However, progress in the firm’s plastics business; building two new plants, closing several others and shifting customers and markets served, has been more challenging, resulting in significantly higher costs in 2015, according to Tony Allott, president/CEO.
Construction of 3 manufacturing facilities
Speaking during Silgan Holdings Q4 2015 results conference call last week, Allott said 2015 was the beginning of a transition period, with ‘several footprint optimization programs’ to improve efficiencies, reduce costs and strengthen its position in each of its markets.
The firm supplies metal, composite and plastic closures for food and beverage products and customers include The Coca-Cola Company, ConAgra Foods, Nestle and Heinz.
The company increased its cash dividend by 7% in the reported earnings period, improving metal food container volumes 56%, and completed a tender offer to purchase $161.8m of common stock.
The footprint optimization program includes the construction of three manufacturing facilities (Hazelwood, Missouri; Burlington, Iowa; Erie County, Pennsylvania) and the closure of two plastic container facilities (Woodstock, New York, and Ligonier, Indiana).
Bob Lewis, executive VP and CFO, Silgan Holdings said income from operations in the metal container business was $236.4m, a decrease of $12.3m versus the prior year.
“We’re forecasting the metal container business to benefit from more efficient operations in the latter part of 2016, once the new manufacturing facility becomes fully operational, improved operating performance of the Van Can assets, and volume growth,” he said.
Plastic container business
“These benefits are expected to be offset by a start-up cost for the new manufacturing facility, ongoing footprint inefficiencies until the new plant is qualified, and inflation in wages and certain other costs. We expect normal pack volumes in the US and Europe, consistent with 2015.
The company acquired Van Can, a manufacturer of metal containers in the US for approximately $40m in 2014.
The metal container business recorded net sales of $2.370bn down $4.4m versus the prior year. This decrease was primarily due to unfavorable foreign currency translation of $56.4m and after a lower raw material cost, partially offset by higher unit volumes, according to Lewis.
Net sales of the plastic container business decreased $65.5m to $593.7m in 2015, also due to unfavorable foreign currency translation of $18.8m, the pass through of lower raw material costs, lower volumes of approximately 3% and the unfavorable financial impact from recent longer-term customer contract renewals.
“We’re expecting operating profit in the plastic container business to be down, largely as a result of significant incremental costs and inefficiencies incurred to service customers during the footprint optimization program, delays in implementing certain cost reduction programs, lower volumes, startup costs related to the new facilities, and the favorable impact in 2015 from the lagged pass-through lower resin costs, which is not expected to recur in 2016,” said Lewis.
Allott said the company generated free cash flow of $117.1m, as it made significant capital expenditures during the year to fund its footprint optimization programs including the construction of three new facilities.
“The closure business has been a phenomenal player for us and it’s gotten deeper in its markets, the execution has been great,” he added.
“The Portola acquisition is a wonderful example of that, where we bought something in and two plus two was five or more in that case. We feel strongly this is a great franchise business and would love to find opportunities to continue to stretch that team and give them more opportunity to create value for shareholders.”