Silgan Holdings Inc (SLGN) 2012 Q4 法說會逐字稿

Thank you for joining the Silgan Holdings fourth-quarter and full-year 2012 earnings conference call. Today's call is being recorded, and at this time I would like to turn the conference over to Ms. Kim Ulmer, Vice President and Controller. Please go ahead, ma'am.

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 on Management expertise 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 2011 and other filings with the SEC. Therefore, the action results of operations or financial conditions of the Company could differ materially from those expressed or implied in the forward-looking statements. With that, let me turn it over to Tony.

Thank you, Kim. Welcome everyone to Silgan's 2012 year end earnings conference call. I want to start by making a few comments about the highlights of 2012. Bob will then review the financial performance for the full year and the fourth quarter, and, afterwards Bob, Adam and I will be pleased to answer any questions. As you've seen in the press release, 2012 was another record year for Silgan as we delivered adjusted earnings per diluted share of $2.70, up from a very strong prior year in which we delivered $2.63 per diluted share. While 2012 presented several challenges, we believe we have further positioned the Company for continued success in our markets by continuing to enhance are sustainable competitive advantages.

Among the milestones leading to the successes in 2012 and beyond, we generated $303.7 million of free cash flow, or $4.35 per diluted share delivering a free cash flow yield of approximately 10%; completed two strategic acquisitions, the high barrier plastic food container business from Wrexham, and Ontas, a Turkish producer of metal food cans and metal closures; enhanced our position in the eastern food can markets by commissioning new plants in Stupino, Russia, just outside of Moscow, and in the Jordan Valley; increased metal food cans volumes; made solid progress improving the operational performance of our Plastics business; increased the cash dividend by 9% to $0.48 per share; commenced a tender offer for up to $250 million worth of our stock; issued $500 million of new, 5% Senior Notes and redeemed existing 7.25% Notes.

These highlights are the result of a relentless focus on our mission to be the best in our markets by focusing on delivering sustainable, competitive advantage to our customers. It is this commitment that led to the initiation of two strategic projects in our Metal Container business that we believe will continue to strengthen the advantages of the food can into the next decade. First is the Can Vision 2020 which is a multi-year initiative designed to partner with our customers to dramatically reduce the systems cost of canned food products from steel to store. This is a comprehensive program including every element of the system from package design, combined purchasing initiatives, can manufacturing and distribution, cooking and filling operations, et cetera.

The goal is to further the already significant cost advantage enjoyed by the metal can for shelf-stable food. And to provide further incentive for customers to grow can offerings. The second initiative we kicked off this year is a partnership with CMI and its industry members to more effectively communicate the significant and sustainable benefits of canned foods, to ensure retailers and less frequent can consumers fully understand the nutritional and environmental benefits of canned foods over frozen, and fresh in the store. In summary we remain committed to our discipline of building our franchise market positions through prudent investments and believe this discipline will allow us to continue to create significant value for our shareholders.

As you can see in our outlook, we believe we are well-positioned for 2013, as we expect to deliver earnings growth in the range of 13% to 19% and continue to invest in enhancing our franchises for the long-term. With that I will turn it over to Bob.

Thank you, Tony, good morning, everyone. As we look back on 2012, it is important to note that in the face of a difficult, global economies, volatile weather and changing customer demand patterns, we delivered record earnings and significantly outperformed our free cash flow target. In addition, we made several investments to drive shareholder returns, including the acquisition of plastic food containers in Ontas, continued investment in the eastern can markets, significant reductions in working capital, opportunistic share repurchases throughout the year, and the commencement of a $250 million share repurchase in the form of a modified Dutch Auction. As a result, adjusted earnings per share increased $2.70, and free cash flow per diluted share doubled to $4.35.

On a consolidated basis, net sales for the year were $3.590 billion, an increase of $79.1 million, or 2.3% versus the prior year, largely a result of the benefits from acquisitions offset by the negative impact of unfavorable foreign currency. We converted these sales into net income for the year of $151.3 million compared to 2011 net income of $193.2 million. However, 2012 includes a loss on early extinguishment of debt of $38.7 million, rationalization charges of $8.7 million and start up costs of $6.4 million, versus 2011 which included income of $25.2 million as a result of the termination of the Graham merger agreement net of corporate development costs, rationalization charges of $7.7 million and a loss on early extinguishment of debt of $1 million.

Interest expense before loss on early extinguishment of debt was unchanged at $63 million, as higher average outstanding borrowings in 2012 were offset by lower average interest rates as a result of the 5% Senior Notes issued in March, 2012 and the refinancing of the credit facility in July, 2011. As a result of these financing, we recorded a loss on early extinguishment of debt of $38.7 million in 2012, and $1 million in 2011. Our 2012 effective tax rate of 32.4% is generally in line with expectations as favorable rate changes in certain jurisdictions and the resolution of certain issues with tax authorities benefited the year-over-year rate.

Full-year capital expenditures totaled $119.2 million, which is at the low end of our estimate and significantly lower than the 2011 spend of $173 million as we chose to drive capital spending into 2011 to maximize the accelerated deduction for capital put in service in 2011 and to support expansion in the eastern markets. Additionally, we paid a quarterly dividend of $0.12 per share in December. The total cash costs of that dividend was $8.4 million, and for the full year, we returned $33.8 million to shareholders in the form of dividends and an additional $34.1 million in the form of share repurchases. Additionally, we commenced the Dutch Auction to repurchase up to $250 million of outstanding stock, and this tender is expected to close on February 5.

As outlined in table C, we generated free cash flow of $303.7 million in 2012, well ahead of the prior year free cash flow of $152.9 million. Free cash flow per share doubled at $4.35, and, as we discussed previously, free cash flow in 2012 does exclude the voluntary pension payment of $76 million which we contributed earlier in the year. The primary drivers behind the improved free cash flow are reduced inventories as we worked off inventory built in 2011 as a precaution to early 2012 labor negotiations. We had better year-end collections and lower capital expenditures.

I'll now provide some specifics regarding the financial performance of the three businesses. The Metal Container business recorded net sales of $2.290 billion, an increase of $82.2 million versus the prior year. This increase was primarily due to volume improvements as a result of the inclusion of Vogel & Noot and Ontas, improvements in base business volumes and the effect of the pass through of higher raw material costs, partly offset by unfavorable foreign currency translation of $23.3 million and weaker European price realization.

Income from operations in the Metal Container business decreased $24.8 million to $231.5 million for the year. Operating income was negatively impacted as a result of the comparative impact of the year-over-year inventory moves as 2012 under absorbed manufacturing overhead as a result of decreasing inventory balances, while 2011 benefited from more efficiently over observing overhead costs while building inventory ahead of the early 2012 labor negotiations.

In addition, 2012 suffered inefficiencies as a result of the timing, mix and geography of customer requirements; the impact of lower-priced realization in Europe; start up cost of $6.4 million associated with the new facilities in Russia and the Middle East; higher depreciation and higher rationalization charges. These effects were partially offset by improved unit volumes and the $3.3 million past product liability dispute settled in the prior year. Net sales in the closure business decreased $7.7 million to $680.1 million primarily as a result of unfavorable foreign currency transaction of $26 million, lower net sales in Europe as a result of the economic weakness and the pass-through of lower resin costs. These declines were partially offset by better unit volumes in the US single serve beverage market.

Income from operations in the closure business decreased $2.8 million to $73.1 million in 2012, primarily due to price pressure and lower unit volumes in Europe, unfavorable foreign currency translation and higher rationalization charges, which were largely offset by improved unit volumes in the US single serve market, ongoing cost reductions and manufacturing efficiencies. Net sales in the Plastic Container business increased $4.6 million to $614.5 million in 2012, principally due to the acquisition of plastic food container business acquired in August 2012, partially offset by the pass-through of lower resin cost, selectively lower unit volumes in the base business and unfavorable foreign currency translation of $1.8 million.

Operating income increased $18.2 million to $30.8 million for the year, largely a result of improved manufacturing performance, the favorable comparison of the year-over-year resin lag effect which benefited 2012, the acquisition of plastic food container operation and lower rationalization charges. For the fourth quarter, the Company reported earnings per diluted share of $0.42 as compared to $0.53 in the prior year quarter. We incurred $2.9 million of rationalization charges and $2.1 million of plant start up costs in 2012 as compared to rationalization of $2.9 million in 2011. As a result, we delivered historically in line adjusted earnings per diluted share of $0.47 in the fourth quarter of 2012, as compared to a very strong $0.56 in the same quarter last year.

Sales for the quarter increased $22.9 million versus the prior year, driven primarily by the inclusion of sales from acquired businesses and higher average selling prices from the pass through of higher tinplate costs. These gains were partially offset by our lower average selling prices as a result of the pass through of lower resin costs, the impact of weak economic conditions in Europe and unfavorable foreign currency of $4.6 million. Income from operations for the fourth quarter 2012 declined to $58.7 million from a very strong fourth quarter 2011, which benefited from an inventory build and the timing of the recovery of certain BPA related costs incurred during the year in our Metal Container business.

In addition, the fourth quarter of 2012 experienced weak economic conditions in Europe; the unfavorable impact of inventory reductions in the Metal Container business; the negative effects on logistics and operations from Hurricane Sandy; and plant start up costs which were personally offset by better operating performance in the Plastic business, higher unit volumes in the Metal Container business and the inclusion of the recently acquired Plastic Container operations.

Turning now to our outlook for 2013, our current estimate of adjusted earnings per diluted share for 2013 is in the range of $3.05, to $3.20, which excludes the impact of rationalization charges and plant start up costs. The midpoint of these estimates represents a 15.7% increase in adjusted earnings per diluted share over the prior year. Reflected in our estimate for 2013 are the following -- we anticipate a lower year-over-year share count as we have assumed the purchase of $250 million of stock pursuant to the pending modified Dutch Auction, and our range of guidance captures the scope of possible prices for the tender.

The Plastic business benefits from the full year ownership of the Plastic Container business. We are focused -- forecasting modest improvements in the Metal Container business as a result of anticipated volume growth, continued manufacturing performance and other benefits from capital investments which will be partially offset by general inflation and strategic spending for the Can Vision 2020 and the industry wide communication initiatives. Consistent with 2012 we anticipate further inventory reduction during the year. We are expecting continued profit improvement in the base Plastic business driven by consistent focus on operational efficiencies. And we expect continued benefit from cost reduction and productivity programs across each of our businesses. In addition, we expect interest expense to increase modestly versus 2012 excluding the loss on early extinguishment of debt, largely a result of higher average outstanding borrowings.

We currently expect our tax rate to increase modestly versus 2012 as a result of higher statutory rates in various jurisdictions and that certain discrete items which benefited 2012 will not recur. As a result, we expect to pay higher cash taxes. Also, we expect capital expenditures in 2013 to return to a more normal level and are targeting to be toward the midpoint of our normal range of $120 million to $150 million. We are also providing a first quarter 2013 estimate of adjusted earnings in the range of $0.40 to $0.50 per diluted share, which also excludes the rationalization charges and plant start up costs.

The first quarter is expected to benefit from a lower share count as a result of the completion of the tender offer, and the benefits from the acquisition of plastic food containers, offset by the negative year-over-year comparison of resin pass-through lags and the favorable absorption of overhead costs in the first quarter of 2012 as the Metal Containers businesses built inventory in advance of labor negotiations.

Based on our current outlook for 2013 we expect free cash flow to be approximately $250 million as improved profitability is offset by more modest working capital reductions and higher capital expenditures. This results in a very strong free cash flow yield of approximately 8.9%. Given our free cash flow generation and the strength of our balance sheet, we are well-positioned to continue to reinvest and grow our business through acquisitions or other deployments of capital to drive value creation for our shareholders.

So, that concludes our prepared remarks. So I will turn it over to Tom, who can now give you directions for the Q&A session.

Thank you, sir.

(Operator Instructions)

George Staphos, Bank of America Merrill Lynch.

Congratulations on the year. I guess the first question I had, and I'll only ask a couple up front, is on the Can Vision 2020 program. Ultimately, what was the catalyst for this program? And as you thought about it, is it to some degree, or why shouldn't we think it to be perhaps a more defensive move reflecting perhaps your observations on the market into the future? And how successful do you think it will be, or what challenges might be presented by consumer perception around the can? And I'll leave it there.

Tony. First of all, the distinction here for whatever it's worth is the Can Vision 2020 project is about cost reduction as opposed to the marketing program. I take from your question, you are kind of referring to both parts of that?

Well, yes. But also, you're working with your customers to reduce obviously the system wide cost getting the product to the retailer, there needs to be -- there's a reason why you want to do that. And, my guess is part of the reason you want retailers to push more canned product, but I'll stop there, and you fill in the blanks.

Okay, fair enough I just want to be sure. So, I'm sure as the call goes on we will get both parts. I'll answer the Can Vision 2020 first. The catalyst here is -- first of all this is something we have always done. We have had a relentless pursuit on taking cost out of our product for our customers, and every year that happens. And so it is not in any way meant as a defensive reaction. It is, however, a recognition over the last decade there has been significant steel inflation, and there's been significant pressure put on our customers through changes in retail stream and just lower cost of food products kind of throughout the country. And so, it's really just a more comprehensive focus on dealing with a more comprehensive problem for our customers over the last decade. So, I think the first thing is just to say it is something that we have been doing all along around it.

The second part is that we think it could be significant. We use the word dramatic, reduced -- dramatic reductions in total system costs. And again this is -- what is a little unique here is it is everything from steel and looking at kind of the steel that comes in, gauge of steel, or any other changes about that, all the way through to the package itself to our customers, how they take our product, how they fill it, how it then moves on to the store. So, it is a bit more comprehensive in that regard, and as we've gone through this so far, and we've been basically been working on this, the entirety of this year, really wanted to give it some time to see how much we could find. And I would tell you thus far we have identified $200 million of opportunities. Now these are long-term in nature so first thing is these are not going to be here next year necessarily. Some of these are very big ideas.

That $200 million is not to our account, and by our I mean the Company and shareholders. The idea, as you pointed out, is really to drive those savings to our customers to help them in terms of their own situation and to want to continue to support the can. But it is going to give us opportunity to make investments to drive those savings and to get our kind of returns on the investment. So there is something in it for us on the bottom line as well but it's not the $200 million coming through. And again, the key here is to enhance the competitive advantage that already exist for the can against every other possible package in the shelf stable food market. And, therefore, to drive further incentive to customers to pursue the can and see it as a great package going forward. So, all the way around, the catalyst is really just a comprehensive look at what's happened over the last decade on the package and to our customers, and we don't think it's defensive. Much more we would say it is offensive.

Okay, but if your customers are saving $0.005 or $0.01 total system cost, how does that help him ultimately if the consumer isn't willing to -- and obviously I am painting this very starkly to just ask the question (multiple speakers).

Yes. I tried to separate the two parts of the conversation, but let's go back then to the consumer. That isn't the case. Our cans grew this year. Cans have been over a long period of time at kind of flat product line. So, I don't think the evidence suggests that consumers our shifting away from the can. What we find the evidence suggests is that there is a frequent user of cans, and the frequent user understands about the can and all of the attributes, why they like it. What we've found there is a lot of less frequent users of cans that have a lot of misunderstanding about the can. And so that starts to drive us into the communication process of helping them. That is sort of the second part your question.

And so, working with CMI and other can manufacturers, we are going to get out there and try to work more on the communication effort. The misunderstandings you find, which are fascinating when you look at it, is you get a lot of consumers who think of all canned goods as processed food and meaning that more in a pejorative way. And, in fact, if you look at fruit and vegetable, for example, and it is prepared. It is not processed at all. There's an assumption and a belief widely held that there is preservatives in food cans. Well, of course there are no preservatives in food cans. And there's a thought that fresh is more sustainable on the environment, et cetera.

Again, as we all know, the fruit and vegetable are prepared. They are not processed. The can, once it is filled, doesn't have to be refrigerated. So it's a much lighter footprint on the planet as it goes forward. You look at fresh food in the grocery store, 50%, nearly 50% of that gets wasted. All the water, all the carbon that goes into growing all that food in a world with limited food, nearly half gets wasted. Almost none gets wasted if it goes into a can. All the nutrients go into that can immediately. And so what we are finding is there a population of people that don't understand that, and with all the kind of noise that is out, they are understanding it less and less as time goes by. And so it becomes incumbent on us and the rest of the industry to be sure that we are communicating that and helping our customers and retailers understand and communicate as well.

Okay. Tony, thanks. I'll stand down. I'll turn it over.

Chris Manuel, Wells Fargo.

Good morning, gentlemen, and congratulations on the strong cash generation. A couple quick thoughts there, first could you give us some -- what you're anticipating as you are looking forward across the different businesses with respect to volume? You did have a little bit of growth this year but I was thinking too we may have a little bit more growth in food next year. Could you maybe give us a little bit of look by region, whether that's Europe, North America and then by Plastics and Closures as well?

Sure, Chris this is Bob. I'll start with the food can business, and then I'll turn it over to Adam to talk about Plastics and Closures. You got it right, we did have some growth this year. I think if you look at 2012 in the aggregate on a global basis we saw volumes increase almost some 4%. A big portion of that is coming from the acquisition of Ontas, the Nestlé Purina acquisition that we annualized as well as some volume coming from the plant start ups. But if you just look at the base business organic growth, we saw about 1% growth, which is a little bit lighter than what we were expecting, because we did come into the year thinking we would have a little bit better pack than what we ultimately saw. So, as we look forward to next year, we do think that we'll see more improvement in volumes. Again, we're kind of getting back to kind of a baseline pack. We're not expecting a robust pack necessarily, but more of a normal kind of pack. And then we will see some benefits coming from the acquisitions as well as from the start up facilities. So, that nets us to probably thinking we see low single-digit kind of growth in the base business for cans globally.

When you move over to Closures, globally, we will start with the 2012 performance as well, and total unit volume for Closures was up a couple percent largely driven by our US single serve volume that continued to show strength as we had a warm summer and a long summer here in the US business. So, US volume was up kind of mid- single-digit while European business was off low single digits in 2012. And, as we go forward into 2013, we expect to see the same kind of continued solid volume for the US business, and we are not anticipating any recovery for the European business. So, I think 2012 was a good year for volume in our Closures business, and we will see more of the same in 2013.

As we move to Plastics, what is interesting is unit volume is a great measure for food cans and for Closures. It's not a perfect measure for our success in the Plastic business, as we selectively focus our efforts and our growth strategies towards very specific target markets. But, as we talk about the pound volume for the business again the 2012, we were down kind of mid single digits as we had expected to be so kind of right in line with our expectations for the year. And then as we move on to the fourth quarter, of 2012 we included obviously the plastic Food Container business which from a unit volume standpoint absolutely met our expectations in 2012 for their unit volume. And 2013 I would say we will expect continued improvement in the operating performance of both pieces of our Plastics business. Again, I think selectively unit volume will be down in our base business, and we will expect nice growth out of the plastic Food Container business that we acquired.

Okay. One last follow question, and it had to do with when we look at the dollar profit levels in the Closures business, they seem to fall apart a bit in 4Q. And I think you referred to some price pressure. I recognize there's probably some seasonality in there, too, but could you give us a little more color into what you're seeing with respect to price pressure? Is the sort of at the beginning of this? Will this run for a year? Or is there some contracts rebid or maybe some extra color there would be helpful?

Sure, again were specifically talking about Europe, and, again, I think some of that price pressure comes from a choppy volume market that we've seen in Europe as that capacity gets aimed at kind of smaller volumes available in the market. So, in the year, it was somewhere in the tune of $2 million that negatively impacted us. I think that happened relatively early in the year, Chris, so we just kind of saw that play out through the balance of the year. And, as we move forward into '13, we don't anticipate further reductions in price. We've seen kind of the market stabilize in Europe for Closures and look for that to stay strong as we head into the next year.

Okay. That's helpful. Thank you, gentleman.

Ghansham Panjabi, Robert W. Baird.

Tony, going back to George's question on Can Vision 2020 and the CMI branding initiative. Can you just give us some color on how long these programs have been in the works -- just sort of some context as you're obviously finding it in 2013, so how long have you been working on this?

Yes. I would again as I said in some ways if you talk Can Vision is something we've always been doing but, as a comprehensive program of this nature, it's been basically the entirety of 2012. Essentially, the same thing is true on the marketing program, although it took a while to finally get agencies in, et cetera and get moving on that. But it sort of been on our plate for the entirety of 2012, and there is spending in 2012 against both of these projects and that will accelerate into 2013.

Okay, I'm sorry if I missed it, but was there a dollar amount you allocated to these two programs, and how do you split between the two?

Yes. I don't necessarily have a great split for you the two. The cost in the current year was $3.5 million, $4 million, and that will probably go up by about the same amount again next year.

Okay. And then, as sort of a follow-up question, on the legacy Plastics business, do you have a sense as to how the margins were during the fourth-quarter? I know it's complicated with Wrexham, but if you can break out those two that would be helpful, too. Thank you so much.

Sure. Ghansham, it's Adam. The margins for the base business did improve, not to the historic levels, but certainly improved versus what we've seen previously. The Wrexham business was right in line with our expectation as well. So, both businesses performed very well. From an operating margin standpoint, we were in the 4.5% range for the base Plastics business. And again Wrexham, I'll just say was in line with what our expedition was.

And so Adam, going to the contract between the two businesses legacy and Wrexham, are they comparable in terms of resin pass through, because resin pass ticked up quite a bit?

Not necessarily. I'd say that our legacy businesses is working very hard to tighten our resin pass-through mechanisms, and the Wrexham business had been a bit in front of us on that front. So, their pass throughs are a little bit tighter than ours on the legacy business.

Okay. Thanks so much.

Adam Josephson, KeyBanc.

What is your full year EPS guidance of $3.05 to $3.20 include as far as uses of the $250 million of free cash flow that you expect to generate aside from the dividend?

You're talking about the free cash flow that were forecasting to generate in 2013?

You got it, Bob.

Yes, so any deployment of that CapEx would be incremental to what's in the guidance right now. You know that's funny this is always the challenge for us is what always here's what we have in hand right now. There's always that last piece that we think about which is deployment of cash. And, obviously we are deploying and counting the cash on the buy back and on the Plastic Container business that we acquired. But, beyond that, we don't know how to factor in so it's not there.

Right. So no additional buy backs, acquisitions or otherwise?

Correct.

Okay. And, how much -- back to resin and the resin lag, how much of a drag do you expect that to be in the first quarter and for the full year?

Well, first of all our forecast for resin is, we are experiencing increases literally as we speak. Certainly in January we saw increases in our base resins. We will anticipate further increases through the first quarter. And so what we do from a forecasting standpoint is we forecast what we know. So we've forecasted the increases without any relief later in the year. So, with that I'd tell you for the full year we're in the $3 million to $4 million range and in the quarter it's $2 million.

That's helpful. And just the last one on the acquisition pipeline, how would you characterize it relative to what you've seen in previous quarters?

Yes, I think there's really not a lot changed there. I mean as we've talked in length it's a core part of our strategy, and we look to deploy capital. Our discipline is that we find things that marry up where we think we can find sustainable competitive positions in those market and that we can earn good returns. That's still the case. There our still plenty of opportunity that is out there. The credit markets our pretty ripe to allow for acquisitions. I think as we've seen in the past, the amount of activity that we undertake, given our discipline, doesn't always translate to near-term acquisitions. But we're hopeful that, as we continue to troll for opportunities, that we find one that fits us well and drives good shareholder return. So, we our still feeling good about the prospects.

Thanks, Bob, thanks everyone, appreciate it.

Phil Gresh, JP Morgan.

First question, just following up on the resins, the $3 million to $4 million headwind for the year. I understand the first quarter and the impact it would have on the second quarter from a carry through standpoint. But, with the pass throughs, I guess I would've thought some of that would've come back in the back half. So maybe you could just refresh my memory on the typical timing of your pass throughs given that we are so early in the year at this point?

Sure. And part of the issue, Phil, is that it is the timing of how quickly resin goes up and how quickly it goes down. And what we've seen here in the first quarter in January is a rapid increase in our base resin prices. So, trying to forecast the down, if you will, of those resins later in the year, it really depends. Is it a sharp fall? And, if that were the case, then there would be a benefit to us. If it is kind of a drawn out, steady decline, there's not much benefit that we could achieve do that as we pass through on a timely basis to our customers. So, that's the background. The answer to your question is, we're still in a kind of 90 day period of resin pass-through for the lag affect in our base Closures -- or our base Plastics business, excuse me.

Okay. Not to belabor the point, but I guess what I would have thought if we were going up and then stable from there, which it sounds like what you were forecasting, that when it stabilizes you do get to recover some of this increase, which I guess I would've thought was in the back half?

You recover the increase, but you never recover the lag that you lost at the beginning of the year. You need a decline to recover that.

Okay. And then on the Metal side, on Metal Food Can, could you just give a little bit of a bridge kind of year-over-year for the fourth quarter? Just how much of an impact there was from the inventory reductions and Sandy and whatever other items you would want to call out?

Sure. So on the fourth quarter I mean first of all just point out as we did in the release, it's a tough comp. It was a very strong fourth-quarter last year. And so -- and it was strong because we were building the inventory which we talked about the time ahead of the labor negotiation. By the way, that's true of Q1, too, so it's sort of the same answer when we get to Q1. It also was strong because it had the benefit of certain project cost we've been working on all year long that we get some reimbursement for. And that reimbursement came in, in Q4 as you had kind of a one time if you will benefit in the quarter. So, both of those made it a tough comp.

Against that you had sizable inventory -- comparatively inventory reductions, and we took the opportunity to continue on that. At the end of the third quarter we told you we had gotten in a little earlier, weren't so sure how much more we would get, but we found an opportunity to keep going in Q4 and got more. So that had some $3 million to $4 million of negative impact on inventory side. We also -- we talk about this logistics point, but, again, this was not the smoothest year on demand patterns, et cetera. So, there $2 million costs associated just for that, shipping product around, plant to plant. And so, beyond that, the rest is basically your. In Europe, as Bob talked about the volumes, we definitely saw, through the course of the year, volumes were okay, pricing was a little challenging. We definitely saw volume pullback in Europe in the fourth quarter, particularly in the December time frame.

We also do think that part of that is attributable to sort of the economic malaise and the idea of getting some working capital out. We also do think some of that is attributable to the timing of the Christmas holiday and customers taking longer shutdowns, et cetera. Time will tell if we are right about that, but that's our view. So, that is the rest of the bridge, if you will, plus the start up costs on the new plants.

Okay.

And that I think bridges you the quarter.

That's very helpful, thanks. And, just to follow up on the first quarter, you said there is some inventory build benefit as well. Roughly how much would that be that we need to be thinking about?

Another $2 million to $3 million difference, and again I has most to do with what we were doing in the first quarter of last year, although we are -- we're going to be reducing less this year as we keep trying to work at inventory.

Okay. All right. Thanks a lot. I'll turn it over.

Anthony Pettinari, Citi.

Good morning. You referenced metal containers potentially showing a little stronger growth in 2013 and, given you've announced some capacity reduction actions in North America last year, following those would you expect that your footprint is going to be pretty stable in North America over the next 12 to 18 months? Or, our there additional steps that could potentially be on the table to optimize your footprint? And maybe just a related question, you called out operational improvements in metal containers in the year, and I was wondering if there was any major initiative that you could point to? Or, if we should think about the timing of those improvements in the year.

Sure. On the footprint question, it's a good question. As you know, we did shut down one plant as you point out. And we talked on our last call that Campbell has completed that they are going to be shutting down their filling operation in Sacramento, California. So the quick answer question is, as we say here right now, we don't see any immediate footprint changes, although we constantly look at that. But, our thinking right now is that there's -- we have a very good asset on the West Coast that we think can be very important, and, because of the shutdown of our Kingsburg plant, we are already absorbing some more volume in the existing footprint. As an aside, a reminder that the [Arcan] plant in Sacramento was roughly 50% Campbell and 50% third party so it already was supplying other customers in the market.

So right now we're not seeing any shift on that, but, as you can -- if you follow me through all that you would realize that the rest of our systems will be that much more tightly utilized because you are going to have a little less on the Sacramental line until we resolve the question. And so we are thinking that in terms of some of the logistic issues we talked about in 2012, we are bracing that we may have more of that because were going to have a very tight system in 2013. So, that's factored in there. Against that we always assume they we are going to make operational improvements and tend to do so through our operations excellence and continually working on outputs, et cetera. So, that's the context that you read.

Okay. That's helpful. And just switching gears to CapEx, you referenced the higher CapEx in your free cash flow guidance. And I was just wondering if you could call out the impact of the acquired businesses on that higher CapEx. If you could quantify that looking at Wrexham or Ontas versus maybe the legacy business or any kind of CapEx projects for 2012 that maybe you deferred into 2013 or maybe how we can think about those buckets?

Sure. Really, the acquisitions that we completed in 2012 will have a minimal impact at least in the near-term on CapEx. So, that $120 million to $160 million is a range that we kind of increased a bit when we acquired the Vogel & Noot business knowing that we would be making some investment into some of the Eastern markets. Still feel like that's a pretty good range in the near-term given what we see on the horizon around those two businesses. And again those two businesses are relatively small against the broader scale. As we move forward and that business continues, that business being the plastic Food Container business, continues to grow there could be some capital deployed, but we are not expecting that to be in 2013.

Great. I'll turn it over.

Chip Dillon, Vertical Research.

You probably mentioned this, and I missed it. What tax rate do you assume for this year? And I'm sure a lot of it is based on the geographical mix you end up with?

You're talking the assumption for 2013, now?

Yes.

Yes, so we are expecting the tax rate increase. It will probably go up into the 34% plus. That's largely -- that's probably a more normal kind of rate of where we've been. We do have some jurisdictional changes in tax rates as well as you mentioned the mix of where profit is going to be driven. And a big part of that change year-over-year is the fact that 2012 benefited from some discrete items that brought it down that will not recur in 2013.

Got you. And I guess as a follow-up, when you think about the whole M&A situation that out there, and you guys are very careful at the pitches you swing at. Are you finding I guess the improving emerging economies or just global economies coupled with the markets are doing is making that more of a challenge? Because I guessed asking prices our up? Or not really because financing costs continue to be low although they've started to come up a little bit?

Yes. I don't think we're seeing huge shifts in value expectations yet. Obviously, if borrowing costs remained as low as they are right now, you would expect that would happen. But I think against that you've gotten -- it's been sort of a rocky couple of years for those developing markets, and, even though people our starting to collect the world economy is headed for better, I guess. We have not seen it a big change in valuations in that regard.

Got you. And then I guess the last question is on the initiative you guys are part of, and I imagine others are too, Tony, you gave some pretty compelling factors that I think our out there. I'm just wondering if you've seen studies that show this perception -- I thought it was quite interesting how, the whole preservative versus fresh issue in the can and outside the can and certainly the footprint issue with the fresh given that so much is wasted. Is that something that you've seen perception at least here in the states change over time? Or, is it -- or why now go through this initiative?

Yes. I don't think the perception has changed. I think it -- there hasn't been much perception and so we've been relatively satisfied with the regular user of the can. And, I think -- and now were starting to look a little further on that. I think what has changed is the American consumer I think is a little more sustainable conscious, certainly the retailers and customers are. And so I think the power of the can is actually much stronger as you get into that side of the discussion. And then I think the whole preservative question -- I think there is a movement afoot. You look at organic foods, and I think people our getting a little more tuned to what they're eating, et cetera. And I think they can would've always historically fallen into a category -- now I'm talking less frequent users, right? Not the regular. But for them they would've typically put the can not in that category of good for me, et cetera. So a big part of this is educating that group so that they feel good about feeding their family from a can that it's a plus not a neutral decision.

Got you. Okay, that's terrific, thanks.

Scott Gaffner, Barclays.

Just wanted to get an update, you mentioned the capacity expansion the plants coming online in Russia and Jordan. Can you just talk a little bit about how those plants our progressing, if they are commercially producing cans for commercial use yet? Are the contracts in place for existing customers? And then maybe I think you mentioned Ukraine coming on early in 2013. Can you talk about those, and can you also frame it in the context of any future possibility of expanding with existing customers? Or in which regions could you expand, et cetera?

Sure. Well, as you know we've targeted the commercialization of two facilities in Russia and one in the Jordan Valley and as you mentioned one coming in the early part of '13 in the Ukraine. The Jordan Valley one is commercialized and has been qualified. It's a little bit disadvantaged right now because of the political situation in Syria and getting goods to much of the Middle East as a result of that. So that's not driving a lot of opportunity for us right now. But it does sit there, should that political change -- political environment change. On Russia, on the other hand, we do have both of those facilities commercialized now. The last one is being qualified with various customers. They are both pack related entities, so we will see that benefit kind of coming as we move into the pack season. We do believe that those areas of Russia in particular will become increasingly important from food can growing regions and food can consumption.

So, we do see opportunity to further build out over time. That doesn't necessarily mean it's going to be in 2013. I think we've taken the approach that we want to build out with local customers where we think we can support the local market, grow with those that are there, be prepared if and when multi-nationals come in but typically we think that there's better profit opportunity by supporting the local customers and that's our focus right now. And then in the Ukraine that a facility that will be kind of a shared facility between cans and Closures and that we should see come board kind of in the first quarter into the second quarter of '13. And again another pack related environment so we will see the benefits there coming in the back half. Generally we think that region, as I indicated, for Russia is ripe for continued growth around food can consumption.

This is Tony, so remember these are relatively small plants so they our kind of one line becomes two line, et cetera. So the -- incrementally the early profitability from them is less because you got all the fixed costs in the plants et cetera. The point is exactly what your question got to is that our belief is that we are going to be able to grow these. And these our markets -- we're going to take Russia as an example. This is a market where we believe that the canned food and the can is going to have a long-term solid future. It's a huge advancement from where they are. Again, you go to these issues of protecting food and not wasting, et cetera. That's a market that that's highly valued in. And so, again, we think it's very important to build the position the way we are in that market, so the opportunity is definitely down the road as those plants grow in size.

Right. And just to go back to the point you're going out to the local account. But, with Can Vision 2020, you're aiding some -- helping out some large national accounts that our potentially global account as well. Does the conversation ever extend to migrating your business overseas with those customers? How do those conversations go? Or is that just not a possibility at this point?

Absolutely. That's part of it. I think what Bob was covering is that the basic strategic focus, our feeling is that you succeed in these markets, if all you do is try to ride the coattails of a multinationals, that may not be a good strategy and plenty have tried that and it hasn't worked. So I would call a bit more of a two pronged. We are staying very focused on the local suppliers, because we think some of them will either succeed on there own right or they will be acquired by multinationals and that a better avenue in. But some of this is with multinationals, although we are certainly going to do that on very careful basis so that we leave ourselves room to grow where we want to. But it's two-pronged.

Great. And just lastly going back to Can Vision 2020, it seems relatively straightforward in how you measure the returns for your customers and I realize $3.5 million to $4 million in 2012 is not a large dollar spend, but how do you measure returns for Silgan and for shareholders on these initiatives when you invest in these initiatives?

Can Vision 2020 is the much is your one about because the big spend here is not the $3.5 million or whatever a year. The big spend here will be a lot of capital because many of these will be changes to the package itself. And so those will be assessed like every other project we do. We are going to want our kind of return on this. So, I think in the end you can look at the cost you spend to find the opportunity and work with your customer to develop it. That against what you get on return of capital on the investment. And you could go back and look at that, and I'm certain that just on the list that we have in front of us it's going to be very compelling. Then, more importantly, it goes back to what we said; this is part of what our job is. It goes right to the mission principal of how Silgan was born which is driving competitive advantage for our customers being the best of the market. The best in the market has to keep finding lower-cost ways to deliver value to our customers.

Great. Thanks.

Mark Wilde, Deutsche Bank.

Tony, I just -- not to belabor this Can Vision, I am curious in the release you talk about kind of a dramatic reduction in system wide cost. I'm trying to figure out what are two or three examples of what can be done to really dramatically change the cost?

Well, the easier examples are, you can lightweight materials of course, you can totally change the way cans are handled between us and our customers so they can be lighter weight. That's one example, but you also can change coding systems, lining systems you can do joint purchasing programs. You can look at shared warehousing, distribution, you can go to the material, so it's actually quite encompassing. And by the way I missed one, but you can look at how we make cans and our own lines and the limitations that we have. And, again, when you get into that more comprehensively and you're willing to bring in your suppliers and your customers, there's actually quite a bit.

Okay. All right. Second question I had is just leveraging the position in Plastic Food Packaging that sounded like we got beyond 2013 you may be thinking about some more capital in that business. Can you just talk about how that might play? Is it expansion of the existing site? Is a new greenfield sites? Is it maybe putting equipment in some existing plants?

It is a good question, Mark. This is Adam. As we look at the proprietary platform that we utilize for our Plastic Food Container business, we think that has merits all around the world, and certainly they've done an excellent job here in the US. We do some export business as well, but one of the neat things about the acquisition is, Silgan's global footprint and global reach to not only local markets outside of the US but to the multi-nationals as well. So, we expect that business to grow. We expect it to grow internationally, and, as we do so, we will be putting more capital to use in that business. So there would be -- at some point in the future, our expectation would be in additional site, and we will determine where that if and when that happens based upon our success in selling the package.

Okay. Sounds good. We'll stay tuned. Good luck in 2013.

(Operator Instructions)

Alex Ovshey, Goldman Sachs.

I just wanted to ask on the penetration rates of the easy open end within the metal food business, where is it now and how do you see that trending over the next couple of years?

Yes. We continue to see penetration, so it's some 60%, 65% of our product line has the easy open ends. We continue to think some form of easy open end will continue to penetrate. I think we've talked many times before. It tends to be markets that shift. Once somebody goes, the rest go. So it comes lumpy, but our view is that it makes sense that convenience is important to consumers. And that will continue. Now that adds cost to package, which is in a bit of conflict with the whole idea of Can Vision 2020, so that's the exact balance customers are always working on.

Okay, thanks, Tony.

George Staphos, Bank of America Merrill Lynch.

A few housekeeping questions. I'll ask them in sequence just maybe to save time. One, could you give us a more precise metric for volume growth for each of the businesses in the last quarter, fourth-quarter? Secondly, directionally, if not precisely, can you talk about what you expect for tinplate pricing? And then, in terms of the progression of the quarter, should we assume Q2 and Q3 are back to more normal progressions in terms of earnings growth? Obviously fourth-quarter is not going to have an easy comparison relative your overall growth goal, or is it all based on third-quarter having a much better year? You understand what I'm saying?

Yes. Well, on the metrics anyway I talked about so Q4 Bob talked about cans being up low single digits, so I think that translates something like in the 3% to 4%-ish range across the global pattern. Closures were down kind of 3%-ish something like that, and then on the plastic side, similar to that, those are roughly the numbers. Again on the closure side that would be primarily on the European side. US was strong of course all year long and then US sort of stopped if you will because it had been such a strong year. So the US was kind of neutral on that. It wasn't pulling anymore.

Okay.

On the tinplate side, George, I think there's a lot of posturing going on in the markets both domestically here in the US and internationally around the steel supply. I guess as we see it now, we're looking at modest increases as we move into next year something in the mid- single digits. We all see what's happening in the economy, but I think the posture and what we're seeing in the market right now indicates that we will see some increases moving into next year. And that's comparatively we saw increases that were kind of in the low single digits in 2012 as it finally shook out as well.

Okay.

The progression question first of all I would not necessarily called Q4 an easy comp. Actually if you look historically this quarter is much more in line than Q4 of '11 was.

Fair point.

Right. And a lot of things that effected the quarter we intend to keep moving on so for instance inventory, that's probably another quarter we are trying to get at the inventory. Hopefully the logistics issues are a little bit less on out. There certainly shouldn't be a hurricane, we're hoping. And in Europe were kind of left in the let's wait and see, although the shortfall in December was a little stronger than we would normally predict in any other year. So there are a few things and make us feel like we'll be higher in Q4, but I would not want to call it as a lay down. And then between Q3 -- Q2 and Q3 I guess history is your best guide there, but we always talk about it swings between quarters so much that's probably our hardest one to get right between the two quarters.

But we're done with the discrete things that could move because of things you're doing that could move the percentage relative to what a normal Q2, Q3 would look like as we are saying?

I think that's right. The only exception that would be when do we get at inventory, and we are again trying to get more finished goods inventory during the year. But my guess is what you say is correct that that's a season where it's pretty hard to get at it, because you need to build inventory for that season. So, it tends to be in the shoulder seasons that we take the bigger hits on inventory. So I think what you're saying is right.

Okay. Two bigger picture questions and I'll turn it over. Have you done any work thus far with secondary packaging company's regarding system cost whether it's [halic guides] or corrugated [guides] or what have you. The related question one of the other packaging companies, actually Mead, has talked a lot about their captivate system at the retail level. Have you seen much affect at all from that system? In terms of maybe changing retailers views of the can, and for that matter have you talked at all with that company about that system relative what you are working on now? And lastly would you share your learnings with the other food can companies, again given your work you are doing now?

Great questions. As to your specific system to the best of my knowledge no, although the good news is I'm not the one who's really down in doing the engineering here, so I could be wrong about that, but I'm unaware of it. I think it's what we're looking more much around that is first and foremost, what is the package that needs to be protected and then you get to the systems that protect it. So were coming a little bit more from that side, although the combined purchasing effort would certainly deal with the suppliers. So we are definitely in contact with suppliers. We are thinking about it, but we're starting more from the different end on that, which is what is the right package to protect our cans. What's your second one?

Would we share with --?

Good. Right, right. As I think you know, as an industry through CMI, when BPA came along, et cetera. We viewed all of that as something that was important for the can in total and that would be -- could be shared. I think there will be a variety of things that come out of Can Vision 2020, and I can imagine some of those will be a obvious for our competitors if we're successful, and they'll pick them up, too. So, most of that we would view in the same light that what's good for us and good for the can is good for everybody. There could be some things in there that are more proprietary and that we would obviously perhaps not share that as much. But again our goal is to drive value to our customers so that they enhance their competitive advantage. It is not to grow sure through a good idea here.

Okay. All right, guys thank you. Good luck in the quarter.

And, Mr. Allott, there appears to be no further questions at this time. I'll turn the call back over to you for any closing remarks.

Great, Tom, thank you. Thank you, everyone, for your today, and we look forward to talking to you in April about our first quarter. Have a good day.

This does conclude today's conference. We appreciate your participation. You may disconnect at this time.