Thank you for joining the Silgan Holdings Fourth 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 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'll turn it over to Tony..

Thank you, Kim. Welcome everyone to Silgan's 2019 year-end earnings conference call. It's funny, I feel like we were just here talking with one another. And unfortunately I doubt my cough has gone yet. So hopefully you'll bear with me through it.

I want to start by making a few comments about the highlights of 2019 and provide a brief update regarding our 2020 outlook. Bob will then review the financial performance for the full year and the fourth quarter, and provide more details around our 2020 outlook. Afterwards, as usual, Bob, Adam and I will be pleased to answer any questions.

As covered in our press release, 2019 was a good year for the company with record financial performance and several milestones.

These included delivering net income per diluted share of $1.74, delivering record adjusted net income per diluted share of $2.16, generating free cash flow of $271.7 million or $2.44 per diluted share, providing a yield on our year-end stock price of 7.9%, completing the issuance of our 4.125% senior notes due 2028, reviewing several long-term metal container contracts, initiating a multi-year metal container footprint optimization effort to continue our relentless pursuit to take costs out of our operations, increase in the cash dividend by approximately 10%, and continuing the acquisition portion of our growth plan with the announcement of a binding offer to acquire Albea's dispensing business.

We're pleased with the performance of our businesses in 2019. We delivered another record year growing adjusted earnings per share by 3.8% to $2.16 in spite of significant pension headwinds and the negative impact of tariff-related costs and market volatility. While there are a lot of moving parts in the year, we're pleased with the outcome.

Our metal container business improved on an adjusted basis, despite anticipated lower volumes due to prior-year pre-buys and lower pension income. Given the understandable focus on food can volumes, let me review what we have said relative to volumes and what has occurred.

In 2018, we indicated that we had benefited by a little over 200 million cans purchased ahead of the expected 2019 metal price increases. We indicated in this call a year ago that the reversal of this pre-buy, which would impact comparisons in Q1 and Q4 of 2019, would have 3% negative impact on our full-year 2019 volumes.

We also expected the overall food can market to see a consistent one-year impact. Further, at the start of the year, we indicated a large pack customer would likely continue to call some business and work up inventory, leading us to expect an aggregated 4% decline in US food can volumes in 2019 -- our US food can volumes in 2019.

In the first and second quarters of 2019, we indicated that that specific customer was still working down inventories but not re-treating market share. So we believed decline would be up only 1% to 2%. In the end, we were down only 1% for the year, representing real growth when adjusted for the impact of the pre-buy.

This result is better than the overall can market for the reasons we also have historically highlighted, namely that Silgan is more represented in the growing can categories and less so in the categories which have been declining. So we believe 2019 stands as confirmation of our expected trend around Silgan's volumes.

Therefore, we see no surprises in our volume information how it compares with industry totals. Moving on, the plastic container business posted another solid year-over-year improvement with volume growth and excellent cost control.

Adjusted for the negative pension impact, the EBITDA margin achieved our multi-year target of 15% and we expect more progress to come.

Our closures business was down for the year in adjusted operating profit, but driven by previously discussed items including lower pension income, unfavorable currency -- foreign exchange currency, and the impact of weaker seasonal pack volumes for metal closures.

The dispensing systems business had volume growth for the year and is operating at profitable levels well ahead of its pre-acquisition level. Our businesses are also well positioned in 2020 with several key initiatives under way to drive profitability in 2020 and beyond.

We expect growth in our closures and plastic businesses as a result of volume gains and continued cost efficiencies.

In the metal container business, we expect little change in profitability as modest volume growth and pension benefits are expected to be offset by the unfavorable impact of lower average selling prices due to lower metal costs and approximately $15 million price impact from renewals of certain significant customer contracts.

Many of you may recall that we had a similar price impact six years ago as we've renewed a large group of contracts. Six years being relative period of average to our contracts. Therefore, we view this as a fairly normal process in our food can business.

We also announced an expanded footprint optimization plan in our metal container business, which is targeted to reduce capacity by more than 0.5 billion units and to continue to drive further cost reductions with the intended closing of six plants, two of which were closed in 2019.

Finally, as we announced on Monday, we've entered into a binding offer to acquire the dispensing business from Albea group, which will enhance our product line and provide further opportunity to grow our closures business.

As Bob will discuss in more detail, we're providing full-year guidance for adjusted earnings per diluted share in the range of $2.28 to $2.38. The midpoint of the range represents 8% increase over 2019. We also expect free cash flow to begin -- be around $275 million. With that, I'll turn it to Bob..

Thank you, Tony. Good morning, everyone. As Tony highlighted, 2019 benefited from several strategic initiatives which leave our businesses well positioned for 2020 and beyond. As a result, in 2019, we delivered adjusted earnings per diluted share of $2.16 and we delivered free cash flow of $271.7 million, in line with our target.

On a consolidated basis, net sales for the year were $4.490 billion, an increase of $41 million or 0.9% over the prior year. This increase was the result of revenue increases in metal containers, partially offset by lower sales in the closures and plastics businesses.

We converted these sales to net income for the year of $193.8 million, or $1.74 per diluted share, as compared to the 2018 net income of $224 million, or $2.01 per diluted share.

In 2019 adjusted earnings per share benefited by adjustments that increased earnings per share by $0.42 for restructuring charges, costs attributable to announced acquisitions and a loss on early extinguishment of debt.

Adjustments increasing earnings per share in 2018 totaled $0.07 including rationalization charges and loss on early extinguishment of debt. As a result, adjusted net income per diluted share was $2.16 in 2019 versus $2.08 in the prior year.

Interest expense before loss on early extinguishment of debt decreased $10.6 million to $105.7 million, primarily due to lower average outstanding borrowings, lower weighted average interest rates, and the favorable impact of foreign currency.

In addition, we incurred a loss on early extinguishment of debt of $1.7 million in 2019, resulting from the redemption of the 5.5% senior notes in August of 2019, and $2.5 million in 2018 as a result of the redemption of all the remaining 5% senior notes in April of 2018 and the amendment of the senior secured credit facility in May of 2018.

Our effective tax rate was 23.1% and 23.6% in 2019 and 2018 respectively. Full-year capital expenditures totaled $230.9 million in 2019, which is slightly higher than anticipated as a result of certain capital projects associated with the expanded footprint optimization plan in metal containers. And capital investments in 2018 totaled $191 million.

Additionally, we paid quarterly dividend of $0.11 per share in December. The total cash cost of the dividend was $12.2 million. And for the full year, we returned $50.8 million to shareholders in the form of dividends.

As outlined in Table C, we generated free cash flow of $271.7 million, $2.44 per share, versus a record $311.4 million, or $2.79 per diluted share in the prior year. The reduction in the year-over-year free cash flow is primarily due to higher capex and the sizable working capital benefit in the prior year.

I'll now provide some specifics regarding the financial performance of each of the businesses. The metal container business recorded net sales of $2.470 billion, up $95.2 million versus the prior year.

This increase was primarily due to the pass through of higher raw material and other manufacturing costs, partially offset by lower unit volumes of approximately 1%, unfavorable foreign currency translation of approximately $16 million and a less favorable mix of products sold.

The reduction in the unit volumes was principally due to the unfavorable impact in the current year of the fourth quarter 2018 pre-buy and lower volumes from fruit and vegetable customers, principally offset by continued growth in pet food as well as higher volumes in soup.

Segment income for the metal container business was $160 million, a decrease of $38.8 million versus the prior year. This decrease was primarily attributable to $44.1 million of higher rationalization charges, lower pension income, lower unit volumes and a less favorable mix of products sold.

These decreases were partially offset by production efficiencies in the US due in part to the favorable impact from a larger amount of finished goods inventory produced in the current year.

Rationalization charges of $49.4 million were largely a result of a Phase 1 of the footprint optimization plan and the withdrawal from the Central States Pension Plan. Rationalization charges in 2018 totaled $5.3 million. Net sales in the closures business were $1.4 billion in 2019, a decrease of $51.2 million versus the prior year.

The decrease was primarily the result of unfavorable foreign currency translation of approximately $34 million, the pass-through of net lower raw material costs, a less favorable mix of products sold, and lower unit volumes of approximately 1%.

Unit volumes declined, principally as a result of weakness in the fruit and vegetable pack and the unfavorable impact in the current year of the fourth quarter 2018 pre-buy. These declines were partially offset by higher volumes in dispensing systems.

Segment income in the closures' business for 2019 decreased $16.4 million to $173.5 million, primarily due to increased rationalization charges of $6.3 million principally related to the announced shutdown of the facility in Spain, lower pension income, the unfavorable impact of foreign currency translation, a less favorable mix of products sold and lower unit volumes.

These headwinds were partially offset by lower manufacturing costs and the favorable impact from the lagged pass through of lower resin costs in 2019, as compared to an unfavorable impact from higher resin costs in the prior year.

Net sales in the plastic container business decreased $3 million to $611.1 million in 2019, principally due to the pass through of lower raw material costs and the unfavorable impact from foreign currency translation of approximately $3 million, partially offset by higher volumes of approximately 2%.

Segment income increased $6.3 million to $48.9 million for the year, largely attributable to higher volumes, lower manufacturing costs, the prior year unfavorable impact from the start-up cost of the Fort Smith, Arkansas facility, and a more favorable mix of products sold, partially offset by lower pension income.

Taking a quick look at the fourth quarter, we reported earnings per diluted share of $0.31 as compared to $0.34 in the prior year quarter. We recorded adjustments increasing income per diluted share by $0.07 in 2019 and by $0.04 in 2018.

As a result, we delivered adjusted earnings per diluted share of $0.38 in each of the four quarters of 2019 and 2018.

Net sales for the quarter were $1.050 billion, down $22.2 million versus the prior year, driven primarily by lower volumes in the metal container enclosure businesses, due largely to the unfavorable impact in the current year period of the fourth quarter 2018 pre-buy, the pass through of lower resin costs in the plastic container and closures businesses, and the impact of unfavorable foreign currency translation of approximately $6 million.

These decreases were partly offset by the pass through of higher raw material and other manufacturing costs in the metal container business, a more favorable mix of products sold in the closures business, and slightly higher volumes in the plastic container businesses.

Income before interest and income taxes for the fourth quarter of 2019 decreased $5.9 million to $71.4 million, primarily due to lower unit volumes in the metal container and closures business, lower pension income, $3 million of higher rationalization charges, $1.8 million of costs attributable to announced acquisitions, and unfavorable foreign currency transactions of approximately $1 million in the closures business.

These declines were partially offset by production efficiencies in the metal container business, due in part to an increased finished goods inventory produced in the current year period, versus a significant reduction in inventory produced in the prior year quarter.

A more favorable mix of products sold in the plastic container and the closures businesses and the unfavorable impact of costs associated with the start-up of Fort Smith in 2018, as well as higher volumes in the plastic container business, which also benefited the quarter.

Interest expense for the fourth quarter 2019 decreased $4.3 million to $23.4 million as a result of lower weighted average interest rates and lower average outstanding borrowings. The effective tax rate for the fourth quarter of 2019 was 27.5% as compared to 23.1% in 2018.

As we look at 2020, our estimate on adjusted earnings per diluted share for 2020 is a range of $2.28 to $2.38, the midpoint representing an 8% increase over the record adjusted earnings per share of $2.16 for the full year 2019. This estimate does not include any impact from the recently announced binding offer for Albea's dispensing systems.

Reflected in our estimates for 2020 are the following; segment income in the metal container business is forecasted to benefit from higher pension income, anticipated higher volumes, and continued manufacturing improvements.

These benefits are expected to be offset by the impact from the renewal of certain significant customer contracts, and in the closures business we expect to benefit from higher pension income, anticipated higher volumes and manufacturing efficiencies.

We're expecting the plastic container business to benefit from higher pension income, anticipated volume gains and again, manufacturing efficiencies. In addition, we expect interest expense to decline versus 2019, largely a result of lower average interest rates and lower average outstanding borrowings.

We currently expect our tax rate to be approximately 24% as compared to the effective rate of 23.1% in 2019. Also we expect capital expenditures in 2020 to be approximately $200 million down from 2019, but slightly higher than anticipated, as we have allocated some spending to the expanded footprint optimization plan in metal containers.

In addition, our guidance also includes a recovery of nearly all of the $20 million decline from 2019 for pension, and this recovery is spread across all of the businesses. We're also providing our first quarter 2020 estimate of adjusted earnings in the range of $0.45 to $0.50 per diluted share, excluding rationalization charges.

This compares to $0.46 in the first quarter of 2019. These benefits exclude rationalization charges, costs attributable to announced acquisitions and loss on early extinguishment of debt, and the estimates for the quarter also exclude any impact for the recently announced binding offer to acquire Albea's dispensing business.

Based on our current outlook for 2020, we expect free cash flow to be approximately $275 million, virtually unchanged from 2019. That will conclude our prepared remarks. So Stephanie, I'll turn it back to you and let you provide directions for the Q&A..

Thank you [Operator Instructions]. Our first question comes from Mark Wilde with Bank of Montreal..

I wonder if you could just help us in thinking about the 2020 increase in can volumes, where that's coming from; because it seems like you're going to continue to be taking capacity out of the market, but I know you've also invested in the pet food can business through '19.

So if you can just kind of help us, as we think about kind of volumes in that business?.

Sure Mark, it's Adam. There is a couple of things really driving the outlook that we have for 2020 on food can volume, particularly in the U.S. market. The first being that we don't have the negative impact of the Q4 2018 pre-buy, so we're looking for a more normalized year from an overall volume standpoint.

Secondly, we spend a pretty good amount of time at our Investor Day, and we've had a lot of dialog on these calls about how -- as Tony mentioned, we are heavily weighted to some of the growth categories of food cans, so items like pet food and protein, we're going to continue to see growth, and even if you go back to our Investor Day, we said at some point, you could see that growth outweighing the general moves of the market for the food can business.

So those are our two big items. A third one I'd give you is our soup volumes. I think what you've seen in the last two quarters certainly are positive trends on soup.

We're not sure exactly where that's going to go, but we like what we see right now from a promotional activity standpoint and the soup story will continue to play out, as we head through the first quarter of the year. Finally, we talk a lot about pack related volumes.

There's two components there, the first being the shelf life of a filled can with either fruits or vegetables from pack related volumes are two to three years on the shelf, and so our customers' can can manage inventory of four packs over the course of a two or three year period, but at some point, that volume is going to have to catch up, and that's what we've seen historically.

So it's a little rare for us to see a continued bad packed momentum of, say more than two years. So we are thinking that we're going to have a more normal pack this year.

The last component of that is, the one customer that we've been talking about for some time now, is now through their inventory reduction program, and their usage will be more reflective of our volumes to them. And so we don't think there is a lot of downside and that volume, in fact, there might be a little bit of upside.

So big answer to your question but a lot of moving parts..

I think Mark, Tony. And then the capacity part, you sort of added on to that, I would just say that, what we're doing is, as you point out, we had added two-piece capacity as we added a plant, couple of years ago. We have been indicated we were going to take some three piece capacity out over time. So really, that's what's happening.

We're honing some excess from our system. But as you know, Silgan has not been out there trying to sell and fill that capacity. Our whole strategy is growing with our customers etc. So really, there is no connection between the capacity coming out and our ability to meet the growth of our customers..

And then, Tony, if I could, just as a follow-on.

Are these four remaining can plants that you've announced today, are they all domestic plants, and can you maybe just give us a little color on what has changed in the last six months? Because I think you announced those other two closures back in June?.

Mark, it's Adam again. Again, we're still evaluating exactly which plants are going to be considered for the plant closures. As Tony mentioned in the prepared remarks, we're really targeting a certain amount of excess capacity that we have now on our three-piece can making equipment. And so, that is primarily a domestic situation.

But we've got a variety of plants [Multiple Speakers]. As Tony said, we're always looking to take cost out of out of our manufacturing footprint and and better optimize it to meet the unique needs of our customers.

So primarily domestic, and we'll be talking more about this, as we go forward through the course of the year, as the evaluation is completed, and we move forward..

And the only thing that's changed is, as we got through all of these contract negotiations, we had more clarity to what our requirements were going to be for the next coming five years or so..

Thank you. [Operator Instructions]. Our next question comes from Anthony Pettinari with Citigroup..

Good morning.

On the footprint rationalization initiative, is there any way to quantify benefits from fixed cost reduction, if any?.

Again, as I said, we're really targeting capacity reduction. I think as you translate that back to kind of the direct costs associated with the business, we're thinking in a broad base now, that overall savings will be something like $18 million a year, in the ballpark of that kind of magnitude, when completed..

And then, just shifting to the plastics, I mean the segment has been recovering pretty nicely for, I think three years now.

How do you think about that business' margins exiting 2019 and maybe sort of the incremental opportunities in that business?.

Again, I'll just say, it's been a journey with the plastics business and we feel really good about where we have ended now 2019. As Tony mentioned, we did achieve the 15% EBITDA margin goal that we had set several years ago, when you normalize for the impact of the lower pension income.

So what we had always said is, once we achieve that rate and get our cost structure where we want it to be and our footprint where we want it to be, it will be about filling the assets. It will be about growth in kind of the existing footprint -- for the most part on the existing asset.

So we're now probably turning the corner, where we are looking for more growth out of this business. They've done a very nice job positioning themselves in the market, the footprint and the cost structure is right and now, we're going to be looking for more growth across that footprint..

Thank you. Our next question comes from Chip Dillon with Vertical Research Partners..

Yes, good morning and thanks for all the details.

Could you talk a little bit about the acquisition of the dispensing business? And you mentioned that -- on Monday, the $20 million spent in synergies, and I was wondering, kind of how do you think about those in terms of being sort of cost rationalization synergies versus commercial opportunities? Does that include commercial opportunities? And also what should we assume as the cost of the debt for that deal?.

Chip this is Bob. So as we said, roughly $20 million of synergies is the target. Some of that is coming from the procurement side, when we put all these businesses together there is an aggregation there that we think we can benefit from. There'll be some SG&A opportunities there, as we get the businesses consolidated.

There are some opportunities to synergize best practices across the plants, which will provide it. But what we have not done in the synergy count is assume any kind of commercial synergy. These are purely cost plays that really from the -- as we said on that call, historic playbook of how we attack synergies, so nothing new there.

In terms of the debt profile there, obviously, we've got it committed with the delayed-draw term loan, which admittedly is at relatively low interest rates these days. We'll see what the fundamental capital structure looks like, as we come through that acquisition.

So I would say that, it's going to be -- on a comparative basis, it's going to be a relatively low cost of debt, but it will be probably somewhere in the 3.5% to 4% kind of range..

And then just a quick follow-up, when you look at the sort of, you're involved in a number of areas that involve plastics, and obviously we've heard a lot of arguments, not arguments but a lot of concern about plastics in a very general big picture sense.

And I know in the past you all have made moves to help promote the food can, are you involved in any efforts to impact the perception of the carbon footprint or other aspects or advantages of plastic based packaging?.

Chip, it's Adam. We work very closely with our customers, and certainly they're involved in a wide variety of initiatives on packaging in general and specific to plastic packaging as well. So we support them.

We don't have any really direct involvement with any agencies or entities around plastic packaging that aren't directly related to our customers..

Thank you. Our next question comes from Ghansham Panjabi with Robert W. Baird..

First off, I guess as part of your contract negotiations on the metal food side, did you pick up any new volume as part of the price give back?.

Hi Ghansham, it's Adam. No. Again, some of those contracts are with products and customers that have growing categories. So as Tony mentioned earlier, again our growth usually comes through our existing customer base. So it does allow for growth, but nothing new, if you will..

And then going back to the Albea acquisition, obviously the corona virus is in the news now and duty-free is being -- is going to be impacted with travel, etc.

Do you have a sense as to how big that end market is for Albea's portfolio business? And then separately, on your free cash flow guidance of $275 million, what do you have embedded in there for working capital. Thanks..

So, on the duty free question we're not going to get into kind of the subsets and channels they sell into. I think it is fair to say, both for their business and our business, duty-free is a part of the beauty sale, as you well know, the. So I think that's the simple answer.

I think the bigger answer to your question is that, well we anticipate there could be some temporary impact to travel. Our view is that, that's going to be more in the temporary nature and is not long term. If it's a long-term issue, then I think the whole world has changed, and I think we're going to see that across every industry we look at.

So it is a part of both of our businesses. It would have some impact temporarily. But that's kind of our view on it..

Ghansham, I'll take the free cash flow. So as we said, $275 million is the target for next year. There is puts and takes there, including a modest benefit from working capital.

But the main driver as to why the the free cash flow is not up year-over-year, is the fact that we're going to have an incremental tax -- cash tax payment that's required, and that is essentially a result of inventory accounting for tax purposes. So to get technical, it's the impact of LIFO accounting around tax payment.

So that's a one-time hit, if you will, it's not a permanent cash flow item on a go-forward basis..

Thank you. Our next question comes from Gabe Hajde with Wells Fargo Securities..

If we go to the contracts, can you give us a sense for what portion of the business was renegotiated and not getting into anything specific, but just how much more there might be to do, on a go-forward basis? And the $50 million I think that you called out in terms of a headwind, is that all going to hit in 2020, or is that something that would be a couple year headwind?.

So a couple of things, as Tony said, this is kind of normal for our metal container business and the -- jumping into the contracts that we are specifically talking about. The average tenure of those agreements that we just renegotiated., we have about seven years on those agreement. It represents about 40% of our 2020 revenue.

So if you take that $50 million of costs that Tony talked about, you're roughly talking about an average of something close to 2%, as far as price impact. So that is the 2020 impact of -- the $50 million is the 2020 impact of those renegotiations.

So a big chunk of our business, and we would consider it as much more of a normal process for us, that we kind of get near the end of contracts. We tend to give some price in that, some incentive to the customer.

And then what we tend to do is, try to work from there, to get ourselves in a position take costs out, which is exactly what we're lined up to do here as well..

Well, you guys have always also talked about trying to outrun inflationary pass-through on the go forward years. Okay..

That's right..

Exactly..

Maybe Bob, a question for you on the tax side. This year, as you pointed out, was abnormally low. Sounds like 2020 might be a little bit higher, and I'm going to try to weave in a question about Albea.

Is that an asset purchase, such that you get the benefit of the step up in basis? And then, is there a way to think about sort of what a normalized cash tax rate might look like?.

Yes, there's a lot in that. But yes, so as we bring in Albea, I think we will -- there's still some work to do. But the thought is that, we'll probably end up with perhaps a slightly higher tax rate, just given the international exposure there. Obviously it's going to be muted by the fact that you're bringing in higher tax in a larger portfolio.

So I don't see a significant change one way or the other from that perspective. I think our tax rate moves around -- to your earlier point, just based on various true-ups in certain jurisdictions, and that's all we really felt in the year. So I wouldn't read anything into that change..

I would just say, I think if you characterize '19 as unusually low tax year.

I think what we're really talking about, is that '20 is going to be unusually high cash tax year, because of the inventory impact, which basically is a one-time and then theoretically, that's something you would get cash benefit for sometime in the future, as you liquidate that inventory. So it's kind of prepaying if you will, that tax.

But it's not a recurring cash type item it's a one-time cash item..

Thank you. Our next question comes from Kyle White with Deutsche Bank..

Just focusing on the capacity reduction, just curious what your view is on supply demand and the overall industry following the excess capacity that you take out? Do you view that as kind of balanced, or how much more do you think could be taken out from others?.

I think as we work through the capacity reduction on our side, obviously, it's not fully addressing the overcapacity in the market. So we think that's something around 1 billion units of of excess capacity remains in the market, and that will continue to be in the market until further reduction efforts are made..

And I think in the Q1 guidance, you talked about shipment volumes, particularly in metal containers going from the first half to third quarter.

Just little bit more details on this, on why is this occurring, and then any way to kind of size this as well?.

So it really is related to one of the agreements that Tony had mentioned, as far as the renegotiation of a long-term contract. And essentially, what this does is, it takes a supply of cans that we have to a packed customer that we typically ship to all year long and they store those cans.

We're now moving to more of a just-in-time relationship of supply of those cans. So doesn't really change when we make the cans, if you will, but we'll be shipping the cans more in the pack season, versus shipping cans to them all year long.

So it really is first half to second half that shift and it's going to be shipments around the timing of the pack season. Probably a bigger impact in Q2, but it will also impact Q1 as well..

Thank you. Your next question comes from George Staphos with Bank of America..

I had a couple of questions, some shorter-term and then some bigger picture longer term questions guys. So first question, just more of a net-net type of question, when I look at the press release on metal containers, we have $44.1 million of higher rationalization charges that are called out, and then a little bit later on, there is $49.4 million.

I'm probably missing something, but what's the variance between those two, because they seem to come from the same source, the rationalization charges..

Yes, I'm not exactly following with you George. I think what [Multiple Speakers]. I guess the difference -- there's the charge, and then there is the difference between the years, and the charge is $49 million and during years, its $41 million..

I think that's right..

The second question I had, on the free cash flow of $275 million.

I know you have the capex with the footprint rationalization in that, do you have cash outlays yet related to any of the employment adjustments that you might make in that $275 million already, or in theory, would that be something we need to account for later on, or would that be happening later on past the forecast period anyway, because just of the nature of these sorts of things?.

Well, I think the answer to that short is yes. So we'll have some of that, that will impact 2020 and that is in our guidance for the period. That will be a relatively small number. And again remember that this is a three year project here, so some of that will roll forward from there, nothing meaningful in the 2020 timeframe..

Bigger picture question, as you've gone through this renegotiation with your customers, and yes, this is a normal sort of process for Silgan over the years, given that you -- maybe more than anybody else in terms of food cans in North America, you've been the the most stable largest, most focused on providing metal containers for the food market in North America.And you've had other players come in and out of the market.

Is that giving you any ability to perhaps get better terms over time and make these renegotiations perhaps less pressurized early on in the tenure of the contracts and what we've seen in the past? Or is that still, some of it has to happen down the road, as more of this excess capacity comes out of the market?.

So George, it's a good question. I would broadly say that, there is not a huge change. I mean without doubt, the point that we would stress to our customers is, we are the long-term player in this market, we are focused. We continue to invest for technology, sustainability other opportunities, and so without doubt, that's still the focus.

You can imagine that our customers of course hear conversation of excess capacity, want to use that as a point to get leverage on us in the process. So I would say, the net of all that is kind of a balance, which is why kind of a 2% down, makes perfect sense in that environment.

So broadly, the terms seem to be similar, the lengths seem to be similar, the negotiations have different items discussed, but every negotiation has tension on both sides. And so that's -- we really wouldn't characterize it massively different than the past..

I mean, look, it's easier being an analyst than running a company as you guys do. But at the end of the day, you are the company that has had the most staying power. You're the ones who have been investing in the food can. And there's always excess capacity in the food can business, just because of the nature of the manufacturing process.

So I would imagine, hopefully over time, that's something that you can and should get leverage for. My last question and I'll turn it over.

It seems like maybe it's a good time that we're now in 2020 to look back at CanVision 2020 and can you remind us how you think that program played out? What were some of the learnings? What went well for you? What maybe didn't go as well as expected? We look at the food can EBIT, it's kind of flat to down over that period of time, but a lot of that's been pension and some other things.

How would you grade CanVision 2020? Thanks guys..

So let's go back and remind ourselves. The CanVision 2020 was always put out there as a value out to our customers. We always were clear that it's not a merge and push for us. But what it did for us, and it certainly did, is it allowed us to extend contracts in order to get at these big projects, et cetara. So that seems to have worked.

We've retained our customers through this time. We got long-term contract. But again, the idea was to drive value to our customers, who had this problem with large box retailers and they couldn't get price through, et cetera.

So without doubt, our customers have benefited been a lot else in that time, as we have talked about, right? Yes, new competition come in the market. You've had wild volatility in our raw materials. So there has been a lot of moving parts, but.

But without doubt, value was delivered to our customers through those programs and those efforts, and it allowed them to get costs out. They would like more, and we're going to continue to try to find ways to do that. But -- so we're pleased with how that program worked out. Our focus on taking costs out and making the can more competitive never stops.

So even though we had the name, the Can Vision 2020, we are still out there right now, trying to find ways to take costs out, make can more sustainable, make our customers more competitive. So in a way it goes on, but we're pleased with the way we capsulated that, and took it as a more broad program to our customers..

Thank you. Our next question comes from Adam Josephson with KeyBanc Capital Markets..

Bob, just on pension for a moment. I think a year ago at this time, you called out $0.13 drag on your '19 earnings guidance from pension. I think you said earlier that, the gain in '20 will be almost as much as what you lost at the $0.13.

So could you just give us a precise number for '20?.

Well, I tried to give you as precise of an estimate as I could. So that $0.13 is the $20 million. So the lion's share of that $0.13 is coming back in the year. And again, it's going to be spread basically on the same percentage or the same dollar amounts that it was in the prior year.

So the lion's share of that roughly half, is going to the containers business, and then the other half being split between plastics and closures..

In terms of the cash costs associated with the six food can plant closures that you're planning. I know Bob, you talked about some of those being in your '20 guides.

But can you give us any sense as to roughly, kind of what level of cash costs you're anticipating over the next three years, as a result of that program?.

Adam, it's Adam, as we are still in the evaluation phase right now, we're thinking that number is going to be roughly $25 million over the course of the next two years, based on what we did in 2019. And again I said the last two years. So to Tony's point, 2019 was the first year of the three-year program..

You closed them toward the end of the year.

In terms of the 0.5 billion cans that you're planning on eliminating, can you just remind us what -- roughly what percentage of your food can capacity that represents?.

We've got a calculator..

It's like 3%, something in that range..

And then once you've done that, Tony, the 3% or so, how would you think about the industry's capacity at that point? Supply demand balance, obviously, there is over-capacity at the moment. You are going to be acting to reduce that.

Once you get rid of this 3%, would do you expect the industry to be balanced at that point, or do you still expect there to be just hangover from what's been added over the past few years?.

I think Adam said, I think we still think there's probably something like 1 billion units out there. In a way, we really don't think of this as changing it, because we have not been in the business of trying to sell this capacity. As we shifted some things from two-piece -- from three-piece to two-piece, we added two-piece capacity.

And we indicated that we need to take three-piece capacity out. But we weren't out trying to sell that. That by the way is not our nature of our business. What we try to do is supply our customers, so our customers grow in the marketplace.

So I think while it does -- it's heightened the overall access, I just want to be clear, it's not that it was out there chopping up the market, it really wasn't. And so we still think there's probably roughly 1 billion out there. I got to say, we don't -- we're speculating that number. Nobody -- there is no reporting of that.

But that would be our view right now..

And just one last one, Tony, just you announced the acquisition on Monday, and you talk about how it's going to increase your closures sales and EBITDA, and reduce your food cans sales and EBITDA. And then you announced this plant closure program and the lower food can prices.

So one could jump to the conclusion that you're trying to run away from food cans. And I know that's not the way you see it.

So could you just kind of frame everything that you've announced this week for us in terms of how you think about the direction in which the company is heading toward closures and away from food cans?.

So you're right, I definitely would say we are not running from food cans. I would say that we are -- again, that's why we started Monday's presentation just talking how we view value creation.

So again, without going through the Silgan slogans, we really do have this view that if you have strong businesses that generate a lot of cash, that's really valuable. And we consider the food can exactly that. It's our highest cash returning business that we have. We invest in it to keep it there.

So I don't want to make -- leave any impression that we're running for making the right investments. In fact, taking these six plants out is a way to invest in that business and make it stronger and better for the future.

So I don't want -- before we get to anything other deployment cash, we make sure we take care of our knitting in our franchise businesses and the food can is that. The second thing is that we then take that money and we get to choose where we invest it. And we really think that the dispensing side of the world has been a great one for us.

The business we bought from WestRock has performed very well, well above where we bought plus synergies. So we're highly accretive on what it's done, we like where it is growing and kind of the product development and the people.

So really it's nothing more than we see an opportunity to do what Silgan has always done, which is to make investments in rigid packaging businesses that we like.

The last thing I'd say, there's a lot of talk about some parts, etc., and certainly, we think you have to look at Silgan in the future with -- if 50% is in dispensing, you have to consider that. If food cans is something -- but our point is not suggesting that a business needs to be broken down into those elements.

Silgan has always been in multiple businesses. These are all in rigid packaging, these are all things we know. The skill set that we as a team bring to rigid packaging adds value to all of these businesses. One thing we do is a lot of shared capabilities.

Some of our businesses are really good at marketing and they're sharing those marketing efforts with the food can side, which lacks on that. Some are really good at product development. We're sharing that to try to get other areas. The food can business is an incredible consistent operator of their plants. We're sharing those skills.

So there is power that comes from all of these, and it's worked for Silgan in the past and will continue to do so. So absolutely not, it's not a run from can at all. I think we've been trying to be very clear with you and I'll try to say again. Our feeling is there are elements with food can that absolutely have been declining.

We are not running from that. That's absolutely the case. It's why we are more in areas where the growth is better because we saw it, knew it and reacted to it. There are areas of food can that absolutely are growing and we see opportunities there. The net of that might be flat.

We made the point, you would think the growing would become bigger and so you'll get a little bit of growth from it over time. But whether it's flat or up 1%, or down 1%, we still like the food can business. It's a great area to get return and cash generation.

But also we like other areas where we can invest other skills that we have like marketing and product development, and most importantly across all these is customer service. One of the other hallmarks of Silgan and we measure it carefully is, how well do we service the needs of our customers and that is important in all these markets.

So again it's not a run from food can. It's a play on the skills that we have and then deploying cash where we think it creates the most value for shareholders..

Thank you. Our next question comes from Daniel Rizzo with Jefferies & Company..

Just one quick question. You mentioned that the next phase for plastic containers is kind of shifting to growth, so kind of help with future margin expansion.

I was just wondering if you could point out where specifically do you think the growth will come from?.

Sure, Dan, it's Adam. Really what I was talking about there is -- what we had said previously is once we got to the 15% EBITDA margin, really that's kind of a sustainable level in the rigid plastic packaging world. So we're looking at growth. I don't know if it's margin expansion beyond the 15% or not.

That's kind of our target where we think the market is. But the growth will come through kind of our core markets, things like food, pet food, personal care, healthcare, etc. But it's really not margin expansion, it's just more of what we do on the fixed assets that we have servicing that market..

Hey Dan, this is Bob. One thing I might add to that is, don't walk away with the idea that that business has not been growing, because we've had actually really nice growth for many quarters now in that business. Likewise, it's not so much. We're kind of past the sort of the big cost take-outs.

And now it's just running this business efficiently and gaining those efficiencies in the operating side on a continual basis. And we'd be happy at this margin with incremental volume coming through the system..

So that's 2% to 3% volume that we've been seeing on a pretty consistent basis. That's what we're looking for going forward..

Exactly..

Okay, thank you for that.

And then with soup I think having like the second or third quarter kind of improving, I was wondering if this is a sustainable turnaround and how long you think it has legs for?.

I think it's very early days. So it is really just two quarters, which are a positive trend. I would say what were -- the activities that we see right now into Q1 are consistent with what we've seen in the last six months. So we are not quite declaring victory yet, but we'll see how the first quarter plays out with soup..

Thank you. [Operator Instructions] Our next question comes from Tyler Langton with JP Morgan..

Adam, I think you mentioned -- for 2020 in metal containers, sort of 40% of the business was renewed and like seven years on those contracts.

Do you have a rough sense of -- do you have -- I guess for 2021, do you have a rough sense for how much of the business could be up for renewal?.

For '21, no, I don't -- just off hand here. I think that again, there is just a normal turn that happens within the business. Our large contracts are on again a longer-term basis. I don't think that we have anything that's coming up that's really significant in ' 21 as we sit here today..

I think it's 70% -- 75% of contracts are 2022 and beyond..

And beyond….

And then just with the closures. I guess for 2019, volumes were down 1% for the year.

Could you just give, I guess provide a little detail on sort of what you saw within sort of -- in sort of the legacy closure business, and dispensing systems and just kind of how you view those markets for this year?.

Again, you heard Tony mention earlier that we were really pleased with the performance of the dispensing systems business. And maybe just jumping into the fourth quarter, our dispensing systems had a nice quarter. They were up almost 3% on the quarter versus prior year.

And really what we had was the impact of the pre-buy on the metal closures segment, mostly related to pack items for our metal closures, both in Europe and in North America. So on a full year basis, again, good growth at dispensing systems.

The pre-buy impact of metal closures muted everything else that was going on in the closure segment from a volume standpoint..

And then just I guess for 2020, do you kind of expect dispensing and sort of the other legacy businesses to kind of post positive volume again?.

Yes, we are looking for good growth in all components of our closure business in 2020..

Thank you. Our next question comes from Arun Viswanathan with RBC Capital Markets..

Just a couple of questions, I guess just with the last question on soup. So yes, we have seen some positive trends here. I guess, just wanted to get your thoughts on the quarters.

Q4 is a little bit money on the can side just given the pre-buy last year, but as you've seen the quarters turn now in metal, would you expect I guess continued improvement? I know that there is a lot of moving parts with the pack and so on, but how are you guys thinking about metal containers through the year?.

You faded out there a little bit.

You're talking about how do we feel about metal containers around soup for the year?.

Well, just for the business, any quarterly commentary, I guess, outside of the pack? And just -- I'm just asking because of the Q4 comparison being a little bit because of the pre-buy..

I think, again, we continue to feel good about the food can business. I think we did explain and go through quite a bit of detail about Q4 and the moving parts there. I think as we go forward into the next year, we are expecting modest growth in the food can business and it's going to be driven by our categories and pet food and protein.

Soup, we feel pretty good about. And the pack business, we talked about as well. So the only thing I would say in 2020 around the quarter -- the quarterization of the food can volume is the shift from the first half to the second half of the one-pack customer that we talked about earlier..

Yes, I might add one more to that. Arun, in that you might remember, in 2019, we had tomato pack that ran a little bit late into fourth quarter, and then it came up a bit short. So I would say if we're expecting a normal pack, you drag that back into Q3..

And then I just want to get your thoughts, a couple of years ago there was talk about soup converting into plastic pouches.

And just given the ESG trends that we've all been hearing about, has there been any retraction from that and back into metal containers that you're hearing from your customers?.

No, I don't think so. I don't think it ever moved far enough away from the food can, to have a meaningful impact. Therefore, moving back didn't do much either.

So I just -- I think, look, these are all incubation ideas and we were talking earlier here just about -- typically we talk about things that are commercial and that are actually results of what our customers are doing in the marketplace. So I think we didn't see a significant move to alternative packaging away from the can particularly in soup..

But I do think the soup customers, and broadly our customers are feeling better about the can than they were, so I don't think we're not here to tell you they're launching new stuff, etc., but I think they are holding their head higher about can being a really good environmentally sustainable package.

And three or four years ago, that may have been -- they were more conscious of other marketing ideas and getting to a new generation with new packages, etc. I think that is on balance, a little less interesting to them..

And I think the idea that -- the fact, I should say, that the food can is the most recycled consumer package in the US market. It does have some staying power right now with our customers and with consumers in general.

So I think there is some messaging that's getting closer to the consumer about the infinitely recyclable attributes of the steel food can..

And then -- I'm sorry to harp on this, but just another thing on cans and soup.

Do you think promotional activity has played into this at all? I.e., and maybe even consumers considering their pocket, but looks -- is there any kind of trade down going on into lower price point products or promotions on soup or any kind of other canned products that's driving volume there?.

Well, the one thing I would say is I think over time what we've seen is, when there are promotions in can foods, it does move volume. So there is a lot of promotional activity right now in the soup market and A, we like it. B, we think it's having an impact.

So I don't know that there is a trade-down per se, but again they're promoting and they are talking about soup as part of consumers everyday eating habit. So it seems to be working, and its driving volume in the category..

I think we're almost done. Let's just take one or two more, and then given it an end..

Thank you. Our next question comes from Brian Maguire with Goldman Sachs..

Just wanted to be clear on the -- we already discussed this a lot, I just want to be clear on it. The $15 million or 2% sort of contract renegotiation, that just steps down once at the beginning of the contract, and that it just starts to stay flat at that level for the duration.

You have all the pass-throughs and everything else, but just want to make sure there aren't like continued de-escalators through the life of the contract on pricing..

For the most part, that's exactly right. So obviously, we have our normal pass-through mechanisms for inflation or deflation. The only thing that I would say that it might vary over time is, these are volume-based contracts. So if volume increases substantially, there would be more value to our customers.

And vice versa, if volume were to decrease, there would be less value. But you've got it pretty much --.

Which is historically normal….

That's not a new point..

And then just the point about timing on some of the cans that, if any other [indiscernible] you'll be -- something you'll be making it and warehousing it a little bit. All else equal, I guess that is pretty neutral for you.

I guess if we could just think about from a modeling point of view, there'll be a little bit more seasonal use of working capital as a result of that just as in course of making it and then recognizing revenue and cash flows?.

Yes, I don't think it's much of a change in the working capital standpoint. I think it's more about just when profits are realized on the volume sales of the product..

The cash flow would have -- is still coming in at the same time as it would have historically eventually then?.

That's correct..

And still a cleanup one.

Bob, any thoughts on the D&A for 2020?.

There is nothing rolling off. So I think if you just make your -- nothing significant rolling off, I should say. So it's just basically the additional capital that we put in will change. And so it'll be probably up a little bit on a year-over-year basis, but nothing material..

Which, remember on a new business like the dispensing, like the parts and closures that've been recently acquired, that's more additive because you don't have anything rolling off. So you get a little bit more of the addition in that case..

When Albea comes in, obviously these will all change a lot, I'm sure. But just from base business point of view, sort of flat to slightly up a little bit. Okay, makes sense. Yeah. Thanks a lot, guys..

Thanks, Brian..

Thank you. And our final question will come from Gabe with Wells Fargo Securities..

Thanks for squeezing in this follow-up, guys. I'll try to make it quick.

With metal coming down, did you -- I'm assuming after we talked about volumes seven times, this should have come up, but if not, was there any delay of purchases from Q4 of '19 to in the first half of 2020 in anticipation of lower deal costs? And then second, Bob, if I missed it, I apologize.

Did you give specific volume for the fourth quarter by segment? And if you did not, could you please?.

I'll take the second question first. This is Adam, Gabe. For the fourth quarter volume, again, I think we talked a little bit about closures. We'll start there first. Volume was down call it 1%, and again that's good growth in dispensing of, call it 3% being offset by the challenges we talked about in the metal closure volume.

On the plastic side, again, another really good quarter for the plastic business, we saw a little over 1% growth year-over-year in the fourth quarter. And then in food cans, again a lot of moving parts, but we were down -- sorry, just grabbing it -- we were down about 6%, all told, with the impact of the pre-buy, which was expected.

On your steel question there, you do a little bit on the edge, but there is just we buy so much steel, there's not a lot you can do around that, nor do the steel companies have a lot of interest in that, so not a big win there..

Thank you. That is all the questions we'd have. I'd like to now turn it back to our presenters for closing remarks..

Great, thank you, Stephanie. Thank you, everyone. We appreciate your time and we look forward to talking to you about our first quarter late in April. Have a good-day..

Thank you ladies and gentlemen. This concludes today's presentation. You may now disconnect..