Silgan Holdings Corp. saw its plastic container business impacted by softer volumes and price concessions during the first quarter.
But the Stamford, Conn.-based company expects the longer contracts signed in exchange for those pricing breaks will help the company in the long term.
Signing three major customers to new contracts starting Jan. 1 is giving Silgan Plastics more security than typical, but also means the company has to cut costs to come in line with those new prices.
And those cost-cutting measures are still being implemented, causing a drag on first-quarter earnings.
“We did not get the costs out on Jan. 1 when the price went down. The good news is we're making progress toward getting those fully implemented here in the second quarter. We think we'll be at the run rate by the end of the quarter [for the savings] and therefore you'll see a back half savings,” said Chief Operating Officer Adam Greenlee on a conference call to discuss earnings.
“Those price concessions were in exchange for significantly longer-term contracts. As we talked about the strategy of our business, one of the items was to focus on specific target markets and partner with our customers that either we secure our own business with or have significant opportunity for growth. And that's exactly what these contracts allow us to do,” Greenlee said.
“To be clear, in two of those cases, they were giving us future volume opportunities for longer-term growth with customers who we saw strategic for our future. That was part of it. It's not reacting to a market situation so much as it is looking forward, saying where do we want to be, who do we want to do it with in the future and to some degree what's the right footprint to service that business,” CEO Tony Allott said on the conference call.
Contracts typically run three to five years, Greenlee said, but the new contracts signed that called for price breaks extend anywhere between six and 12 years.
That kind of longevity allows Silgan to plan out its manufacturing approach and make investments.
Silgan Plastics, the subsidiary based in Chesterfield, Mo., is in the midst of building two new facilities, one in North East, Pa., and the other in Hazelwood, Mo. The Pennsylvania facility is expected to be online during the third quarter, and the Missouri site will be operational by the end of the year, the company said.
Signing longer-than-normal contracts is a “significant investment by both ourselves and our customers,” Greenlee said. “Part of it does allow us to invest in new facilities and get the returns that we're looking for and also lower our overall manufacturing footprint costs.”
The company's plastic container business posted net sales of $159.6 million for the first quarter, a $14 million decrease, from $173.6 million from the first quarter of 2014.
Overall, Silgan earned a profit of $33.3 million, or 53 cents per diluted share, on sales of $816.6 million for the first quarter. That compares with a profit of $31.5 million, or 49 cents per diluted share, on sales of $855.8 million for the first quarter of last year. This quarter's net income per share was a record for the company.
Along with its plastic container business, Silgan is a heavy hitter in the metal can business, where it had sales of $458.9 million for the first quarter. Silgan's plastic and metal closures business had sales of $198.1 million, down $15.7 million from the previous first quarter.
Unfavorable foreign currency exchanges and the discontinuation of operations in Venezuela impacted the closures business, Silgan said.
