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Edited Transcript of SLGN earnings conference call or presentation 30-Jan-19 4:00pm GMT

Q4 2018 Silgan Holdings Inc Earnings Call

STAMFORD Feb 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Silgan Holdings Inc earnings conference call or presentation Wednesday, January 30, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam J. Greenlee

Silgan Holdings Inc. - Executive VP & COO

* Anthony J. Allott

Silgan Holdings Inc. - President, CEO & Director

* 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

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Matthew T. Krueger

Robert W. Baird & Co. Incorporated, Research Division - Junior 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 Fourth Quarter 2018 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.

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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, President and CEO; Bob Lewis, EVP and CFO; and Adam Greenlee, EVP 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 2017, 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 for us. With that, I'll turn it over to Tony.

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [3]

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Thanks, Kim. Welcome, everyone to Silgan's 2018 Year-End Earnings Conference Call. I want to start by making a few comments about the highlights of 2018 and provide a brief update regarding the 2019 outlook. Bob will then review the financial performance for the full year and the fourth quarter and provide more details around our 2019 outlook. Afterwards, Bob, Adam and I will be pleased to take any questions. As covered in our press release, 2018 was a very good year for the company with several record performances and milestones, including: delivering net income per share of $2.01; delivering a record adjusted net income per share of $2.08, 26% above the prior year record level; generating free cash flow of $311.4 million or $2.79 per share, an increase of 39% versus the prior year; and a free cash flow yield at year-end stock price of 11.8%; renewing the long-term contract with our largest customer through 2025 and positioning us to further support their growth objectives; exceeding inventory reduction targets in our U.S. metal food can business; continuing strong growth and further accretion from our dispensing systems operations; delivering another year of significant improvement in our plastic container business; commercializing 2 new manufacturing facilities to support growth in the pet food market; rationalizing can manufacturing operations in 2 metal container facilities; completing a favorable amendment to our senior secured credit facility and redeeming all of our outstanding 5% senior notes; and finally, increasing the cash dividend by approximately 11%.

We're pleased with the performance of each of our businesses in 2018. Earnings growth was primarily driven by the inclusion and strong performance of Dispensing Systems operations as well as continued improvement in our plastic container business. As expected, these improvements were partly offset by the metal containers business as we focused on cash generation and incurred an $18 million headwind for unabsorbed overhead cost as we work down finished goods inventories. The volumes in metal container business were down 4%, but these were the results of a few specific customer actions, while the rest of food can industry grew during the year, reflecting the continued relative stability of the metal food can and our end markets. We believe our business -- businesses are also well positioned in 2019 and anticipate solid earnings growth before considering the impact on pension costs for market declines late in 2018. Therefore, as Bob will discuss in more detail, we're providing full year guidance for the adjusted earnings per diluted share in the range of $2.10 to $2.20, which includes a $0.13 per diluted share for the unfavorable pension impact. The midpoint of this estimate represents an almost 10% increase over our record 2018 earnings, excluding the pension impact. We also expect free cash flow to be approximately $275 million. With that, I'll turn it 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. As Tony highlighted, 2018 benefited from several strategic initiatives, which leave our businesses well positioned for 2019 and beyond. These initiatives included deployment of growth capital on our plastic and metal food container businesses, rightsizing our inventory levels to generate incremental free cash flow, initiating plant rationalization activities, renewing a long-term contract with our largest customer and completing the integration of the Dispensing Systems operations. As a result, in 2018, we delivered adjusted earnings per diluted share of $2.08, and we delivered free cash flow of $311.4 million.

On a consolidated basis, net sales for the year were $4,450,000,000, an increase of $359 million or 8.8% over the prior year. This increase was a result of revenue increases across all of our businesses. When we converted these sales to net income for the year of $224 million or $2.01 per diluted share as compared to 2017 net income of $269.7 million or $2.42 per diluted share.

In 2018, adjusted earnings per share benefited by adjustments that increased earnings per share by $0.07 for restructuring costs and loss on early extinguishment of debt. Adjustments decreasing earnings per share in 2017 totaled $0.77, including a decrease of $1 per share and the net tax adjustment reflecting reduced future cash tax obligations under the U.S. Tax Cuts and Jobs Act of 2017, and increases of $0.15 for costs attributable to announced acquisitions and $0.08 of restructuring costs and loss on early extinguishment of debt. As a result, adjusted net income per diluted share was $2.08 in 2018 versus $1.65 in 2017, an increase of 26%.

Interest expense before loss on early extinguishment of debt increased $6.1 million to $116.3 million, primarily due to higher weighted average outstanding borrowings, principally as a result of borrowings to fund the Dispensing Systems acquisition in April of 2017 and higher weighted average interest rates. In addition, we incurred a loss on early extinguishment of debt of $2.5 million as a result of the redemption of all the remaining 5% senior notes due 2020 in April of 2018, and the amendment to the senior secured credit facility in May 2018.

In 2017, we incurred a loss on early extinguishment of debt of $7.1 million as a result of the prepayment of outstanding U.S. and Euro term loans under the previous senior secured credit facility in conjunction with the issuance of the new senior notes and the April 2017 partial redemption of the 5% senior notes due 2020.

Our 2018 effective tax rate was 23.6% versus a negative 12.5% in 2017. The 2017 rate was favorably impacted by the benefit from the effective tax rate adjustments totaling $110.9 million or $1 per share. These adjustments are primarily the result of the revaluation of net deferred tax liabilities to reflect lower future tax obligations as a result of the reduction in the U.S. corporate tax rates under the U.S. Tax Cuts and Jobs Act of 2017. The effective rate for 2017, exclusive of these effective tax rate adjustments, would have been 33.8%. Full year capital expenditures totaled $191 million in 2018, which is slightly lower than anticipated as a result of the timing of the completion of certain projects, which will carry over into 2019. Capital investments in 2018 totaled $174.5 million. Additionally, we paid a quarterly cash dividend of $0.10 per share in December. The total cash cost of the dividend was $11.1 million. For the full year, we returned $44.5 million to shareholders in the form of dividends.

As outlined in Table C, we generated record free cash flow of $311.4 million or $2.79 per share versus $224.1 million or $2.01 per share in the prior year.

I'll now provide some specifics regarding the financial performance of each of our businesses. The metal container business recorded net sales of $2,380,000,000, up $99.9 million versus the prior year. This increase was primarily due to the pass-through of higher raw material and other manufacturing costs and the impact of favorable foreign currency translation of approximately $12 million, partially offset by lower unit volumes of approximately 4%. The reduction in unit volumes was principally due to a few specific causes we have been discussing all year, namely a seasonal customer reducing inventory levels, a customer plant shutdown in the fruit market, a competitive loss of a smaller customer and a less favorable harvest in Europe. These declines were partially offset by higher pet food volumes and an incremental buy ahead by customers in 2018 in anticipation of significant steel inflation in 2019. Segment income in the metal container business was $198.8 million, a decrease of $31.4 million versus the prior year. This decrease was primarily attributable to the unfavorable overhead absorption of approximately $18 million due to the reduction of finished goods inventory by approximately $65 million, lower unit volumes, higher freight expense and higher rationalization costs. These costs were partially offset by the favorable impact from the contractual pass-through to customers of index inflation on nonmetal costs as compared to the unfavorable impact in the prior year from the contractual pass-through of index deflation on nonmetal costs.

Lower manufacturing costs and a charge in the prior year related to the resolution of a past noncommercial legal dispute. We also incurred rationalization charges of $5.3 million and $3.3 million in each of 2018 and 2017, respectively. The costs in 2018 are primarily the result of the liquidation of the business in Belarus and the shutdown of operations in Jordan.

Net sales in the closure business increased $210.1 million to $1,460,000,000 in 2018, primarily due to the inclusion of the Dispensing Systems operations for a full year, the pass-through of higher raw material and other manufacturing costs and the impact of favorable foreign currency translation of approximately $18 million. These benefits were partially offset by approximately 2% lower volumes in the legacy closure operation, primarily as the result of less favorable fruit and vegetable pack in Europe due to poor weather conditions.

Segment income in the closures business for 2018 increased $47.9 million to $189.9 million, primarily due to the inclusion of the full year of Dispensing Systems operations, the unfavorable impact in the prior year of a one-time $11.9 million write-up of inventory of the Dispensing Systems operations for purchase accounting in the second quarter of 2017, lower manufacturing costs and foreign currency transaction losses in the prior year period, partially offset by volume effects from the less favorable fruit and vegetable pack in Europe. Net sales in the plastic container business increased $49 million to $614.1 million in 2018, principally due to the pass-through of higher raw material costs and higher volumes of approximately 4%. Segment income increased $14.8 million to $42.6 million for the year, largely attributable to higher volumes and lower manufacturing costs, partially offset by costs associated with the startup of the facility in Fort Smith, Arkansas.

For the fourth quarter report, we reported earnings per diluted share of $0.34 as compared to $1.31 in the prior year quarter. We reported adjustments increasing income by $0.04 in 2018. And during 2017, we recorded adjustments reducing earnings by $0.99 per diluted share, largely as a result of the net tax adjustments, reducing future tax obligations. As a result, we delivered record adjusted earnings per diluted share of $0.38 in the fourth quarter of 2018 versus $0.32 per diluted share in the same quarter a year ago.

Net sales for the quarter increased $74.8 million versus the prior year, driven primarily by the pass-through of higher raw material and other manufacturing costs and an increase in volumes in each of the businesses, partially offset by the unfavorable impact in foreign currency translation of approximately $8 million. For the fourth quarter 2018, volumes increased by 4% in each of the metal and plastic container businesses and 1% in the closures business. The volume improvement in metal food containers was principally due to a larger buy ahead by customers in anticipation of significant inflation in 2019.

Income before interest and income taxes for the fourth quarter of 2018 decreased by $9.1 million to $77.3 million, primarily as a result of the unfavorable overhead absorption of approximately $18 million in the metal container business due to the reduction of finished goods inventory by approximately $65 million, higher SG&A cost, higher rationalization charges and costs associated with the startup of the new plant in Fort Smith. These costs were partially offset by higher volumes in each of the businesses, lower manufacturing costs, a favorable mix of products sold in the closures business and a favorable impact from the lagged pass-through of lower resin costs in closures business. The effective tax rate for the fourth quarter 2018 was $23.1 million versus a negative 159.2% in the prior year quarter. During the fourth quarter of 2017, we reported effective tax rate adjustments of $110.9 million, primarily due to the revalue of net deferred tax liabilities to reflect lower future tax obligations due to the reduction in U.S. corporate tax rates. Exclusive to these adjustments, the fourth quarter effective rate would have been 37.6%.

As we turn now to 2019, our estimate of adjusted earnings per diluted share for 2019 is a range of $2.10 to $2.20, which includes an unfavorable noncash pension impact of $0.13, resulting from significant market declines in investment values at the end of 2018. This estimate compares to adjusted earnings per share of $2.08 for the full year of 2018. Reflected in our estimates for 2019 are the following: Segment income in the metal container business is forecasted to benefit from a normal production level in 2019 as compared to the significant finished goods inventory reduction in 2018, and continued manufacturing efficiencies, offset by the unfavorable pension impact and anticipated lower unit volumes. The expected decline in unit volumes is primarily the result of the customer pre-buy activity in 2018 in advance of the anticipated steel inflation and the expected continuation of an inventory and portfolio management program at a certain customer. These negative drivers are expected to be partially offset by continued growth in pet food and a more normal fruit and vegetable pack in Europe. The closures business is expected to benefit from anticipated volume gains and continued manufacturing efficiencies, offset by the unfavorable pension impact. We're expecting the plastic container business to benefit from continued manufacturing efficiencies in volume growth, including from the new Fort Smith, Arkansas facility. These benefits will be partially offset by the unfavorable pension impact.

In addition, we expect interest expense to decline slightly versus 2018, largely a result of the lower average outstanding borrowings, partially offset by anticipated higher interest rates. We currently expect our tax rate to be approximately 24%, largely in line with the 2018 rate. Also, we expect capital expenditures in 2019 to be approximately $200 million as capital for certain projects initiated in 2018 will be paid in 2019.

We're also providing a first quarter 2019 estimate of adjusted earnings per diluted share in the range of $0.40 to $0.45, excluding rationalization charge. This compares to $0.42 in the first quarter of 2018. We anticipate slightly higher volumes in the closure and plastic container business, continued manufacturing efficiencies across all businesses and more seasonal inventory build in the metal container business, a favorable impact from the lagged pass-through of lower resin cost and lower interest cost as well as lower unit volumes in the metal container business and the unfavorable noncash impact of approximately $0.03 per diluted share.

Metal container volumes are expected to decline as customers utilize product purchase as part of the strong pre-buy at the end of 2018, the continuation of the inventory and portfolio management program at a certain customer and the continued impact of smaller customer loss, partially offset by higher volumes in the pet food. Based on our current outlook for 2019, we expect free cash flow to be approximately $275 million versus the $311.4 million in 2018, as 2018 benefited from a significant reduction in finished goods inventory, which is not expected to recur and slightly lower CapEx. Additionally, 2019 will benefit from improved earnings and lower cash interest.

That concludes our prepared comments. So in an effort to allow everyone to have their questions answered, we'd like to ask that you limit your time to 1 question and 1 follow-up, and we'll be happy to take additional questions if you want to get back in the queue. So David, I'll turn it over to you for directions for the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Anthony Pettinari with Citi.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [2]

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Just had a question on the 4Q metal container volumes. I think they were up 4% on pre-buy activity. The CMI data was sort of flat. Did you meaningfully outperform your peers? Or is it possible that the pre-buy benefit wasn't tracked by CMI? Or do your customers maybe pre-buy more than peers? I'm just trying to kind of parse out the details there.

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [3]

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Sure. Good question. So the -- yes, we're up 4%. That increase is entirely driven by pre-buying a little bit more. We would have been down had there not been pre-buying activity in the quarter. You're right that the market was more flat in the fourth quarter. But I think if you look back to the fourth quarter a year ago, the industry was up, I think, somewhere in the 3%, 3.1%. And that we attributed at that time to our understanding that the pack in the Midwest, particularly southern Midwest, was much stronger. So we are a little less represented by it. So I think the answer is that our peers had a strong fourth quarter a year ago and that, that was a tough comp for them.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [4]

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Okay, that's helpful. And then just, it seems like this year, maybe later in the year, you'll be in a position where you could potentially repurchase shares, but you've also had some success with the HH&B acquisition. Just wondered if you could talk about the M&A pipeline broadly, and then kind of the attractiveness of M&A versus repurchases?

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [5]

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Yes. Look, Anthony, we're doing well against our cash flow guidance. We're delevering. I think that speaks to the strength of the franchise. Remember, with the deal back in April of '17, we kind of levered up to the mid-4s, communicating that we'd be able to get pretty quickly back into the range. As we exited '18, we're kind of right at the top end of that range, with a $275 free cash flow target next year. That will put us closer to the midpoint. So I think more than anything, from a capital deployment standpoint, that puts us exactly where we would want to be to have the flexibility to be able to take advantage of M&A opportunities should they arise, further delever if there is a short-term absence of M&A opportunities and then look, as we have always done at a return to capital, if it's a longer-term kind of a slowdown in M&A activity. But I wouldn't at all think or say that there is that kind of slowdown. I think there's some nervousness around what the credit markets have done. I think they've settled down a little bit more recently. I think there's quite a bit of activity in the marketplace around the M&A space and there's certainly things that we would have interest in looking at, none of that necessarily means that we get a deal done, but there's certainly things that we would want to look at. And I think that's where we would see the capital allocation as a consequence.

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Operator [6]

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And next, we'll go to Scott Gaffner with Barclays.

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Scott Louis Gaffner, Barclays Bank PLC, Research Division - Director & Senior Analyst [7]

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Bob, when we you were mentioning the puts and takes in 2019 for the metal containers business, I was just wondering if you look at the pre-buy and some of the comparison issues that's going to create for 2019, do you still think that you can get to positive year-over-year operating profit in the metal containers business?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [8]

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Scott, it's Tony. So I sort of -- you didn't go where I thought you were going on that question. So on the -- the answer is, yes, we do think we can get to positive operating profit. Remember that the metal container business had $18 million of inventory, overhead cost on the year. So that's kind of a meaningful benefit we climb against on that. And so we do expect that even though there's going to be this significant pension impact, that we will have that benefit. Where I thought you were going to go, and I think I'll answer anyway was on volumes. So it is -- we are expecting volumes to be down next year. But the primary reason for that has to do with the pre-buy. And I just want to take a minute, because it's worth looking at the impact of pre-buy. They are significantly, negatively impacts on the year that follows a pre-buy, because you have, the year before it, has the sale that you -- in the first quarter of the year following, you don't have those sales. And then by the fourth quarter, you're cycling against the prior year on a comparative basis that you essentially end up with kind of 2x the hit on the comparative percentage. So if the majority of the reason we think volumes would be down in 2019, it's nothing more than the pre-buying you saw at the end of 2018. And yes, with the -- our expectation is the profit can get back to a positive. But it -- we do have to come over a significant pension impact. So that's why we're saying we'll be pretty modest.

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Scott Louis Gaffner, Barclays Bank PLC, Research Division - Director & Senior Analyst [9]

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Sure. That makes sense. And just as far as the pre-buy, that was going to be the second part of my question, actually is, just the -- did you feel the pre-buy in both Europe and the U.S? And was that across various customer segments? Or was it particular to certain customer segments?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [10]

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Good question. So the pre-buy was not in Europe. What's happening in the steel markets is quite different between Europe and the U.S. So there would would've been not a lot of reason in Europe to do a pre-buy. And as you'll recall, it's a pretty negative pack season there, so there were -- there was really no reason to try to be -- be doing that, in any case. So whereas in certain markets here, I would say that yes, it probably skews a little bit more to the vegetable market just because those are the customers who typically can theoretically do that pre-buy. And so it's definitely domestic and it's probably got to be a little bit more, as you look at that industry data, it's just a little bit more in the veg category.

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Operator [11]

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And next, we'll go to Mark Wilde with Bank of Montréal.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [12]

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Tony, I wonder if you could just walk over to the closures in Dispensing business. And if you could just help us unbundle volumes both in the fourth quarter and the full year between closures and Dispensing?

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

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Hey, Mark, it's Adam. I'll jump in on this one, Tony, you can correct whatever I get wrong to start with. If you look at the fourth quarter, we did see again, continued growth in the Dispensing Systems business. So their volume was up about 3% in the quarter versus prior year. And if you look at the legacy business, importantly, the U.S. single-serve market that we've been talking about for some time now, as we had previously said, we thought the back half of the year was going to see a recovery, mostly because we had very difficult comps in the first half of the year. We did see growth of about 2% in the U.S. single-serve business in the fourth quarter as well. Those are largely offset or partially offset by some continued weakness in the European food pack. So if you kind of break it down, I'd say, dispensing up 3%, the important U.S. single-serve market up 2%, and Europe down just a couple of percent as well. Then if you look at the full year -- you go ahead, Mark. Sorry?

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [14]

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No, no that's exactly what I was going, the full year.

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Adam J. Greenlee, Silgan Holdings Inc. - Executive VP & COO [15]

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Okay. So full year, Dispensing Systems, as we've talked, it's kind of the mid-single-digit kind of unit volume growth business and it delivered exactly as expected. So we're kind of mid-single digits. Our hot-fill closure business in the U.S., the single-serve market we just talked about, all told, we came in about 2% down versus prior year. Again, I'll just say as expected. And then the unfavorable volume impact was really Europe and it's mostly related to the food pack that we've been talking about for some time. So the interesting thing with that is that closure isn't necessarily a closure. So with some weakness in the European food pack, a pick-up in volume at Dispensing Systems, we actually had a favorable mix in our closures business as we look at the total as well. So all in, I'd say a pretty solid year and a very good end of the year in Q4 for 2018.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [16]

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Okay, and if I could, Adam, just as a follow on. When you bought this business, you talked about sort of the potential for kind of bolt-on M&A in that business, and I wondered if you could just update us on how you're thinking about that right now.

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [17]

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Yes, Mark, this is Bob. That is it -- you're right. We did say that. We thought that there will be opportunities across the globe to think about the various silos of product line around that business, and that we would be able to, over time, find areas where we could invest and further grow. That is a focus of our M&A strategy. Obviously, we've not announced one as we sit here today, but it is something that we still think that we can avail ourselves to and will present opportunity over time.

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [18]

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Mark, let me add more point on that, which is, that we also see opportunity for organic growth in that business, and investments on organic growth. So some of it's acquisition-based, some is, that we're just having success growing with customers' end markets, and can also take the route of organically investing in that.

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Operator [19]

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And next we'll go to Chip Dillon with Vertical Research.

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

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I had a quick question, a couple. One has to do with the pet food area. I know Q3 '17, I believe was the year you saw a big pop, like 7%, and then I think you mentioned -- I think last year, it was -- it moderated quite a bit. And I just want to know what your thoughts are about pet food going forward? I've frankly, been seeing a lot more in pouches, et cetera, and I didn't know if there is -- if you're -- if that's going to have an impact or not.

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [21]

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Okay, Chip. Tony, it's a good question. We continue to see pet food as a pretty solid, growing area across our businesses. And so if you look at kind of pet population, percentage of households with pets, those numbers continue to be up 5%, 6%, 7%, 8%, depending on which stack you kind of look at in there. So we continue to think pet food will grow. You are right that it -- sometimes it moves in -- it's not a linear, straight line up. What happens, you got promotional activity that throws that by quite a bit. So you'll have your -- our history on this is we'll have years where we see significant growth, and then we'll have the years that are flat, maybe get a little bit back. But over time, pet has been a steady grower, and we think it'll continue to be. And we think the kind of packages our customers chose, they do it for a lot of different reasons. So the -- we feel really good about what it's in, canned pet food makes a lot of sense. It's a great package, as is true with all of our packages, it's fully recyclable, consumers like it, so that works well. Other customers looking more at plastic solutions, and that's something else that we can deliver for them. So we're little bit agnostic, not towards pouch, but really, we don't see a lot of pouch in North America in any case.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [22]

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Okay. Let's get to earnings. Quick follow up. You mentioned that when you were with a big customer, after 2025 and still didn't know if this year or in the future, there will be a significant capital component to maintain that business. And is it fair to say it's typical of renewals, where maybe during the year, if you might give up a little bit of margin, but expect to get back that and more in the later years?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [23]

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Good question. I don't want to get into any specifics. I would say a couple of things on that. One is that, it is a business that we anticipate growth over time, and has grown historically, and we have invested behind that. So yes, they will be kind of ordinary course capital investments to support the growth on the business as we go forward. On the renewal, I would just say that I would call it typical of our contract renewals where we try to go into each of them and find win-win. Obviously, the customer's looking for value of some kind, and we're trying to find cost savings, growth opportunities, et cetera. And so we really, no different than any other contract. We're trying to find a solution that's good for both parties on that, and I would say this one fell right into that category.

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Operator [24]

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And next we'll go to Gabe Hajde with Wells Fargo Securities.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [25]

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Had a question about the closures business. To the extent that there's any sort of exposure to, I guess, the Chinese consumer or some of these fragrance or beauty and personal care products find themselves in duty-free shops and stuff like that, have you had any dialogue with customers that are a little bit cautious on the volume environment? Just provide a little color on that front.

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [26]

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Sure. So a relatively small portion of our closure sales are into and for the Chinese market. A big part of our Chinese footprint is to have a lower labor cost means to supply markets around the world. And so, that doesn't mean we don't sell in that market. Well of course, we do, but it's pretty small and yes, you can, I would say it's fair. There's been some softening of more high-end personal care kind of markets that we fell into, but it's so that it's small enough to us, it's not a meaningful part of the financial performance.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [27]

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Okay. And I believe you mentioned it, but is there any way to parse out -- is there an expected kind of resin benefit here in the first half where things have trended in the plastics and the closures business?

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [28]

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Sure. I think in total, Gabe, we're looking at probably a couple million dollars of benefit in Q1. And then what we do as a company, our policy on the forward-look of resin for our budget is that we then hold resin flat for the remainder of the year. So obviously, the resin markets are volatile right now. We've seen some drops as we come into the year. Depending upon the resin type you're talking about, there'll be some stabilization. In primary resin, certainly resins also will go up as well, particularly polypropylene. So I think as we sit here today, it will be a small benefit in the first quarter, and then should not have much of an impact on the course of the year. The real reason for that is we've done a nice job systemically reducing kind of our exposure to the lagged pass-through of resin in our core businesses over time, and have shortened those pass-through mechanisms. Dispensing Systems is one business that has slightly longer lags. So that's where you are seeing more of the resin impact for our business.

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Operator [29]

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And next we'll go to Debbie Jones with Deutsche Bank.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [30]

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I wanted to ask about the client rationalizations that you mentioned. I didn't catch specifically where those were. I think you might have mentioned something in Jordan and the timing of that and whether or not you've already started to see a benefit? I mean, if you could just comment on too, like why those decisions remain?

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

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Sure. Basically, the charges that we've incurred in the year relate to 2 primary facilities. We closed a facility out of the European operation in Belarus, and we ceased operations in Jordan. Remember that both were relatively small facilities for us, each of which were part of the geopolitical landscape. So it made sense for us to do that. Given most of that activity has been influencing the operations of those 2 entities for the last year or 2, there really isn't much benefit to be had there other than just not have the distraction of trying to operate those facilities and navigate those waters. So the impact won't be very significant in the overall P&L as we move forward.

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [32]

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And then, Debbie, I think maybe you're asking us a more general question about other rationalizations that could come from there. I think the -- we've, basically in our can business, we've shut down nearly a plant for every plant we operate. So we are constantly looking at the footprint and the opportunities on that. As you've heard from us over the last year, we're really waiting and watching a little bit to understand a particular set of customer actions. If volumes remain where they are now, there's more opportunity for us to do that, and we certainly will get at that and do it. If volumes were to come back a little bit, because a customer's been working off inventories and doing some portfolio management, if at end they see a different forward-looking number, then we would have a little less of that to do. But we're absolutely looking at it, and I think it's reasonable to assume there could be some more going forward.

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

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Okay. The second question, around the [-- there's kind of 2 parts, the...]

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Comment on the potential impact or what you're watching for when you think about the perception around plastic. Is it -- is Dispensing closures, which I would consider to maybe be a little more immune to some of those concerns? And then, as a secondary to that, does any of this discussion around perception, around this issue impact your M&A strategy going forward? And even some of the multiples that you might be seeing in these businesses?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [34]

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Sure. You broke up at the beginning, but I think the crux of the question was, what are we seeing around plastics, concerns around ocean plastics and the impact on, first of all our businesses and then our M&A strategy. So we talked about before. I think the -- where the heat is most, is around one direction, one use packages. That is not the bulk of our plastic container business for sure. It is, and it also is not around our Dispensing Systems business. So really, the one area that is mostly in that issue is going to be around our flat closure business, primarily to the hot-fill market. Now that closure adds a lot of benefit in terms of maintaining vacuum, et cetera. So it's not just a dust cover like you'd say around a watertight closure. So really our thinking there -- first of all, right now, we've really seen no impact meaningful on that at all. I think what is possible is that the technology around that closure may change. It may -- governments may want it to be tethered to the bottle to enhance recycling. That's something that we would be kind of advantaged in developing and getting that in to our customers. So we really, at this stage, do not see significant risk around our existing businesses on this ocean plastic area. I will deviate again and say I do think the industry has to get better about recycling. The industry is getting better about recycling. There is a lot that we, as participants in plastic industry, need to do more and help with. So I'm not walking away from that point at all, but I think that kind of where the volume is going to move, it does not seem to be in areas we think affect us. Does it affect our M&A strategy? Sure. You absolutely do have to think about what markets are going to be impacted, and I think there are some that are definitely going have some impact around this, the CSD water being probably the most likely area. Yes, so yes, it is something I could think about.

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Operator [35]

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Next we'll go to Ghansham Panjabi from Baird.

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Matthew T. Krueger, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [36]

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It's actually Matt Krieger sitting in for Ghansham. So my first question is, were your inventory reduction efforts even more pronounced than you expected given the volume upside associated with the pre-buy in the metal containers business? And then, could we see any sort of swing back from a working capital perspective into 2019 because of that?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [37]

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Good question, Matt. So the -- absolutely, we got more inventory out than we had originally set as target. We were thinking kind of in the $50-ish million range and we actually got to -- we saw $65 million out. One of the things that helped us, there were a few, but one is the demand. You did have kind of a spike in demand at the end of the year, and we chose not to kind of produce against that, but rather move it out of inventory. So that was, I think, was great for us. It created kind of P&L hit, which more or less offset the volume gain that we had in the fourth quarter. So it kind of worked out well in that regard. It did allow us to generate significant cash flow. We do not think there will be a swing back. We, our intention is to hold these inventory levels. And so we don't think we'll get swing back, but obviously, you won't get the same benefit again. The $65 million was sort of a one-time thing. So when you look at the free cash flow, you can't duplicate that, but we are not expecting working capital swing back. And we're staying very focused on our working capital.

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Matthew T. Krueger, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [38]

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Okay. That's definitely helpful. And then as my follow-up, can you quantify what you expect in terms of steel and tin plate inflation by region, North America and Europe? And then what do you expect in terms of a price mix impact across the metal containers business as a result into 2019?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [39]

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Sure. I can -- I'll try the second one. First, which is, it is our intention, our business model to pass-through whatever we get. So I'm not going to actually blend it into our revenue for you. But basically, our business model is to pass through our exposure and our increased cost. So what we're seeing in North America is, as you recall, we had tariffs that came in middle of last year to the tune of 25% on steel, 10% on aluminum. That affected wherever the imports were. For us, that's some 30% of our buy, because Canada was ultimately included in that. So if you now look at the U.S. suppliers, they are now looking to come in right underneath the tariff. And so you're talking about increases there in the high teens to low 20-ish percent range, North America. So we're going to see a significant increase across our North American metal business. Europe, on the other hand, is not so much of that. There is a little bit of quotas being established, so that the Asian market is not dumped into Europe, but I don't think that's changing that market all that much. There's plenty of capacity. So the -- [actually at this stage in that market,] mid to, or low to mid single-digit kind of increase. So very different dynamics in the 2 markets this coming year.

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Operator [40]

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Next we'll go to 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 [41]

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Congrats on the year, especially the cash flow, Tony and Bob. And the first question I had was on just demand, again, in food cans. Recognizing you're looking for it to be down, is there a way to put up a finer point on it for both the quarter and the year? Recognizing it's the end of January and a lot of things can change, and relatedly, when will you have any kind of view on what the customer in question's plans are for their portfolio down the road?

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Adam J. Greenlee, Silgan Holdings Inc. - Executive VP & COO [42]

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Okay, George. So on, I think by the quarter, you mean first quarter and year '19. And so absolutely the buy forward that we saw in the fourth quarter is going to affect the first quarter. So we're going to be down probably somewhere in the range of 6% would be our take right now in that first quarter, so a significant down. You'll get -- remember now, that's a relatively small quarter so you see, you get kind of a sizable impact on that. On the year, as we've said, we're thinking down about 4%, but majority of that 3% of it is nothing but that buy forward and the way it affects, kind of doubly impacts the comparison of the 2 years. So beyond that, we're really -- it's mostly about the one customer who is still talking about some more inventory reduction. And then you get a little bit of carryover of some of the impact. There was a smaller piece of business that was lost, middle of the years get carryover impact of that. Against that, we do believe that Europe should have a better pack season. You should gain -- pick up something in Europe. We do think you'll see this growth that we talked about in the pet food side. Soup is a little bit more of an unknown, but right now, it looks pretty good on the soup side. So those are kind of the moving pieces on it, and what we expect for next year.

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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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Okay. And my follow-on, I recognize this year you have a couple of items that are kind of one-off. You have the reabsorption of overhead, which will help the earnings. You have steel going up, which affects you on a percentage basis, doesn't really affect you on a dollar basis and EBIT. When I think about some other components, the shift to pet food in your mix, if there's any kind of nonmetal pass-through this year, how do those factors blend together in terms of what a normalized margin or return would be trending at? Do those factors help you this year? Do those factors hurt you this year?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [44]

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Sure, George, thank you. So reabsorption is -- I want to be clear, we're not going to rebuild inventory. So all you get is, you no longer have the over absorption coming through, right? So yes. So yes that, that not having that issue comes through, it helps us. The pension is sizable. It's some, nearly half the total pension issue comes right through the food can business. So there's not an unimportant point. And as we said, you've got this volume comparison issue. And so, yes, those are the big moving parts. The rest is that our business has continued to do a really good job of controlling its costs. We expect to continue to see that, and so that's kind of the paddling that goes on underneath the water that you don't see as much. And so the net of all that gets us back to, it should be slightly positive after the pension hit.

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Operator [45]

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Next, we will go to Daniel Rizzo with Jefferies.

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Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [46]

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Just in terms of the pre-buying that you said was kind of a tailwind. Is -- in general, does pre-buying generally end at the end of a calendar year? Or can it extend into next year? That is, I mean, could it be a short-term tailwind here in the first quarter?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [47]

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No. Nearly all of our contracts in North America start up again on January 1. So there, you would not expect anything to carry into this year.

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Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [48]

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Okay. And then, what -- you mentioned tethering and the issues around sustainability. I was wondering how sustainability affects the single-serve market. And I mean, it would seem to be -- tends to be a tailwind, as it pushes towards more, I guess recyclable plastics and more recyclable products?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [49]

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So if I understand the question, you say more of a tailwind for the can business because of issues on the plastic side of single-serve?

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Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [50]

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Well, yes.

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [51]

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Yes, so absolutely, there is some logic to that. I mean, there's -- let's start with the fact that the steel can is infinitely recyclable. It's the most recycled package in the world. It's easy to recycle, it's magnetically attractive, so kind of every recycling place can easily sort it. And so there's a lot of really good reasons on why you should see more of that. There are some examples where we're hearing from customers on it. But I would not say that's [data] point yet, but I would just leave it as saying, it certainly can't hurt the metal can.

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Operator [52]

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And next we'll go to Adam Josephson with KeyBanc Capital Markets.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [53]

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Tony, just one more on this plastics issue. I know, I think even some of your customers have talked about kind of shifting some of their business from metal to standup pouches, correct me if I'm wrong there. So it's not clear to me that this shift would be an opportunity for the metal can. Why do you think it would be?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [54]

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Well, so let's -- I'm not sure if -- what I said is, I think if anything, it certainly can't hurt. I think it would be, because everything I had just said, it's a, it's an infinitely recyclable package. Pouches, I -- I believe, and remember, I came from the flexible world, I think the world is coming to realize pouches are one hell of a problem on that. They have lots of recyclability problems. So yes, it's lighter content but, but what do you do with it at the end? And so you've got to separate materials and you've talking about food products, retort products, et cetera, you need heavy barrier, you're going to get lots of layers, so lots of stuff in those pouches, as we all know. So -- but the pouch has been there forever. I mean, the cans have competed with the pouch for as long as pouches have been out there. So I think what's happening is on balance now. There's a question about the pouch of what happens in the recyclability chain that wasn't there 5 years ago. And so I think on balance it helps the can versus the pouch. And I just -- I think our customers will have to think twice before they move into any plastic product right now.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [55]

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Got it. And then just on -- back to the food can volume for a moment. You were down 4% in '18 and then you're guiding -- you're assuming about the same in '19. And the pre-buy washes out because it boosts one year and it's a drag on the other year, so bottom line, you're down, call it 4% in '18 and '19. And I know you had some one-off customer defections and inventory reductions, et cetera, but what gives you confidence that you would go from down 4% and down 4% to flat thereafter, that you wouldn't have additional customer losses or inventory reductions, et cetera, comparable to what you've recently been experiencing?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [56]

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Okay. Good question. First of all, I'll encourage you to go look at the math. It's actually not correct. It does not wash through. If you take pre-buys out entirely of '18, it was still down 4%. Now some of that's because it came in with a smaller pre-buy. But then again, I'll say when you look at percentages, the pre-buy is twice as damaging on the year that follows it than it is beneficial to the year that gets it. And I'll leave the math right now, off the table. So actually, I would say what you're looking at, and what we do told you, it's 4% down in '18 and 1% down in '19. Because pre-buy drives the other 3% of '19. So -- but your question's still out there, what makes us have confidence? The -- it's why we keep tabs on very specific items. So yes, a customer who shut a plant has very specific disruption impacts of that. You have a -- sizable customers who went on a sudden, major inventory reduction. So that's just in the stream reduction of inventory. Unfortunately, I can't tell you exactly how much of it is inventory reduction versus walking away from certain portfolio management programs. So if I could -- if I do the exact on that, I can give you clearer answers. But as the portion that was inventory reduction, there is no logic I can think of that doesn't have some recovery from it. You can't keep working down your inventories. So those are the -- I think that are, our feeling has been clear, there had been a couple of discrete items going on. Our head is not in the sand. We fully understand there are some markets of the food cans that are declining, right? There's some -- we said pretty clearly, fruit is in decline, et cetera. But as we said last call, again that, we're also just as clear that pet food is increasing and pet food is, by far, our largest individual component now, and becomes larger with each year of growth on that. So that's what makes us feel pretty confident that over time, that there's going to be a flat-to-modest growing situation for Silgan as we look forward.

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Operator [57]

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And next we'll go to Brian Maguire with Goldman Sachs.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [58]

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Just another question on the, back to the pre-buying. Just wondered, how do you actually know the extent of the pre-buying activity as it's happening? Do customers kind of give you a hint at what's going on there? Or do you just see sort of out of pattern ordering? And sort of related to that, do you think most of the negative impact to 2019 will be felt in 1Q? Or due to the seasonal needs of some of these products, it'll be more spread out through the year?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [59]

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Sure. Good question. Actually we have really good knowledge in almost all of it. And so as to when it happens, the customer, we have very specific order patterns, expectations. We have to get steel orders way ahead of our customers' need. So when a customer asks for a pre-buy, they need to tell us in advance that they're doing that. And so we have quite good clarity. There are couple of customers who could -- they can order a little bit more. But on balance, we kind of know the pre-buy on it. The -- yes, most of this will show in Q1. There are some customers that pack fill might be Q1 and Q2, they'll spread a little bit in Q2, but the bulk of this, as we've listed so far ought to be coming against us, again in Q1. Now to be repetitive, you'll see it in our comps, in 2 spots: You'll see it in Q1, where we don't sell the can; and you'll see it in Q4 when we compare against the prior quarter where we did sell the can.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [60]

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Yes, yes, makes sense. And likewise, I assume some positive comps in 2Q and 3Q as you sort of lap those inventory drawdowns, some that your customers have called out. But just one last one, just on the working capital assumptions in the cash flow guidance. I think in response to Matt's question earlier, you said it's not going to be a use of cash. Just wondering if you assuming the -- I know you talked about trying to work down some more inventory on the margin. Can -- do you anticipate working capital to be a source of cash in 2019?

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [61]

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Yes, as we look into 2019, quite frankly, as we've done for the last several years, so we took some -- I think it was $30 million or so out of '17, we took $65 million out of '18. We would expect to be able to marginally improve as we move into '19. But to be clear on it, if you're walking the cash flow from the $311 million to the guidance, it's a fairly sizable negative drag on free cash flow on a year-over-year basis. But in pure dollars, it is expected to be a small benefit for 2019.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [62]

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Okay, like $5 million, $10 million, kind of range or a little bit, a little better than that?

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [63]

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Yet, it's a probably little more of a $10 million.

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Operator [64]

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And next we'll go to Tyler Langton with JPMorgan.

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Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [65]

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Just had a -- questions on freight. I guess, do you have a rough sense, I guess on the impact of the higher freight rates in '18? And then just what could happen this year?

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Adam J. Greenlee, Silgan Holdings Inc. - Executive VP & COO [66]

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Sure. It's -- I mean, I don't know if we've given a specific number, but it's in several million dollars of impact on freight in the year. Some of that, of course -- that's what we took. Our customers took more of it, obviously. We are expecting some continuation of that. On a year-to-year comparative basis, meaning we are not right now expecting freight to be a meaningful change in the cost structure.

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Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [67]

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Okay. Perfect. And then just on plastic, because with the, with the volume growth you're expecting this year and sort of the ultimate target, I think it's sort of a 50% EBITDA margin. I mean I guess do you have a sense on more line of sight on when you can get there and just how confident you are in hitting that?

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Adam J. Greenlee, Silgan Holdings Inc. - Executive VP & COO [68]

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Sure, Tyler, it's Adam. Again we continue to make really good progress towards getting to our goal of 15% EBITDA margins. We said in 2018, it'd be a little bit lumpy if new businesses would come in, and the seasonality of the business. And I think we'll see more of that in 2019 as well. But our expectation is that we'll achieve the 15% EBITDA margin run rate at some point in 2019. Again, I'll be careful with what we say. There will be some seasonality in the business. But we expect growth and we expect continued improved operational performance in the business and expect to achieve our target.

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Operator [69]

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And next we'll go to Arun Viswanathan with RBC Capital Markets.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [70]

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I guess the first question I had was on the pre-buy. Is there in certain areas, which you've seen [potential to] remove that potential aspect? Is that something that you guys have considered? Is that your customers would be open to or receptive to? Maybe you can just give me your thoughts on that.

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Adam J. Greenlee, Silgan Holdings Inc. - Executive VP & COO [71]

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Yes, the answer's no. If we can source the materials for them but we have the material on hand, we're perfectly willing to let our customers enjoy the benefit of that. I think some of this goes really way back to the way Silgan thinks about our business model, which is really driving competitive value to our customers so our customers can win in the market. So if we -- if they've got a big inflation item coming, and we can help them with that, we're going to do what we can to try help them with it, so they can do well in their market space. And so no, we're not trying to model ourselves away from that. Again, we don't lose in that exchange. We might lose -- there might be an opportunity cost where we have more steel and get a benefit next year, but so all we're losing is an opportunity cost, but we don't lose in exchange. It's lower cost steel that they're consuming on it. So that for us is in the right trade to make for our customers.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [72]

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Great. And just another question on the metal container business overall longer term. Last couple of calls, we've discussed that there could be customers that always kind of take portfolio shifts and inventory debt. And so longer term, as we look at the metal computer industry, what you think food cans should grow at? Should we do flat, and then embedded in there, I guess, what's the growth rate for pet food and how large does that become as part of the portfolio? And similarly, for soup and fruits and the deteriorating categories, how small can those really become, and still be meaningful for a fixed cost absorption within your system?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [73]

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Sure, a lot to that. I think what we have always said and we kept by is our feeling that food cans, flat is a reasonable answer, right? I would say flat to modest growth. I think some of them can make flat to a modest decline. I think either of those -- so let's leave ourselves to kind of flat. I think the -- what happens over time from Silgan's perspective, particularly is that the growth the pet food overcomes the rest of the declines and so, as we've said before, I think clearly the most obvious one is fruit, which has been declining fairly steadily. We think that will continue but it's a very small, I think, 4% of our portfolio today. If you look at vegetable market, there has been some decline over time, but a lot of the segments of vegetable that had been in decline are getting quite small. So the lion's share of that market now is corn and tomato, which are much more stable. And so again, there we would be maybe a little bit of decline but not significant. And then to your point, our thinking is pet food again, if you look at what's out there, in terms of numbers of pets, et cetera. You have something in that 3%, 4%, seems very reasonable to us. I could be thinking 5%, I think that would be a little aggressive over time, but 3% to 4% makes a lot of sense to us.

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Operator [74]

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And next we'll go to Edlain Rodriguez with UBS.

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Edlain S. Rodriguez, UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals [75]

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One quick one. I mean, last quarter, you've talked about walking away from certain customers. Is that still the case? Or have customer losses come to an end?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [76]

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Good question. We certainly hope they've come to an end. I mean again, what we were trying to convey is not that we want to walk away from customers, but rather that there are some business that the margin does not justify fighting it out. There is some excess capacity in the market space. And so, as in our industry, it has made sense from time to time to do that. I think our feeling is, we have done that and we don't really choose to do a lot more of that, that the market is at a reasonable spot right now. We probably can take some capacity out, just in what's happening today. Again, so long as we understand what the run rate is for the customer we've been talking about. So I think we're perfectly prepared to do that, we think that's the right thing for the market, et cetera. But it would not be our expectation to be conceding a lot more volume in market and that's really the way. We have a big fixed cost structure, just like everybody else in the market. That doesn't work at a certain point. So the [2 that] happened, have been fine and okay, but it's -- that's not our business strategy.

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Edlain S. Rodriguez, UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals [77]

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That makes sense. And in terms of the customer that's doing the inventory management, I mean, do you have a sense of how long that's going to go through? Or is this just -- you just have to wait and see what they do?

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [78]

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Thank you for asking that question. I didn't fully answer it when, I think, George asked it before. So on that customer, we're in regular dialogue with them, they have been quite public about what they're trying to do, and they really describe the inventory plan of that as a 2-year project, and so this being the second year. So our feeling is that they -- from everything we've heard from them, and just the scale of what they have done, we would tend to believe the inventories get down there pretty far. I think they too have the same issue we do. They have a heavy fixed cost structure and so I think walking away, a portfolio management for them -- this is my own opinion, that comes harder and harder because you've got the overhead cost that sits there. And so it's our hope that they'll begin to say they are better off not conceding any more ground and holding on to what they have and maybe even try to reclaim a little bit of that. But hope is not a strategy. So we're going to wait and kind of see what they conclude on their own on that.

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Operator [79]

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And next, we'll go to Gabe Hajde with Wells Fargo Securities.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [80]

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Bob, real quick follow-up if you could, it sounds like you broke out -- the pension expense was $10 million, [10 maybe] or a little bit more in the metal food. Can you give us a breakdown of the other 2 segments?

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [81]

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Yes, sure. The remaining $10 million is split pretty equally between the closures business and the plastics business.

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Operator [82]

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And that does conclude today's question-and-answer session. Now I'd like to turn the call back over to Tony Allott for any additional comments or closing remarks.

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Anthony J. Allott, Silgan Holdings Inc. - President, CEO & Director [83]

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Great. Thank you, David, and thank you all for the call. And we look forward to talking to you about our first quarter 2019 late in April.

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Operator [84]

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And that does conclude today's conference. We thank you for your participation. You may now disconnect.