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Edited Transcript of SLGN earnings conference call or presentation 24-Apr-19 3:00pm GMT

Q1 2019 Silgan Holdings Inc Earnings Call

STAMFORD Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Silgan Holdings Inc earnings conference call or presentation Wednesday, April 24, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam J. Greenlee

Silgan Holdings Inc. - President & COO

* Anthony J. Allott

Silgan Holdings Inc. - CEO & Chairman of the Board

* Kimberly I. Ulmer

Silgan Holdings Inc. - VP of Finance & Treasurer

* Robert B. Lewis

Silgan Holdings Inc. - Executive VP & CFO

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Conference Call Participants

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* Adam Jesse Josephson

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Anthony James Pettinari

Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst

* Arun Shankar Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Brian P. Maguire

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Clyde Alvin Dillon

Vertical Research Partners, LLC - Partner

* Daniel Dalton Rizzo

Jefferies LLC, Research Division - Equity Analyst

* Deborah Anne Jones

Deutsche Bank AG, Research Division - Director

* Edlain S. Rodriguez

UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals

* Gabrial Shane Hajde

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* George Leon Staphos

BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research

* Ghansham Panjabi

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Scott Louis Gaffner

Barclays Bank PLC, Research Division - Director & Senior Analyst

* Tyler J. Langton

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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

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Kimberly I. Ulmer, Silgan Holdings Inc. - VP of Finance & Treasurer [2]

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Thank you. Joining me from the company today, I have Tony Allott, Chairman and CEO; Adam Greenlee, President and COO; and Bob Lewis, EVP and CFO.

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.

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [3]

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Thanks, Kim. Welcome, everyone, to Silgan's First Quarter 2019 Earnings Conference Call. I'll start by making a few comments about the highlights of first quarter and provide a brief update regarding our outlook for the remainder of the year. Bob will then review the financial performance for the first quarter and provide further details around our 2019 outlook. Afterwards, Bob, Adam and I will be pleased to answer any questions.

As you saw on the press release, our first quarter results exceeded our earnings estimates as we delivered adjusted earnings per share of $0.46 as compared with $0.42 in the prior year. Because there's several unique items impacting the year-on-year comparisons, let me just summarize that we're pleased with the initial performance of each of our businesses.

The buy forward in Q4 of 2018, ahead of nearly 20% inflation in North American steel markets did, as expected, negatively impact volumes in the metal food cans. But we were pleased with the resilience in the general market demand patterns in the first quarter as well as the good operating cost performance.

Our closure business also experienced some impact in the metal closure volumes in the quarter due to significant steel inflation. More significantly, results in our closure business were negatively impacted by onetime restructuring charges of $5.7 million as we proactively reduced our European cost footprint and by a negative impact of foreign exchange. Our cost control is excellent, and we continue to expect full year volume growth.

Our plastic container business continues to gain traction with another quarter of volume growth and improved operational performance. Despite exceeding our first quarter earnings estimate and delivering solid performance thus far, we're maintaining our full year guidance at this early stage of the year. Therefore, our estimate for the full year adjusted earnings per diluted share remains at $2.10 to $2.20 as compared to $2.08 in 2018 which did benefit by $0.13 per share of higher pension income. We also anticipate improved results from operations in the second quarter and provide an estimate in the range of $0.51 to $0.56 as compared to $0.52 in the second quarter of 2018.

With that, I'll turn over to Bob.

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [4]

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Thank you, Tony. Good morning, everyone. Overall results for the first quarter of 2019 compared favorably to prior year and our estimates. We delivered adjusted earnings per diluted share of $0.46, an increase of nearly 10% versus the prior year period and modestly better than our estimate of $0.40 to $0.45, largely due to better-than-expected food can performance. On a consolidated basis, net sales for the first quarter 2019 increased 1.5% versus the prior year, totaling $1,030,000,000 as the metal container and plastic businesses delivered top line improvement while closures declined slightly.

Net sales benefited from the pass-through of higher raw material costs across the businesses, better volumes in the plastic business and favorable mix in the closures business. These increases were partially offset by unfavorable FX translation of approximately $20 million, primarily related to declines in the euro and lower unit volumes in the metal container and closures business, largely the result of customer pre-buy activity around significant metal inflation.

We converted these sales to income before interest and taxes for the quarter of $86.7 million versus $92.2 million in the prior year quarter, primarily as a result of higher rationalization charges related to the announced shutdown of our metal closures facility in Spain, lower unit volumes in the metal container and closures businesses largely a result of customer pre-buy activity, lower noncash pension income of $5.1 million spread across all businesses and unfavorable foreign currency translation of approximately $2 million.

These negative drivers were partially offset by improved manufacturing efficiencies across each business, a larger seasonal inventory building containers as compared to the first quarter of 2018 in which we reduced our seasonal build, a favorable impact from the lagged pass-through of lower raw material costs, higher volumes in plastics and a favorable mix of products sold in closures. Interest and other debt expense declined $3.4 million versus the prior year quarter. The decrease was primarily due to lower average outstanding borrowings as we used free cash flow to repay outstanding debt at the end of 2018.

Our first quarter 2019 effective tax rate was 21.6% as compared to the '18 rate of 25.9%. The first quarter 2019 rate benefited from the timing of certain tax deductions recognized in the quarter, primarily as a result of the vesting of RSU-based compensation and changes in certain state tax rates while the 2018 rate was unfavorably impacted by higher income in less favorable tax jurisdictions.

Capital expenditures for the first quarter 2019 totaled $61.7 million as compared to $49.2 million in the prior year. On a full year basis, we expect capital expenditures to be approximately $200 million in this year as compared to $191 million in the prior year. Additionally, we paid a quarterly dividend of $0.11 per share in March with a total cash cost of $14.2 million.

Details for each of our business franchises are as follows. The metal container business reported net sales of $507 million, up $21 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 and the impact of unfavorable foreign currency translation of approximately $5 million. Unit volumes were down approximately 4% as a result of customer pre-buy activity in the fourth quarter of 2018 in advance of significant 2019 steel inflation and the prior year competitive loss of the customer. These declines were partially offset by continued growth in pass-through.

Segment income in the metal container business was $38.9 million, an increase of $1.8 million versus the prior year. This increase was primarily attributable to a larger seasonal inventory build in the first quarter of 2019 versus the prior year and improved manufacturing efficiencies, partially offset by a decline in unit volumes and lower pension income.

Net sales in the closures business were $356.2 million. They decreased $14.1 million, primarily due to the impact from unfavorable foreign currency translation of approximately $13 million and 2% lower unit volumes as a result of U.S. and European customer pre-buy activity for metal closures around significant steel inflation. These reductions were principally offset by the pass-through of higher raw material costs and a favorable mix of products sold.

Segment income in the closures business decreased $8 million to $40.2 million in the first quarter of 2019, primarily due to higher rationalization cost of $5.7 million, principally associated with the announced shutdown of the metal closures facility in Spain, lower unit volumes, unfavorable foreign currency translation of approximately $2 million and lower pension income. These costs were partially offset by favorable impact of the lagged pass-through, lower raw material cost and a favorable mix of products sold.

Net sales in the plastic container business increased $7.9 million to $163.9 million in 2019, principally due to the pass-through of higher raw material costs and approximately 2% improvement in volumes, partially offset by the impact of unfavorable foreign currency translation of approximately $1 million. Segment income increased $1 million to $12.1 million for the quarter, largely attributable to higher volumes and lower manufacturing costs, partially offset by lower pension income.

Turning now to our outlook for 2019. We're off to a strong start and are reconfirming our estimate of adjusted earnings per diluted share for 2019 in the range of $2.10 to $2.20, which includes an unfavorable noncash pension impact of $0.13 per diluted share as a result of significant market value declines in the fourth quarter of 2018, that negatively impact the assets held in the company's pension plans. This compares to adjusted net income per diluted share in 2018 of $2.08.

We're also providing a second quarter 2019 estimate of adjusted earnings in the range of $0.51 to $0.56 per diluted share as compared to adjusted net income per diluted share of $0.52 in the second quarter of 2018. We anticipate improvements in each of our businesses despite the negative noncash pension impact of $0.03 per diluted share. The quarter and full year estimates of adjusted net income per diluted share excludes rationalization charges and loss on early extinguishment of debt.

Based on our current outlook for 2019, we're also maintaining our free cash flow guidance of approximately $275 million as compared to $311 million in 2018, which benefited from the significant inventory reduction program in metal containers.

That concludes our prepared comments. And I'll ask that everyone limit their time to one question and one follow-up.

With that, I'll turn it over to Jessica to provide directions for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go now to Scott Gaffner with Barclays.

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Scott Louis Gaffner, Barclays Bank PLC, Research Division - Director & Senior Analyst [2]

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Just quickly on metal containers mainly, it sounds like the impact on the pre-buy wasn't as negative as you expected. Is there something else going on there other than the pet food picking up that you discussed? And how should we think about, I think, before you were talking about, if I recall correctly, about 4% unit volume declines for the full year with 1% from the base business and 3% from pre-buy? Is that still a good number? Or how should we think about that?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [3]

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Scott, it's Adam. Good questions. As far as the metal container business is concerned about what happened in the first quarter, you're right. We did anticipate full year volumes down in the 4% range. You've got the numbers right, 3% of that 4% was due to the pre-buy. That would've really impacted Q1 and Q4, and the balance of the year would have been roughly comparable to prior year. So the pre-buy, given the nature of our metal food can business, is pretty well defined. So there really was no change to the pre-buy.

What had happened in Q1 for us was we did see, again, good volume and growth in our pet food markets. We saw a little bit better volume in the soup market as well. And then customers we've been talking about this in managing their inventory, which was a big part of our projection for 2019 volume, did a little bit better from a volume standpoint than we anticipated. And as we've been in regular dialogue with them, we've now come to understand that they're reassessing some of their strategy both from a driving inventory down perspective and also from an exiting certain aspects of their business perspective. So at this point, we're very pleased with the volume that came through in the first quarter. Again, we're still talking with our customer about the impact of inventory and management of Q2. But if we sit here in Q2, our expectation would be a little bit down versus prior year, probably in that 1% range with the possibility of getting back to flat if that customer inventory management program looks something like it did in Q1.

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Scott Louis Gaffner, Barclays Bank PLC, Research Division - Director & Senior Analyst [4]

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Okay. And just as a follow-up to that, when we look at the weather in California and in the Midwest, maybe the Midwest isn't -- wasn't close enough to you from where your -- most of your customers are. But can you talk about what gives you confidence in the normalized harvest 2019 despite some negative weather impact to the start of the year?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [5]

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Sure. I think you've got it right as far as where our customers are located in those growing regions. So typically, we're a little further north in the Midwest than where most of the flooding occurred. So as we look at the packs right now, our early packs are already in the ground. They look good. They are 100% contracted as far as the acreage or tonnage, and we feel good about the early packs. Those are things like sweet peas, et cetera. Corn, green beans, again, are 100% contracted from a volume standpoint, and those are starting to go in the ground now. Again, no real delays as far as we're concerned and where our product's grown. We go out to the West Coast with fruit and tomatoes, really no change to our expectation. Tomato tonnage is up slightly versus 2018 in total. But as we've talked about before, that really doesn't affect the canned volume portion of that. Can volume's protected if volumes are down for total tonnage, and really it's pretty secured if volumes go up. It goes more to paste and other products.

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Operator [6]

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We'll now take a question from Anthony Pettinari with Citi.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [7]

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I was wondering if you could -- I was wondering if you could talk a little bit about what you're seeing in your PN metal containers. It seems like the industry has a extremely easy comp this year with the pack season last year. You're taking some footprint rationalization moves, and I think our competitor has talked about some competitive pressure in the industry. I was wondering if you could just kind of talk generally about what you're seeing in Europe.

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [8]

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Sure. As we look at Europe, I think we are expecting a more normal pack in Europe this year. We've had some challenges in the past. So I think you're right as far as the year-on-year volume of the pack. It should be a more normal pack versus a pack that was below expectations last year. As far as our footprint rationalization, we have taken cost out of our European footprint. We'll get the benefit of that this year from a year-to-year standpoint. But really we'll see a little bit of growth in our European can business this year and generally in line with our expectations.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [9]

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Okay. And then maybe switching to closures, is it safe to say you still expect kind of full year volume growth in closures? And in terms of the volume performance you saw in 1Q and maybe expect for the year, could you talk a little bit about metal hot-fill and then Dispensing Systems and then plastic, cold-fill and hot-fill?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [10]

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Sure. So absolutely, we are expecting growth in the closures segment for the year. So just for clarity, really what happened in the first quarter, as you heard in the prepared remarks as well as in the press release, this really was all around our metal closures, which is an interesting concept because it's not a segment of our business that we talk a lot about on this call. And the reason why is because it is so stable and it is so predictable, we have very few swings that would impact the business to the point where we talk about it on this kind of call. But as we've talked a lot about with our can business, the 20%-ish inflation that we saw in the U.S. market did influence pre-buy activity in the U.S. market, and then we've had significant inflation over the last couple of years in Europe as well. So the volume decline really was about our metal closures business. Our dispensing closures had another very good quarter. We're expecting the same 3% to 4% kind of growth that we've expected out of that business over time. We're expecting our hot-fill business to grow as well. So nothing has changed about the full year expectation. It's really about a timing issue and the metal closures part of the business.

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Operator [11]

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We'll now take a question from Chip Dillon with Vertical Research.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [12]

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My first question has to do with the -- just looking at the full year and just to get a feel, certainly you have expected conservatism being so early in the year. But it looks like when we look at the first half, it looks a lot better than certainly we were looking for and, therefore, the full -- the second half looks like maybe it's a little more cautious than we and others might be looking at. And I don't know if there's anything in particular that you would point to for why you would maintain that conservatism other than just the fact that it's early in the calendar?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [13]

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Chip, it's Adam. It's a really good question, and we spend a lot of time talking about it internally. It's -- as we look at the metal container business, which is a big driver here, we're very early days in the year. And again, while we're in regular dialogue with our customer regarding their inventory management program, they're reassessing that as we speak, and we just don't have a final outcome. So I think that would be an upside for the year if they would change that strategy and review the strategy that they took to exit some of their business as well. But as of now we just don't have a final answer on that. And again, we had a good start to the year with Q1. Feel very good about Q2. And as we look at the balance of our businesses, we'll see good growth in closures and plastics for the year as expected.

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [14]

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Chip, the only thing that I might add to that is that obviously there's a fair bit of assumption because it is so early in the year, right? Adam just kind of walked through the weather conditions, but that, too, is subject to change as we all know. So I think we're doing the prudent thing here. I would say that we are very bullish on the year in terms of where we go from here, but there's a lot of risk that sits out there yet to be determined. So I think that's kind of where we're coming out with guidance thus far.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [15]

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Okay. That's helpful. And then when you look at the nonoperating pension change, it looks like it's around $0.12 this year. First of all, we need to point out that not everyone like you all are -- is -- some people are actually taking it out of adjusted earnings, which obviously means the quality of your earnings is higher than these other companies, and this is another area. So I don't want to make this look bad but be applauded. But as we think about the market hitting new highs today, if the stock market had ended last year about where it is now, that is at a high. Is it fair to say that $0.12 probably wouldn't have happened this year? And maybe said differently, if we -- our estimates level roughly at the end of this year, and I know there are other puts and takes with interest rates on the liabilities side, could we see that pension, nonoperating pension item swing back the other way?

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [16]

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Yes, you pretty much have it right. So essentially, all of that pension change is -- it is a noncash item because of our pension plan even with the market decline is still in excess of 100% funded. As at year-end, I think, it was about 112% funded. So our estimated rate of return is 8.5%. Last year, as we all know, the market kind of fell apart in the fourth quarter. Our portfolio yield was in negative territory in the mid-single digits. Obviously, the market has recovered pretty significantly. Our portfolio is up some 10% on a year-to-date basis. So the accounting doesn't quite follow that impurity because it's all both of those end up getting amortized through the P&L. But yes, and we ended last year where we are now, the big portion of that $0.13 would not be in our P&L. But again, it is a noncash item. So it's not really that important from the cash generation of the business.

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [17]

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And you're also right, I think.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [18]

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Try to get that and just turning it out...

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [19]

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You're also right, and I thank you for pointing out that. Because we talk segment income, we do, it does show up in each of our segment results. And you are right, that is not true for every company out there.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [20]

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Yes. That's right. And just quickly before we turn it over, you mentioned the Spain plant closure. I thought pretty much everything you had in food can was actually through Vogel & Noot, and I thought that was more Central and Eastern Europe. So can you let us know how you got that plant? And could there be more -- and is that part of that acquisition?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [21]

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Sure. Chip, it's Adam. Actually, the Spanish plant that we closed was actually part of our closures business, not part of the can business that came through Vogel & Noot. So it come through an acquisition of the vacuum business back in the, call it, the mid-2000s range, and it was a small plant for us, and that volume would be absorbed into our other closure facilities across Europe.

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Operator [22]

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We'll now take a question from Mark Wilde with Bank of Montréal.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [23]

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I wondered if we could switch over to the plastics business. And maybe Adam or Bob, you just give me a sense of whether you think that 15% EBITDA margin target that you had by, I think, the end of '19, whether you think that's still a good target?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [24]

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Mark, it's Adam. We do think it's a good target. If you look at our projections now, I think if you would -- the 15% never really considered the pension income, the detriment that we're experiencing this year. So our projections would put us probably right above 15% for the year, if we did not have that onetime effect of the lower pension income. So we think it's a good target. What I'd say is that there's been a lot of work in the business that's gotten us to this point and a lot of that has been driving costs out of the system. And really, now as we transition to the next phase of where we're going with plastic, growth is going to be driven by revenue and by new volume coming in. So as we've said all along, that would be a little bit lumpy. This quarter is a little bit lumpy as we look at the 2%. But our growth projections for the year continue to be pretty good for this business.

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [25]

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Yes. Mark, this is -- sorry, I was going to say just to put that in perspective, that pension impact for that business is something pretty close to a 4 percentage point on the margin.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [26]

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Okay. Right. And just kind of staying on plastics, I wondered if you could give us some sense of whether any of this plastics backlash that we're seeing in the market, whether that has any effect on that business? And also, whether this is still a business that you would think about making acquisitions in?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [27]

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Sure. As far as single-use plastic, that really is not part of what we do. A lot of our products go into multiuse, whether it be personal care or home care products in our plastics business. So we don't think we're in a segment that is a target area focus on single-use product. We have portions of our business that do -- in the food side of our business with pet food that are essentially single-use products, but it's a package that our customers are committed to and feel good about from a sustainability standpoint. So we do think it's an issue. But I think for the most part, our business is outside of the single-use criteria.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [28]

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Okay. And then just in growth in that business, Adam?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [29]

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Growth in the plastics business?

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [30]

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Yes.

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [31]

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I think what we had said is something in the 3% to 4% kind of growth over time. And again, it'll be lumpy as we win new business and continue to manage the portfolio that we currently have in the plastics business.

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Operator [32]

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We'll now take a question from Debbie Jones with Deutsche Bank.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [33]

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I wondered to first ask about you should have a number of Board changes? And I think, Adam, now you've become president, I wanted to just see if there's anything you could comment on there, and any changes in roles or responsibilities?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [34]

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Sure. Well, first of all, you're right, we have made a couple of changes. I would say that they're sort of the combination of a very long and gradual process. Greg Horrigan always used to like to say that succession should be a little like taking your finger slowly out of water, and I think that's what we've been trying to do. So I would not say there are radical changes that come from that. I think Adam's taking on, as you hear on the call, even more of the responsibility of all the businesses. Although he had that for a period of time. So no radical changes. We work together, the 3 of us, as a team for some lengthy period of time. I think I speak for all 3 of us. We enjoy that. We challenge each other on a regular basis. And I think that's part of the uniqueness of Silgan kind of that confident Socratic method. Every idea gets torn at pretty hard, and so we hope to continue that. So I wouldn't expect any major changes on it. We all -- I think we all feel very privileged to be following in the footsteps of our founders and the roles that we're taking on, and we take that pretty seriously and we'll continue to do so.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [35]

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Okay. I wanted to go back to European food. I know it's a smaller business for you, and you mentioned, too, that I think you seem okay for you there. But there have been some reports of just pricing pressure, and from what I've heard maybe some more than normal volume shifts. And I'm just wondering if you're seeing any of that, if it's impacting the regions where you compete?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [36]

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I wouldn't say that there's anything new in that. You may recall that Europe unlike our North American market, which is -- tend to be long-term contract. Europe is more of an annual contract. So there's always a bit of friction that goes on each year. And so I said, that's kind of more the norm. It may be a little market specific where you're referring to. Again, remember, we point pretty Far East. And so again, so I want to be clear. I'm not saying there's not competitive action all the time, but I wouldn't say there's anything particularly new about that. And we feel really good about kind of the value proposition we bring to our customers, and we think we'll do well over time.

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Operator [37]

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We'll now hand the call over to Ghansham Panjabi for a question, with Baird.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [38]

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I guess going back to the upside volumes for the first quarter relative to initial view, I mean, kind of thinking back to last year, a lot of your customers also had to deal with higher freight costs and logistics costs, et cetera. Are you seeing them manage production differently that may also be impacting your order pattern, or is that not the case?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [39]

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No, I don't think so in the can business, Ghansham. I mean the demand patterns for that business are pretty well established over the course of the year. That's why as we talked about on our last call, we were so confident that we understood and could kind of capture where the pre-buy activity was at the end of the year. I think the biggest single item here is we're talking about steel inflation in the U.S. market of something close to 20%. So outside of that activity, yes, there are other inflationary items. But with the demand pattern really doesn't change over the course of the year versus our expectation.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [40]

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Okay. And then just going to the closures business and the plant closure in Spain, what does that intend to signal to us in terms of just the overall growth rate from metal closures in Europe? Is that shifted dramatically over the years? Is it losing share to plastics? Is it pretty stable? Or just more optimization relative to your aggregate footprint.

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [41]

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I think it's the last item. It really is about optimizing our footprint. I mean that business in Europe from a volume standpoint on the metal closures side has been very stable. I think Europe is at the forefront of single-use plastic. So it's an interesting time to be in an alternative package. And it really is about our relentless focus on just driving cost out of the system and lowering the overall cost footprint for the business.

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Operator [42]

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We'll now take a question with George Staphos with Bank of America Merrill Lynch.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [43]

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Thanks for the details, and congratulations on the start to the year and the change in responsibility, everybody. First question, and apologies a little bit in advance in terms of them being more nitty-gritty in nature. But when you look back at the first quarter in metal containers, was the variance versus your expectations mostly driven by the inventory build on your part and, in turn, the lower unit cost that you would've gotten from that? Or was it more driven by the fact that volume was to the end market a little bit better than expected? And if you could parse out, that would be helpful.

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [44]

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So George, if I understand the question, I would say these variations or expectation was mostly driven by slightly better volume and good operating performance. There was really no variance to speak of to our expectation around the inventory. That was just the year-on-year comparative point.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [45]

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Okay. That's fair. And then the other question I had kind of a two-parter. When we look at closures, and you said the volume was down in the quarter I think 2%, and that was impacted by pre-buying ahead of the steel price hike, when I look back at the fourth quarter last year closures overall, I think it was up 1%, it didn't look like there was a large pre-buy. Can you remind us within that number, what metal might have done in advance of the steel closure? And then more broadly, what effect are you seeing from direct to consumer in terms of your customers' plans for the food can and the other products that you produce. Are you seeing more interest in the food can and some of your Dispensing Systems, lest how would you say that's shaking up?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [46]

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I think the -- we've got to be clear, you're right that we did not call out the fourth quarter that our closures had a pre-buy, and that's what Adam was talking about that we can see that so visibly in our can business. But our closures business is just more fluid than that. So we -- intuitively, we knew there was something there, but we didn't feel like we had the concrete enough data to call it on that. If you look at volumes in the quarter, they had a lot more to do with the kind of the beverage side of the hot-fill market, what was going on that side. So in retrospect looking back, you could see some increase on it. The second thing, and the reason our language is a little different about the closures. There's sort of 2 things going on. The U.S., there's this spike in steel this year in the U.S. And there was a fourth quarter by fourth. There is a second impact happening in the volumes of metal comparatively this year and that's because Europe had a sizable steel increase last year. And Europe -- this gets a little complex, but Europe pushes its price increase during the first quarter. So we actually, in 2018 first quarter, we had the benefit of some pre-buying ahead of that increase in Europe. So you got it. You have the compound of both of them hitting this quarter on. But to be clear, there's the whole difference in this quarter is about metal closures. And everything else is exactly what we expected and is consistent.

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [47]

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As far as our customers inquiring in activity around maybe transitioning to metal cans. Look, we're always in regular dialogue with our customers. It is something that's on the table. We haven't seen any movement at this point. There was a lot of talk about opportunities but nothing concrete as we sit here.

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Operator [48]

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Our next question will come from Adam Josephson with KeyBanc.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [49]

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Adam, just on the closures volume expectation. Just -- I know you're expecting growth this year. I think last year, legacy volumes were down, too. I think the previous year, they were down 3. Correct me if wrong there. Given that and given the first quarter decline, why do you expect growth this year? And then longer term, what do you think is the right number for your legacy closures volume?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [50]

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Sure. I think you're roughly directionally correct on the 2 prior years as far as the flat caps at those closures business for us. As we sit here today, again, it's really about the timing of the first quarter that Tony just walked through. The balance of the business. We do have annual and in many cases long-term contracts that provide the volume outlook for us. So we sit here today with a good order book for us that does provide growth for the full year. Certainly, it provides growth in the second quarter as well on kind of our historic business and closures. So we do feel good about that. I think if you go back over time, there were some significant items like weather that drove our hot-fill business. It drove it up in 2016 and then we had a poor weather year that drove volumes down in 2017. So as we sit here now it's just beginning of the pre-fill season. And I would say we've got very good confidence based upon the assignments from our customers of filling locations and the contractual commitment that we have that we will see good growth. And it's a growing market for us still.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [51]

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And just on sustainability, just as a company that's in both plastics and metal cans and given that we hear from some other metal can manufacturers that cans are taking share from plastics in certain markets or going to do so at some point, how do you view the issue?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [52]

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Yes. I think Adam sort of hit it before. I think you can't help but believe that it is a bit of a tailwind to the can business. I mean it's -- and you could even look at -- again the generally, the market was pretty solid this first quarter across all categories. So is there a little bit of that in it? Maybe. It's hard for us to quantify it and say, but it just felt a little bit better, but it's only 1 quarter and who knows. I think the food can is much more complex in terms of changing. I think the beverage industry is a very different argument. Those customers use both packages all the time and so you can see a quicker change. Food can, part of what we've always told you guys about food can is don't worry about of us falling off a cliff on volume because the system is so deep in terms of what goes into a food can. The same is true on the side, right? It's not easy to shift stuff into food cans in a big manner. So what's great for us generally slows that process down. So I think you'll still find us feeling that, yes, for sure, customers and consumers are more focused on this issue than in the past. Definitely, plastics has some improvement to do in terms of recyclability and its storyline. And all that gives us a little bit of help, but I just think if food can -- it'll be less than you probably like to see in the beverage can.

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Operator [53]

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We'll now take a question from Gabe Hajde with Wells Fargo Securities.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [54]

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Congratulations to all. If you could maybe, Bob, quantify the raw material benefit that you did realize in plastics? And if there was anything in closures and/or anything expected in the second quarter?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [55]

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Sure. Dave, it's Adam. If you look at raw materials and resin in the first quarter, there was a small benefit in the closures business of a couple of million dollars. And then in our plastics business, there was really no impact in the quarter. So interestingly, we -- as we go forward and look at Q2 in our projection, CDI just published this morning, and those projects have changed now, which is why we always are pretty consistent in our forward look so we take the current quarter, and we essentially hold that flat for the balance of the year. So there typically is some upside or some risk to our forecast based upon movement in resin. As we sit here now, I would say there's not much impact in our forecast, a little bit of headwind in Q2. I'd also say that, that's probably now changed based upon the publication this morning, but we'll see how the markets play throughout the quarter.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [56]

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Okay. And then back to the Spain closure, I recognize it's small in the grand scheme of part of Silgan as a whole. But can you give us a sense for what the benefit could be on an annual basis from the closure and/or presuming you're transitioning some of the business out of facilities? And was that contemplated sort of when you gave full year guidance earlier in the year?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [57]

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Yes. So in terms of the overall cost, I think we called it out that there's roughly $5.7 million of restructuring charges, a little more than half of that is noncash. So basically the way we look at these types of projects is on a cash-on-cash return basis, kind of right in that mid-teen kind of return hurdle so that you can safely apply that metric to this one as well as you look forward. So it really, as Adam said before, it really came down to an opportunity to take costs out and do it in a manner where we did not have to disrupt customers where we could continue to supply, which is in large part the way we supply the broader European market in the closure side of the business from a select few facilities as well. So that is really the underlying premise there.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [58]

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And it was contemplated when you gave the full year outlook before?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [59]

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No. This would probably be incremental. But again, you're going to have a lengthy conversion here that in the cost of setting up against it. So not much real impact for the year.

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Operator [60]

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Our next question will come from Dan Rizzo with Jefferies.

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Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [61]

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You guys mentioned the plant in Spain, the optimization there. I was just wondering if there is other opportunities for optimization throughout your -- the different segments.

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [62]

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Sure. Dan, it's Adam. As we talked about earlier, it's something that we are constantly evaluating and then again, we've got a relentless focus to just drive cost right out of our system. So as we look across the segments, obviously, we're -- we'll continue to think about closures and opportunities there. Plastics, we had a pretty extensive footprint rationalization program that we've been through. We're coming out of that. I think you're using the benefit of that now. On the metal cans side, we announced the closure of a couple facilities in Europe last year. And then in the U.S. market, we had even alluded to on the last call that we are evaluating and a lot of that's going to depend upon whether or not the volume levels that we were projecting for the year are any normal or if it's onetime kind of impact on volume. So we're still evaluating that in deep discussions with our customers gaining a better understanding of those volume projections as well.

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Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [63]

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Okay. And then you talked a great length about the issues with the customer while making decisions on inventories. I was just wondering if they've given you a timeframe when this issue will be resolved or when we'll have a plan in place. Is it something that's kind of going to linger over the next mostly a year? Or is these something we -- they're going to have a decision relatively quickly?

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [64]

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Well, I think we're going to know quite a bit here in the next couple of months, is my guess. If you think about the business at their end, it is more of a seasonal pack business. So there are a couple of things in play. One, they're going to have to put inventory in place, and two, they're going to have to sell that through to the market. So I think those decisions will be upon us in pretty short order. We just don't have full clarity at this point, but we're in constant dialogue on the subject as we speak.

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Operator [65]

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We'll now take a question from Arun Viswanathan with RBC Capital Markets.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [66]

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Just wanted to ask, I guess, around the volumes in metal container in Q1. That 4%, I guess, down, was that kind of in line with your expectations and/or was it slightly better? And then secondarily, as you go through the year, are there any notable kind of impacts from customers changing kind of business? Or do you see any of that could impact your view as it has in the last couple of years?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [67]

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Sure. As we look at Q1, again, our expectation was decline of about 6% in volume in Q1. So coming in at 4% decline actually was better than what we originally anticipated, which, I think, Bob and Tony had talked about in prepared remarks. So volume was good for us in the first quarter versus our expectation. And then really, the single or 2 big notable items probably for the year, it's the customer and the inventory management program that we've been talking about. And then secondly, one of the benefits we saw in the first quarter versus our expectation was a little bit stronger suit volume. So we've had a lot of discussion on these calls in the past year or so about the supermarket and what our customers were doing in the supermarket. We feel good that we think there's a renewed focus on kind of the core products that we supply to the supermarket. So Q1 for us was kind of the tail end of the soup season. So I wouldn't necessarily think that would affect Q2 or Q3, but as we move later in the year, soup will be something that we'll be talking about and considering from a volume standpoint.

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [68]

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Arun, one other thing that I'll add to that and we did talk about it in our full year guidance, but I think it's -- for purposes of clarity, it's probably good to get it on the table. And that is that Q4 last year benefited from the buy-ahead. So as you think about comparatively this Q4 versus last year, there's going to be a pretty meaningful decline in volumes as a consequence of that and that's nothing more than the buy-ahead issue that we benefited from at the tail end of '18.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [69]

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Okay. Understood. So I guess similarly, just looking at -- actually, first off, on the soup issue, would you say that the conversions to plastic are moderating at all? And again, just wanted to touch on the sustainability issue. On the one hand, you have difficult way to value issues in cans but obviously, it seems like the recycling in some other aspects to be positive. So maybe if you can just reiterate your views on sustainability? And again, the recent potential strength in soup is that it could be related to kind of a plateauing of those conversions?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [70]

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Yes. I don't think what you're saying in soup, which was pretty modest. And I got Adam, who's just trying to say there was some -- you saw a little bit of progress there. And again, it's hard for us to know what it means on the year yet. Soup is a broad topic. Again, we talk about it a lot. It's -- I think what gives us some hope is that our customers are talking more about the importance of it as a core product and needing to and that's in -- and solve some challenges there. So I think that we feel better about it. I don't know that we consider today and say we see actual growth from that yet but maybe. As to alternate packages, plastic, which, of course, we supply a large part of the plastic containers for the supermarket as well, has never been a really meaningful part of that market. So it's not really -- this is not so much a story about converting to other packages as it is a story about soup consumption and the importance of soup in the meal category. I think the 1 other package that has gained some and certainly in broth this is true and there are some products would be more in a box form. And I think that is an interesting area where the environmental question may come into play because that is -- it's not as simple an environmental story, a recycling story as the can is. Can is infinitely recyclable, it uses recycled content. So it's about as good as you can get. That recycling story, particularly in the U.S., is much more complex around boxes. So maybe there would be some benefit there despite my previous comment, but it's -- even that is -- I can't tell you there's clear data of a shift in either direction on that.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [71]

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And then on a similar topic is some plastic containers, what's your thoughts on any impact there? I know you noted that your participation in single-use is lower, but just what your thoughts on going forward if there could be an impact on that business from the sustainability?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [72]

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Arun, we don't think there's going to be much of an impact at this point as we look out at the landscape of our plastic container business. Just for the comments, I made earlier just regarding multiuse versus single-use plastic. There's a spot in the market for multi-use products that plastic is a very, very good package and material for those applications.

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Operator [73]

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We'll now take a question from Tyler Langton with JPMorgan.

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Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [74]

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Just on capital allocation, I guess, can you talk about just reviewing your debt targets, can you talk about, I guess, a preference for acquisitions versus buybacks and then just with acquisitions sort of you're seeing in the market in terms of number of targets out there and multiples?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [75]

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Yes. Sure, Tyler. As you saw at the year-end, we were, kind of, back in the range that we had kind of put out as the optimal range, 2.5 to 3.5x, we were kind of sitting right at the high end of that. Obviously, with the free cash flow generation forecast that we've got, we'll -- all else equal that will take roughly another half a turn off of that. So we'll be squarely in the midst of that guidance. I think what that means for us is that kind of same strategy that we've always had and that is look for opportunities through the M&A lens to grow the platform where we can. And in the absence of that, I would say all else equal kind of near-term debt reduction probably still sits there for a little bit to give us dry powder to continue to look for M&A targets and then on a longer-term basis, as we continue to de-lever then a return to capital to shareholders much like we've done in the past is squarely on the table as well.

So I think as we would sit here today, we are actively engaged in looking at things that would fit us from a strategic standpoint and making sure that they would have the right kind of return profile for us. Yes, there are a number of properties in the market, multiples are generally high, trading multiples for public comps are equally high. So I think the trick is as we've always done to find the right kind of opportunity where we can buy the multiple down through synergies or have the right kind of cash profile whether it's from a growth standpoint or from a limited capital standpoint that allows the return metric to work. But I think the important part is that we stay disciplined around the M&A side. We are optimistic about our opportunity to find something that would fit us and merge in pretty well with us. So yes, there's no real change is strategy but with the balance sheet that's equipped to take advantage of opportunities.

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Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [76]

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Okay. Perfect. And then just I think in the past for metal containers, it was the -- last year in 2018, you had $18 million negative from the lower production. Is that still sort of in terms of getting that back this year? Is that number still sort of in the range with some in Q1 that you would've gotten and then the rest sort of in Q4 at the end of the year?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [77]

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Yes. It's a little bit confusing based on what happened last year. So as you might recall, we actually reduced inventory in Q1 of last year. We built it back in Q2. So the front half was kind of neutral. And then ultimately, what we did is we took all of that inventory reduction out in Q4. So you sort of have to keep that sequence in mind when you start thinking about your comps. But in total, you're right. It's the $18 million.

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Operator [78]

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We'll take our next question from Brian Maguire with Goldman Sachs.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [79]

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Most of my questions have already been asked, but I just wanted to come back to the metal volumes again as 1Q coming in better than expected but the full year guidance sort of maintained. Is it possible that some of that outperformance in 1Q was seasonal change or shift or some kind of a pull-forward from future quarters? Obviously, nothing to do really with metal prices, but just customer order patterns moving a little bit sooner in the year? And that's the reason for some of the conservatism? Or is it really just that -- you guys are just early in the year not wanting to make a call on the full year at this point?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [80]

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Yes. Brian, it's Adam. I think as we look at the volume in the first quarter, we didn't see a whole lot of timing variation versus our expectation. So I think it was just stronger volume in the quarter. And for the most part, it just -- it is, to your point, very early days in the year, and there's a lot of ground that we have to plow here for the remainder of the year in food cans to really feel good about where we're going for the whole year.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [81]

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Yes. Okay. That makes sense. And then just one for Bob real quick. I guess in the press release, you didn't mention about free cash flow guidance, but I'm assuming that's unchanged. And then also if you could comment on expectations for the book tax rate for the year?

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [82]

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Yes. Sure. So we did -- I did comment on the script that we're holding free cash flow guidance consistent with the $275 million, but it's down a little bit versus prior year largely because prior year benefited from the large inventory reduction. But obviously, we feel like we're off to a good start to that end and feeling good in that range so we did reiterate that.

On the tax side, really what you had in the quarter was some timing differences. So you get a tax benefit relative to the -- some of the stock-based compensation invested in Q1. So that adjustment and some state tax change, rate changes against the relatively small quarter had a fairly wide impact on the rate, but spread over the full year, it doesn't really have much of an impact against our rate guidance. So we're not really changing guidance from where we originally started on the tax rate for the year.

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Operator [83]

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Our next question will come from Edlain Rodriguez with UBS.

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Edlain S. Rodriguez, UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals [84]

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Quick one on containers -- on metal containers. So in the past, you've talked about walking away from certain businesses that weren't profitable. Is that something that's still going on? Or has it come to a close?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [85]

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Well, I think what we've talked about is there have been, from time to time, competitive issues that have come up, and we've chosen not to chase business in those competitive issues. So I think that's a slight nuance of the difference. So it's not as if we have elements of our portfolio on the can side that we look at that just to not do that. That's not really true. It's more if a competitive intrusion comes at you, how do you react to that. So no, there is nothing there we would want to walk away from. We like the business we have and think we take great care of our customers, et cetera. And as we said, as the leader of industry, there is a degree to which you may do that, and it may suit your footprint to do it. And then there's a point at which you will not do that and you will defend that business.

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Edlain S. Rodriguez, UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals [86]

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Okay. And one on closures, and again apologies if you have already addressed that. Like how confident are you that the volume decline we saw this quarter is just due to timing and will definitely come back during the year?

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [87]

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We're highly confident that it was just timing in 1 portion of our closures business and feel very good about not only the entire segment but the full year for the segment from a volume standpoint.

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Operator [88]

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We'll now take your question from Adam Josephson with KeyBanc.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [89]

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Just a similar question to what I asked on closures related to the food can business. So if you're down on volume 3% to 4% this year, I think there would be 3 straight years of anywhere from 2% to 4% volume declines. Thereafter, do you think flat is a reasonable expectation? Or is it more reasonable to perhaps expect just a smaller rate of decline?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [90]

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Boy, there's is a lot to that one. So first of all, I think what we've been talking about is that over time, the growing elements of the -- our food can business are becoming a bigger part of what we are. And so I would say I think flat is a logical answer as things like pet food become a larger percentage of our business and it's been a consistent grower over the longer period of time. And products like fruit, which have been a consistent decliner over time are down to now 4% of our total business. So I think, flat's about right. I think -- I got to be clear, we are just not as manically focused as you all are on individual growth in our individual businesses. The model of Silgan from the beginning of time has been invest and get a franchise position in mature businesses, run those businesses for cash, take that cash and deploy that cash. If you look over the last decade, our food can business, you guys can give me the exact numbers but the global food -- the North America, again, is probably down some, I usually say flat, but it's not meant to be an exact answer. But over that time, Silgan has generated an increase in our EPS of 9.4%.

So -- and so you'll take my answer and understand it, it just comes from when I read things that say, well, Silgan is a lower growth company, so it should get a lower multiple. I keep looking at things, but that's not how our model works. We take care of these franchise businesses very carefully. We take the cash, we deploy that cash. And the cash is half of the strategy of our engine. And I recognize it's hard to know how to model that, but over time, I think it's demonstrated as being a very workable answer to that. So that's part of why this is we don't get quite as narrowly hung up on that growth question on the cans as your question might imply.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [91]

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Sure. Two other questions. D&A versus CapEx, it's -- I think, you expect them to be roughly equivalent this year. Did you expect that to remain the case? I guess because you had volumes declining at least in food can this year but I guess, thereafter, you're thinking volume would be flattish to up depending on the segment so you would expect CapEx to be at least in line with D&A? Is that a reasonable assumption?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [92]

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Yes. The one thing that throws that off obviously is when you end up with the deal through M&A. That could have some influence on your D&A as well. But all things equal, I think you're in the right ballpark.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [93]

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And just one last one back to sustainability for a moment. Obviously, you invested a considerable amount of money in plastic packaging 2 years ago with the dispensing deal. Just given all this talk about sustainability and the media concerns about plastic, et cetera, are you any more reluctant to deploy capital on plastic packaging than you were before this discussion about sustainability reached a fever pitch as it seemingly has now?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [94]

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Yes. Excellent question. I would say it really depends on the plastic package. So if I look at the Dispensing Systems business, we wouldn't change one bit on that. The uniqueness of what is delivered in their product and their dispensing systems, I don't see any viable change to that market. And it goes kind of what Adam is saying. Those are very much multi-use, specialized products, et cetera, that, to me, I just can't, for the life of me, envision another package taking that market over. If you're asking me about water bottles, I think that's a very different question for us. And so it does -- we are definitely paying attention to it and does change our view of certain markets.

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Operator [95]

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We'll take a question from George Staphos with Bank of America Merrill Lynch.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [96]

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First of all, when I look at cash flow, I noticed there was a fairly large drop in payables in the first quarter or use of cash, I should say. And by the way, congratulations on maintaining the balance sheet pretty tightly quarter-on-quarter this year. Is that just -- you might have bought some steel ahead last year, ahead of pricing going up and now is when you're paying the vendors or is it related to any of the payments related to any of your traditional rightsizing and restructuring? Just what was -- curious what was in that number? And then if you could remind us, recognizing it's not in your guidance, if the customer came back, the customers came back and ordered in more normal levels relative to where they had been in '17 and prior. In terms of upside to guidance, would that be a few pennies, would that be down if you had any kind of view that you could share recognizing it's a bit of sensitive topic, I would appreciate it.

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [97]

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Yes. George, I'll take the cash flow one. You essentially have it right. So that was largely due to kind of timing with all the inflation and cost changes coming through around steel. As we managed our own purchases and that carried through year-end at given terms, ultimately that flushes through in Q1. There's probably a little bit of deferred tax that's showing up on that line as well but for the most part, it is the AP issue.

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [98]

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And George, on your second one, if I understand, we're talking about [Byford] and the impact of that if I have that right in your question...

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [99]

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No, no. If the customer in question went back to their normal order patterns that you've been saying you're not sure yet whether they will or won't, what that might add to your earnings all else equal in a normal year?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [100]

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Got it. Now I got it. I think if they said, look, let's forget about this inventory reduction this year, there's some probably 150 million to 200 million units that would come from that and I'll let you do the math that comes from there, but that sort of what would come back.

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Operator [101]

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It appears there are no further questions at this time. I'd like to turn the conference back to Mr. Tony Allott for any additional or closing remarks.

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [102]

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Right. Thank you, Jessica. Thank you very much for your time. And we look forward to talking about our second quarter in late July.

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Operator [103]

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This concludes our teleconference. Thank you for your participation.