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Edited Transcript of SLGN earnings conference call or presentation 23-Oct-19 3:00pm GMT

Q3 2019 Silgan Holdings Inc Earnings Call

STAMFORD Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Silgan Holdings Inc earnings conference call or presentation Wednesday, October 23, 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

* Brian P. Maguire

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Clyde Alvin Dillon

Vertical Research Partners, LLC - Partner

* David Paige Papadogonas

RBC Capital Markets, LLC, Research Division - Senior Associate

* Deborah Anne Jones

Deutsche Bank AG, Research Division - Director

* Gabrial Shane Hajde

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Ghansham Panjabi

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

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Molly Rose Baum

BofA Merrill Lynch, 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 Third 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 from the company today, I have Tony Allott, Chairman and CEO; Bob Lewis, EVP and CFO; and Adam Greenlee, President and COO. Before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks including, but not limited to, those described in the company's annual report on Form 10-K for 2018 and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements.

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

As you saw in the press release, we delivered adjusted earnings per diluted share of $0.76 for the third quarter, in line with our estimates and matching our record performance of prior year quarter, noting that we also overcame a $0.03 decrease in noncash pension income in the current year quarter. However, pack volumes were a little short of our expectations and challenging economic environment in Europe both kept us a little short of the high end of our range for the quarter.

Our plastic business once again delivered volume growth and solid operational performance, leading to another quarter of improved results. The metal container and closure businesses were largely in line with our prior year; however, another relatively weak fruit pack and vegetable pack in Europe, combined with a late start in U.S., resulted in volumes below our initial expectations. Despite this, both businesses did well in controlling operating costs and achieving profit objectives.

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

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

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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, we delivered an in-line quarter as adjusted earnings per diluted share of $0.76 was consistent with the record performance in the prior year quarter and in line with our earnings estimates.

On a year-over-year basis, the quarter benefited from production efficiencies in the metal container business as inventories declined less than expected due to the curtailed sales volumes resulting from lower pack sales.

We also benefited from volume gains and strong operating performance in the plastic container business; the prior year startup cost in Fort Smith, Arkansas, which did not recur; and the favorable impact from the lagged pass-through of lower resin costs in the closures business as compared to the unfavorable impact from higher costs in the prior year. The less favorable mix of products sold primarily related to pack movements, higher rationalization charges and lower noncash pension income across all businesses of approximately $5 million for the quarter more than offset these gains. In addition, the quarter also benefited from lower interest expense and a slightly lower tax rate.

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

Results for the third quarter of 2019 include charges totaling $0.03 per diluted share attributable to the announced shutdown of 2 metal container facilities and a loss on early extinguishment of debt. There were no adjustments to earnings in the third quarter of 2018. Therefore, adjusted earnings per share were $0.76 in each of the third quarters, 2019 and 2018.

Interest and other debt expense before the loss on early extinguishment of debt for the third quarter 2019 decreased $1.5 million to $26.7 million primarily due to the lower average outstanding borrowings, largely a result of the repayment of debt at the end of 2018 and lower weighted average interest rate due in part to the redemptions of the 5.5% senior notes on August 1, 2019. The loss on early extinguishment of debt of $1.7 million was the result of the redemption of the 5.5% notes.

Capital expenditures for the third quarter of 2019 totaled $50.6 million compared with $43.4 million in the prior year quarter. Year-to-date capital expenditures totaled $166.8 million versus $134.6 million in the prior year.

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

Moving on to the specifics around each of the businesses, the metal container business recorded net sales of $822.3 million for the third quarter of 2019, an increase of $24.5 million or 3.1% versus the prior year quarter. This increase was primarily a result of the pass-through of higher raw material and other manufacturing costs partially offset by lower sales of larger pack-related cans and the impact of unfavorable foreign currency translation of approximately $4 million.

Unit volumes were flat versus the prior year as lower volumes with pack customers were offset by volume gains with other customers, including for soup.

Segment income in the metal container business was $81.1 million for the third quarter of 2019 versus $86.9 million in the same period a year ago. The decrease in segment income was primarily due to lower sales of larger pack-related cans, challenging economic conditions in Europe, higher rationalization charges and lower pension income partially offset by production efficiencies in the U.S. due in part to higher finished goods inventory produced in the quarter in anticipation of higher pack sales.

Net sales in the closures business decreased $7.4 million to $353.4 million for the quarter primarily due to the impact from unfavorable foreign currency translation of approximately $7 million and a less favorable mix of products sold. Unit volumes in the quarter were flat as compared to the prior year as higher volume demand in the U.S. beverage market was largely offset by lower volumes in the international markets.

Segment income in the closures business for the third quarter of 2019 was $44.8 million, down $2.5 million versus the prior year quarter. This decrease was primarily a result of the net impact from higher sales of classic beverage closures and a decline in pack-related metal closures, challenging economic conditions in Europe and lower pension income partially offset by the favorable impact from the lagged pass-through of lower resin costs in the current period as compared to the unfavorable impact from higher resin costs in the prior year period.

Net sales in the plastic container business were $145.6 million for the third quarter 2019, a decrease of $2.8 million versus the prior year quarter. This decrease was largely due to the pass-through of lower raw material costs partially offset by a 3% improvement in volumes primarily related to the growth of pet food containers in Fort Smith, Arkansas.

Segment income increased $2.9 million to $11.4 million for the third quarter of 2019. This increase was primarily attributable to higher volumes, strong operating performance and the prior year unfavorable impact from costs associated with the startup of the Fort Smith, Arkansas, facility partially offset by lower pension income.

As we turn now to the outlook for the remainder of 2019, as is typical for the seasonally smaller fourth quarter, we are tightening our range of estimate to a $0.05 range. As a result and based on our year-to-date performance and the outlook for the remainder of the year, we're providing an estimate of adjusted net income per diluted share in the range of $2.12 to $2.17, which remains consistent with the midpoint of our original estimate. This estimate excludes the impact from certain adjustments outlined in Table B of the press release.

We're also providing a fourth quarter 2019 estimate of adjusted earnings in the range of $0.34 to $0.39 per diluted share, which includes the unfavorable noncash pension impact of approximately $0.03 per diluted share and reflects an abrupt end to the fruit and vegetable pack in early October. This estimate compares to a record adjusted net income per diluted share of $0.38 in the fourth quarter of 2018 which benefited from a strong prebuy in metal containers ahead of significant steel inflation. In addition, we continue to estimate free cash flow to be approximately $275 million for the year.

That concludes our prepared comments. We can open it up for Q&A. And once again, I'd like to ask everyone to keep their questions to one question and one follow-up.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question now from Anthony Pettinari from Citi.

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

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In metal containers, there was a Wall Street Journal article that came out during the quarter around the vegetable pack being historically bad and maybe generating up to a billion cans of excess capacity that maybe could negatively impact the market. You referenced the weakness in your comments. I'm just wondering if you're seeing this weakness kind of create knock-on effects in terms of excess supply in the system or maybe some competitors getting more aggressive on price. Just wondering if there's any color you can provide on the competitive environment after this difficult pack.

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

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Anthony, it's Tony. I'll try a little bit, although, I can't really reconcile all the points there. As we said, the pack was a little shy of our expectations. As you can see, our volumes were flat over the time period. So even when you look at our veg -- fruit and veg, we know in there, there's a little bit of a inventory correction for a sizable customer. In this case, I'm talking about now inventory that's unfilled. So we have complete visibility to the difference between what got build and what got shipped. And so we have good visibility to that needs of volume in this area. So I really cannot, for the life of me, explain a billion cans that get -- actually I just -- I think it's incorrect data. What it probably has more to do with is where steel is coming from the filled cans. I take that as is that coming from the steel industry, for example it probably has more to do with there could be that much steel out of the system because of the pricing of the domestic steel versus import steel. But in no way do I think there's anything like a billion cans. And so therefore, no to the rest of your question that I don't think that has any impact on the basic fundamentals of what's happening in our market in pricing, et cetera.

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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 very helpful. And then the CMI data that came out last night for 3Q, I think, showed pet food shipments down 6%. And again, that doesn't seem to really tie with your flat volumes. I'm just wondering if you could talk about what you saw in pet food. Was it a tough comp for the quarter? Or you see any inventory shifts? Kind of any color there?

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

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Sure. Anthony, it's Adam. Maybe we should take a quick step back and talk about the pet food market in general. If you go to a year-to-date basis and you look at our volume, our volume is up about 6% versus prior year. So maybe even a little stronger than what we had initially signaled to you folks earlier this summer. So we feel really good about not only our position in the market but the future prospects for continued growth as well. When you get back to the third quarter, one thing that certainly happened with our customers, and our volume for the quarter was essentially flat in pet foot, but our customers have been investing significantly to support their growth going forward. So we were in a situation in Q3 where our customers had taken lines down to rework them to increase their filling capacity. So we've seen significant investments both in the reworking of existing lines, the addition of new lines and, in some cases, the addition of new operating facilities for our products in wet pet food. So we think that maybe some of the year-to-date results for our volume up 6% was a little bit of a pull forward in advance of shutting down those lines to make these capacity enhancements at the customer level. So we feel really good about it. We feel great about our position. Our customers are winning in the market, and we're excited. Nothing has really changed in our view for the rest of the year nor for 2020.

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Operator [6]

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(Operator Instructions) We'll now take our next question from Chip Dillon for Vertical Research.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [7]

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Tony and Bob, appreciate all the -- and Kim, appreciate all the details. I guess my first question is we saw a huge sell-off in the equity markets at the end of 2018, and now we've seen pretty much that fully recovered. And if that stays the case through year-end, could we see this $0.13 of lower pension income likely -- or that went away this year come back next year?

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [8]

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Yes. Chip, it's Bob. I think there's a lot to that question and still time to go, right? So your point is accurate that the markets have recovered pretty nicely in terms of the gains that they suffered in the last year. However, that gain is against a lower base from a return perspective. So you'd need to significantly outperform the prior year to make up all of that gain. And then the other piece of that equation that folks tend to want to look past is what happens to the discount rate, right? And that will have import on what -- how the liability grows or shrinks. So I think as we sit here today, we would say if this was the point in time that you measured it, we would certainly have some benefit against that $0.13 headwind that we've been suffering. But the fact of the matter is we won't know where the discount rate shakes out until the very last day of the year. That's the way the accounting for pension works. So depending upon which way that moves, that will either improve where we sit today or it could erode a bit. So a long-winded answer to say, look, we're optimistic, but we got to let it play out and see exactly where it ends at the end of the year.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [9]

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

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [10]

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Yes. Sure, Chip. It's Adam. I think I just went through a little bit of detail in the pet food market, but again, I would say what we've communicated previously was that we continue to expect pet food cans to continue to grow in our market space. We've got a pretty sizable share. We're overweighted to pet food, and our customers are continuing to win in that space at the retail level. Just to repeat, I'd say we're up 6% year-to-date. Our Q3 was flat. Our growth is going to play out for the year essentially exactly as we thought it would, and we'll be up in the kind of the 3-ish, 3.5% range for the year in pet food.

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Operator [11]

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We'll take our next question from Mark Wilde from Bank of Montréal.

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

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

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

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Sure. I think when you start with caps and closure, to begin with, what we did see was nice growth in our plastic closures primarily for beverages in the United States. So that's the old, historic kind of pot sale volume that we've been talking about. So good growth as expected there. Where we saw some weakness was in metal closures. And I would say most of that weakness was around pack-related items and pack-related products, so things like jams and jellies, which are created from the fruit harvest; things like fruit juices, vegetable juices, et cetera; and then vegetables themselves that go in glass packaging with a metal closure. So really, outside of that in the metal side of the business, everything performed fairly well outside of pack-related items, and then you've got Dispensing Systems. And so you think about those 3 main product lines: plastic closures, metal closures and Dispensing Systems, there's obviously a mix variation across those 3. So with plastic being up, metal being down, that is a less favorable mix for us. And then Dispensing Systems is also a very highly engineered set of products that we take to market that is very mix favorable when volumes are up. And amongst the Dispensing Systems product line, we just see some softness in Europe in particular and in some of our core markets. But fragrance was up, other product lines were up to offset that, so volume was essentially flat in our Dispensing Systems. Therefore, the mix is really around metal and plastic and it's the balance is closures.

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

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Okay. And then over in plastic, is there some...

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

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

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

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

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

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Sure. I assume I know what you're referring to. So there was a business that sold. That business is primarily in the single-serve beverage market, closures for that market. As you probably have picked up from us on this call, in the past, that's not a high-interest area for us. So it's not particularly a business that's suited us in that case. The same could be said for any assets that might still be around that they may sell out on that. So I don't think it has a huge grab point to us on either side.

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [18]

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

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

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That's correct, yes.

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Operator [20]

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

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [21]

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

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [22]

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

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [23]

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Yes. Sorry, if I cut off.

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

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Okay. So just for profitability in European cans, I think the challenge we had this year is that we were expecting a very strong pack off of very poor packs in the previous year. So the pack was better than the prior year but not nearly what we expected. So I think the results were a little disappointing. So margins were not quite what we were expecting them to be. They were below our expectation. As we go forward, the capital needs of the business there are not really impactful to the overall capital that we spend for the balance of the business. So no real change. And then as we look at the volume and the units going forward, we do see some opportunities for growth. We've got some committed growth with specific customers as well but some challenges in broad Europe for all of our businesses, including the free cans, going forward.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [25]

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Okay. My follow-up question, you noted some softening in certain markets on your 2Q call. You discussed a bit of it here, but if you can kind of isolate how things like weather, would you say that things are materially different in Q3 or you're seeing kind of much -- more of the same specifically like you mentioned last quarter, first the payer markets were softening, kind of the similar trajectory, or things about stabilized?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [26]

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So I take that question in all of our businesses. So I would say that first of all, just to be clear, because you mentioned a bit around the pack and so everything about food can is exactly as we thought from the beginning of the year. Our full year guidance is very close to where we thought long term in the year. So amazingly as we sit here today, just by everything we read about food cans, they've played out exactly as we expected thus far this year. There was a little bit of chance we're going to do better, that's the disappointment that I highlighted in my comments. Because in some other areas, wet pet foods that Adam's talking about, it looks good but we needed the pack to be a little stronger than it was. Back to your other question, just briefly on that. And so our expectation in the past ultimately will come back that the markets still has the same demand level for that, both in Europe and in the U.S. And so at some point, it would seem like you can't continue to have these unusual pack. But now back to -- then broadly, if you talk about rest of our business, I think it's so that we, certainly on the personal care side, have seen some slowing maybe particularly around branded areas. And so I think that seems to be a trend that we're seeing a little bit more. And then the second one Adam already alluded to, which is Europe just broadly feels a little weaker to us in kind of every one of our businesses. And that's been happening over the course of the year. I wouldn't say anything abruptly occurred in this quarter, but that seems to be a trend we are watching carefully.

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Operator [27]

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

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [28]

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Tony, just one, or Adam, on Dispensing Systems, I think Adam said volumes were about flat year to date in that business, correct me if I'm wrong there. I think when you announced the deal, I think it was January 17, you talked about, I think, the developed markets as being mature but there being growth opportunities in the emerging markets. So I think the growth profile of that business at the time was up 2, 3-ish, if I'm not mistaken. How would you compare what you've seen volume-wise in that business year-to-date to what you were expecting or what you were saying at the time of that deal? I'm just trying to get some sense of what you think the volume profile of that business is in the context of what has been a flattish closures business for you of late.

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

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Sure. And I think just talking about the year-to-date basis or our full year expectation, we are, just for clarity, expecting growth in Dispensing Systems. So I think you'll have, over time, some lumpiness between quarters as our large CPG customers are promoting or maybe not promoting products quite as much, but the core markets we still feel very good about. So if you look at Q3 specifically, our trigger business, which is one that I think we have a lot of discussion about on these calls and other conversations about the business but we saw a nice growth. And we expect to see continued growth going forward. Items like fragrance, lawn and garden were all up in the quarter, so we feel good about those. I think what impacted the Dispensing Systems business in the quarter was really more softness in Europe than anything else. And again, just to Tony's point earlier, it's a broader conversation about Europe than maybe in any one specific market. But as I sit here today, I'd say we feel great about the business. Our expectations haven't change. We'll expect 2% to 3% growth, again, next year, and we will have growth this year. We'll see exactly what that plays out here in the fourth quarter. But we'll have growth year-over-year.

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [30]

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And now the other part of it, because this is an engineered product line, there's a pipeline aspect to it and so there's a reason we're saying this beyond just a hope, and that's because we have a very robust pipeline. We feel really good about the products that are coming on, developing efforts, et cetera. So what basically happened is that continued right along the path, but some of the base business, personal care and Europe, et cetera, of existing customers, what we know we have solid position, they're just down, and that offsets kind of the regular growth of the business. So we still feel very good about prospects.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [31]

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And just one follow-up on that, Tony and Adam, and thanks for that answer, by the way. So I think closures for the year are down slightly volume-wise. If dispensing is going to be up for the year, what -- can you just help me with, again, if you expect closures for the full year to be flat or down volume-wise, as was the case over the last couple of years, what do you expect to offset that growth exactly in dispensing?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [32]

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So just first of all, let's remember -- and when we had our Analyst Day we gave you a little bit more thought into the scale of it. So in terms of volumes, Dispensing Systems business is relatively small part of the volume of business. So it can be up 3%, and you could have 1% decline in either the other flattop closure market that we serve and that would more than overwhelm the Dispensing on a volume basis.

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [33]

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On a volume basis, not on a profit or a revenue basis.

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

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Correct, correct. So that's why mix becomes an important part of the topic, not so much on the volumes side. And again, to be clear, our talk about what we think the census view is more about future. I'm not saying by the end of this year or how that's going to evolve necessarily, we're just saying we see a trend line that, over time, that ought to get positive. To Bob's point, that's high margin, really good business for us, but it could get overwhelmed by just a pack can more than overtake all of it on a volume conversation.

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Operator [35]

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

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Molly Rose Baum, BofA Merrill Lynch, Research Division - Research Analyst [36]

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This is actually Molly Baum on the line for George. My first question is, on metal containers, can you kind of help us bridge what the various puts and takes will be specifically for the fourth quarter? And more specifically in the press release, you talk about a larger amount of finished goods inventory. So in 4Q '18, you talk about an $16 million negative impact from unfavorable absorption. Should we expect to see any of that in the fourth quarter of 2019? Any thoughts you have there would be helpful.

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [37]

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Sure. I think to get started, I'll just talk about the volume comparison versus prior year. So you have to recall that we are cycling over a fairly significant prebuy from fourth quarter of 2018. So volume is expected to be down considerably. As Tony said, as we've kind of communicated all throughout the year, that's what's going to happen in fourth quarter. And as far as the finished goods that we're carrying out of Q3 into Q4, related to the pack, these were at the end of the pack we have essentially our largest cans being filled at the end of the pack. So when the pack goes away or the pack moves into Q4, those cans need to be ready to be filled for our customers. So we've made those cans already in the quarter and then the volume doesn't materialize due to the abruptness of the end of the pack. We did carry some of those larger cans into Q4 from an inventory standpoint.

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [38]

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So the other half of that is if you recall last year, we did some -- we had major inventory reduction which ended up being all in the fourth quarter. That was -- had some P&L effect to the range of $16 million of negative impact on the fourth quarter last year. So the good news is we get the benefit of not having that this year. The bad news, as what Adam just said, is we're now going to do some reduction this year. So instead of getting an increment of that $16 million, that increment looks more like in the range of $10 million, roughly, on inventory alone. And then the volume that Adam talked about is more than enough to compensate for that. And that's why you kind of look at what looks a bit more flattish to down a bit on the quarter.

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Molly Rose Baum, BofA Merrill Lynch, Research Division - Research Analyst [39]

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Got it. And then just a follow-up. So recent trade prices talked about some pack customers perhaps reducing their footprint. So to the extent that you can comment, what effect might this have on your business in 2019 or how might this impact plans for 2020?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [40]

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Sure. So there has been some of that. I think really the question is more about what's the demand requirement to the market and who is going to fulfill that demand. And so as we sit here today, we don't necessarily see that, that would have an impact. It does depend exactly who ends up with capacity, and so I don't have all the answers for you. But as a rule, we've got -- in the market that we're supplying, we've got a meaningful share position, and so we have a sense that we would keep that. Some of our contracts require that. In any case, it sort of depends on what way things gets sold off, et cetera. So again, as we sit here today without all the answers, we feel like that would not have any too meaningful of an impact.

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Operator [41]

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We will take our next question from Ghansham Panjabi from Baird.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [42]

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I guess, first off, and sort of a follow-up to the last question, Tony. How are you thinking about steel tinplate for 2020 versus '19? It seems like most industrial commodities are down. I would imagine, tinplate is down and that -- related to that, do you see a risk of destocking by a customer that's going into 2020 apart from the comp you have that's very difficult in the fourth quarter?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [43]

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Sure. Ghansham, it's Adam. And you're right. So this has been a bit of a rollercoaster from a steel-pricing standpoint for our customers. So the significant inflation that we brought in to 2019 from 2018 did invoke a pre-buy for our customer base. We're not planning on anything as far as the destocking at the end of the year at this point, and we work very closely with all of our customers to try to understand what their exact requirements are. So we don't see anything material in Q4 pushing to Q1 as we sit here today. I think as we look out at 2020 steel pricing, first of all, we're in the throes of those negotiations right now. So we're working very hard every single day to get the maximum benefit for our customers that we passed through to our contracts. We're looking at inflation, not nearly -- I'm sorry, deflation, not nearly to the level of the inflation that we suffered, but we will see a deflation in 2020. We're expecting something in the upper single digits to maybe low double digits on a percentage basis.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [44]

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

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [45]

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Sure. So the -- yes, I would call it a typical year, nothing particularly unusual in the coming year on contracts. So volumes, first of all, we have not gone through our budgeting process. As Adam just said, we don't have steel nailed down, which should have some impact. And so what I can give you is nothing more than sort of a sense directionally of where we're going based on what we know so far. And so I think in food cans, our expectation would be a very modest improvement that will be driven by, as we said, we believe sooner or later, you're going to get a real pack in Europe, which we did not get again this year. The U.S. pack, by the way, was -- it ended abruptly, but this was not like a terrible pack, it was a fair pack. So -- but that could be a little bit better, I suppose. As I said before, we have a particular inventory reduction at one customer that we know. So we expect to get some improvement on that. Adam talked about pet food growth that we'd expect. And then against all that, you just have the vagaries of what can happen in the soup market and some of the other markets. And so you got to pick your answer here from flat to up modestly on the food can side.

Closures, again, we would expect to see growth, as we said, in Dispensing Systems. We expect growth similarly on a lot of our food and beverage side. We would if pack get better, we benefit on that on the closures side as well, and so that ought to help us. And then plastic has been growing, and so we would expect to see modest continued growth there.

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Operator [46]

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

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [47]

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I think before, Bob, you've talked about a slightly inflationary environment is often better for the food can business in terms of contractual pass-throughs and what have you. I think I heard some deflationary discussion. I wasn't -- it wasn't clear to me if that was specific to steel or in general. What contracts may pass-through next year knowing that typically there are pay raises and health care costs go up? So I'm curious just directionally speaking, I guess, to piggyback off of Ghansham's questions about volumes, would you expect metal food profitability to be up or down or flat next year given kind of the inflationary comments that you're talking about?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [48]

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There's a lot of parts to that question. So let me start with the easier part, which is we were talking about the metal side of that in our previous conversation, which we would expect would be deflationary. We certainly expect things like labor are inflationary right now. As you know, labor is very tight. And so that takes you to the -- where you started the question, which is what we would generally say is in theory, the inflation of those other costs, we get hurt a little bit because we delay in passing that on. So if you have accelerating inflation of labor, for instance, we'll pass that through in our can contracts but not until a year out. So I would say that's a little bit of headwind for us on it, and that's in our canned business. In most of our other businesses, we actually don't have pass-through of labor inflation. So I think that is a bit of headwind for us and a lot of industry for next year.

So as -- and beyond that on the container side, I would just say that you'll probably continue to see a little bit more of what we've seen, which is some amount of competitive activities with the excess volume capacity in the U.S. and, frankly, with a volatile steel cost market that makes the market a little more confusing. And then in Europe, we talked about there have been some aggressive moves from the larger players in Europe. And so if you assume those continue, you're going to get some mitigant against the volume improvement that I just talked about with Ghansham on the margin side.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [49]

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Okay. And then, Adam, I sense some optimism in the pet food business. So I guess a couple of guys have comment toward -- to that effect. Might that warrant additional investment for some capacity? Or were the adjustments that you made or investments I should say recently enough to compensate for that?

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

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Sure. Yes, I think you read the optimism correctly. It's been a nice growth market for us, and we expect it to continue to grow going forward. We've been investing all throughout this growth cycle with our customers for additional pet food can capacity on our side. There's a variety of projects underway right now to increase our capacity. We've also got some hard capital going in to overall increase our capacity as well. So it's little bit of both. I'd say nothing significant as far as no new plants, anything like that, the enhancements to increase our capacity are what we're looking at in the near term.

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [51]

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And let me just go back and finish the previous comment. So I got kind of in the food can side, I didn't really finish that. I think closures, as I said, with its volume up, we ought to be able to continue to improve profitability of that business. Same on plastics we've done in the past. And then I think the third thing and kind of the whole reason that we got our analyst meeting and one thing we've been really trying to talk a lot about is we have sort of 2 levers to pull on our business. Lever 1 is we run these franchise business well and we run them for free cash, and then our second lever is we deploy free cash. And so as you think about steel goods next year and you think about kind of the comments I made about the container business -- or the metal container business, for example, I would just remind you that we are back now into the midpoint range roughly by the end of the year of our leverage level. And our own view is that next year, between the 2 levers, it might be a little bit more lever of the cash deployment side.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [52]

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If I could sneak one last one in for Bob. The tax rate came in a little bit lower, are you still guiding to 23%, 24%? Or...

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Robert B. Lewis, Silgan Holdings Inc. - Executive VP & CFO [53]

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Yes. I think we'll probably -- we did see a benefit in the quarter that will obviously have a bit of an impact on the full year rate as well, although a bit more muted against the full year. I think if we're looking forward kind of in that 23% kind of range, it's probably as good as I could get it. We probably do maybe a hair better than that for the full year this year just given the benefit that we saw and the seasonally larger Q3 that will carry over a little bit for the full year. But I wouldn't think it would be meaningfully different.

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Operator [54]

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

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David Paige Papadogonas, RBC Capital Markets, LLC, Research Division - Senior Associate [55]

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This is David Paige on for Arun. I wanted to -- in your metal container segment, you discussed -- you mentioned soup volumes increasing. I just want to know if you think the soup category in general is stabilizing, and where do you see future growth in the soup category?

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Adam J. Greenlee, Silgan Holdings Inc. - President & COO [56]

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Sure. Good question. I think -- for starters, I think when you look at the soup category in the quarter, it was a difficult year last year in the third quarter. So where we are today, we saw some nice growth year-over-year, but we feel pretty good about what's happening right now in the soup business. And we're at the early part of the season, selling for soup, but we think the activity in the market, the promotional activity, the focus on soup products, I think, has been good, and canned soup has been good for us. So we feel good about where it's going.

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Operator [57]

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

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

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I hopped on a little bit late so I apologize if this was already asked, but just wondering if you could comment on what you're seeing in the pricing environment over in Europe on the metal can side.

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [59]

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Sure. I alluded to it a little bit. We certainly saw -- this is going to be a 2019 comment, not really about '20 at this stage, but we saw a little more competitive activity in Europe than we've seen in the past. We saw some big players who were really looking hard for volume. And it didn't seem to us like it was getting full cost recovery of what was happening on the steel side. So we're hopeful that, that will change. Certainly the cost dynamic has continued to change, but that will -- we won't know that about '20 until we get into it a bit. In Europe, you have some that happens in the beginning of the year, you have some that goes into negotiations first quarter. So you -- clarity takes a while to get there.

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

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

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [61]

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Yes. It's no -- less on our contract. I would -- I guess for you a little bit here, but something like 20% is probably under multiyear contract, and more like 80% is annual negotiation.

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

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Got it. Okay, that helps. And the last one for me, just, Tony, following on your comments around the leverage kind of being back in the range you want it to be in, just wanted to get a comment on -- or your thoughts a bit on trade-off between M&A and buybacks. You've been pretty active in both arenas in the past. Maybe you can just kind of comment on the general M&A environment and where multiples sit versus where you think fair value is in any specific parts of the portfolio. I know you've talked about dispensing in the past as being a fine middle market that you can -- you think that there's some room to pursue M&A? Is that still the case? Or are there any other parts of the portfolio you're looking at?

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

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Yes. Brian, this is Bob speaking. Look, as Tony said, we're kind of right square back into a range that gives us a lot of flexibility around how we deploy capital. No difference in strategy from where we've been for quite some time that our interest and desire is to first allocate that capital deployment toward M&A activity. I think as we look through the segments that we operate in, obviously, we would love to continue to find opportunities to build out the closure segment and particularly build out around the dispensing systems side of that. If there are ways to tuck things in around the can business, that would be interesting to us but perhaps a little more challenging given the market share, if you will. And then, look, the plastics business has turned the corner nicely right in line with what we would've expected to have happen over time. So the idea that we could see some capital allocated there is not off the table. I'm not trying to signal that there's something that we're going hard after, but it's certainly -- the team has earned at least the opportunity for us to be thinking about capital deployment there. All of that in the backdrop of the same kind of discipline that Silgan has historically put forward on the M&A side and that is if the cash on cash returns are not there, then we'll drop back and look at all of those options against what happens from a return of capital to the shareholders. So I would not at all rule that as off the table. And quite frankly, as we look forward into 2020, as Tony said, the idea of allocating capital to one or the other though is -- remains pretty high and will benefit the year.

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Operator [64]

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We'll take our next question from Chip Dillon from Vertical Research.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [65]

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My main question is -- I got two. One is, is there any update, and I don't think you all are involved at all, but I know that there's some kind of an investigation about the food can business in Europe, and anything you can tell us about that?

And then secondly, and this is a very broad question, but we've continued to hear more and more about the ban of plastics and single-use plastics and -- in various places. Certainly nothing on a wide scale involving containers, but I do know that's an important market for both closures and plastic containers. And just any kind of update you have on that and maybe moves that you and others are taking to try to counteract some of the PR that's out there going the other way?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [66]

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First of all, we are in Europe in the can business and everybody who is in that jurisdiction in the can business got pulled in. So we are part of that, which we have disclosed, and there's no updates to that to offer.

The -- on the plastics side, the -- there's a lot there. I think you're asking the right question. So there's perception of plastics, which is one whole issue. And I think we all know that there's a heightened awareness as we speak. I do still think that it's primarily around single-use applications and, as Adam pointed out, particularly things like single-use water for a lot of those are asking, well, why does this make sense. So I think that continues to percolate. And so we watch it very carefully.

Again, I think the question was very pointed in that bans are particularly important to us because as sentiment moves a little more slowly, bans can come in fairly quickly, and so we do watch that. I think where that's most likely -- you've seen it on straws, you may see it around the fact, and that's not a ban, but that the closure needs to be tethered or somehow tied to the bottle. You're -- certainly in Europe, you're seeing that, and I think you'll probably see in other jurisdictions. We've said on this call before that, that is not necessarily a bad thing for us being the scale we are, the development capabilities, et cetera. We feel that we're in a really good spot to work on that with our customers to come to a good solution on it. And so -- and that'll add some complexity and engineering content to the closure, if you will. So those are the kind of moves that we're focused on is how do we address the real challenges that are out there and help it where you don't end up with a ban of the entire product area. And now I'll remind you that -- the fact that the single-serve beverage is less than 2% of what we are. So it's not a big point in any case. Our plastic bottle business, as you know, is primarily around household use, health care, personal care, et cetera. So those are multiuse applications are in home, the kitchen, the bathroom. So the idea of moving to glass or other, it's just a little hard to imagine any major change there. So our belief is that, that is an area that will be fine through this. We need to be responsible and part of the solution. We need to keep working up close, consumer new resins in our products, which we are, whether it's biodegradable. And so there's a whole variety of bio resins that we are all looking at working. So we're doing all of that around it, but I really think the heart of this problem is going to be more around single-serve, particularly probably single-serve water areas.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [67]

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Okay. Which, again, is less than 2%. Okay.

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [68]

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That's correct.

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Operator [69]

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

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [70]

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I just wanted to actually, Tony, to follow-on on the plastics. So first of all, can you give us your EBITDA margin in plastics in the third quarter?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [71]

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Yes. It's -- somebody will look it up, but it's just sub 15%, 14.8% I think from memory. (inaudible) Kim is giving me a thumbs up, by the way. So I think 14.8%.

The -- so your obvious question is how you're doing. I think you're headed there at how we're doing against the 15%. If you just put the pension back on, you're above -- it's at or above the 15%. So to that topic, if I'm guessing you correctly, we view that we more or less achieve the first hurdle here, which is that we got the business back to where we think it's a sustainable level. Hurdle 2 is kind of what are the growth prospects at that level and where do we go.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [72]

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And what do you think about that?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [73]

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Well, we're working. You're seeing growth in the business now. So I think we're feeling a little bit better about it. We feel really good about the team and how they've gotten us to where we are. So we're going to watch the pipeline a little bit more. We're going to see where the business can develop before we kind of declare an all clear and that we're necessarily going to try to keep pushing in, in the marketplace. The other thing I said is we think consolidation needs to happen in the plastic bottle supplier community. There are a lot of players, and so I think it's going to be an important aspect to it. And so either we feel like we need to be part of that process or need to watch that happen around us before we can finish the thought process on what's the long term.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [74]

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

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [75]

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Yes. It's -- there's always a little bit of room. Obviously, within 15%, you have things that are higher, businesses that are higher and businesses that are lower. So you can always look at it like it could be better, but that will always be true. And so we really aren't thinking about it if -- markets that we serve today and the way we serve those markets, we think to get [15%] percent is around about the right spot and you can get a good return on capital at that level. So I think that's kind of where it stands. And therefore, you can read that also as that we don't have a huge amount of capacity that we could fill to drive that number up. There is some capacity, but it's got to be exactly the right kind of bottle, et cetera. And we are working on doing that, and that's part of how we've improved to this level. But it's not enough to move 15% by a big number.

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Operator [76]

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We'll take our next question from Adam Josephson from KeyBanc.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [77]

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Tony, just one follow-up for you, back on sustainability. So some of your competitors in paper and packaging have obviously been talking about that subject quite a bit and to the extent they can show volume growth and tie it to sustainability, there multiples have been getting a nice bump because, obviously, investors are starved for growth stories. Bearing in mind that volume growth isn't in and of itself the be-all and end-all, how do you think about the relationship between volume growth and multiples that we're seeing in the sector these days. I ask because you had your Analyst Day a few months ago and you talked about your multiple discount to the group and I think a large part of the reason for that is volume growth.

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [78]

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Yes. So look, we fully understand that as a public company, growth is somewhat linked to multiple without doubt. The point we keep trying to raise is that if you're a disciplined deployer of free cash flow and you've got a lot of free cash flow that it seems like the market ultimately ought to reward that. And I think over the history of Silgan, we would say it has rewarded us, right? Not always at every moment in time, but -- and we do seem to be at a point now where the organic growth seems incredibly high and above this level. And I -- we're a little hopeful that, that will fade over time and people will start to say about the cash deployment it is really important. So that's a big answer to your question. But of course, if you have more organic growth, there is a value benefit from that. And yes, sustainability can play a part of that, and yes, you're probably right that we do not beat that drum as loudly perhaps as some, which is ironic because nobody has a better story than a steel can, right? Because again, it's fully recyclable, more recyclable than anything else. It's magnetically pulled out of the waste stream. So it's far preferred by also waste processor and low energy to recycle just like aluminum can. And so it's got a great story. The only reason we've been a little quieter is when we have actual sales that are from that, we promise to tell you that. It's just it's a long lead time on it, where there's a lot of customers who are talking to us about a whole bunch of different ideas of steel packaging. But really, it's been -- it's not like us to talk it up until it's actually in the numbers, and so we'll wait for that.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [79]

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Tony, just one follow-up on that. Obviously, steel and aluminum have a good recycling story. Plastic has a much better carbon footprint story because, obviously, mining bauxite, converting into aluminum is incredibly energy-intensive relative to PET. So how do you think about the actual environmental impact of, say, PET or single-serve plastic bottles versus steel or aluminum cans?

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [80]

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That's a great question. I think that steel can is a different animal entirely. It does not have that same bauxite energy. So it's more energy than plastic but not a lot more because it is so recycled, you have to address that recycling content. And so essentially, the steel can keeps going round and round. And so it's way lower energy when you consider that fact. And therefore, I believe even just on that straight point, once you consider the cycling of it, it's better. The thing with plastic that we forget is in order to use it -- in order to recycle it, you got to ship all the plastic all over the place to wherever site can recycle, et cetera. So there's a lot of cost and energy that gets consumed in that process as well. And so I -- by the way, I think there is an argument for plastics on this side, the problem with plastic is a waste issue more than anything, and I'm not sure that, that is going to be quickly solvable.

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Operator [81]

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

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Anthony J. Allott, Silgan Holdings Inc. - CEO & Chairman of the Board [82]

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

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Operator [83]

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This concludes the teleconference. Thank you for your participation.