Silgan Holdings Inc (SLGN) 2013 Q3 法說會逐字稿

Thank you for joining the Silgan Holdings third-quarter 2013 earnings release conference call. Today's call is being recorded. At this time, I would like to turn the call over to Kim Ulmer. Please go ahead.

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

Before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the Company. And, therefore, involve a number of uncertainties and risks including, but not limited to, those described in the Company's annual report on Form 10-K for 2012 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'd like to turn it over to Tony.

Thanks, Tim. Welcome, everyone, to our third-quarter 2013 earnings conference call. This morning we will review our financial performance for the third quarter, make a few comments about our outlook for fourth quarter of 2013, and then we will take any questions that you may have.

As you saw in the press release, our adjusted earnings per share for the third quarter 2013 were $1.23 as compared to $1.17 in the prior year. These results represent yet another record for the Company but were below our previously communicated expectations. Our food can business, particularly in North America, continues to perform well. Revenue, EBIT, and margins are all up versus the prior-year third quarter, with volumes up 2% for the quarter, and nearly 6% on a year-to-date basis, largely on strong pet food and recovering soup sales.

However, we also had anticipated a strong recovery pack after suffering a lackluster growing season in 2012. Unfortunately, the fruit pack on the West Coast in the US and in Greece were well behind our expectations. Our closures business continued to operate very well, but cooler than expected weather conditions in the US negatively impacted volumes in the single-serve beverage market. Both businesses did an excellent job in reacting to these volumes shifts, and remain focused on enhancing our competitive advantages and driving continued growth in our markets. Our plastic container business continued its transition program in the quarter, and increased revenue and operating profit largely on the inclusion of the plastic food container business. Given our year-to-date performance, the remaining volume impact of the weaker pack conditions, and higher interest and resin costs, we are revising our full-year estimate of adjusted earnings per diluted share to $2.75 to $2.85 per share.

With that, I will now turn it over to Bob to review the financial results in more detail and provide additional explanation around the earnings estimates for the remainder of 2013.

Thank you, Tony. Good morning, everyone. As Tony highlighted, we delivered favorable year-over-year financial performance, with record third-quarter 2013 adjusted earnings per share of $1.23 versus the prior-year quarter of $1.17, an increase of 5.1%. In addition to the weather-related headwinds that impacted the quarter, we also incurred higher than anticipated interest expense as a result of the senior notes issued in September to take advantage of attractive long-term interest rates. And the tax rate for the quarter was significantly higher than the prior-year quarter.

On a consolidated basis, net sales for the third quarter of 2013 increased 2.5% to $1.168 billion as net sales improved across all of our businesses. Net income for the third quarter was $77.2 million, or $1.21 per diluted share, compared to third quarter of 2012 net income of $78.7 million, or $1.13 per diluted share. The net impact on the bottom line from foreign exchange was immaterial as we continue to be effectively hedged, having financed the international businesses in their local currency. Interest expense for the quarter was $17 million, up $1 million from the same period a year ago as a result of higher average interest rates resulting from the September 2013 issuance of $300 million of 5.5% senior notes due 2022.

Capital expenditures for the third quarter of 2013 totaled $26.6 million compared with $24.2 million in the prior-year quarter. On a year-to-date basis, capital expenditures totaled $73.2 million in 2013 versus $83.3 million in the prior year. We estimate capital spending for the full year to be in line with the prior year. Additionally, we paid a quarterly dividend of $0.14 per share in September with a total cash cost of $9.1 million.

Moving now to the details of our individual businesses, the metal container business reported net sales of $831.1 million for the third quarter of 2013, an increase of $17 million versus the prior-year quarter. This increase was primarily a result of increased unit volumes, the impact of favorable foreign currency translation of $5.4 million, and the pass-through of higher raw material costs. Unit volumes were up 2% as continued growth in pet food and solid soup volumes were partially offset by flat pack volumes in a period that was expected to be an easy comparison, as poor pack conditions impacted the Western US and Central and Eastern Europe.

Income from operations in the metal container business increased $4.8 million to $108.3 million for the third quarter 2013 versus $103.5 million in the same period a year ago. The increase in operating income was primarily attributable to increased volumes, the favorable impact of better absorption of overhead costs due to a smaller inventory reduction versus the third quarter of 2012, lower rationalization charges, and new plant start up costs incurred in 2012. These gains were partially offset by an unfavorable mix and the impact of under-absorbed overhead costs at the new plants in Eastern Europe and the Middle East. Net sales in the closure business increased $2.5 million to $185.2 million for the quarter, primarily due to the impact of favorable foreign currency translation of $4.9 million and the pass-through of higher raw material costs. These gains were partially offset by the impact of lower unit volumes of approximately 4% on a global basis, which is largely attributable to softness in the single-serve beverage market as compared to a very strong domestic demand for these products in the prior-year quarter.

Income from operations in the closures business totaled $23.1 million for the third quarter of 2013, down $1 million versus the prior year quarter. Volume declines, the unfavorable impact from the lag pass-through of increases in resin costs, and higher rationalization charges were partially offset by operating cost savings and improved manufacturing efficiencies.

Net sales in the plastic container business increased $8.9 million to $151.6 million in the third quarter of 2013, primarily due to volume gains of approximately 4%, higher average selling prices as a result of the pass-through of higher raw material costs, and a more favorable mix of products sold. Unfavorable foreign currency translation of $1.1 million negatively impacted net sales for the quarter. Unit volume benefits from the 2012 acquisition of the plastic food container business were more than offset by declines in the legacy business. Operating income in plastics increased $2.4 million in the third quarter to $8.6 million versus $6.2 million in the period a year ago, as a result of the inclusion of the plastic food container business and a more favorable mix of products sold, partially offset by lower volumes in the legacy business and the unfavorable impact in the lag pass-through of resin cost increases in the current quarter versus the favorable impact from resin in the prior-year quarter.

Turning now to our outlook. While overall food can volumes are expected to be up approximately 2% to 3% for the full year, we now anticipate fruit and vegetable pack volumes to be down due to unfavorable growing conditions. As a result, the fourth-quarter comparison is expected to be negative as the 2012 pack season was more heavily weighted to the fourth quarter. Based on our year-to-date performance, lower than anticipated fourth-quarter volumes in the metal and plastic container businesses, the impact of additional interest expense and fourth-quarter dilution from the Portola acquisition as a result of purchase accounting, we are revising our full-year estimate of adjusted net income per diluted share in the range of $2.75 to $2.85. This estimate excludes items outlined in the press release as adjustments to net income per diluted share.

As a result, we are providing a fourth quarter 2013 estimate of adjusted earnings per diluted share in the range of $0.44 to $0.54. Comparatively we delivered adjusted earnings of $0.47 per diluted share in the fourth quarter of 2012. In consideration of the current earnings estimate, the impact of the inventory built for pack-related sales, and the cash impact of the tax settlement reached in the second quarter of 2013, we're also revising our free cash flow guidance for 2013 to approximately $225 million, down from the prior estimate of approximately $250 million.

That wraps up our prepared comments. So we can open it up for Q&A. And I will turn it back to Tim so that he can provide instructions for that Q&A session.

(Operator Instructions)

Chris Manuel with Wells Fargo.

Good morning, gentlemen. A couple of different questions for you. First, an easy one with the tax rate, Bob. In the third quarter, it was pretty high. Was there anything unusual here this quarter that did? And what is your anticipation for the full year?

Not really anything unusual. I think it's climbing over a very low rate in the prior year, largely because that had to do with the timing of tax rate changes in certain foreign jurisdictions. Probably the one thing that did impact it a little bit is just the mix of where jurisdictional, where earnings are coming from. So we were expecting a rate that was 34%-ish anyway, so up a little bit from our expectations, but very significantly up versus the prior year.

Okay, thank you. And then my second question has to do with, if we were to look through the metal food business, could you maybe give us a sense as to how volumes were different in different regions? So what were volumes like in Europe maybe with your legacy business, and then with what was added. And in North America it sounds like the strength must have all came from pet food. So, if you could give us a little color there. And then, as well, what is early conversations you've had, as this has come in below your expectations and your customer expectations for what 2014 might shape up like.

Okay, Chris. This is Tony. First of all, in terms of where the volume is, it's fairly consistent in that we are up both in the US and Europe. Fairly similar percentages, call it that 2% range in both locations. It is different within each of those, of course. As you picked up, the pack on the West Coast was where the weakness was. By the way, I will make the point now, it will probably come up later, but we will feel that more than the rest of the market because we have a higher concentration on the West Coast. So if you look again in the US, that's the spot. Pack in general is down a bit despite our expectation of being up a bit. And it's going to be down for the year despite our expectations of being up. All that being to the US side.

So you are right that pet food was good. That's one of the offsets to it. Soup was fine as a category. In Europe, it is, essentially, you got growth coming from the new plant that is being essentially fully offset by Greece. In the case of Greece, which is a sizable part of our non new plant part of Europe, we were down some 20% on volumes on the peach fruit pack. And that, just to close the loop, is primarily the result of hail that had been experienced. Unfortunately, when they finally got to harvesting, the fruit was pretty severely damaged. And so there was a sizable call down in the harvest in that region. As to 2014, nothing would be getting communicated yet. I can hypothesize with you that you had a pretty tough 2011 pack, a normal-ish but disappointing to us 2012 pack. So, our early expectations would be that there would be an effort to want to restock against all of that. And that there would be increase of acreage in 2014. But we don't know that.

Okay. That's actually very helpful. Thank you.

George Staphos with Bank of America Merrill Lynch.

Hi, everyone. Good morning. It's actually Alex Wong sitting in for George. My first question, can you talk about the Portola acquisition and the impact in fourth quarter. And then also maybe about the accretion you guys expect in 2014.

Sure. As you saw, the acquisition just closed. So there will be some dilution that we are expecting, albeit modest in the last quarter here, largely to do with the write-up of inventory for purchase accounting. As we move into next year, we view that business as being modestly accretive for the year. What we have said so far is we have paid roughly $266 million for that business. Coming along with that is an NOL that we would say has a value of about $20 million. So our view is that it's something around $246 million, $250 million for the base business. That business on a run rate basis does something like $34 million of EBITDA. I will point out that that's giving it the pro forma benefit of a restructuring that was undertaken prior to the acquisition. So that restructuring is done and complete. The wild card here from a real accretion number next year is going to be where does the D&A come out. We've got to work through the valuation analysis there. We are expecting that there will be some synergies around this business. And that, obviously, it will have to cover the incremental interest, which is largely the new notes that were issued at 5.5%. So all of that netting to a modest accretion for next year.

Recall, though, synergies ramp up over 18 months. You won't get all of those in 2014.

Great. That's helpful. Thank you. And then just next, can you describe -- obviously, we have heard about the strong soup volumes coming back and also pet foods. But what was the impact of the weaker than expected pack in 3Q? Is there any way to quantify that?

If you talk on the volume side, it shaved a couple percentage points off the quarter. It will do the same to the year, basically, broadly across the total business. But, to be clear, we are up now almost 6% on food cans in total across the system. And our expectation is that will be up for the year. We will be down in Q4 for everything that Bob said, but our expectation is that we will be up 2%, or better than 2% on the year. So another second year in a row of growth on can volumes.

Great. That's very helpful. And just, lastly, if you can just talk about, if you turn to plastics, what volumes were ex acquisitions?

Sure. When you look at the legacy business, our volumes from a pounds perspective were down mid-single digits. We've talked a lot in the prior calls also about units and how that fits in with our portfolio rebalancing. Interestingly, units were not down nearly as much as pounds. So it does go towards our ongoing program of rebalancing the portfolio and moving towards our target market. And getting into new business that is focused on better returns than where we have been. Obviously, what we had in this quarter is a little bit of the lumpiness that we've also talked about, with business falling off the backside as the new business coming in didn't fully offset what we knew was going to be leaving the franchise.

Great. Thanks very much. I will turn it over.

Adam Josephson with KeyBank.

Thanks. Good morning, everyone. How would you characterize the status of your contract negotiations with your large soup customer? And do you expect the customer to extract significant price concessions given the competitive pressure in the US food can market?

Interesting question. Status is that we are under negotiation fairly actively, as you would expect at this point in the process. Not much more I can say on that. No, I don't expect that. First of all, I think that customer and most of Silgan's customers enjoy an incredible value from Silgan. I will remind you that the model we have is unique to the business in that we have a long-term relationship with our customers where we have an initial understanding of the returns we're going to get on capital spend, often because it was self-made take-out, and a direct pass-through of our materials going forward. Many times on this call we would get the question of why aren't your margins -- in a tight market, why aren't you getting enhancements in your margins, et cetera. And we would always say -- But that's not our model. Our model is that our customers have certainty of price pass-through, et cetera, and we have certainty of long-term relationships. We don't expect any change there because we think that customer and all of our customers enjoy an incredible value situation from Silgan, particularly considering we believe we have the lowest cost production in the world for food cans.

Thanks, Tony. Just two others. One on the fruit and veggie packs. You've now experienced three consecutive years of disappointing fruit and veggie packs in the US. At what point do you become concerned that these sub-optimal packs might be the rule rather than the exception? And what if anything can you do about it?

It's a good question. It's part of why I reviewed that. Just to remind that '12 -- it wasn't everything we had hoped for. It was also not a washout, by any means. So, we definitely expect to do better than that. But '11 was worse. All I can tell you on that is that our customers go out and they contract for more acreage. So, it seems to us that our customers want more stuff in cans. Is weather more volatile? I'm not smart enough to help answer that question. Others are on it. But it does seem like there's been a little more volatility of late. There's no question this year we set ourselves up a little bit, and so did the industry. The expectation was high on the West Coast. There was a lot of planning for a very big tomato harvest. And when you look at the curve of the harvest, it never crossed last year to, I think, everyone's surprise. It was lower week after week. The best answer I can give you is our customers seem to want the product, they just haven't been able to get it.

Thanks, Tony. Just one last one, Tony. How would you compare the Portola acquisition to your US food can acquisitions over the past decade? And to what extent does this acquisition represent a move away from topline growth oriented acquisitions, as the two previous acquisitions were?

I have to think about the second part as I start. I would say that it has some similarities to some of our food can acquisitions in that it is a fairly synergistic opportunity for us. It fits in nicely with business that we have. It's got a good opportunity to share footprint, share overhead costs, et cetera. Which is true of some of the historical food can opportunities. On the growth side, again, I would say if you look at the markets that are served by Portola business, I would say that they are not growthy markets either. So, I would say it has some of the normal attributes for us, which is markets where we think you can really deliver sustainable competitive advantage and build out through your customer success rather than really growthy markets that attracts a huge amount of capital.

Adam, the only other thing I would probably add to that is, as you look at the Portola acquisition, this is one that is a bit more synergistic versus the other two in the sense that it fits right into our existing infrastructure. And there will be things that we can get to from that perspective. So, yes, I think there's opportunity on that front. But I don't ever think that we had a deviation in our strategy to say, let's go find growth markets. It just happened to be that in the case of Vogel & Noot, there was an opportunity in a foreign market that we found attractive. Sure, on the PFC acquisition, it was a little bit more growth-oriented, for various reasons. But that was never the strategy to move toward that kind of acquisition.

Thanks, Bob. Thanks, Tony.

Phil Gresh with JPMorgan.

Good morning. A couple questions. The first one is, just looking at the fourth-quarter guidance on the metal foods side. Last year's fourth quarter was a tough quarter on the cost side of the equation. You had the Sandy impact. I believe there was some inventory reductions, as well. It appears your guidance would, perhaps, suggest that the EBIT in that segment is roughly flat with last year. So correct me if I'm wrong there, maybe just help me understand the moving pieces. Is it just volume declines in the fourth quarter this year that is creating that situation?

No. I would say that volume is a big part of it. It's also somewhat a continuation of what we've said. Europe will continue to be a bit of a headwind, we think, as well. Again, the pack there ended in Greece, as an example. So there's a volume element to it, and then the overhead cost that we've been talking about on the new plants will sit there. So, I think those are the two main components on it. Recall that you did last year have, you had Campbell was shutting down a plant. So you had a lot of buy of soup that we attributed to inventory at that point in time. We are not expecting a repeat in that side. So, there were a few other factors going on in Q4 a year ago on the can side.

Got it, okay. To take the questions slightly bigger picture, if I look at your EBIT this year with your guidance and compare it with last year, it looks like it's going to be roughly flat as a total company. You do have contribution from the Rexam acquisition. You have low single-digit volume growth in the food can business. If I look ahead to next year, it seems like the playbook is pretty similar. You acquired Portola just now and so you should have some benefit there. Perhaps some of the harvest will be better next year. So maybe I'm just hoping you could talk about some of the puts and takes that led to this flattish EBIT this year despite those positives. And how we should think about 2014 with respect to any puts and takes that we should be thinking about from this year.

Sure. I think you said it right. I would characterize it as a lot of moving parts this year. And probably a few more of them went against us than the normal balance of pluses and minuses. So I think as we drop back, what we focus on is that we are seeing growth in metal food cans in the US outside of a pack that is going to be down. So, you can only view that as a positive future aspect. We see a US business that cost position, which was a little tougher last year has been excellent this year. So, we feel very good about the operations side of that, et cetera. As we look to Europe, we can't for the life of us imagine Greece having the same situation again. So you have to feel like you get some of that back. You do think your new plants will continue to improve over time. We are very cautious about that though. That's going to take time. We always said this was a long-term play for us. It's clear to us that building a new plant in a developing market is not a one-year thing. It's a multi-year effort. We are committed to it, but that's going to take time. So I'd be more cautious on that one, but it should be somewhat positive as we move forward.

On the closure side, as you mentioned, it just was not a very good weather season this year for energy drinks, to use that term for it. Last year was particularly good, so the comp is a little bit tough. But we would certainly expect that that would be better. In the meantime, Portola comes in and starts to help the closure business. Plastics, as we've been talking about, we're committed to a transition that we believe is going to work, and a management team that is in place that we think is doing the right thing. And we said that's also going to be a little bit slow and lumpy, I think has been our word. So, our expectation is count on all of that in 2014. But we do believe that that is part of a challenge this year that will begin to get better for us '14 going forward. Tax rate was a little high. Hopefully, that will be a little bit better as we go from there. So those are the moving pieces that made this year a challenge. But when we look strategically and the position of the business, we really feel pretty darn good.

That's really helpful. My last question is, last quarter there were some questions around the CapEx plans with respect to Can Vision 2020. I'm wondering if you have any update, anything more specific around that. And any additional color you could provide around how you're thinking about the return potential and the timing of that return with respect to any projects you could do.

Sure. Unfortunately, I can't say anything more than the last call because projects develop, our work with our customers develop. But as we have always said, this is a pretty long-term effort we are working on. There are definitely -- and I said it last time -- there are some projects that are already in the process of coming up. They are not big enough to change the curve much for next year. So right now I can't yet say that '14 is going to be bigger capital because of it. I can say the same thing I did last time, which is it could be. And so could '15. But there's nothing more to declare on that yet.

Okay. Thanks a lot.

Ghansham Panjabi from Robert W Baird.

Hi, guys. Good morning. Not to beat a dead horse here on North American metal food can, but, Tony, you gave us some parameters on how to think about volumes for, for example, fruit and vegetable out in 2014. But soup had a pretty strong year so far. And some of the other categories did, as well. Do you expect that same momentum to flow through in 2014, as well, for those categories? Or do you think that would be some sort of a headwind as we think about our full-year estimate for volumes next year?

That's a great question. I am not sure I would go to the camp of headwind yet. I think it's a little harder to figure out is how sustainable is the progress that we have seen. I think we surfaced right from the beginning that Campbell is bound to be going through some inventory moves as they dealt with their reduction down to three fill sites. It is still hard for us to gauge that. I think we feel very good about the focus that Campbell and others have on the markets. As we've talked about before, all of the advertising is quite positive in that regard. I think the promotional efforts are positive. We even think the other packages that they are trying to do, and the other consumers they are trying to pull in by means outside of the can, is a plus for us, as we've said before. So, I think we feel like things are moving in the right direction. But it's a little early for us to gauge what that means against the volumes of 2013.

Okay. And then maybe a question for Bob who has been quiet. As you think about free cash flow, Bob, for next year, 2014 versus 2013, is there any reason that free cash flow shouldn't be higher year over year just based on your revised guidance here?

I think, ultimately, we're going to have to dig in and see where working capital ends up the year. Remember, we came into the year and our initial guidance, and still embedded in what's there, is some incremental improvement over a very good performance in working capital in 2012. So, the question is, does that start to flatten out and mute, if you will, some of the free cash flow growth. I certainly don't see it being worse, particularly with the acquisition. We should start to get some benefit there. But I wouldn't necessarily sit here today expecting a step change in the growth of free cash flow for that very reason.

Got it. Thanks so much.

Mark Wells with Deutsche Bank.

Good morning. Is it possible, either Bob or Tony, to get some sense of what the impact of that unabsorbed fixed cost is on those new plants in Eastern Europe and the Middle East? And how much improvement you might expect as we look into the next year.

Sure. It's Tony again. By the way, that's the first time I have ever heard of Bob being accused of being quiet. I want to go on record saying that. (laughter) But if you look at the new plants right now, you would say on the quarter they were, comparative year on year they cost us a little over $1 million on the quarter. So that has been the story line, if you will, this whole year. I think the opportunity to improve if you analyze that, it's something in that range, as we get the overhead absorbed. Again, that will just take time. A lot of that is coming from one or two of these locations. Some are fine and up to speed, some are just going through qualification and they sit on the overhead costs until they do it. And then Jordan we also talked with Syria, which is sitting and waiting for a resolution.

Okay. It sounded like, Tony, from what you said earlier, then you wouldn't expect this drag to completely go away next year because you said the improvement in some of these emerging markets is going to take a while. Is that right?

I think that is a fair view of what I said, yes.

Okay. And then I just wanted to turn to plastics for a minute or two. It just seems like the restructuring of the North American plastics business is taking a little longer than I might have thought going back two or three years ago. Can you give us your thoughts on that?

Sure, Mark. It's Adam. I think I would generally say that the business is about in line with where we thought it would be at this point as far as the restructuring and the rebalancing of our portfolio, and the vision that we had for the business going forward. I think one thing to talk about, particularly for the quarter, not only cycling over some of the volume issues from last year that we've rebalanced, we also had a negative impact of resin. Resin was unfavorable in the quarter by about $2 million, and it has hurt the year, as well. We didn't necessarily anticipate that. If you go back to prior forecasts from CDI and other mechanisms, they were calling for a more favorable impact of resin this year. Frankly, it has been a hurt. I think we feel good about -- I will repeat what Tony said -- feel good about the team, feel good about what they're working on, and feel good about where the business is going. It's just going to take a little bit of time.

If I can tag on -- and we've said this before, I don't think Adam just said it now. But we always talk about two steps. One was an operational step and then one was a market step. And I think you are right. If your expectation around the operational step you thought we could do that fairly quickly. Us, too. And we have. We feel very good about the operational position of the business. There is still some costs to be gotten at, but in terms of the issues that we had around our own operations and stubbing our toe, as we used to call it, that is well behind us. It is just slower, this idea of which markets and which customers do you want to service, and growing with them. And providing the unique competitive advantage that's going to allow you to grow in those markets. That is going to take time.

Okay. And, Tony, you guys are not the only ones to be seeing some weak volumes here. I wonder if you take out any portfolio moves that you are making where you are choosing to step away from business, what kind of underlying demand are you seeing from your customers?

I think what you said is right. I think there were some just broad-based weakness across the spectrum. The big point was we walked away from a particular piece of business that affected the quarter. But underneath that, across the board, things were just a little bit softer. And then we picked up against that some more strategic business, but not nearly enough to offset those two points.

Okay. And then the last thing just on plastics, there's a big consumer goods company that seems to have set up its own plastics. I don't know whether it's machinery, whether they're actually going to do any fabrication, but they've put up a website and they seem to be hiring people. Some of the claims around this would suggest that they found ways to take a lot of resin out of some types of plastic containers. Do you have any view on that?

Mark, it's Adam again. What I'd say is we have read mostly some of the same reports. Obviously, it's a customer of ours -- a small customer of ours. What we have gleaned at this point is that it does look like a manufacturing technology. If you rifle through the patent applications, it looks like it might be for products that aren't necessarily the type of products that we sell to them. And I will focus specifically on parts. Several of the patent applications talked about items like toothbrushes and mascara brushes, tampon applicators, et cetera. It's not necessarily packaged goods like what we provide them. It's more high velocity, high-speed injection-molded parts where the benefit of this technology may, indeed, come from.

All right. That's really helpful, Adam. Thanks a lot.

Chip Dillon with Vertical Research Partners.

Yes, and good morning. First question is just on making sure we understand the contribution of the Rexam business to plastic. You bought it, I think, about one-third of the way through the year-ago quarter. So is it fair to say that was pushing $20 million in terms of the revenue change year over year? In other words, if you had known that you would've had -- that's the increment that you got for the two additional months you owned it.

In the quarter we had only owned it for two months. I think in the quarter it was about $14 million of additional revenue for the business. Dropping through the bottom line, I will tell you what we had said before was $2 million, $3 million of EBIT associated with that business. They are right in line with where we expected them to be. So they are performing well. They are doing what we anticipated they'd be doing.

Got you. So that $14 million is in addition to whatever you got in that month you owned it a year ago.

That is correct, yes.

Okay. That's very helpful. And then, in terms of the Portola acquisition, and I don't know how much you've said, but you mentioned it would be accretive next year. I know that their last numbers that I saw were from about five years ago. It looks like the revenue run rate declined from that probably because you all or they made themselves more profitable. I suppose what I am backing into is it would look like that the EBIT contribution next year should be somewhere in the ballpark of $20 million, given the interest expense you are incurring. Or, said differently, maybe you could weave what you expect from that business into what you see in synergies.

Yes, I think in terms of getting EBIT contribution for next year, I'm going to want to be a little bit careful because, as I said before, we are still doing the valuation work to figure out what the D&A for that business is going to be. But the run rate of the business from an EBITDA perspective is about $34 million. And then you'll have to layer on that any synergies that we can garner out for next year. What we've said is that we do see pretty sizable synergies in this business, but it will take us 18 months or so to get to them.

Got you.

And then back to the first part of your question, the business had been dramatically changed in the time period you're talking about. They had gotten out of some business on the cosmetics that were not very profitable for them. They had changed some of the markets they were servicing on closures. And they invested heavily in new assets and new technologies. So it's a pretty different business than five years prior.

Got you. And that EBITDA number again was $30 million flat, you said?

$34 million.

$34 million, okay. And then last question, we have been hearing about new technologies in the food can world. Obviously, there is that new plant in Virginia being built. And maybe you alluded to that a little bit in terms of the variability and what CapEx could be next year. But as we think about lighter weight food cans, could you just help us understand how much of the market that could apply to, in your opinion? Is it something that, as contracts come up you would see most of your customers, perhaps, trying to get you to invest in such technology? Would that require whole new plants, or would it just be small components of plants?

It's a lot to your question. I think the plants you are referring to are two-piece plants. So the lower cost technology that I understand of that is only as compared to three piece. Some 75% of what we do is already two piece. So to us that is a yawner in terms of a comparison on cost. If you are referring to the idea that maybe there is a lower metal technology that that particular supplier might be bringing to the market, we don't believe that's the case. We don't believe the US market, that that particular technology is going to work in. Nor do we really believe that that's what's behind the investment. As to that specific point, I would just say what we understand is coming in as two-piece technology is something we know extremely well. Most of what I said, we are already heavily in two piece. So there's not a huge amount of investment for us around two piece, three piece. Most of the things that are in three piece today are there for a reason. Around the edge of that, there might be a few opportunities but not a lot.

As to down gauging more specifically, we do think there are opportunities in down gauging. But they do take a lot of technological change. The perfect answer is you can do those with the same basic plants you have in place. You know how we think about capital, so we are always thinking about how much capital is going to go in and what's the return on that. Our main goal is to try to help drive cost reductions to our customers to continue to expand the competitive advantage of a food can. And so, for us, if we have to spend a lot of capital on it, we've got to get a return on a lot of capital, then we can't drive a lot of benefit to our customers. So, we very much are trying to figure out, to th extent it can work, how do you do it with the existing assets in place.

Very good. Thank you.

Scott Gaffner with Barclays.

Good morning. Just going back to your West Coast exposure within metal food can. You mentioned, and you've mentioned in the past, how your overweight on the West Coast. Can you quantify that for us, how you think about your food pack exposure West Coast versus the industry?

Like I said, we are the largest player on the West Coast, and particularly to the pack markets. Again, recall our history and the self-make takeouts of Del Monte, of PCP, et cetera. Those are main players on the West Coast. We're just more heavily skewed to that region. So, if you have either a boom or a bust harvest, we're going to feel that much more directly.

Okay. You mentioned tomato specifically. Are there any other items that we should be thinking about on the West Coast? And also it seems as if things are coming to an abrupt end, not just in Europe but in the US, as well, as far as the pack. No bleeding over into the fourth quarter.

Yes, that's basically correct. The two main harvests -- there is a fruit harvest. And in that case the fruit just came in smaller in size, so the yields were lower. So, it was down year on year, and down even more so from our expectation on the fruit side. On the tomato side, you had a combination of issues. We had a curly worm virus that we knew about. Didn't think it was going to have all that much impact. In the end, it had a little more impact than we expected. Then you had rain coming, which is, of all the things we worry about, rain at harvest time is the worst, because you can get mold that sets up on the tomatoes and that just stops the tomato process cold. Some of our customers experienced some of that. So, it was not broad across the market, but it did impact in certain regions. So, yes, the net of all of that is that those packs were pretty much done fairly early into Q4. The only pack that continued on in a more normal matter was corn in the Midwest. That was probably the best of the harvest. Midwest was fine broadly, corn being better, green bean and peas being down a bit.

Okay. And then when we move over to mix, does the weak pack season negatively impact the mix? Meaning, I would think if there was an overabundance of a harvest that maybe more of the harvest would end up in larger cans, which I would assume is higher margin. Is that something we should be thinking about, as well?

Almost. Yes, absolutely, the pack does have negative mix affect. The only thing I take exception for in your question is to the margin point. It's more just about a unit of volume. You're talking about small cans, if you're talking about PET versus big cans. Tomato as an example. So, it's not that the margin rate is necessarily higher, but per unit you get a lot more dollar contribution from a big can. So, yes, that is correct. That has a negative mix impact against the volume number.

Okay. Thanks a lot.

Al Kabili with Macquarie.

Thanks. Good morning. A question, Tony, on, you mentioned the third quarter of 2011 was a pretty weak pack. And if I look at the earnings, the EBIT, in your metal food business, you are down $3 million of EBIT versus 3Q 2011. So I was just wondering if you can talk about what drove that. It seems to me that Europe is a lot of it. But if you can just help us bridge that gap there.

Sure. Europe is the biggest piece of the answer to that question. I'd have to go back and analyze that quarter a little bit more on margins. But I don't recall that being a particularly bad margin rate quarter. So I'd say a big part is you get Europe or your negative comp a couple million on that. I'm sorry -- and if you go back to 2011, Europe is a lower-margin business in general. So, including Europe against that, and as Europe grows, that by definition is going to bring that margin rate down some. So if you look US to US, we feel fine about where our margin rates are. Again, recognizing the mix impact already discussed.

Okay. And I wasn't even just talking about margin. But I'm must talking about EBIT. If you are down $3 million EBIT-wise, despite since then you bought the Nestle's pet food business, you bought the small Turkish food can business in there, as well. It just seems like there's been some underlying pressure in the business since then. Help us with that. Is that, again, Europe, that's driving that?

Europe is contributing EBIT. So the answer to that is, no, it's not. I'd probably have to get back to you and look closer at that. But it's definitely something about that quarter. There is nothing inherent in the business. It's going to have to do with mix or the timing of the pack. In fact, does anyone remember the timing of the pack in 2011? We will come back to you. But there is nothing inherent in the US business that is driving that down. Nor is the European business a negative on the EBIT line.

Okay. And you mentioned the vegetable pack being a little bit less than you expected. But if I look at the CMI data, in the third quarter I think vegetables are up 2.5% year over year, at least on the CMI reported data. So, are you guys saying that you're well below that, like flat versus that? Or, help us just with that one.

You're talking about the vegetable line. I think what we've said is vegetables is primarily Midwest. And vegetables were fine. Corn's been fine, as I said. Peas and beans were down a little bit. The rest, that would be just customer and region, et cetera. Vegetable in the US has not been all that much of a story line. It's had much more to do with what's happening on the West Coast on, broadly, fruit.

Okay. And then if you could just help us with the pricing outlook in Europe, how you're feeling about that at this juncture for next year. Given some of the weakness in Europe, how are you feeling about competitive dynamics there, and, as you're going into new price negotiations?

If you look at Central Europe -- West, I can't speak to as much, I'm the leaving the new plant in the East out because that's a different story line -- if you looked at Central Europe probably the price pressure seemed greatest a year ago, a little less this year. And so right now I'm not expecting a huge amount of that. I think all the players in the market are trying to deal with the capacity situation in as responsible a manner as they possibly can. At this point our expectation is it will be okay around that. But it definitely is competitive. There is too much capacity in the market. And so you'd rather that not be the case.

Okay. Last question, for Bob. Just a housekeeping question on interest expect. How should we be thinking about the fourth quarter interest expense?

It's largely going to be up as a result of the incremental borrowings of the $300 million. The cash flow comes in the late part of the quarter so you're not really going to get the benefit of that. So, year over year you should be expecting interest to be up.

RIght. And are we thinking like $18 million with the amortization? I'm just trying to get a flavor for the book interest expense because you did the notes in September, and then we've got -- so we got a full quarter of that. And then we've got some amortization of fees, et cetera, in there. So, I don't know if you have a sense for what we should be thinking a quarterly run rate is pro forma for the recent refinancing.

You are probably up some $4 million or $5 million versus the prior year.

Okay. Got it. Okay. Thank you very much. Good luck on the fourth quarter.

Anthony Pettinari from Citi.

Good morning. Just a follow-up question on plastics. As part of your guidance you called out weaker 4Q volumes. And I was wondering if the volume weakness you are referring to, is that purely a function of weaker expected demand? Or when you talk about efforts to rebalance the portfolio and your transition plan there, is there any acceleration of those efforts that might make you give up some volumes or let go of some business that you don't see as strategic?

It's a combination of both. We are seeing a bit of softness in consumer demand in general, as Tony alluded to earlier. And then, as we have also talked about, we are cycling over a piece of business that we had for all of last year that essentially we stopped shipping those products in July of this year. So we will have a negative comp for the entire back half on our portfolio rebalancing effort, because of the size of the products that we were shipping last year, the volume of the products.

Is that business the vast majority of the volume weakness, or is it 50/50? Or is there any way to quantify?

Boy, we can take a look at it and get back to you. I wouldn't be able to give you a good guess at it right now.

That's fair. And then maybe just a follow-up on Portola. You called out expected synergies to be realized over 18 months. Just wondering if you can give us any color on where the synergies are coming from, maybe what integration activities you are undertaking or expect to undertake. And then, very rough cut, if there is any initial take on what 2014 CapEx might be up as a result of Portola.

As to the synergies, we are just working through that with the Portola business now, so I don't want to be too specific on that. But I can say that when you look at the footprint of the business there, certainly, there is some overlap between our closure business and the Portola business. When you look at the SG&A side, there is clearly opportunities that fit there. In Europe there is opportunity for a little less synergy, a little bit more complement here. But there is opportunity for us to have a good technical plastic presence combined with our strong food and beverage relationships through our White Cap business. So there is quite a few levers. But we will get more clarity as we allow everyone a chance to work through the specifics.

As you look at CapEx, I wouldn't necessarily expect the addition of the Portola business in and of itself to create incremental CapEx for us next year. What you should expect, though, is that as we were through some of the synergies and the integration, there will be some costs associated with that integration and any restructuring that may get done. So there will be a little bit of incremental cash spending that, until we work through those detail plans, is a bit premature to try to give you an answer. But I don't expect that to necessarily be on the CapEx line.

Okay. That's helpful. I will turn it over.

Alex Ovshey with Goldman Sachs.

Thanks. How are you guys? I wanted to go back to the metal can business in North America. From an outsider's perspective, it seems that over time there has been a lot of value that's been created in that business by driving productivity ahead of non raw material inflation. Can you provide some color on how your productivity initiatives have trended relative to your non raw material inflation in 2013 and how you are thinking about that for next year?

Sure. We think about it similar every year, which is we are constantly looking at ways to drive out waste in the system through lean initiatives, et cetera. That continues to be on path. What you try to do is mitigate the inflation as best you can in that process. Often you'll do that to a point where you will pass more inflation to the customer for a period of time in the contract. That's in the history. Then when you get to contract renewals, then that's the bit of the discussion on it. So, we continue on that. We see continuing opportunities. I think probably the more interesting one will be as we go through the Can Vision process. I think on top of what I just said, we will have opportunity, I believe, to spend capital at certain points in time and get further returns on that capital. That's more interesting to us as we think about spending the capital and getting the return on that to drive further advantage to our customers.

Okay, Tony. Got it. And then on the European side for food cans, a number of players in Western Europe have talked about negative mix out there as a result of just the softness in the macro over the last couple years. You are not necessarily in that part of Europe. But I'm just curious, for your business in Europe, what impact has mix been? I'm sure it's been the negative, but to the extent that the overall macro environment does improve out in Europe, what kind of benefit do you potentially see from that?

It has been negative. But Europe is that much tougher because you've got mix in the countries you are selling in. You've got mix in the fact you are growing in certain markets. In our case, in many instances we are growing in agricultural regions where it is a fairly basic can you're shipping out. So it's going to be a lower average selling price can, now and in the future. And it's one that you make more cheaply, of course. So you ought to still get fair returns on that. But the simple answer to your question is mix was a negative impact, as well, in Europe. And probably that will continue as we grow in those other regions.

Okay, got it. And then just last question. With the Portola acquisition, I think (inaudible) covers the higher end of your longer-term leverage target that is out there. I think one could argue that for a short period of time. You could certainly run this business at a higher leverage level than 3.5 times. In that context, what's the appetite for share buyback, at the current leverage level for the Company?

Alex, this is Bob. I think in calculating what you are viewing as the leverage ratio, you may be ignoring the fact that the free cash flow generation is coming in the back part of the year. We would expect to be closer to the middle part of that range by the time all is said and done at the end of the year. We have ebbed and flowed around that range. And, remember, that that range has really been more of a longer-term view of how we look at our balance sheet, that we have operated both below it in times where the credit markets haven't been very robust, and in times of acquisitions where we saw opportunity to deploy capital. With good free cash flow we would have been above it. So, I wouldn't look at that so hard and fast as if we are on one side or the other. There's something to be done. I think our balance sheet is in fine shape. And we will continue to look at all opportunities to deploy capital for future shareholder return.

Thank you guys.

Chris Manuel with Wells Fargo.

Good morning. Just a couple quick follow-ups. First, some thoughts on tinplate heading into 2014, how it may be different here versus, say, in Europe?

Okay. Do you want to get the other ones out or do you want me to answer that one first?

Do that one first, and the second one is a whole different topic.

Fair enough. Tinplate, broadly what I would say is that you've got a steel industry that has had a fairly tough time of it. Obviously, they want to try to get some price. Both markets they are trying to get some price. So our view -- and we are in the heat of that, so I don't know where it will end up -- our view is there probably would be some inflation in both markets. But, again, we are heavily engaged in protecting the can and ensuring that that spread remains against all alternatives. So we are in the fight for the future of the can. Which, by the way, we think is in the steel suppliers' interest, too, because it's been a very good, steady consumer of steel for a long period of time. So we've just got to keep raising that point.

Okay. That's helpful. My second question, if we could talk about the closures business for a moment. Your base closures business, I think you said it was down mid-single digits. I forget the total number overall. But if we could dissect that piece a little bit and talk about maybe how that is different in North America for metal versus the plastic side. And how that might be different regionally through Europe as to what you are seeing in some of the underlying markets.

I will start with Europe first. Europe generally has been performing pretty well for us this year. So there's really not a whole lot to talk about in Europe. Really, our volume issue for the quarter and really for this year does reside in the US business. And it is in the plastic single-serve side of our closures business. If you look back a year ago, the warm weather that affected most of the US really started very early in the year in February, and ran late in the year, as well. In our release, we talked about cooler weather. It's really the comparative to last year. Last year it was just hot for a very long period of time. Our sports drinks and nutraceuticals and energy drinks had a terrific year last year. So, consumer demand is down a little bit for those products, I think. We talked about on the last call that one of our largest customers did do an inventory correction at the end of Q2 that spilled over a little bit into the early part of Q3. Outside of that, that's really the story with what happened with closures. We feel very good about how that business is operating, its customer base, and its prospects for the future.

Okay. And then with Portola, can you help us with the mix? What's in North America, what's in Europe? Will that all tuck into closures, or is there a small portion of that that will end up getting tucked into the base plastics business, as well?

You've got two plants in Europe. The remainder are in North America. And in North America, there are also in there three plastic bottle plants. So, when all is said and done, the bottle plants will end up in our plastic container business, and then everything else will end up in the closures business.

Chris, just to give you some perspective there, about 80% of the revenue of that business comes out of North America. So, the predominant piece of that will be plastic closures going into our closures business.

Okay. That's very helpful. And did you have a rough assumption at this juncture as to -- or target, I should say -- as to what you anticipate those 18-month synergies to be?

Yes. I think we would tell you that they are $5 million to $10 million range. $10 million is certainly the one we are trying to get to.

Okay, that's very helpful. Thank you, gentlemen.

George Staphos with Bank of America Merrill Lynch.

Hi, thanks for taking the question. Just one quick follow, mostly around food can margins. Do you guys see current levels as you being able to hold the levels? We are hearing about competitive pressures that we've heard over the call. And also, on the other side of the equation, Can 2020. So just wanted to see, over time do you see margins decline slowly? Or how would you have us think about that?

Sure. I will start with the general answer, which is we really don't think to margins because we think to capital and return on capital. So, if we see an opportunity to invest capital and get a good return on that, that might drive margins up or down, depending. Again, we are thinking all about the returns from it. With that said, there's nothing about the margins to us that seem out of line particularly at all. Again, I think we give a great value proposition to our customers, and I think the margin makes perfect sense where it is. But I will go back to the caveat -- that's not really how we manage the business.

Great. Thanks very much.

Adam Josephson with KeyBank.

Thanks for taking my follow-ups. Appreciate it. Tony, two questions. One on the Rexam acquisition. You are about a year into it. How would you characterize its performance relative to your initial expectation?

Good. We've talked before about the fact that there is one component of the business which serves the military/ government. That is definitely off a little bit. So, we'd rather have that than not, but we understood at the time that was going to be hit or miss. So what we don't get this year we think we will get next year. Aside from that, we feel very good about, in the US the business is performing as we expected. Again, there is a lot of rotation in the customers that use this product. And so you are seeing that rotation where it's working for some products, not for others. But you always have other customers that are coming in, launching new products. And so the capacity utilization is quite high against all of that. Internationally, it's a high price point product, so some of the business that was in place is not robust, as you would expect right now. Against that, we are finding other opportunities to bring into business. So, right now it is performing just about as we expected, with maybe the (inaudible) around the military piece of business. But we expect that to come and go over time.

Thanks, Tony. Just one last broader question. It seems as though weather conditions have become more volatile. Demand has become more volatile. Political conditions have been more volatile than in years past. Would you agree with that characterization? And if so, how do you manage the business any differently than you are accustomed to?

That's a good question. It certainly feels that way. Certainly, we have made the business a little more exposed to volatility. We're in many more geographic regions than we were five years ago or so. So there is more of that. Weather, I really don't know. I was almost kidding before. I think weather has always had ups and downs, so I'm not so sure that one is as real. But clearly we are in many more countries with many more product line capabilities. Would we manage it differently? I don't think so. The milestone of Silgan is this idea that we've got really good operators in individual businesses out in the field. And our job is to basically help focus that, et cetera. But really allow the people closest to customers to have as much authority, for lack of a better word, to run their businesses. We continue to believe that's the right way. So, in each of those regions, we believe that we've got a very tight focus on customers, what those markets need, and we are doing the right things to get that accomplished. If we were a very central organization, that would be much harder. It would be much harder to meet the needs of those customers. Now, the net of that might be there is a little more volatility around our forecasting, et cetera. I think we do a pretty good job of working through that. And I think we will continue to do it. But does that mean there could be a need for slightly wider ranges over time on earnings estimates? I suppose that's possible. But the important thing is how are we building the business, how are we building long-term sustainable competitive advantages. And I think the way we are structured is exactly the right answer for that.

Thanks a lot, Tony. Appreciate it.

Robert Kirkpatrick with Cardinal Capital.

Good morning. Could you guys talk about the M&A environment going forward and whether Portola takes you out of the operation of that for the next couple of quarters, the next year?

I think I probably got myself in trouble a quarter ago talking about how I viewed the market. I would say that right now the overall atmosphere is a normal pipeline for us. I don't think that, depending on where an acquisition might fit, would depend upon whether we are ready to take it on now or whether we'd need some digestion period in the various businesses. But I don't think there is anything unique about the market that gives me any pause about future opportunities. Nor do I think our capital structure prevents us from being active in the M&A front where it is appropriate for us to find value for shareholders.

Great. Thank you so much.

And that concludes our Q&A session. I will turn it back over to our presenters for any closing remarks.

Great. Thank you, everyone. We appreciate the time and we look forward to talking to you about our year-end numbers in the new year.

And that concludes today's conference call. We appreciate your participation.