Operator

(Operator Instructions). We have a follow-up question from Chris Manuel with KeyBanc Capital Markets.

Chris Manuel - KeyBanc Capital Markets

Good morning again gentlemen.

Tony Allott

Hi Tony.

Chris Manuel - KeyBanc Capital Markets

Another question with respect to timing of pay back on some of your projects, I know traditionally your growth and productivity sort of projects have paid back usually within a twelve months period. Is there any shift to the type of more productivity or growth organic projects that you've been doing the last year? Or so: it may have caused or maybe causing some of that pay back move out to a more of 12 or 18 or 24 months period?

Tony Allott

Well, I am going to start with the end in that and say that I think if you look at the returns on asset of the business, they have improved this year and that includes taking, using and ending balance sheet kind of a number of assets. So, I would just start by saying the returns on business are high and actually improved. Now I hesitate to say that because we don't necessarily want to keep improving them. There are plenty of projects that are laid around that level, maybe even a hair below that will be very attractive for us.

Chris Manuel - KeyBanc Capital Markets

Tony, I mean you guys have done a terrific job with return on cap. I'm just thinking in from a perspective of, are the projects getting, you've taken a lot of costs out of the business, so the projects getting incrementally more challenging from here that: maybe some of the low hanging stuff is kind of done and we are pushing back to some more challenging projects that have a little longer payback?

Tony Allott

No. I would say no, and that's why I started with that end point, because there's certainly that, you wouldn't think that as you look at the numbers and I don't believe that to be the case. I think you're right though there's been some shift in the kind of capital. There's been a little bit more if I to the look at $155 million we spent in 2007, it was a little bit more to growth, some of that because the plastic business you recall we were really holding back and letting the market goes through with the gyrations over the last five years that went through. And we kind of released it for a bit of growth because we felt better about the market.

So I think on balance there's a little more growth to it. But we hold ourselves still to a pretty rigorous standard in terms of the returns we believe we're going to get from that investments and I don't see any meaningful shift to them.

Chris Manuel - KeyBanc Capital Markets

Okay. That's helpful. And then, Bob actually a question for you with regard to the working capital. It looks like in the fourth quarter, it was up about -- full year up about 20ish million. Is that a similar sort of impact that we could anticipate? You said working capital down in '08. Should we anticipate something similar coming back out in '08?

Bob Lewis

Yeah. I think what we've said is a kind of a modest improvement in working capital. I'd also pointed out when you are looking at that change in working capital there you've got to factor in there's kind of a LIFO adjustment in there, particularly on the inventory that is kind of a non-cash move, if you will. So essentially what you have got is we would look at working capital as kind of being flat for the year as opposed to where you are seeing a cash generator.

Chris Manuel - KeyBanc Capital Markets

Okay.

Bob Lewis

But a modest improvement in the working capital is what we are forecasting.

Chris Manuel - KeyBanc Capital Markets

Okay. So I am just kind of coming at just been thinking about your free cash number for next year that working capital won't be a use of cash kind from a balance sheet or a cash flow perspective, higher earnings and lower CapEx. Could 2008 be something more like a 175ish to 200ish sort of range for free cash next year. Can you give us maybe a sort of range?

Bob Lewis

Well, I will let you do the math. I would say that I think your directional points are all correct.

Chris Manuel - KeyBanc Capital Markets

Okay. That's good. Thank you very much.

Bob Lewis

Thank you.

Operator

We will go next to Roger Harris with (inaudible).

Roger Harris

Good afternoon.

Tony Allott

Good afternoon, Roger.

Roger Harris

I guess when you look at the adjustment with Q1 and when you compare that year-over-year with '05 and '06 and that trend and do a similar thing for Q4 and we probably should have seen more of an adjustment upfront in that. But when you move beyond Q1, would it then applies to the midpoint is significant strength the remaining part of the year and again based on the cash flow that was just touched upon, you seem like you are being in an incredibly strong position and I know I would certainly like to see those proceeds first go to potential acquisition. We've talked about that for nine months.

So two things, one can we get a little more color on that pipeline where you are seeing the opportunities domestic, international, Europe, Asia, U.S.? And then secondly, at what point during the year if you are not able to buy something at the right price that your price given that we're almost that at two times on the leverage (inaudible) as it is, at what point do you begin to having the serious discussion as to what we do with that free cash flow, obviously debt pay down then is in his higher priority because you are already in your target range so to speak. At what point Tony do you begin to address potential stock buybacks or increases in dividend things of that nature?

Tony Allott

First of all, Roger, I just want to say I think we need to bring you on to our communication step because that's pretty good we feel and we look at next year's outlook and we think it's pretty bullish outlook for the business. You didn't say that's coming off of a 15% plus growth this year, 14% plus growth last year. So I would echo the point that you make, to the question, first one in terms of pipeline of acquisition, we set well, there is a quite bit out there.

There is no question that as the debt market pull back I think that probably slowed sellers interest, so I am not sure as quite as much out there as what last six months ago. But I still think our property is available. Our interest is really around our franchises. So it's going to be certainly strongly domestic to the can and the plastic business. But certainly international interest around the closures, that would be kind of like prioritize and then we look at other opportunities beyond that. But we would not say it wouldn't be international. In fact we've looked the closure business and think that we have a very strong franchise and market positions there and see a market that really could get consolidated up more. So we do view that as a one of the possibilities for us.

Again I'd say I didn't communicate exactly right. I think there is no question that we would like to do acquisitions for us. We think that the history of the business is that's where value has been created over time, but that we are getting to a point where leverage levels are getting inefficient, if you will, in terms of optimal capital structures. And so we agree that if good acquisitions aren't available to us over the course of the year, we'll have to really think harder and harder about the other uses of our cash. As to when that happens because of the cash flow comes in so much at the end of the year, I think really we have the bulk of the year to think and talk about that. We don't necessarily have to do a lot of action around till the end of the year or perhaps even in the early '09.

Roger Harris

Thank you.

Tony Allott

That was comprehensive answer to your question.

Operator

We have no additional questions at this time. I would like to turn the call back over to Mr. Allott for any closing remarks.

Tony Allott

Great! We just want to thank everybody for your time and we look forward to talking to you all after the first quarter. Thank you.

Operator

This concludes today's conference. We thank everyone for their participation. And you may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Silgan Holdings Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts