Silgan Holdings Inc (SLGN) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for joining the Silgan Holdings fourth-quarter and full-year earnings results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Miss 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 risks and uncertainties including but not limited to those described in the Company's annual report on Form 10-K for 2013 and other filings with the SEC. Therefore, the actual results of operations or financial condition of the Company could differ materially from those expressed or implied in the forward-looking statements.

With that, I'll turn it over to Tony.

Thanks, Kim. Welcome everyone to Silgan's 2014 year-end earnings conference call.

I want to start by making a few comments about the highlights of 2014 and briefly comment on a few of our 2015 initiatives that will allow us to further expand our competitive advantage and position the Company to continue to deliver strong shareholder value. Bob will then review the financial performance for the full-year and fourth-quarter and provide highlights on the 2015 outlook. Afterwards, we'll be pleased to take any questions that you will have.

As you've seen in the press release, 2014 was another record year for Silgan, as we delivered adjusted earnings per diluted share of $3.17, up 15.7% from a very strong prior year in which we delivered $2.74 per diluted share. While we're pleased with our 2014 performance, we're even more excited about the prospects for our business as we look out towards 2015 and beyond. As we also announced today, several key initiatives will allow us to continue to strengthen our competitive positions in our market.

Among the milestones leading to the success in 2014 and these future initiatives, we delivered net income per share of $2.86; delivered record adjusted net income per share of $3.17; generated cash from operations of $5.41 per share; generated free cash flow in excess of $200 million for the third consecutive year; increased cash dividend by 7% to an annual rate of $0.60 per share; successfully integrated Portola Packaging; acquired the North American assets of Van Can Company; shut down the production facility in Venezuela; initiated a project to build a major new metal can manufacturing facility to better optimize our logistical footprint in North America; began construction of two new plastic container facilities; and announced our intention to commence a modified Dutch Auction tender offer to purchase up to $200 million of common stock.

As we enter 2015, we are very focused on successfully completing these new initiatives to further enhance our franchise positions. The new can manufacturing facility will be our largest steel can plant in terms of capacity, will cost approximately $100 million, and is expected to drive returns through optimizing freight and logistical costs, as well as allow us to avoid certain capital associated with BPA alternative coatings on existing lines. This plant will not result in a significant increase in metal food can capacity, but will allow the consolidation of other less optimally located assets. The plastic plants represent the next step in our effort to reduce costs of the business and to invest in growth with strategic customers.

In summary, we remain committed to our discipline of building our franchise market positions through prudent investment, and believe this discipline will allow us to continue to create significant value for our shareholders. As you can see in our outlook, we expect 2015 to be a transitional year as we focus our efforts on completing these initiatives and delivering market-leading quality of service to our customers. As a result we expect to deliver low to mid single-digit earnings growth in 2015, while continuing to invest enhancing our franchises for the long-term.

With that, I'll turn it over to Bob.

Thank you, Tony. Good morning, everyone.

Each of our businesses faced a series of challenges in 2014, including significant fluctuations in pack volumes across the globe, difficult economic conditions across broader Europe, volatile political and economic circumstances in the Russian markets, ongoing difficulties operating in Venezuela, the continued efforts to reposition our plastics business, and the task of integrating new acquisitions. Once again our businesses remain focused on enhancing their competitive advantages in their markets which benefited our employees, customers, and shareholders.

We grew our food can volumes and continue to solidify longer-term contracts with our customers, made progress toward improving the profitability of the plastics business, successfully integrated the Portola acquisition into our closures business, and continue to benefit from our focus on optimizing our investment in working capital. As a result, adjusted earnings per diluted share increased to $3.17, and we delivered free cash flow of approximately $200 million.

On a consolidated basis, net sales for the year were $3.9 billion, an increase of $203.3 million or 5.5% versus the prior year, as sales grew across all businesses. We converted these sales to net income for the year of $182.4 million or $2.86 per share, as compared to 2013 net income of $185.4 million or $2.87 per share. However, 2014 includes adjustments increasing earnings per share by $0.31 while 2013 included adjustments that decreased earnings per share by $0.13 and as a result, adjusted net income per diluted share was $3.17 in 2014 versus $2.74 in 2013.

Interest expense before loss on early extinguishment of debt was $74.8 million, an increase of $7.4 million as compared to 2013, as a result of higher weighted average rates and higher average outstanding borrowings. We recorded a loss on early extinguishment of debt of $1.5 million in 2014 as a result of the refinancing of the senior secured credit facility in January 2014. While 2013 included a loss on early extinguishment of $2.1 million as a result of a $300 million prepayment of term debt under the previous secured credit facility.

Our 2014 effective tax rate was 35.9%, as compared to the 2013 rate of 35%, net of the favorable tax adjustment recorded in the second quarter of 2013. The 2014 rate was negatively impacted as a result of nondeductible rationalization expenses and the write-off of deferred tax assets, each resulting from the shutdown of the manufacturing facility in Venezuela, partially offset by the favorable impact from the expected realization of certain foreign tax benefits.

Full-year capital expenditures totaled $140.5 million in 2014, as compared to $103.1 million in the prior year. Additionally, we paid a quarterly dividend of $0.15 per share in December. The total cash cost of the dividend was $9.5 million. For the full year, we returned $38.6 million to shareholders in the form of dividends and an additional $24.7 million in the form of share repurchases. As outlined in table C, we generated free cash flow of $200.8 million or $3.15 per share, as 2014 once again benefited from improvements in working capital. However, as expected, those gains were comparatively smaller than the 2013 improvements, and capital expenditures were nearly $40 million higher in 2014 versus 2013, as we continue to find opportunities to invest in our core businesses.

Looking at the individual franchises, the metal container business recorded net sales of $2.37 billion, an increase of $28.3 million versus the prior year. This increase was primarily due to the pass-through of higher raw materials and other manufacturing costs, partially offset by the financial impact from a large number of significantly longer-term customer contract renewals and extensions. Volumes were relatively flat from the prior year, as a strong European fruit and vegetable pack and volumes attributable to the Van Can acquisition were offset by declines in vegetables and soup in the US.

Income from operations in the metal container business was $248.7 million, an increase of $12.4 million versus the prior year. This increase was primarily due to lower manufacturing and depreciation expenses, better operating performance in Europe due in part to higher unit volumes, and rationalization credits in 2014 as compared to rationalization charges in 2013. These gains were partly offset by the financial impact from customer contract renewals and extensions, and a decrease in US volumes.

Net sales in the closure business were $882.9 million, an increase of $162.8 million, primarily due to the inclusion of the Portola Packaging acquisition. Income from operations in the closure business increased $12.6 million to $75.6 million in 2014, primarily due to the inclusion of Portola Packaging, partly offset by higher rationalization charges during the year. Rationalization charges of $12.2 million were primarily related to the shutdown of the manufacturing facility in Venezuela and headcount reductions in Europe.

Net sales in the plastic container business increased $12.2 million to $659.2 million in 2014, principally due to the pass-through of higher raw material costs and a more favorable mix of products sold, partially offset by unfavorable foreign currency translation of $8.4 million. Operating income increased $12.9 million to $51.5 million for the year, largely attributable to the lower manufacturing and depreciation expenses, a customer reimbursement for certain historical project costs, a more favorable mix of products sold, and lower rationalization charges.

For the fourth quarter, we've reported earnings per diluted share of $0.37 as compared to $0.36 in the prior year quarter. We incurred $9.5 million of rationalization charges in 2014, which were largely nondeductible as compared to rationalization charges of $8.4 million in 2013. As a result we delivered adjusted earnings per share of $0.58 in the fourth quarter 2014, as compared to $0.40 in the same quarter last year.

Net sales for the quarter increased $45.4 million versus the prior year, driven primarily by higher average selling prices for the pass-through of higher raw material costs, an increase in metal container volumes largely associated with the acquisition of Van Can, and an increase in closure volumes primarily from the acquisition of Portola. These increases were partly offset by the impact of unfavorable foreign currency translation of approximately $15 million, and the financial impact from longer-term customer contract renewals and extensions. Income from operations for the fourth quarter of 2014 increased $3.8 million, primarily as a result of lower manufacturing and depreciation expenses, an increase in unit volumes in the metal container business, and the inclusion of Portola Packaging.

These increases were partially offset by a loss from operations in Venezuela versus income in the prior year quarter, the financial impact from the longer-term renewals and extensions of customer contracts, and higher rationalization charges. The fourth quarter 2014 tax rate of 42.7% was negatively impacted by the nondeductible rationalization charges and the write-off of deferred tax assets, each resulting from the shutdown of the manufacturing facility in Venezuela, partially offset by the favorable impact from the expected realization of certain foreign tax benefits. This compares to a normalized tax rate of 34.8% in the fourth quarter of 2013.

As we turn to our 2015 outlook, our current estimate of adjusted earnings per diluted share is a range of $3.20 to $3.40, which excludes certain items identified in the press release. Reflected in our estimate for 2015 are the following. We're forecasting a slight improvement in operating income in the metal container business, we expect modest volume improvements in the metal container business attributable to a full year of Van Can and the anticipation of more normal pack volumes in the US, offset by a more conservative view of Europe.

We also expect higher manufacturing costs associated with inefficient operations, resulting from logistic challenges as a result of certain changes in customer demand patterns, the absorption of new volumes associated with the Van Can acquisition, startup costs related to the new manufacturing facility, higher pension costs, and the financial impact from renewals of certain customer contracts. We remain cautious about the economic outlook for Europe throughout 2015.

The closures business is expected to benefit from slightly higher unit volumes, manufacturing efficiencies, and the favorable impact from the lagged pass-through of lower resin cost in the first quarter. These benefits are expected to be partially offset by general inflation, higher pension expense, and a conservative outlook for Europe. We're also expecting operating profit in the plastic container business to be down, largely as a result of the unfavorable impact from recent longer term customer contracts, and higher manufacturing costs including those associated with the startup of the new facilities. These headwinds will be partially offset by the favorable impact from the lagged pass-through of lower resin cost in the first quarter.

We expect continued benefit from cost reductions and productivity programs across each of our business. In addition, we expect interest expense to increase slightly versus 2014, largely as a result of higher average outstanding borrowings resulting from the proposed tender offer and incremental capital expenditures largely associated with the three new facilities. We currently expect our tax rate to be largely in line with a more normalized rate of 34.5%. Also, we expect capital expenditures in 2015 to be approximately $250 million, as some projects from 2014 will carry over into 2015, and we're making investments in three new domestic manufacturing facilities to enable us to optimize our operating footprint and cost structure to meet the unique needs of our customers.

We're also providing first quarter 2015 estimate of adjusted earnings in the range of $0.50 to $0.60 per diluted share, excluding rationalization charges. Based on our current outlook for 2015, we expect free cash flow to be approximately $100 million, down from approximately $200 million in 2014, largely attributable to the incremental domestic capital expenditures associated with the construction of the three new manufacturing facilities. That concludes our prepared comments.

I'll turn it over to Melody to provide directions for the Q&A session.

(Operator Instructions)

Scott Gaffner with Barclays.

Just a few questions on the capacity expansion in North America. Can you talk a little bit about the shift in customer preferences? Sounded like you also mentioned BPA as an issue, but are we seeing a shift at two-piece from three-piece? Then, couple of follow-on questions on the returns on that, as well. Can you talk about what sort of IRR, et cetera?

This is Tony getting back to you. So let me just drop back on the whole thing. As you look at the new line, it basically, is a cost savings budget. It's not about new capacity. I made that point before and I'm sure we'll cover it again. The cost-savings basically comes from geography and scale.

So, the first part of that is we embarked on our Can Vision 2020 project awhile back, one of the things we got looking at hard is where we make and ship for our customers. We were under a long-term project, really analyze that, and see if there weren't opportunities, and we found some opportunities. That's one part.

The second part is that we have seen a shift from a couple of our very important customers from the West to the Midwest. We have two significant customers that are shut down their operations on the West coast, filling operations, and moved them to the Midwest. So that has further tightened up our capacity in the Midwest, and then when you add to that the fact that we acquired the Van Can business, that came in with new volume that has tightened up our system as well, and so we have a fairly tight system in the Midwest right now.

So, there's sizable opportunities for us in terms of taking the inefficiency cost out and getting the benefit of the cost of other manufacturing capacities. So, we will be shutting down other two-piece and three-piece capacity as the line comes on. The third piece which we did put in the release, is that there is some capital spend around BPA alternatives. Though, the other point is that some of this capital is just being deferred. We won't spend it on lines that will be shut down, down the road. So, some of the capital would have been spent, in any case, on other assets.

Okay. When we look at the returns though, I mean you still-- the cost avoidance, I mean, how do you think about the returns for putting this type of facility in? I know it's not a growth initiative.

We are expecting our kind of ordinary cost reduction returns on it. It is intended as a return project.

Right. Lastly on this, for me, and then I'll turn it over. Does this call into question at all the idea that a lot of your facilities are co-located with your customers? Maybe there's not enough scale now going forward to have co-located facilities? Is that an issue, or do look at this very customer specific?

Quite the opposite. In fact, this is trying to get closer to customer location. So, in those cases where we are co-located and the customer continues to run that filling plant, that's the best answer. This is the next best answer, which is trying to get yourself centrally situated to the customers that you have in place. So, absolutely, you don't want to ship cans along the way and that's exactly what this is about. It is getting closer to customers to reduce the freight cost associated with it.

Thank you.

Anthony Pettinari with Citi.

I was wondering, with your metal containers outlook for 2015, you discussed weakness in Europe, and I was wondering if you could quantify what kind of volumes you expect in Europe? Do think you they'll be down year-over-year in 2015? Are there any specific categories or geographies where you are expecting weakness?

Really, all we are doing there is hedging a little bit. Recall that Europe had a very strong pack season this year. So, the answered question would be mostly around pack, and it's really just assuming that there could be some give-back to a more normal pack season. It would be modest decline, sort of the assumption we have as a result of that, because you had nice growth in 2014.

Okay. That's helpful. In the past, you've been active in M&A in Europe. But if I look at last year and this year with Portola and Van Can and the new container plants, you've shifted more towards North America, and I was wondering if you could talk about, generally, the M&A environment that you're seeing in Europe and was that sort of a conscious choice? Or, if you could just talk about preference relative between North America and Europe, in terms of acquisitions or investments?

This is Bob.

I guess there's no question, given some of the struggles that have been going on in the European economies, that by definition we've been a little more conservative around investment there, particularly M&A activity, which is nothing more than to say more price sensitive, right? So, as a consequence of that discipline, there have just been less opportunities for us to make investment there.

I think, a lot of times, out of turmoil comes opportunity, so we wouldn't necessarily say that we absolutely won't make investments in those parts of the world. I think they'd have to be priced accordingly and risk-adjusted accordingly. It just so happens that we found the right kind of opportunities more in our domestic markets, of late.

I think as you look across the broader acquisition environment, there's still a number of things that are either in market or coming to market. There is no question that price around M&A activity is very robust at the moment.

So, I think, against the quality of assets that we have seen, we've been a little more disciplined and stayed on the sideline against some of those. But, our focus is still to continue to turn over every rock and look for opportunities to continue to build out the business. As in the past, it will come and go where the activity meets our requirements, and times where we take a pause and do something different with our cash to earn return for our shareholders. So, that's kind of the environment that we're in right now.

Okay. That's very helpful. Maybe one quick last one. Apologies if I missed this. The North American metal container facility, when would you expect that to be fully up and running?

It will take kind of the bulk of this year to get fully constructed, so it will be online, is the plan, by the end of the year it'll be going through qualifications into 2016.

Okay. I will turn it over.

George Staphos with Bank of America Merrill Lynch.

Thanks for all the details. Good luck with all the initiatives.

I guess my first question, you mentioned that it's going to be $100 million related to the metal facility, if I heard you correctly. One, what is the incremental capital you expect to spend on the plastic facilities, and what incremental cost do you expect to entail or to have as you shut down older facilities? Then I have a few follow-ons.

George, I'll let Adam answer to the plastics ones. You were correct that you heard $100 million, approximately, the capital on the new can plant. There will be rationalization costs afterwards.

Our expectation at this point is that would be no more than $10 million of cash cost, and that, obviously, is included. When we talk about a return project, we include those costs, we include all the benefits of shutting down all the other lines, et cetera, into that.

On the plastic side, the capital associated with the two new facilities is right around $25 million. Again, as Tony had mentioned earlier, really the primary focus of those two plants are continued cost-out efforts in our plastics business, and also to support our customers' growing needs and growth in the markets that we like and that we participate in today.

(multiple speakers)

Go ahead, I'm sorry.

Last thing I would say, as a reminder over the last several years, we've shut down four of our less efficient, smaller plastics facilities. So, in line with what we're talking about on food cans, these facilities offer size and scale and in some cases, the near site logistical advantages to our prior footprint.

Okay. Are you in a position to mention what kind of -- on the plastics side -- what types of containers you're going to be making? Or, which customers you're dealing with? I'm guessing you probably can't answer the latter, but I figured I'd give it a shot. Thus far, we should pencil in, basically, $135 million all investment including rationalization charges. Would you agree with that?

To start with, the types of products and customers we're dealing with out of the new plastic facilities, what I'd tell you is we appreciate the effort. Unfortunately, we can't talk specifics about the customers or the products themselves. Just focusing on the markets for a second, George, it is in primarily food and healthcare with, again, one of our core competencies is still personal care, as well. So, it's growth, really, in those three markets that are driving the investment and the longer-term contracts, as well, that we're focused on.

Okay and--

Yes, $135 million seems to be the right number. There could be some other costs on the plastic side, but it's kind of spread more out over a bunch of plants. I wouldn't think it would be that much of a number to throw off your $135 million.

Okay. Thanks for that, Tony. Two last ones and I'll turn it over. In terms of the food can plant, is it a two-piece plant? Is it a combination of two and three-piece? Can you comment to that effect?

Then, are there long-term contracts being signed up for the major customers for both facilities or all three facilities? If so, how long are they? Were there any contracts coming up for renewal or expiring that prompted these decisions?

Thanks, and I'll turn it over.

The plant is a two-piece plant, specifically. Again, I mentioned scale, it is a sizable plant, so it is a case of us massing up what we do in that region. This is -- it's just our typical business going into it. It's already under contract, and you'll recall, we've done a lot, we always have a lot under contract in our can business.

We've done a lot of renewals. We figure today with some 95% of our can business under contract. By definition, those are long-term contracts, at least initially on them, and we have quite a bit to go on our big contracts, primarily, on the food side.

Over to the plastic side, we specifically called out the three new longer-term contracts. Those are with existing customers and the near site, for example, George, that is a unique versus our traditional plastic contract, our usual contracts are three years to five years in the plastics business. These are much more can like terms, as far as the length of contract. So, to build a near site plant, this looks much more like a can contract than a traditional plastic contract.

These three were called out because of that fact. They look a little more like can contracts than is typical for the plastics business.

Correct.

Okay. I appreciate it. I'd missed that earlier. I will turn it over.

Al [Cavelli] with Macquarie.

Thanks and good morning.

To follow up on the new food can plant that you're building. Do we have any, I guess, visibility as far as beyond this project? If you see other similar projects to optimize the footprint? Or, do see this as sort of a-- more of a one-off type of opportunity on the logistics side?

I would call this pretty one-off. We always look at the logistics of all of our plants. We're always looking at opportunities to further hone our system. Obviously that continues, but the scale of this is unique.

We've been looking for a long time for a way to do this. It just didn't make any sense until we had some customers that shifted business into a tight area already. It needed all of those elements to come together before it made sense, and I don't see that happening anytime in the near future, again.

Okay. Thanks, Tony. Appreciate that.

I guess along those lines, from the returns, I know you mentioned Silgan-like returns. Do you expect those returns to immediately be present in 2016 as this facility starts up? Or, is there a ramp-up period and it takes you a few years before you're realizing the full run rate of the targeted returns from the facility?

There clearly is a ramp-up. As I said, you'd be still qualifying into the beginning of 2016. So you'd be qualifying with customers. Then, you've got the job of getting other capacity shut down and rationalized. I think very much 2016 will begin to see the benefit, but you won't get the run rate until certainly the end of that or into 2017.

(multiple speakers)

It's not multi-year either. I mean, do we get half the return? I understand all the details. But I mean, how much of a step up is there from 2016 to 2017, because it sounds like from a cost savings perspective it should be a fairly rapid step up.

Well, it's rapid and once you get the other capacity shut down and all of the costs of that out of the system. So, I think it's going to happen throughout 2016, and timing later will matter. Exactly when is the plant online, exactly when do you get qualification done? It's going to be a little hard to gauge that for you.

Okay. Okay. Appreciate that, Tony.

Final question and I'll turn it over. It sounds like more of this is a logistical cost savings opportunity. That said, you did mention in the release incorporating some learnings from Can Vision 2020 and, to the degree you can, how much of this is Can Vision 2020?

Is it minimal? And it's really more of a logistical exercise here in savings? Or, is there maybe a little more of an element to 2020 than maybe I'm realizing?

It's much more about cost savings than it is about Can Vision 2020. Essentially, what we're alluding to there is only that we are giving ourselves the flexibility in the new plant to take advantage of some of the learnings that we have gained through 2020. Now, none of that requires a new line. All of that can be retroactively done to existing assets.

The obvious question is sort of this-- if this technology takes off, does this mean you have to put in new-- other new lines? The answer is no, we don't. We would just retrofit lines. Since are going to be building line anyhow, which is justified on the cost side, we might as well put in some of the learnings that we've had from Can Vision 2020.

Okay. Got it. That's very helpful. Thanks. Good luck. I'll turn it over.

Ghansham Panjabi with Robert W. Baird.

Tony, maybe this question is for you on the metal investment in terms of the CapEx. How would you qualify this as sort of a defensive move that you would have done anyway versus trying to be offensive based on, maybe the changing market conditions in North America?

100% cost reduction, 0% offensive. Remember, this whole discussion of us looking at the cost situation between us, customers in the market, all predates any of the -- at least, analyst community concern about the market. So, this is really just about us doing what we always do, which is really try to hone in our cost, drive value and competitive advantage to our customers every way we can.

Granted, this one's a bigger investment against that. As I said, that's really because a couple of stars aligned where we could do this. We view this as just the typical effort we're always working at, which is getting cost out of the system, driving competitive advantage into the market.

Okay. Just two other questions.

In terms of the CapEx flow-through for these specific projects into 2016, first off, is there any? Second, there seems to be some transitory cost that will be impacting 2015 in terms of startup cost and so on and so forth. Can you quantify that as we think about 2016?

Thanks.

Sure. The bulk of the capital on these three projects, is the easiest way to talk about it, is going to be spent in 2015. Some of the rationalization cost would probably be in 2016, but that's obviously a much smaller component of what we're talking about. So, there would not really be that carryover on the capital, at least.

In terms of startup costs and transitory costs in 2015?

That should be all absorbed in 2015 and the number we're looking at across the system is some $5 million-ish of startup cost.

Okay. One last one for Bob, just a modeling question in terms of cash pension for 2015. Thanks.

Our pensions are very well-funded. Our US plants are approaching 120% funded, so we don't have any cash contributions coming at us in 2015. I will point out though, that we do have a little bit of a headwind comparatively, 2015 over 2014 against pension, largely because of the change in the discount rate and the change to the mortality table.

So, there's a headwind there that's probably pushing up $8 million to $10 million against that. Now, we've offset that a little bit with the returns that we've had in the plan on the return on assets. But again, that's more about the P&L impact and less about the cash consequence of the pension plan.

Okay. Awesome. Thanks so much.

Chris Manuel with Wells Fargo Securities.

Congratulations on the exciting stuff that you are going to have to be working on here the next year or two.

Thanks.

A couple quick ones, if I could, just to help me understand. First, on the food side. Have you disclosed where you're locating that plant at this point?

No, we haven't. We've disclosed Midwest, we've got a couple of locations that are kind of under final negotiation on incentives, etc., so we're not prepared to announce location yet.

Can you maybe share for this timing if you feel that from a perspective-- you're going to spend the money this year so you anticipate having it built this year and then running in 2016?

That's right.

Okay. So, with respect to the startup issue, the last couple questions, it's probably -- you said startup will be all done this year, so there won't be that lingering expense in the next year tune of $5 million for the metal food. Is that correct?

The $5 million was meant to be across both systems. That's all three lines, if you will. But, your point is correct, that should -- if everybody stays on schedule here, which we anticipate they will -- that should be absorbed or taken through the numbers in 2015.

Okay. The two plastics plants. Have you disclosed where those are?

We've talked about where one of them is located. The near site is in Pennsylvania and the second site we've not disclosed the location. Similar to what Tony used to describe the food can plants will be in a Midwest location that is optimized from a customer support and logistics standpoint.

Okay. Next question I have there too is, that's going to -- there's a breaking ground here in 1Q, and we'll be up and running for 2015, is that right?

The end of 2015, yes.

End of 2015. I know you were pretty careful with saying that you're not anticipating, or you're not putting in new capacity, per se, in the metal food side. But, is there an opportunity for adding capacity in some of these new -- presumably you are putting in some newer technology stuff in the plastic side as well. How should be think about that opportunity?

Sure. Certainly, the plastic plants, particularly the second plant in the Midwest is going to be designed to take on additional growth. So, both plastic facilities will have newer equipment that will be customary with our recent investments. But, it is scalable.

They will be able to grow, we'll be able to grow into it. As we've rebalanced our base business, we'll be growing in areas where we want to grow with our strategic customers. So, we are excited about what that means for the future.

And we've been talking for a while about getting at legacy cost of the system. So, that's part of the point of the plant, too, is to allow us to have more flexibility in that regard, as well.

The last question I have here. You mentioned EBIT would be up in two of the three segments. I think in plastics, you said it wouldn't be. If we were to not have these startup costs or different elements, within the plastic side, would EBIT be up as well in the plastics unit?

No, actually it wouldn't. As part of the negotiation of those three longer-term contracts, there was a bit of price concession given in the plastics business. Really, it's the primary culprit for the down year-on-year comparison.

Okay. That's helpful. Good luck.

Chip Dillon with Vertical Research Partners.

Good to catch up. Bob and Tony, I had a question -- first of all, if you have -- this might have been asked -- how should we see CapEx in 2016 and 2017 after the hump in 2015?

It should come back to a more normalized level. I think what we've long said is that we think kind of $120 million to $150 million is a more normalized capital. That's certainly been, if you looked over time, that's been our average. Of that, some $50 million or $60 million is maintenance capital, so that part of it's not going to change.

There may be a little bit of a reprieve on the high side, there. So, right now, without having gone through any longer-term planning here, I'd probably point to the lower end of that target.

In 2016?

Yes.

Okay. About the tax rate. I know that bounces around. What does it look like this year? I don't think you all indicated that, and do you think it will be a little higher than what we should expect in future years, given the softness in Europe?

No. I think we're targeting that we'll be more normalized at that 34.5% rate plus or minus a little bit as we look into 2015 and beyond. So, actually the profitability in Europe has actually improved over the last year or so, so that's actually been a bit of a tailwind to the rate. To be clear, the rate's going to be higher in 2015 than it was in 2014 on a normalized basis. So, that's a little bit of a headwind for us, correct.

Okay. Then, you mentioned that you expect the food business could come back, the food can business in the US, this year, if we had a more normal pack. If it were, what is the range that we would expect to see? Is that something more like 1%, could it be 2% to 3% to get back to that normal level?

Actually, the pack was off a little bit this year. You'll recall -- and I won't take us through it all, but it was pretty good on the tomato side, not so good on the veg side.

When all was said and done, it wasn't a terrible pack. It was a little off. Our expectation right now is that there would be a fairly small recovery on the pack side but it's not a huge element to what we're thinking for next year.

Okay. Got you.

The last question is, as you look out-- I mean, if I look back, certainly the amount of, I believe, the amount of capital that you're spending, at least on organic growth as opposed to acquisition, in this one year is probably the largest, if ever -- certainly in a very long time. As we go out, can you sense at this point that there might be other opportunities to, if you will, to lower cost like you are doing and maybe locate closer to facilities after what you are doing in 2015? In other words, could you have visions in something like 2018, 2019, 2020? Or is this your best guess, this is it, for as far as you can see?

I think I answered before. We do this all the time. We're constantly looking at the cost of our plans, the logistics, can we enhance it in any way? It happens all the time. Obviously, the scale of this one is unique. I think I used the term "the stars aligned" in a lot of ways on this one. It's hard to imagine around logistics that there's going to be anything of this scale.

But meantime, the Can Vision 2020 work continues, so we're still looking at technology opportunities, we're still looking at every other cost component with our customers, and those probably will also be capital. So, I think we put the caveat out there that there could be more that comes from that. But again, I think the scale is kind of unique on this particular project, and I would not expect that, even as you go out in 2018 or beyond.

Okay. One last one. Obviously, you may not know all the details. From what you've heard, do you feel that what you are doing technology-wise in the new plant you're building, is it similar to what a competitor's been building in Virginia or not?

Well, I'm not going to get into any particular competitor, but I'm glad you asked that question. I do not want anyone on this call to think that there's some great big new revelation out there in can plants.

We have more than 70 -- almost 75% of the cans we make in North America today are on two-piece assets, either steel or aluminum. There is not a meaningful difference between what we're putting in here now and those lines. That's newer, you can optimize the way it handles the cans afterwards.

There is scale on this one, right, because this is going to be a bigger single plant than most of our plants. You certainly pick up a little in scale. We brought in some Can Vision 2020 opportunities that could marginally improve it.

But, this is not wildly different than what's been out there forever, and frankly, the beverage can industry uses. So, we're still unaware of any kind of big difference between what this line can do and what anybody else's and newer lines can do.

Got you. We'll all sleep better now. Thank you.

Mark Wilde with BMO Capital Markets.

Tony, in the release, with regard to both plastics and metal, you talked about the impact of some new contracts or contract extensions. It sounded from your comments during the call here like the plastic ones are all tied to the new facilities.

I think the metal is a little bit different. Can you talk with us about how much longer this process of contract revision -- and it sounds like probably with a little lower price -- likely to go on in the can business?

Sure.

How long's the tail?

On the can side -- and this question came up a call or two ago. 2014, as you will all recall, was a very big year for contract renewals, and that had to do with the timing of when contracts came up, it had to do with the Can Vision 2020, and the fact that we wanted to spend capital, and we needed to get contracts in place, and even this line fixed to that point. So, we had to get stuff handled before we could make long-term capital decisions. We went through a lot in 2014.

Much of what we're talking about on the can side is the annualization of that, because some of that happened during 2014, so we're coming over it in 2015. Our expectation would be that we're going to be kind of more normal from here. So, contracts do come up and you'll always have some of this. It's the normal process. But I think the big increase with what happened in 2014 is just effecting the 2014 numbers and the 2015 numbers that it absorbs through.

On the plastic side, just one point of clarification, which is that not all of those contracts are directly connected to the capital. So you also have cases where you just had a contract that came up, and we look at it like we do in any case and say are we making good money on this? Is this a customer that we want to continue to do business with long-term and what is the competitive situation? So there's also cases here where we just said it's still the right customer, it's still good profit business for us, and unfortunately it does mean a decrease on the revenue line.

Okay. All right. That's fine, that's helpful. I wondered-- you also mentioned with this new can plant that part of what you're doing there is going to be to kind of solve some BPA issues, or presumably move away from BPA. Can you just talk generally about what that involves?

Yes. In this case, it's literally that there are some changes to assets that need to happen with some of the new coatings. If you do it to an existing line, you've got to go in and spend money to modify some elements of that line to deal with the difference in the coatings themselves. All we're saying here is that instead of spending that on existing assets, it's sort of a cost offset, if you will, on the new assets. So, that's the specific answer to your question.

The broader point on BPA, just to be clear, there's been -- the science continues to be pretty supportive that BPA is very safe at current levels. Both the FDA and the European Food Safety have come out again and said things are safe and there's really not a need to be limiting the exposure here and taking BPA out of cans. But it's about consumer sentiment, and our customer's trying to deal with consumer sentiment.

For us, today, 70% of our cans are human food cans which is really where this matters. About 15% of those, today, are in some kind of a BPA non-intent coating system. Our expectation by the end of the year is that number will come to some 25% of the human food cans that we sell, so it is growing and customers are wanting to make a move. It does cost them money and more expensive coating systems than it does cost us money in some cases in capital, yet, it's going to move forward, and our view is that will continue to move forward.

Probably the long answer to what you probably meant as a short question.

That's very helpful.

Bob, can you talk about FX potential impact in each of the segments? As I recall, there is no real plastics outside of North America. So, sounds like it's mostly closures and cans and if you can just help size that impact for us?

Sure. You're right.

Plastics has a little bit of exposure in Canada, but that's a relatively small piece. So, it's mostly in food containers and closures. Obviously the scale of it is going to be more weighted toward the food can.

I think as we look forward into next year, given where FX rates -- and our exposure is mostly to the euro here. Our exposure against current rate probably says that we've got a headwind against the revenue side that could be $75 million or $100 million on a year-over-year basis. That probably creates a headwind across the Company on an earnings perspective and this is the good news, that kind of impact on the top line given the way we're hedged, doesn't really translate to a meaningful move on the bottom. There's probably some $0.03 or $0.04 dilution because of FX to the bottom line. Again, that will be largely weighted, I think, to the container business.

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

Debbie Jones with Deutsche Bank.

Are you able to give more specifics on how the West coast drought and package are mixed in metal food, if that materially impacted your profitability this year? If you look to next year, and you're calling for a normalized pack, should mix be a positive or negative in 2015?

See if I got that. The shift -- if you're asking did the shift from the West coast to Midwest affect the mix of our product sales? The answer is no.

However, and this might not be your question -- but it has driven up costs. One of the key points here is that there's-- we call out of orbit. The can's not coming from where we wanted it to for the customer. It costs us money. We refer to that as out of orbit.

In 2014, we suffered out of orbit costs from one customer who moved some of their filling. 2015, that's going to get compounded by the second customer's doing, and that's part of what the new line helps us resolve, is those out of orbit costs. Again, they are in the 2015 estimate, that there's going to be higher cost from that.

Not, I'm going to come back to mix. There was no real mix impact from that. The mix in the fourth quarter, however, was a little bit skewed to smaller cans, so you can see that a little bit in terms of the drop-through from the volume. And there was one other question at the end?

Just looking at 2015, if it should be a positive or negative for you. You've kind of answered that.

Yes. I'm sorry. You're right, thank you. Pack, what we've said is it should be a slight positive impact in 2015, assuming that it comes back more to normal levels.

Okay. Thank you. You referenced Can Vision 2020. Can you just give us an update on what the priorities are for that program and targeted spending? You're kind of getting the benefits that you expected from this?

We really haven't laid out spend. The spend in terms of the P&L is a couple of million dollars a year and that will continue on the development side. The bigger point will be capital spend opportunities as we come along.

What we've been saying for the last year, I would say, is that our focus is going to probably first be around the things we know. So, logistics or some of the things we've talked about. You can now see some result from that.

A lot of it is around things we know. Logistics, a better end for customer, a better design that we already make but we've lined it up more for an individual customer. So, that's been a big part of what has been happening so far.

Meantime, we've been doing more of what we would call developmental efforts on bigger ideas that may be meaningful to our customers and their systems. Those are going to take time. It's a little hard to predict when they come, but we feel good about the progress that we're making, and we feel very good about the engagement from our customers who are very interested in continuing to drive down cost of what is already the lowest-cost package for their products.

Thanks.

Alex O'Shea with Goldman Sachs.

A couple of questions for you. First on the plastics. It's not clear to me whether there's an opportunity for a volume step up in late 2015, early 2016, as those plants come online. On metal it's clear that there won't be one, but it's not clear to me on the plastics side.

Absolutely, there is a step up in volume. We are expecting volume growth in plastics in 2015. The plants will support that.

But, in addition to that, we are growing organically within the business as we, again, rebalance the portfolio and really focus on certain target markets. So, once those plants are operational, there will be additional volume that comes our way in 2016, as well.

So Adam, it seems some of that would be a change in share in the marketplace, is that fair?

It's a good mix. There's certainly some of that happening, where we're picking up business that's out in the market and we're also positioned for our customers continuing to grow, as well.

That's helpful. Just on the returns. Tony, you mentioned the returns are consistent with Silgan's typical returns on productivity projects. Can you remind us a range and this implication that the threshold is different than the returns would be on the growth-oriented project?

Yes. The threshold's different because the risk is lower. When you're talking about going and securing new business and all the vagaries that happen with that or M&A or something else, it is a little bit lower in that regard. The direct answer to your question is that you're talking something in the 15% to 20%, IRR number.

Okay. Got you. Very good. Last one on the tender. You guys want to talk about how to think about the percentage range before it? I know you did one in 2012, in late 2012. Is it going to be similar to what happened then?

No. We absolutely can't do that. What you know, we are intending to launch to $200 million tender. It'll be done shortly. There'll be full documents, tender documents, that'll be issued at that time, but we really can't get into any more detail on it.

That's fair. Thank you very much. Everyone else, thank you.

George Staphos with Bank of America Merrill Lynch for a follow-up question.

Back to the metal food container plant in the Midwest. Recognizing that you said this is not really adding capacity, will there be some amount of capacity that is available for open market out of that facility? What is the overall capacity of that facility?

We could estimate it, but I was hoping you could maybe give us a finer point on that, and the reason I asked the question is obviously, you mentioned logistical savings and flexibility, and a lot of this moving production from the West to the Midwest, but two-piece can oftentimes be not as flexible a capacity as three-piece as we know. Just wanted a couple of points on that, if you had them available.

Sure. The capacity of the plant will be somewhere around 1.5 billion cans. The available for open market is really not the way we do business. We conduct business under long-term contracts. So, that's just not something we would envision at all with the line. As I said, it's a cost savings kind of a program.

Are two-piece less flexible? Yes, obviously can't change them as much. But, because you've got size and scale here, this does allow for the main sizes, the two-piece cans, and that market is a little bit more homogeneous, if you will. So, absolutely it offers us the ability to absorb the capacity, which we know, that we need to supply.

Tony, can you comment as to how many primary customers are going to be associated with this facility? Is it one, is it three, is there a way to size that at all for this form?

Not really. It's pretty concentrated, as you'd expect, from a two-piece can line, as you point out. But, I'm not sure it's going to be helpful to give you a number on that.

Okay. Understand. One question, to the extent that you can comment, on the tender offer. How did you determine that $200 million was the right size as opposed to $300 million or $100 million? Would you have been doing this anyway if these projects weren't coming up?

One could look at this as a way to continue to improve equity returns during a period where the operating business isn't moving with the same momentum as you would normally have, because you obviously have a lot going on. If you can provide some answer around it, that would be helpful.

Yes. I think, George, just because we are going to be launching a tender is, I'm not sure what the harm is of those conversations but I think, nonetheless, we'll hold off.

Okay. I understand, Tony. I will turn it over. Thanks.

Mark Wilde with BMO Capital Markets has the final question.

Just two pretty straightforward ones. First, I want to clarify. Are you completely shut down in Venezuela now?

We have ceased operations. There is still a little bit of ongoing shutdown work, but in terms of production, we are down in Venezuela.

Okay. Is that something, Bob, that could come back at some point or are you just-- how do you think about that?

Yes. Look, typically when we make a decision to close a facility, that's exactly what we do. We close the facility and we move on. Particularly in this case, given the volatility in that region and the difficulty getting raw materials, our customers in that region suffer the same consequence of getting their own raw materials, so volume has been downwardly trending and volatile at best. So, I think all of that speaks to-- it's the right decision to just cut bait and move on.

Okay. The other question I had for either you or Tony- some sense when we look across the European metal can operations and we include, say, the Middle East, where are you operating right now versus your potential capacity?

It's a good question. We get it from time to time. It's hard, because that business, more than any of ours, is so regionally specific that you've got assets in-- for a particular size, a particular market. I really don't even know how we'd answer. It probably is lower utilize-- it certainly is lower utilizes than our US assets for sure, because you've got these lines in all the locations.

In terms of do we see opportunity to fill a lot of capacity, I think that's going to be primarily around the regions that we were going into, so it'd be Russia, to the extent we want to take on more risk in Russia, which is an important question. Clearly, you've got a cost structure that really wants more revenue on it. That's an area where you would like to sell more, if you feel comfortable about doing that. So, it'd be more of those areas where we put in new plants, and the rest are kind of fine where they are in terms of their capacity utilization.

Okay. That's helpful. Thanks very much. Good luck in the quarter. Good luck in the year.

No further questions in the queue, I'd like to turn the call back over to our host for any additional or closing remarks.

Thanks, Melody, and thank you all. We look forward to talking about our first quarter in late April.

Ladies and gentlemen, that does conclude today's conference. Thank you all for joining.