Thank you for joining the Silgan Holdings Third Quarter 2019 Earnings Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Kim Ulmer, Vice President, Finance and Treasurer. Please go ahead..

Thank you. Joining me from the company today, I have Tony Allott, Chairman and CEO; Bob Lewis, EVP and CFO; and Adam Greenlee, President 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 2018 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, I will turn it over to Tony..

Thanks, Kim. Welcome everyone to our third quarter 2019 earnings conference call. Our agenda for the morning will focus on the financial performance for the third quarter and then a review of our outlook for the remainder of 2019. After prepared remarks Bob, Adam, and I'll be happy to take any questions.

As you saw in the press release, we delivered adjusted earnings per diluted share of $0.76 for the third quarter in line with our estimates and matching our record performance in the prior year quarter, knowing that we also overcame a $0.03 decrease in non-cash pension income the current year quarter.

However, pack volumes were a little short of our expectations and challenging economic environment in Europe both kept us a little short of the high-end of our range for the quarter. Our plastic business once again delivered volume growth and solid operational performance leading to another quarter of improved results.

The metal container and closure businesses were largely in line with our prior year. However, another relatively weaker pack, conventional pack in Europe combined with a late start in the U.S. resulted in volumes below our initial expectations. Despite that, both businesses did well in controlling operating costs and achieving profit objectives.

Based on our year-to-date results and our outlook for the fourth quarter which includes an earlier than anticipated end to the fruit and vegetable pack in early October, we're maintaining our guidance and tightening the range for a full-year estimated adjusted earnings per share to $2.12 to $2.17 which includes the unfavorable non-cash pension headwinds of approximately $0.13 per diluted share.

With that, I'll now turn over to Bob to review the financial results in more detail and provide additional explanation on our earnings estimates for the remainder of the year..

Thank you, Tony. Good morning, everyone. As Tony highlighted, we delivered an in-line quarter as adjusted earnings per diluted share of $0.76 was consistent with the record performance in the prior year quarter and in-line with our earnings estimates.

On a year-over-year basis, the quarter benefited from production efficiencies in the metal container business as inventories declined less than expected due to the curtailed sales volume resulting from lower pack sales. We also benefited from volume gains and strong operating performance in the plastic container business.

The prior year startup costs in Fort Smith, Arkansas, which did not recur, and the favorable impact of light pass-through of lower resin costs in the closures business as compared to the unfavorable impact from higher costs in the prior year.

The less favorable mix of products sold primarily related to pack movements, higher rationalization charges and lower non-cash pension income across all businesses of approximately $5 million for the quarter more than offset these gains. In addition, the quarter also benefited from lower interest expense and a slightly lower tax rate.

On a consolidated basis net sales for the third quarter of 2019 were $1.320 billion, an increase of $14.3 million, primarily due to the pass-through of higher raw material costs in the metal container business and improved volumes in the plastic container business partially offset by a less favorable mix of products sold, the pass-through of lower raw material costs in the plastic container business and an unfavorable impact in foreign currency translation of approximately $12 million.

The results for the third quarter 2019 include charges totaling $0.03 per diluted share attributable to the announced shutdown of two metal container facilities and a loss on early extinguishment of debt. There were no adjustments to earnings in the third quarter of 2018.

Therefore adjusted earnings per share were $0.76 in each of the third quarters of 2019 and 2018.

Interest and other debt expense before the loss on early extinguishment of debt for the third quarter 2019 decreased a $1.5 million to $26.7 million, primarily due to the lower average outstanding borrowings, largely a result of the repayment of debt at the end of 2018 and lower weighted average interest rates due in part to the redemption of the 5.5% senior notes on August 1 of 2019.

The loss on early extinguishing of debt of $1.7 million was a result of the redemption of the 5.5% notes. Capital expenditures for the third quarter of 2019 totaled $50.6 million compared with $43.4 million in the prior year quarter. Year-to-date capital expenditures totaled $166.8 million versus $134.6 million in the prior year.

Additionally, we paid a quarterly dividend of $0.11 per share in September for the total cash cost of $12.2 million. On a year-to-date basis, cash dividends totaled $38.6 million.

Moving on to the specifics around each of the businesses, the metal container business recorded net sales of $822.3 million for the third quarter of 2019, an increase of $24.5 million or 3.1% versus the prior year quarter.

This increase is primarily result of the pass-through of higher raw material and other manufacturing costs, partially offset by lower sales of larger pack-related can, and the impact of unfavorable foreign currency translation of approximately $4 million.

Unit volumes were flat versus the prior year as lower volumes with pack customers were offset by volume gains with other customers including pet food. Segment income in the metal container business was $81.1 million for the third quarter of 2019 versus $86.9 million in the same period a year-ago.

The decrease in segment income was primarily due to lower sales of larger tax-related cans, challenging economic conditions in Europe, higher rationalization charges, and lower pension income partially offset by production efficiencies in the U.S., due in part to higher finished goods inventory produced in the quarter in anticipation of higher pack sales.

Net sales in the closures business decreased $7.4 million to $353.4 million for the quarter, primarily due to the impact from unfavorable foreign currency translation of approximately $7 million and a less favorable mix of product sold. Unit volumes in the quarter were flat as compared to the prior year as higher volume demand in the U.S.

beverage market was largely offset by lower volumes in the international markets. Segment income in the closures business for the third quarter of 2019 was $44.8 million, down $2.5 million versus the prior year quarter.

This decrease was primarily a result of the net impact of higher sales of plastic beverage closures and a decline in pack-related metal closures.

Challenging economic conditions in Europe and lower pension income partially offset by the favorable impact in the light pass-through of lower resin costs in the current period as compared to the unfavorable impact from higher resin costs in the prior year period.

Net sales in the plastic container business were $145.6 million for the third quarter 2019, a decrease of $2.8 million versus the prior year quarter.

This decrease was largely due to the pass-through of lower raw material costs partially offset by 3% improvement in volumes, primarily related to the growth of plastic containers in Fort Smith, Arkansas. Segment income increased $2.9 million to $11.4 million for the third quarter of 2019.

This increase was primarily attributable to higher volumes, strong operating performance, and the prior year unfavorable impact in costs associated with the start-up of the Fort Smith, Arkansas facility partially offset by lower pension income.

As we turn now to the outlook for the remainder of 2019, as is typical for the season, the smaller fourth quarter, we are tightening our range of estimate to a $0.05 range.

As a result, and based on our year-to-date performance and the outlook for the remainder of the year, we’re providing an estimate of adjusted net income per diluted share in the range of $2.12 to $2.17 which remains consistent with the midpoint of our original estimate.

This estimate excludes the impact from certain adjustments outlined in Table B of the press release.

We're also providing a fourth quarter 2019 estimate of adjusted earnings in the range of $0.34 to $0.39 per diluted share, which includes the unfavorable non-cash pension impact of approximately $0.03 per diluted share, and reflects an abrupt end to the fruit and vegetable pack in early October.

This estimate compares to a record adjusted net income per diluted share of $0.38 in the fourth quarter of 2018, which benefited from a strong pre-buy in metal containers ahead of significant steel inflation. In addition, we continue to estimate free cash flows to be approximately $275 million for the year.

That concludes our prepared comments, so we can open it up for Q&A. And once again, I'd like to ask everyone to keep their questions to one question and one follow-up. With that, I'll turn it over to Chloe, who can provide directions for the Q&A session..

Thank you. [Operator Instructions]. We will take our first question now from Anthony Pettinari from Citi..

Good morning. In metal containers there was a Wall Street Journal article that came out during the quarter around the vegetable pack being historically bad and then maybe generating up to a million cans of excess capacity that maybe could negatively impact the market. You referenced the weakness in your comments.

But I'm just wondering if you're seeing this weakness kind of create knock on effects in terms of excess supply in the system or maybe some competitors getting more aggressive on price. Just wondering if there's any color you can provide on the competitive environment after this difficult pack..

Hi, Anthony, it’s Tony, I'll try a little bit of it, I can't really reconcile all the point there. As we said the pack was a little shy of our expectations, as you can see our volumes were flat over the time period. So again, even when you look at our veg, food and veg, we know in there's a little bit of inventory correction for a sizable customer.

In this case, I'm talking about now inventories are unfilled, so we have complete visibility to the difference between what got filled and what got shifted. So we have good visibility to that piece of volume in this period. So I really cannot likely explain a billion cans that is I’m sorry, just I think it's incorrect data.

What it probably has more to do with is where the steel is coming from the filled cans. I think that, that is coming from the steel industry for example, and probably has more to do with damaged steel out of the system because of the pricing of the domestic steel versus import steel.

But in the way, do I think there is anything like a billion cans and so therefore, no to the rest of your question. But I don't think that has any impact on the basic fundamentals of what's happening in our market in pricing and et cetera..

Okay, that's very helpful. And then the CMI data that came out last night for 3Q, I think showed pet food shipments down 6%. And again, that doesn't seem to really tie with your flat volumes. I'm just wondering if you could talk about what you saw in pet food.

Was it a tough comp for the quarter? Are you seeing any inventory shifts, kind of any color there?.

Sure. Anthony it’s Adam, maybe to take a quick step back and talk about the pet food market in general. If you go to a year-to-date basis and you look at our volume, our volume is up about 6% versus prior year. So maybe even a little stronger than what we had initially signaled to you folks earlier this summer.

So we feel really good about not only our position in the market, but the future prospects for continued growth as well.

When you get back to the third quarter one thing that that certainly happened with our customers and our volume for the quarter was essentially flat in pet food, but our customers have been investing significantly to support their growth going forward.

So we were in a situation in Q3 where our customers had taken lines down to rework them to increase their filling capacity. So we've seen significant investments both in the reworking of existing lines, the addition of new lines, and in some cases, the addition of new operating facilities for our products in pet food.

So we think that, maybe some of the year-to-date results for our volume of 6% was a little bit of a pull-forward in advance of shutting down those lines to make these capacity enhancements at the customer level.

So we feel really good about it, we feel great about our position, our customers are winning in the market and we're excited and nothing's really changed in our view for the rest of the year nor for 2020..

[Operator Instructions]. We will now take our next question from Chip Dillon from Vertical Research..

Yes, good morning, Tony and Bob, I appreciate all the -- and Kim, I appreciate all the details. I guess my first question is we saw a huge sell-off in the equity markets at the end of 2018.

And now we've seen pretty much that fully recovered and if that stays the case through year-end, could we see this $0.13 of lower pension income likely, or that went away this year, come back next year..

Yes, Chip it’s Bob. I think there's a lot to that question and still time to go. Right, so your point is, is accurate that the markets have recovered pretty nicely in terms of the gains that they suffered in the last year. However, that gain is against a lower base from a return perspective.

So you need to significantly outperform the prior year to make up all of that gain. And then the other piece of that equation that folks tend to want to look at is what happens to the discount rate, right. And that will have import on what how the liability grows or shrinks.

So I think as we sit here today, we would say if -- if this was the point in time that you measured it, we would certainly have some benefit against that $0.13 headwind that we've been suffering. But the fact of the matter is we won't know where the discount rate shakes out until the very last day of the year.

That's the way the accounting for pension works. So depending upon which way that moves that will either improve where we sit today, or it could erode a bit. So a longwinded answer to say, look, we're optimistic, but we got to let it play out and see exactly where it ends at the end of the year..

Okay, that's super helpful.

And then quickly, could you just talk a little bit about how the pet food sector or the food can business is going versus other types of can usages?.

Sure, Chip it’s Adam. I think I just went through a little bit of detail on the pet food market, but again, I would say what we’ve communicated previously was that we continue to expect pet food can to continue to grow in our market space. We've got a pretty sizable share. We're overweight into pet food.

And our customers are continuing to win in that space at the retail level. Just to repeat, I say we're up 6% year-to-date, our Q3 was flat. Our growth is going to play out for the year, essentially exactly as we thought it would, and will be up in the kind of the 3-ish, 3.5% range for the year in pet food..

We will take our next question from Mark Wilde from Bank of Montreal..

Adam, you have talked about sort of the mix issues in food can business, I wondered if you guys could put a little more color on the mix issues in caps and closures and also in the plastics business?.

Sure. I think when you start with caps and closures to begin with, what we did see was nice, nice growth in our plastic closures primarily for beverages in the United States. So that's the old historic kind of possible volume that we've been talking about. So good growth as expected there.

Where we saw some weakness was in metal closures and I would say most of that weakness was around pack-related items and pack-related products.

So things like jams and jellies, which are created from the fruit harvest, things like fruit juices, vegetable juices, et cetera and then vegetables themselves they go in glass packaging with the metal closures. So really outside of that in the mental side of the business, everything performs fairly well outside of pack-related items.

And then you've got dispensing systems and so you think about those three main product lines, plastic closures, metal closures, and dispensing systems there's obviously a mix variation across those three. So with plastic being up, metal being down that is a less favorable mix for us.

And then dispensing systems is also a very highly engineered set of products that we take to market that is very mix favorable when volumes are up.

And amongst the dispensing systems product line, we could see some softness in Europe in particular, and in some of our core markets, but fragrance was up, other product lines were up to offset that the volume was essentially flat in our dispensing systems. Therefore the mix is really around metal and plastics in the battle of closures..

Okay, metal and plastic --.

And then Mark just to jump over to plastics quickly. And most of our growth as Bob has said was related to the new Fort Smith plant and that growth is primarily related to pet food. So those are typically smaller packages that are traditional plastics business and a little less favorable from a mix standpoint for the overall product line..

Okay. All right, then as a follow-on, I just -- I note that there was a recent sale of a major competitor in caps and closures, and I just wondered if you had any perspective on that sale? And also, it seems like they didn't sell the entire business. So I wonder if there are pieces of that franchise that could be of interest to you at a point..

Sure, I assume I know what you're referring to. So it was a business that’s sold that business is primarily in the single-serve beverage market closures for that market. As you probably have picked up from us on this call, in the past, that's not a high interest area for us. So it was not particularly businesses that suited us in that case.

The same could be said for any assets that might still be around that they may sell out on that. So I don't think that is a huge direct point to us on either side..

You mentioned single-serve, I think that was more directed to water and carbonated soft drinks..

That’s correct, yes..

And we will take our next question from Debbie Jones from Deutsche Bank..

My first question, I wanted to ask about European food I know you don't disclose margins, but can you give us a sense of whether they are materially up or down year-over-year, how they're impacting your total global margin, and then the capital needs for the business going forward, is the weak demand kind of question of optimization or if you could just run the business for cash?.

All of those Debbie are related to the European business and cans for clarity..

Yes, sorry if I cutoff..

Okay. So just for profitability in European cans, I think the challenge we have this year is that, we were expecting a very strong pack off of very four packs in the previous year. So the pack was better than the prior year, but not nearly what we expected. So I think the results were a little disappointing.

So margins were not quite what we were expecting them to be, they were below our expectations. As we go forward, the capital needs of the business there are not, it’s really impactful to the overall capital that we spend for the balance of the business.

So no real change and then as we look at the volume and the units going forward, we do see some opportunities for growth. We've got some committed growth with specific customers as well but some challenges in broad Europe for all of our businesses, including the food chain going forward..

Okay. I just hope you noted some softening in certain markets on your Q2 call; you discussed a bit of it here.

But if you kind of isolate how things like weather, would you say that, things are materially different in Q3? Are you seeing kind of much more of the same specifically, like you mentioned last quarter personal care markets were softening kind of the similar trajectory or things about stabilized?.

So I take that question in all of our businesses. So I would say that first of all, just to be clear, you mentioned a bit around the pack. So everything about food can is exactly as we thought from the beginning of the year, our full-year guidance is very close to where we thought long-term in the year.

So amazingly, as we sit here today despite everything we read about food can, laid out exactly as we expected thus far this year, there's a little bit of chance we're going to get better that's the disappointment that I highlighted in my comments because in some other areas, like pet foods that I’m talking about it looks good.

But maybe in the past we feel stronger than it was. Back to your other question briefly on that. And so to your expectation in the past ultimately will come back. But the market still has the same demand level for that both in Europe and in the U.S. And so at some point, it would seem like you can't see this unusual path.

But now back to just broadly, if you talk to the restaurant business, I think it's so that we certainly on the personal care side, have seen some slowing maybe particularly around branded areas. And so I think that seems to be a trend that we're seeing a little bit more.

And then the second one Adam already alluded to, which is Europe just probably feels a little weaker to us in kind of every one of our businesses. And that's been happening over the course of the year. I wouldn't say anything abruptly occurred in this quarter, but that seems to be a trend we're watching carefully. Well we’re ready for another one..

We will take our next question from Adam Josephson from KeyBanc..

Hey guys, Tony just one or Adam on dispensing systems, I think Adam said volumes are about flat year-to-date and just correct me if I'm wrong there. I think when you announced the deal I think it was January 17.

You talked about I think the developed markets as being mature but they're being growth opportunities in the emerging markets, so I think the growth profile that this is at the time was up two, three-ish, if I'm not mistaken.

How would you compare what you've seen volume wise in that business year-to-date to what you were expecting or what you were saying at the time of the deal? I'm just trying to get some sense of what you think the volume profile of that business is in the context of what has been a flattish closures business for you of late?.

Sure, I think if you talk about the year-to-date basis, or full-year expectation, we are just for clarity, expecting growth in dispensing systems. So I think you'll have over time some lumpiness between quarters as our large CPG customers are promoting or maybe not promoting products quite as much. But the core markets we still feel very good about.

So if you look at Q3 specifically, our trigger business, which is one that I think we have a lot of discussion about on these calls and other conversations about the business, but we saw nice growth, and we expect to see continued growth going forward. Items like fragrance, lawn and garden were all up in the quarter. So we feel good about those.

I think what impacted the dispensing systems business in the quarter was really more softness in Europe than anything else. And again, just to Tony’s point earlier, it's a broader conversation about Europe than it may be in any one specific market. But as I sit here today, I say we feel great about the business.

Our expectations haven't changed; we will expect 2% to 3% growth again next year. And we will have growth this year. We'll see exactly what that plays out here in the fourth quarter but we'll have growth year-over-year..

And Adam, basically the other half of that because of an engineered product line is there's a pipeline aspect to it and so where there's a reason we're saying this beyond just hope and that's what we have a very robust pipeline, we feel really good about the products that are coming on development efforts et cetera.

So we expect to have that continued right along the path but some of the base business personal care Europe et cetera, while existing customers what we know we have solid efficient, they just don’t sit down, and that offset kind of the regular grow the business. So we still feel very good about the prospects..

And just one follow-up on that Tony and thanks for that answer by the way.

So I think closures for the year are down slightly volume wise, if dispensing is going to be up for the year, what -- can you just help me with again, if you expect closures for the full-year to be flat or down volume wise, as was the case the last couple of years? What do you expect to offset that growth exactly in dispensing?.

So first of all, let's remember when we had our Analyst Meeting, we gave you a little bit more content to the scale of it.

So in terms of volumes, the dispensing systems business is relatively small part of the volumes of business, so it could be up 3% and you could have a 1% decline in either of the other flat top closure markets that we serve and that would more than overwhelm the dispensing system..

On a volume base not on a profit or revenue base..

Correct, correct. So that's where -- that's why nick becomes an important part of the topic not so much on the volume side. And again to be clear our talk about what we think dispensing view is more about future and I'm not saying by the end of this year, or how we're going to evolve necessarily.

We are just saying we see a trend line over time that ought to get positive. To Bob’s point that's high margin, really good business for us, but it could get overwhelmed by just the pack season could more than also overtake all of it on a volume conversation..

We will now take our next question from George Staphos from Bank of America Merrill Lynch. Please go ahead..

Hi, this is actually Molly Baum on for George. My first question on metal containers, can you kind of help us bridge what the various puts and takes will be specifically for the fourth quarter and more specifically in the press release, you talk about larger amount of finished goods inventory.

So in 4Q 2018, you talk about an $18 million negative impact from unfavorable absorption. Should we expect to see any of that in the fourth quarter of 2019 any thoughts you have there would be helpful? Thank you..

Sure, I think to get started; I will just talk about the volume comparison versus prior year. So you have to recall that we are cycling over a fairly significant pre-buys from fourth quarter of 2018.

So, volume is expected to be down considerably as Tony said, as we've kind of communicated all throughout the year that's what's going to happen in fourth quarter.

And as far as the finished goods that we're carrying out of Q3 into Q4 related to the pack, these were at the end of the pack; we have essentially our largest cans being sold at the end of the pack. So when the pack goes late, or the pack moves into Q4, those cans need to be ready to be filled for our customers.

So we've made those cans already in the quarter, and then the volume doesn't materialize due to the abruptness of the end of the pack. We did carry some of those larger cans into Q4 from an inventory standpoint..

So the other half of that is if you recall last year we did some -- we did major reduction which ended up being all in the fourth quarter. That was that some P&L effects in the range of $16 million of negative impact on the fourth quarter last year. So the good news is we get the benefit of not having that this year.

The bad news, what Adam just said is we're now going to do some production this year. So instead of getting an increment of that $16 million, that increment looks more in the range of $10 million, roughly on inventory alone, and then the volume that I'm talking about is more than enough to compensate for that.

And that's why you kind of look at what looks a bit more flattish to down a bit on the quarter..

Yes, got it. Thank you. Yes, got it, thank you. Appreciate that. And then just a follow-up, so, recent Trade Press has talked about some pack customers perhaps reducing their footprint. So to the extent that you can comment, what effect might this have on your business in 2019? Or how might impact plans for 2020? Thank you..

Sure, there has been some of that. I think really the question is more about what the demand requirements to the market and who's going to fulfill that demand. And so, as we sit here today, we don't necessarily see that we have impact. It does depend exactly who ends up with capacity. And so I don't have all the answers for you.

But as a rule, we've got in the market that we're supplying, we've got a meaningful share position and so we have a sense that we would keep that, some of our contracts require that it indicate sort of depends on what way things get sold off, et cetera.

So again, as we sit here today, without all the answers, we feel like that would not have any too meaningful impact..

And we will take our next question from Ghansham Panjabi from Baird..

Hey guys, good morning.

I guess first off as sort of a follow-up to the last question, Tony, how are you thinking about steel tinplate for 2020 versus 2019, it seems like most industrial commodities are down, I would imagine tinplate is down and then related to that, do you see a risk of destocking by your customers going into 2020 apart from the comp you have that is very difficult in the fourth quarter?.

Sure, Ghansham it’s Adam and you're right. So this has been a bit of a roller coaster from a steel pricing standpoint for our customers. So the significant inflation that we brought into 2019 from 2018 did invoke a pre-buy for our customer base.

We're not planning on anything as far as destocking at the end of the year at this point and we worked very closely with all of our customers to try to understand what their exact requirements are. So we don't see anything material in Q4 pushed into Q1 as we sit here today. I think as we look out at 2020 steel pricing.

First of all, we're in the throes of those negotiations right now. So we're working very hard every single day to get the maximum benefit for our customers that we've passed through to our contracts. We're looking at inflation, not nearly I'm sorry, deflation, not nearly to the level of the inflation that we suffer.

But we will see deflation in 2020 we're expecting something in the upper single-digits to maybe low double-digits on a percentage basis..

Okay, that's helpful. And then just in terms of the metal food can business in the U.S., do you have any big contracts coming up for renewal at the end of this year for next year or for 2020 going into 2021. And just more broadly, how should we think about volumes for Silgan across the various segments in 2020? Thank you..

Sure. So the -- yes, I would call it a typical year nothing particularly unusual in the coming year on contracts. So volumes, first of all, we have not gone through our budgeting process, as Adam just said, we don't have steel meltdown which would have some impact.

And so what I can give you is nothing more than sort of a sense directionally where we're going based on what we know so far. And so I think our food cans, our expectation would be very modest improvement that will be driven by we said, we expect sooner or later you're going to get a real pack in Europe, which we could not get again this year.

The U.S. pack by the way was it ended abruptly but it just was not like a terrible pack, it was a fair pack. So but that could be a little bit better, I suppose. As I said before, we have a particular inventory reduction at one customer that we are -- we know as we expect to get some improvement on that.

Adam talked about packed food growth which we would expect and then against all that you just have the vagaries of what happened in the supermarket and some of the other markets and stuff. Yes, you can kind of pick your answer here from flat to modestly on the food can side.

Closures again we would expect to see growth as we said in dispensing systems we expect growth similarly on a lot of our food and beverage side, we would have packed it better, we benefit on that on the closure side as well. And so that that ought to help us.

And then plastic has been growing and so we would expect that the model to continue to grow there..

We will take our next question from Gabe Hajde from Wells Fargo Securities..

Good morning, gentlemen, thanks for taking the question.

I think before Bob, you've talked about a slightly inflationary environment is often better for the food can business in terms of contractual pass-throughs and what have you? I think I heard some deflationary discussion, it wasn't clear to me that was specific to steel, or in general, what contracts may pass-through next year, knowing that typically, there are pay raises and healthcare costs go up.

So I'm curious, just directionally speaking, I guess to piggyback off of Ghansham’s questions about volumes would you expect metal food profitability to be up or down or flat next year given kind of inflationary comments that you're talking about?.

Okay, that says a lot of parts to that question. So let me start with the easier part which is, we were talking about the metal side of that in our previous conversation, which we would expect will be deflationary. We certainly expect things like labor are inflationary right now, as you know labor is very tight.

And so that takes you to the -- the way you started the question, which is what we would generally say is in periods of inflation of those other costs, we get hurt a little bit because we delay in patenting it on. So if you have accelerating inflation of labor for instance and we will pass that through our can contract, but not until a year-out.

So I would say that that's a little bit of headwind for us on it, and that’s in our can business and most of our other business, we actually don't have pass-through of labor inflation. So I think that is a bit of a headwind for us than a lot of industry for next year.

So and then beyond that, on the container side, I would just say that you probably continue to see a little bit more of what we’ve seeing which is some amount of competitive activities with the excess volume capacity in U.S. and frankly, with a volatile steel cost market that makes the market a little more confusing.

And then in Europe, we talked about there's been some aggressive moves from the larger players in Europe. And so if you assume those continue, you're going to get submitted against the volume improvement that I just talked about with Ghansham on the margin side..

Okay, thanks. And then out of my sense of optimism in the pet food business, I guess as a couple of guys have commented towards to that effect.

Might that warrant additional investments for some capacity? Or were the adjustments that you've made or investments I should say, recently enough to compensate for that?.

Sure. Yes, I think you read the optimism correctly. It's been a nice growth market for us and we expect it to continue to grow going forward. We've been investing all throughout this growth cycle with our customers for additional pet food can capacity on our side.

There's a variety of projects underway right now to increase our capacity, we've also got some hot capital going in to overall increase our capacity as well. So it's a little bit of both, I'd say nothing significant as far as no new plans, anything like that, but enhancements to increase our capacity or, or what we're looking at in the near term..

And Gabe, let me just go back and finish the previous comments. So I got to the food can side, I didn't really finish that I think floaters as I said will have volume up, we ought to be able to continue to improve profitability of that business. Same on plastics, which we have done in the past.

And then I think the third thing and kind of the whole reason we got our Analysts Meeting and one of the thing we've been really trying to talk a lot about is, we sort of had two levers to pull our business, lever one is we run these franchise businesses well, and we run them for free cash and then our second lever is we deploy free cash.

And so if you think about food can next year, and you think about kind of the comments I made about the container business, the metal container business, for example, I would just remind you that we are back now into the mid-point range roughly by the end of the year of our leverage level.

And so our own view is that next year between the two levers, it might be a little bit more lever, the cash deployment side..

Thank you. If I could sneak one last one in for Bob, the tax rate came in a little bit lower.

Are you still guiding to 23%, 24% or?.

Yes, I think we'll probably, we did see a benefit in the quarter that will obviously have a bit of an impact on the full-year rate as well, although a bit more muted against the full-year. I think if we're looking forward kind of in that that 23% kind of range is probably as good as I could get it.

We probably do maybe a hair better than that for the full-year this year, just given the benefit that we saw on the seasonally larger Q3 that'll carryover a little bit to the full-year, but I wouldn't -- I wouldn't think it'd be meaningfully different..

We'll take our next question from Arun Viswanathan from RBC. Please go ahead..

Hi, this is David Page on for Arun..

Hi David..

Hi, I wanted to in your metal containers segment you discussed, you mentioned soup volumes increasing.

I just want to know if you think the soup category in general is stabilizing and where do you see future growth in the soup category?.

Sure, good question. I think for starters, I think when we look at the soup category in the quarter it was a difficult year, last year in the third quarter.

So where we are today, we saw some nice growth year-over-year but we feel pretty good about what's happening right now in the soup business and -- and we're at the early part of the season, filling for soup.

But we think the activity in the market, the promotional activity, the focus on soup products, I think it's been good and can soup has been good for us. So we feel good about where it is going..

And we'll take our next question from Brian Maguire from Goldman Sachs..

Hey, good morning. Thanks for taking my question. I have found a little bit late.

So I apologize if this is already asked, but I just wondered if you could comment on what you're seeing in the pricing environment over in Europe in the metal can side?.

Sure, I alluded to a little bit. We certainly saw this is going to be a 2019 comment not really about wanting at this stage, but we saw a little more competitive activity in Europe than we've seen in the past. We saw some big players who were really working hard for volume.

And it didn't seem to us like it was getting full cost recovery of what was happening on the steel side.

So we're hopeful that that'll change certainly the cost dynamic has continued to change but that'll -- we won't know that about 2020 until we get into it a bit, in European we had some that happens in the beginning of the year, you have some that goes into negotiations first quarter, so you clearly takes a while to get there..

And the mix of contracts there is it roughly like half that resets annually and half a ton locker term contracts any way to think about the -- how much of it is kind of impacted by recent weakness?.

Yes, if no less on our contract, right I’d guess probably a little bit here, but something like 20% probably under multi-year contract and more like 80% it is annual negotiations..

Got it, okay. It helps. And then last for me just Tony, following on your comments around the leverage kind of being back in the range you wanted to be in. Just wonder if you could comment on your thoughts that doing a trade-off between M&A and buybacks have been pretty active in both arenas in the past.

Maybe you can just kind of comment on the general M&A environment, and where multiple sit versus where you think fair value is and any specific parts of the portfolio. I know you talked about dispensing in the past as being a fragmented market that you can, you think that there's some room to pursue M&A.

And is that still the case? Or are there any other parts of the portfolio you're looking at?.

Yes Brian, this is Bob speaking. Look at as Tony said, we're kind of right square back into a range that gives us a lot of flexibility around how we deploy capital. No difference in strategy from where we've been for quite some time that our interest and desire is to first allocate that capital deployment toward M&A activity.

I think as we look through the segments that we operate in, obviously we would love to continue to find opportunities to build out the closure segment and particularly build out around the dispending system side of that, if there were ways to talk things in around the can business that would be interesting to us, but perhaps a little more challenging given the market share, if you will.

And then, look the plastics business has turned the corner nicely, right in line with what we would have expected to have happened over time. So the idea that we could see some capital allocated there is not off the table.

I'm not trying to signal that, but there's something that we're going hard after but it certainly -- the team has earned at least the opportunity for us to be thinking about capital deployment there.

All of that in the backdrop of the same kind of discipline that Silgan has historically put forward on the M&A side and that is if the cash on cash returns are not there, then we'll drop back and look at all of those options against what happens from a return of capital to the shareholders.

So I would not at all rule that as off the table, and quite frankly, as we look forward into 2020, as Tony said, the idea of allocating capital to one or the other of those is it remains pretty high and will benefit the year..

And we will take our next question from Chip Dillon from Vertical Research. Please go ahead..

Yes, thank you very much for taking my follow-up.

My main question is two, one is, is there any update and I don't think you all are involved at all, but I know that there's some kind of an investigation about the food can business in Europe and anything you can tell us about that? And then secondly, this is a very broad question, but we continue to hear more and more about the ban of plastics and single-used plastics in various places, certainly nothing on a wide scale involving containers, but I do know that's an important market for both closures and plastic containers and just any, any kind of update you have on that and maybe moves that you and others are taking to try to counteract some of the PR that's out there going the other way?.

First of all the -- we already in Europe in the can business and basically everybody who is in that jurisdiction, the can business got pulled in. So we are part of that, which we have disclosed. And really there's no updates to that to offer. On the plastics side, there’s a lot there. I think you're asking the right question.

So there's perception of plastics, which is one whole issue and I think we all know that there is -- there's a heightened awareness around it as we speak.

I do still think that is primarily around single-used applications, and as Adam pointed out, particularly things like single-used water for a lot of dealers and ask themselves why does this make sense. And so I think that that continues to percolate. And so we watch it very carefully.

Again, I think your question was very pointed in that bans are particularly important to us, because that segment moved little more slowly; bans can come in fairly quickly. And so we do watch that. I think where that most likely you've seen it on straws.

You may see it around the fact, and that’s not just the ban, but that the closure needs to be tethered or somehow tied to the bottle. You're certainly in Europe, you're seeing that. And I think you've probably seen in other jurisdictions.

We've done this call before that that is not necessarily a bad thing for us things being that the scale we are the development capabilities, et cetera. And we feel that we're in really good spot to work on that with our customers to come to a good solution on it.

And so and that'll add some complexity and engineering content to the closure, if you will. So those are the kind of moves that we're focused on is how do we address the real challenges that are out there and help us where you don't end up with a band of the entire product there right now.

I'll remind you that -- the fact that the single-serve beverage is less than 2% of what we are. So it's not a big point in any case. Our plastic bottle businesses as you know is primarily around household use, healthcare, personal care, et cetera. So those are multi-used applications that are in home, the kitchens, the bathrooms.

So the idea of moving to class or other, it's just a little hard to imagine any major changes. So our belief is that that is an area that will be fine through this, it needs to be a responsible part of solution.

We need to keep working on post-consumer resin in our products, which we are whether it's an biodegradable and so there's a whole variety of bioresins that we are all looking at working on. So we're doing all of that around it.

But I really think the heart of this problem is to be more around single-serve particularly probably single-serve water areas..

Okay, which again, is less than 2%. That's very helpful. Thank you..

That’s correct, thanks..

We will take another question from Mark Wilde from Bank of Montreal..

Yes, I just wanted actually Tony to follow-on, on the plastics.

So first of all, can you give us your EBITDA margin in plastics in the third quarter?.

Yes, looks like -- if somebody's going to look it up or but it's just 15%, 14.8% I think from memory. How did you get? Kim is giving me thumbs up by the way. So I think 14.8% the -- so your obvious question is how are you doing, I think you had to do how we’re doing against the 15%.

If you just put the pension back on you’re above the 15% -- at or above the 15%. So to that topic, if I'm guessing you correctly, we view that we more or less achieved the first hurdle, which is that we got the business back to what we think is a sustainable level, hurdle two is kind of what are the growth prospects at that level, where do we go..

And what do you think about that?.

We're working; you're seeing growth in the business now. So I think we're feeling a little bit better about it. We feel really good about the team and how they've gotten us to where we are.

So, we're going to watch the pipeline a little bit more, we're going to see where the business can develop, before we kind of declare on all clear and that we're necessarily going to try to keep pushing in, in the market space.

And the other thing we have said is we think consolidation needs to happen in the plastic bottle supplier community, there are a lot of players. And so I think, it’s going to be an important aspect to it.

And so either we feel like, we need to be part of that process, or at least we want to watch that to happen around us before we can finish the thought process on what the long-term..

Okay, is it possible Tony just to get some sense of how much volume runway you have in your existing footprint? And also what's the upside might be to kind of a 15% margin since you're basically there right now?.

Yes, there is always a little bit of room obviously, within 15% yes, things that are higher, businesses that are higher, businesses that is lower, so you can always look at it that you can do better. But that will always be true. And so we really are thinking about it.

If you look at, if you take the markets that we serve today and the way we serve those markets, we did 15% ran about the right spot, and you can get a good return on capital at that level. So I think that's kind of where it stands.

And therefore you can read that also as that we don't have a huge amount of capacity that we could fill to drive that number up, there is some capacity that got to be exactly the right kind of bottle et cetera. And we are working at doing that and that's part of why we've improved to this level, but it's not enough to move 15% by a big number..

Okay, all right. That's really helpful. Good luck in the fourth quarter and through the year..

Thanks..

Thank you, Mark..

We will take our next question from Adam Josephson from KeyBanc..

Yes, thanks, everyone. Tony, just one follow-up for you back on sustainability. So some of your competitors in paper and packaging have obviously been talking about that subject quite a bit.

And to the extent they can show volume growth and tied to sustainability, their multiples have been getting a nice bump because obviously investors are starved for growth stories.

Bearing in mind that volume growth isn't in and of itself and beyond and all, how do you think about the relationship between volume growth and multiples that we're seeing in the sector these days? I asked because you had your Analyst Day a few months ago, and you talked about multiple discount to the group and I think a large part of the reason for that is volume growth?.

Yes. So we fully understand that and as a public company growth is somewhat linked to multiple without doubt. The point we keep trying to raise is that if you're a disciplined deployer of free cash flow and you've got a lot of free cash flow that it seems like the market ultimately ought to reward that.

And I think over the history of Silgan, we would say it has rewarded that, right. Not always at every moment in time.

But and we do seem to be at a point now where the organic growth being incredibly high and above this level but we’re a little hopeful that that'll fade over time and people will start to say about the cash deployment is really important. So that's a big answer to your question.

But of course, if we have more organic growth, there is a value benefit from that. And yes, sustainability can play a part of that. And yes, you're probably right that we do not beat that drum as loudly perhaps as some, which is ironic because nobody has a better story than a steel can, right.

Yes, I guess it’s fully recyclable, more recycle than anything else, it magnetically pulled out of the waste stream. So far preferred by all of the waste processors and low energy to recycle just like aluminum can and so it's got a great story.

The only reason we've been a little quieter is when we have actual sales that are from that, we promise we will tell you that, it just gets a long lead time on it, where there's a lot of customers who are talking to us about a whole bunch of different ideas of steel packaging.

But really it's not like us to talk it up until actually in the numbers and so we'll wait for that..

Tony just one follow-up on that obviously steel and aluminum have a good recycling story, plastic has a much better carbon footprint story because obviously mining bauxite converting into aluminum is incredibly energy intensive relative to PET.

So how do you think about the actual environmental impact of say PET or single-serve plastic bottles versus steel or aluminum cans?.

Hey, it's a great question. I think the steel can is a different animal entirely; it does not have that same bauxite energy, so it gets more energy than plastic, but not a lot more because it is so recycled. You have to address that recycling content. And so essentially the steel can get you round and round.

And so it's way lower energy when you consider that fact. And therefore I believe even just on that straight point, once you consider the cycling of it, it's better. The thing with plastic there that we forget is in order to use it in order to recycle, you got to ship of plastic all over the place to wherever it’s going to recycles, et cetera.

So there's a lot of cost and energy that gets consumed in that process as well. And so by the way, I think there is an argument with the plastic on this side. The problem with plastic is a waste issue more than anything, and I'm not sure that that is going to be quickly solved..

It appears there are no further questions and that ends our question-and-answer session for today. At this time, I'd like to turn the conference up over to Tony Allott, President and Chief Executive Officer for any closing remarks..

Thank you, Chloe. Thank you everyone and we look forward to talking to you about our year-end results late in January..

This concludes the teleconference. Thank you for your participation..