Silgan Holdings Inc (SLGN) 2015 Q3 法說會逐字稿

Good day, everyone, and thank you for joining this Silgan Holdings third-quarter 2015 earnings results conference call. Today's conference is being recorded. At this time, I would like to turn the conference to Kim Ulmer, Vice President and Controller. Please go ahead, ma'am.

Thank you. Joining me from the Company today I have Tony Allott, President and CEO; Bob Lewis, EVP & CFO; and Adam Greenlee, EVP & 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 2014 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 will turn it over to Tony.

Thanks, Kim. Welcome, everyone, to our third-quarter 2015 earnings conference call. Our agenda for this morning will focus on the financial performance for the third quarter and to review our outlook for 2015. After the prepared remarks, Bob, Adam, and I will be pleased to answer any questions.

As you saw in the press release, adjusted earnings per diluted share were below our expectations at $1.26 for the third quarter versus $1.33 in the same period a year ago. While we fully expected 2015 to be a challenging and transitional year for each of our businesses, there is no question the performance in the plastic container business has been disappointing and well below our expectations. As in plastics business, I believe it's important to take a minute and review our longer-term situation and why we embarked on this significant rationalization effort and elaborate on the recent challenges.

The plastic bottle business has undergone significant change in recent years, with increased customer focus on near sight production, high support requirement and continuous cost reductions. In order to meet these needs and capitalize on our belief that no supplier fully meets the needs, we believe it's vital to address the legacy costs and geographic proximity of our business.

One of the strengths of our plastic business is its wide variety of manufacturing platforms and technologies available to meet our customers' unique needs. Unfortunately, this strength presents a challenge during restructuring activities as we operate a significant number of specific equipment platforms with production capacities dedicated to, and paired closely with, customer-specific volumes.

This tight production capacity model mandates that when we -- when any manufacturing line is moved, sufficient inventory must be built. The line must be moved within a small window of time while training new employees in a new location to operate the equipment upon installation. Therefore, if any issues arise, they can become large problems very quickly. Our job is to deal with these challenges as they are identified and under any circumstances to protect our customers by maintaining service and supply throughout this transition.

This plan was aggressive and problems have arisen. Accordingly, we are incurring significantly higher incremental costs associated with mitigating the impact of these issues on our customers. During the quarter, we incurred direct incremental costs associated with the plastic footprint optimization and the efforts to minimize the impact of these activities on our customers. These incremental costs will continue as we go forward for the next several quarters and, where possible and helpful, we may elect to slow down some of these activities.

In strengthening our response to these challenges, we've also made several management changes to the plastics team, including naming Jay Martin as the President of Silgan Plastics. Jay was previously the President of Silgan Plastic Closures Solutions and most recently led the successful Portola integration and the related footprint optimization program within the Closures business in the US.

Our metal container business delivered 8% volume growth as a result of new volumes associated with the Van Can acquisition, continued growth in pet food in the US and solid volumes in the European business. However, despite a great start, the US fruit and vegetable pack was below expectation as the pack ended abruptly in September.

As we've seen earlier in the year, our metal container team did a good job meeting this increased demand and the previously discussed shifting geographic customer requirements from our existing infrastructure. This effort continues to drive higher manufacturing costs and out-of-order freight and logistics costs.

While our footprint optimization is progressing on schedule, the new plant is scheduled to start up in the early part of 2016 and will then go through customer qualifications. Therefore, some of these incremental costs will persist until the second half of 2016. Later in the year, we anticipate easing our capacity limitations and then beginning to reduce other inefficiently located capacity in the system.

Our closure business continues to perform well, having successfully completed its footprint optimization program in the quarter. Based on our year-to-date performance and our outlook for the remainder of the year, we are revising our full-year estimate of adjusted earnings per share in a range of $2.88 to $2.98. This estimate assumes similar fourth-quarter incremental cost levels in the plastic container and metal food can business as we incurred in the third quarter.

With that, I will now turn it over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimates for 2015.

Thank you, Tony. Good morning, everyone. Tony provided an overview of the challenges we face during the quarter, so I will focus my comments on the financial results for the quarter as well as our outlook for the balance of 2015. Our consolidated basis net sales for the third quarter of 2015 were $1.2 billion, a decrease of $24.9 million, as decreases in the plastic container and closure businesses, due partly to the impact of unfavorable foreign currency, were partially offset by increased sales in the metal container business. The aggregate impact of foreign currency across all of our businesses unfavorably impacted revenue by $40.6 million in the quarter.

Net income for the third quarter was $70.3 million, or $1.16 per diluted share, compared to third-quarter of 2014 net income of $83.3 million, or $1.31 per share. The results for 2015 include rationalization charges of $9.1 million for a total increase to earnings per share of $0.10, while results for 2014 included rationalization charges of $2.5 million and net income in Venezuela of $800,000 for a net increase to earnings per share of $0.02. As a result, we delivered adjusted income per diluted share of $1.26 in 2015 versus $1.33 in 2014.

Interest and other debt expense decreased $2.2 million to $17.1 million for the quarter, primarily as a result of lower weighted average borrowings rates and an unfavorable -- a favorable impact in foreign currency translation. As we continue to make progress on new plant start-ups, net capital expenditures for the third quarter of 2015 totaled $53.1 million, compared with $33.5 million in the prior-year quarter.

Year-to-date net capital expenditures totaled $151.2 million versus $93.1 million in the prior year. Additionally, we paid a quarterly dividend of $0.16 per share in September with a total cash cost of $9.8 million. Year-to-date share repurchases totaled $170.1 million.

I will now provide some specifics regarding financial performance of our three business franchises. The metal container business recorded net sales of $845.4 million for the third quarter of 2015, an increase of $17.7 million, or 2.1%, versus the prior-year quarter. This increase is primarily the result of 8% higher unit volumes, partially offset by unfavorable foreign currency of $17.9 million. Volumes were higher year over year as a result of incremental US volumes associated with the Van Can acquisition and continued growth in pet food, and Europe was also stronger on a year-over-year basis.

Income from operations in the metal container business was $106 million for the third quarter 2015 versus $112.2 million in the same period a year ago. The decrease in operating income was primarily due to higher manufacturing costs due largely to logistical challenges from changes in customer demand patterns which was further exacerbated as a result of higher volumes and a less favorable mix of products sold, including volumes associated with the less efficient Van Can operation. These were partially offset by higher volume.

Net sales in the closure business decreased $25.3 million to $215.7 million for the quarter, primarily due to the unfavorable impact of foreign currency of $17 million, the pass-through of lower resin costs, and the cessation of operations in Venezuela at the end of 2014, partially offset by a 1% improvement in unit volumes. Income from operations in the closure business for the third quarter of 2015 was $27.1 million, down $600,000 versus the prior-year quarter. This reduction was primarily a result of unfavorable foreign currency translation, partially offset by better operating performance as a result of the benefits of the Portola integration and plant optimization programs, the favorable impact from the lag pass-through of decreases in resin costs in the current-year quarter versus the unfavorable impact from resins in the prior-year quarter and higher unit volume.

Net sales in the plastic container business were $142.4 million for the third quarter 2015, down $17.3 million versus the prior-year quarter. This decrease was largely due to the pass-through of lower raw material costs, the impact of unfavorable foreign currency translation of $5.8 million, a 1% decline in volumes, and in the unfavorable impact from recent longer-term customer contract renewals. The loss from operations is $7.3 million for the third quarter of 2015 versus income from operations in the prior-year quarter of $13.1 million.

This decrease was primarily related to higher rationalization charges, significant cost and manufacturing inefficiencies associated with the footprint optimization program, the unfavorable impact from recent longer-term customer contract renewals, a customer reimbursement for historical project costs in the prior-year period, lower volumes and the impact of unfavorable foreign currency translation, partially offset by the favorable impact of the lag pass-through of decreases in resin costs. The rationalization charges for the shut down of two facilities in the Midwest totaled $8.9 million for the quarter.

Turning now to our outlook for 2015, based on our year-to-date performance and the outlook for the remainder of the year, we are reducing our estimate of adjusted net income per diluted share in the range of $2.88 to $2.98, down from a range of $3.10 to $3.30 per share. This estimate excludes the impacts from certain adjustments outlined in table B of our press release. We're also providing a fourth-quarter 2015 estimate of adjusted earnings in the range of $0.38 to $0.48 per diluted share, excluding rationalization charges. This estimate compares to adjusted net income per diluted share of $0.58 in the prior-year quarter.

The decline on the year-over-year basis is largely due to the continuation of incremental costs similar to those in the third quarter associated with our footprint optimization programs in both the plastics and metal container businesses, lower pound volumes in plastics, and the impact from an abrupt end to the fruit and vegetable pack. Despite the reduction in forecasted earnings, we continue to forecast free cash flow generation to be approximately $100 million, largely a result of a slight shift of capital spending from 2015 to 2016.

That concludes our prepared comments, so we'll turn it over for Q&A. I'll turn it back to Augusta, who can provide directions for the Q&A session.

(Operator Instructions)

We'll go first to Adam Josephson of KeyBanc.

Thanks. Good morning, everyone. Tony or Bob, can you talk about exactly what happened in the plastics business in the quarter, such that your costs ended up much higher than you were anticipating, just to give us some idea of what transpired?

Sure, Adam. It's Adam. Just talking about the performance of plastics versus our expectations, a couple of things: One, we're working really hard to protect our customers, and maintain the service and supply, albeit at a significantly higher cost. So, if you talk about our previous expectations, we said Q3 was going to look a lot like Q2; and in doing so, the difference really falls into three buckets. We had about $4 million of incremental operating costs that hit us in the quarter, all to serve our customers. Volume was a negative on the quarter of about $2 million as well, and then we had inventory-related activities that hit us for about $3 million, all of which were not included in our guidance when we talked last quarter.

So, what happened is basically you have a couple of plants that were, because of all this movement, the need to build inventory if you can, we had plants that fell behind on the production side, and so the spend is basically -- that creates pinch points for capacity, puts pressure on assets that you really want to move, et cetera. In the end, talking about our costs, we spent basically a result of those issues -- people costs, equipment-related costs, et cetera. I think that answers the question.

Got it. Thanks, Tony. On the incremental costs that you talked about, in the fourth quarter and beyond in both plastics and metal cans, can you give us some perspective as to how significant these incremental costs will be next year, and some idea of whether you expect these related costs to be higher or lower in 2016 versus 2015?

Sure. If you talk about -- we'll take the plastics side first. The kind of year to date, these incremental costs that we are talking about, which are (inaudible) incremental spend is $10 million year to date. That number looks like it is going to -- it'll end up being kind of in the $15 million range -- so, another $5 million in Q4.

In containers, metal food can side, we had been talking all along about a $10 million to $15 million. So, just to be clear, in neither case are these numbers a surprise. We knew we had these. I think in plastics the total number is bigger than we thought. And on the container side, that $10 million to $15 million, I think by the time we're done, that's going to look a little more like $20 million in the year. And so, you will have another -- in the current quarter, that was sort of an $8 million range, although this is our seasonally peak quarter. Both of those are going to continue into next year.

In the case of plastics, it is going to continue as we continue to stabilize the Business and slowly try to recover. So, that's going to be a couple of quarters that we're going to see that come into the year. And then on the container side, as I said in the prepared remarks, until the line gets up in kind of late-ish in the first quarter, as it begins to enter qualification, it will kind of ease those costs off as that capacity becomes available to us. But both of these spends will continue into 2016, for sure.

Thanks. Just two others, then I will get back. Back to plastics, your margins have fluctuated rather dramatically in recent years in this business, and you've been asked on occasion about whether you should be in this business long term. Why today do you think you should remain in this business long term, in light of what you're experiencing?

Well, what I would say is what we're experiencing is transitional. I'm not trying to make light of it. It's a big deal. We've got a lot of effort on it. You can see just by how much we're spending. We don't take it lightly at all.

But this is -- we started the year by saying we're going to go do a major rationalization, and there's going to be risks around it. So, while the number is a little surprising to us, the risk that sits here is not at all surprising to us. We knew what we had to do was challenging.

The reason we are doing it, as I said in the prepared remarks, is we continue to believe that the plastics market, the plastic bottle market is underserved by quality suppliers who do the kind of service that is needed by our customers. And so, we believe an opportunity still sits there and is worth looking at. What we said on the last call, I think, is that we believe this business could get back to -- I think we talked EBIT margin, and I think we talked sort of in the 10%. We really think a little bit more in EBITDA, and I think we said mid-teens. We believe there's a very vital business in that case. So, we wouldn't take the transitional costs we are going through now and making any fundamental decisions on those. That's just the cost of what we have to do to get on to a better opportunity for the Business, which we still believe sits there.

Thanks, Tony -- last one for Bob. Bob, on CapEx, you were assuming around $250 million previously. What is that number now, and then what do you expect it to be, rough order of magnitude, next year?

Yes, I think as we look at the capital for this year, obviously as we're taking a hard line at when we're making payments and how things are coming up to speed, there's probably something that looks like, call it as much as $20 million or so, maybe even $25 million that could shift year to year, so that could bring the $250 million down by that in 2015. And then in 2016, we were previously talking about kind of getting back to our $120 million to $150 million kind of range. So, at a minimum, we probably start to look at the higher end of that range and maybe even just a touch above that for next year. Again, we're in the midst of beginning and reviewing our budget process, so I don't have good visibility to that. But that's our thinking right now.

Thanks a lot, Bob, appreciate it.

Our next question comes from Chris Manuel of Wells Fargo.

Good morning, gentlemen.

Hi, Chris.

Okay, so, I appreciate the color thus far on the plastics, on the containers business, but I want to drill perhaps a little bit deeper into each. Let's start with the plastics, if we can. The restructuring and the work that was going on -- I mean, when I think through the Business, what areas is this centered around? In particular, if I think of the high barrier food piece, that was -- a plant that was doing its own thing, so that's 20% of your revenue that's not impacted by this. It's probably not happening -- when I think through the pieces, is this primarily geared towards what you are doing in food and personal care, or can you give us some color there?

Yes, Chris, it's Adam. That's exactly where we're focused on. It's our targeted growth markets going forward, so, food, healthcare, personal care, and really trying to get our footprint in the most optimal spot from a geographic location and ability to support our customer standpoint. What this entails is moving lines that we have existing in our infrastructure to a more strategically located geographic footprint.

Hey, Chris, this is Bob. Just to be crystal clear here, this isn't impacting the high barrier foods business. This is really -- we're talking about our legacy plastic business here.

Right. Okay. That's what I thought.

So, the plan was, you were going to be relocating some equipment during 3Q/4Q. It sounds like now that's -- you gave us some color earlier on what the costs were, but maybe not as much as I was hoping for, with respect to why it's taking longer and what the pressure points have been that have caused you to increase your expense stuff. Is it that you've had difficulty getting site prep to move in? The volume doesn't seem to be hurting you, unlike maybe -- we'll talk about metal in a moment, but what are the issues here? Maybe if you get a little more color as to help us understand what they are, that helps us understand how long they could persist.

Sure. And what I would say is, number one, our new plant construction schedules are right on schedule. This does not have to deal with the new facilities that we're building. This is really about, again, kind of our high-volume, customer-specific dedicated assets moving from one plant to another to be closer to our customers. And as we started that process, which Tony kind of talked about earlier, there's a whole bunch of things that have to go right in order for that process to work smoothly, and we definitely have hit some bumps in the road.

If you look at what we've done historically in this business, we've had something like 20, 25 activities around line moves and relocations over time. We had an aggressive plan for 2015, something to the tune of 80 line moves and new lines being installed. We knew it was aggressive. We knew it was stepped up versus prior year. As you mentioned, Chris, and as Tony did as well, we have slowed some of those activities here for the back half, or the final quarter of the year, and we're going to focus on continuing to service our customers.

So, we have slowed down to some degree. When we stabilize, we'll reinitiate and we'll continue down the path. But one final step removed, I would say that we -- this program was really a multi-year program from a footprint optimization. We had expected to complete the process in 2017, so we are in the middle of it, and we do have a ways to go. But we'll get stabilized before we really reinitiate.

Last question on this before I kind of flip to containers: Are you buying from outside suppliers and vendors today to meet demand?

Yes, we are.

Okay.

In some cases.

Okay. In the metal side, again, I'm grossly oversimplifying this but my understanding was you were consolidating activity from a handful of plants into two locations -- maybe three, four, five into two. And then, that was new equipment going into the new facilities. So, I get that you had a big volume quarter here and maybe had to draw down more inventory than what you anticipated but, A, are the new plants building on line? And then B, perhaps what were the costs from this if you weren't going to take these down until the new one was ready to go? I guess I'm maybe a bit perplexed as to what the extra cost expense might have been.

Great question, and having read some of the write-ups this morning, I think this deserves some discussion, because the majority of the costs, which on the container side we knew about, we talked about, and we had in our forecast. So, the costs are basically all of the inefficiency. Recall that -- two things: We had two customers, sizable customers, that moved their fill to the Midwest, which tightened up our Midwest system. We also added the Van Can business, and so that all tightened up our system. And so, as you mentioned that we have a plan to deal with that by building a new plant.

But we knew, no matter what, the plant wasn't going to be there to help us this year. We were absolutely going to have higher costs to move product around to where it had to be for our customers, and to tighten, basically run less efficiently in the Midwest region where we needed to have the cans. So, that was all known. We talked about the $10 million to $15 million item.

The quarter had a couple million of higher costs in it, and that's just mix related. It's not anything's out of control. It depends what customers are pulling what product. So, a little bit higher costs in the quarter.

But the bigger point on the container side for the quarter was that we were having a boomer pack, and we were feeling very good. In fact, we really -- there was a point in the mid-quarter where we thought the metal food can business was going to help sustain some of the issues we were seeing in plastics. Unfortunately, our packs across the board stopped early. You had cold in the Midwest that stopped corn particularly, in the upper Midwest, and then you had water or moisture in California that stopped the tomato pack. So, while you had great growing conditions all the way up, everything looked record, it all kind of stopped.

Now, that doesn't mean it was a bad pack. We view it more as a normal kind of pack in terms of total volume, but it wasn't normal in terms of when it came in. It came in sooner and ended. So, that has more to do with the metal food can third quarter than did anything to do with cost and inefficiency.

Okay, that's helpful. So, then perhaps as we think about 2016, again, just to follow up then in the containers piece, you seem to indicate that some of these issues or problems would continue to linger through the year, but if the equipment is all running again in the first quarter as you kind of had suggested, or I think you had suggested, why would those continue to persist so long? Is there anything, perhaps, that's delayed or that we're not appreciating or realizing there?

Nope, the new plan is basically on schedule. We're expecting first cans off of it in -- off of the lines in the first quarter. I will say that we did have a very wet beginning season for building the building, so that schedule hasn't moved -- has definitely compressed in terms of the finishing of the building and equipment delivery. So, I would say the risk on that has gone up a little bit.

But in any case, it's sort of a Q1 we'd be getting first cans off. But because these are food cans, you've got to go through individual customer qualifications. None of this is news to us, by the way. We didn't talk a lot about 2016 when we first talked about it.

So, we're going to be going through qualification in -- by Q2, Q3 of next year. Some customers will get qualified and we'll start producing cans for them. It will begin to give us some relief, but it's going to be kind of incremental through Q2 and Q3. We should exit the year with full capacity relief from the new lines on, and the ability to get at some of the other capacity in the system that we said we were going to be taking out.

You said that was --

That's all on plan.

That's next year, Q2, Q3, you said?

Q2, Q3 would be the transitional time, when we're getting qualified and beginning to relieve the pressure. Then, by the end of the year, we'd expect to be shutting down capacity.

Okay. That's helpful. Thank you.

We'll go next to George Staphos of Bank of America.

Hi, guys. Good morning. I'll ask a few questions, and turn it over so that everybody can get in. I would say the first question I had, maybe piggybacking on Chris's question, how much incremental costs are we looking at in plastics and in containers, metal containers, for 2016 versus 2015? I know you're not in a position to guide now. I respect that. But is there a chance, assuming normal volumes, normal pack, normal economy relative to plastics, that 2016 earnings could be relatively flat because of these incremental costs, or how would you have us think about that?

Yes, they're good questions, George. This is my normal time where I do say we have not done our budgets yet. And as you can tell, there are a lot of moving parts, as there are every year. So, I think we will be getting a little ahead of ourselves to answer the question. I think it's a legitimate question.

What we are saying is you're coming in with a cost load, so I think there are going to be parts of 2016 that are going to look a little like 2015 in reverse, coming in a little bit heavy loaded on the cost side, and then getting some of the benefits on the back end. Where exactly that gets, unfortunately, is guidance we can't really give you yet with any kind of certainty around it. As to the costs, as I said, we're going to be somewhere in the $15 million to $20 million of the sort of incremental costs in the food can business.

This year.

This year, in 2015.

Correct.

And then, I don't have the exact number on that yet, but you are going to certainly carry that for the first half of 2016. So, I believe that number should be less next year, but I don't think it should go to zero. It certainly won't go to zero. So, right now I guess I'd take half of it as an assumption, but just recognize that's a pretty rough assumption.

Understood.

On the plastics side, I think it could be more comparable in number, because I think there is a possibility -- these costs really ramped up in Q3 and Q4. We're saying, at least our belief of Q4, we're saying that continued Q1 and into Q2. My own view is that I'm a little hopeful by Q2 we're beginning to ease those off, and we're beginning to get some benefits, but I think that's putting the cart a little ahead of the horse right now. So, I think it will be more comparable year on year in plastics.

Tony, can you remind me what did you say the total costs were for this year, just so I don't have to scroll back through my notes here, for plastics?

$15 million.

Okay, fair enough. I appreciate the comments there.

I remember from last quarter, maybe incorrectly so, and remained me of that if that's the case, but I thought that you were not -- you had said that there was really not a heck of a lot of upward surprise potential from the pack this year in the first place because of all the realignment. And so, explain why now the fact that the pack came in below expectations, you had, it sounds like, a hard freeze, you had wet issues, weather issues, moisture in the west coast, that it wound up being a negative factor. In other words, because you lost the incremental you thought could offset plastics.

Your memory is correct that what I said is that even if we have a boomer, that it's going to -- the conversion of that is going to be less than you would expect. I don't think I said there would be no conversion from that. So, by getting less of it, it certainly has an impact.

I think add to that, that there is a mix component here that what we really seem to have dropped is large cans, which on a per-unit basis is very significant. And so, a little bit of mix component, too. But nonetheless, we're only talking, in a pretty big quarter, some $3 million or $4 million of impact from it. So I would still say that it was -- it could have been a lot worse if we didn't already have some of these costs that were embedded into the system at that time.

Okay. I guess my last question, and I'll turn it over: We understand ultimately as you'd presented it why you want to move to the tight production capacity model. Does it nonetheless add risk to the system now that you are going to have operations that are so linked to the customer that perhaps there's a leverage risk down the road? You've hitched your wagons to a larger degree with certain specific customers in the end markets, and that could wind up being a problem just as the integration factors are behind you?

And I guess the related point, Tony, and I mean this with all due respect, obviously you've looked at lots of plastic acquisitions over the years and you've made a number. If you were looking at your existing plastic packaging business, clean slate of paper, would you actually find it an attractive business to acquire from a Silgan standpoint and why? Thanks, guys. I'll turn it over.

Good questions. So, the first one is that as to the question of getting closer to the customer and the risk of that -- first of all, I don't want to overstate the point. We are not going to an all on-site model. What we are doing is getting a little more near site and on site. It's not binary in that regard.

Secondly, I would say that this is what Silgan has done from its beginning. You look at most of our businesses, and where we have great success we're very near the customers, and we service the hell out of them. And that's what we're going to do in the plastics business, is we're going to enhance the service aspect of what we do. We're going to get close to the right customers.

Admittedly, we've just stubbed our toe here on that, and that's why we're making the -- taking care of customer at this moment is so important and focused on it. But long term, we believe there's a great opportunity there, and we can grow by doing that. But again, the idea is not all on site or near site. It's only that we're open to that where it works with a certain select customer.

The second one is, how would I view our Business from the outside? I think it's -- I would view it as unproven thus far. I think -- I can look around at where we do a good job on service. Again, we're talking about a couple of plants throwing us off. There are a lot of plants that are doing a great job right now, and customers are being well serviced through them. I look at the team we have in place, including the changes we've just made, and I really do believe that we have the opportunity to be a much higher service model in customer support than others in the market. So, the answer to the question is, I have looked, but I would definitely -- I would be waiting to see the proof, which I know we all are.

Thanks, Tony.

Our next question comes from Ghansham Panjabi with Robert W. Baird.

This is actually Matt Krueger sitting in for Ghansham. How are you guys doing?

Good, Matt.

My first question revolves around some of the capital spending and free cash flow. How much total capital has been spent on the optimization efforts across the businesses? And then, do you have any update on free cash flow for 2015, given all the moving pieces?

Yes. So, the update on free cash flow, maybe I'll take them in reverse, is that we're -- we've reiterated our approximately $100 million free cash flow. So, what you've got there is a little bit of a reduction in the profitability being offset by the timing of which capital gets spent. So, kind of moving from 2015 into 2016, aggregate totals still being pretty similar but moving some, call it, $20 million or so between the years, really between Q4 and Q1.

In terms of the capital dollars spent on the programs, the bulk of it is associated with the $100 million spend or so relative to the can plant. And then you've got another $25 million in the plastics plant, and then you've got some equipment rebuild that pales in comparison relative to those other two pieces of costs.

Okay. That's helpful. And then, can you guys provide a brief update on the current European market dynamics and kind of the pricing environment over in that region? What are your European capacity utilization rates and do you foresee any need to add new capacity moving forward?

Sure. As you know, we're primarily focused on kind of central Europe to the eastern markets, so I would say pricing has been a bit more stable over the last year or so, although I would say relative to the broader market, we probably haven't seen anything outside of what the broader market is seeing. Some of that is nuanced by particular markets that we're in -- so, some better than others. I think our capacity utilization is not constrained necessarily right now, so that near term, we don't necessarily see any broad need to build the incremental capacity in that marketplace. So, by all accounts, from where we were a few years ago, I think we're feeling better about that business -- still think it's got room to improve, but certainly on the improvement side of the ledger.

Okay, great. Then one more question, and I'll turn it over. Given that BPA non-intent seems to be gaining some momentum, both in Europe and North America, where are you in terms of the adoption of the technology across your product portfolio? And then, what commentary or feedback are you getting from customers regarding the BPA non-intent product?

We've been working on BPA non-intent coating for eight-plus years now. We have done test packs over and over again of almost every package that we hold, product that we hold. We've spent a lot of time on this, mostly because we were concerned about kind of the consumer advocacy side. I will spare you all that. Nothing has changed on the science here, so you've got kind of a relatively small group of scientists who are pushing an agenda here and a lot of regulators who are saying, at the current levels, that as a (inaudible) it is not a lot to worry about.

Nonetheless, I think that consumer continues to hear more and more about it. Our view is that at some point in time, the change is going to happen. So, the answer is that we have -- solutions exist for most of our product lines. There are definitely some vegetables, soups that are the more aggressive on the coatings that we still have a ways to go there. I'm sure in time that will get resolved. But it may mean shelf life is jeopardized. I think it certainly will mean the robustness of the package is somewhat less than it was.

But the opportunity exists there. Today we've got -- if you look at our portfolio, some 30% of it is -- are pet cans, so that's not an issue at the BPA. We're probably another 15% of what's already converted, and our view is probably next year another 15% of what's left there would get converted. So, probably by next year, we'll be 50/50 in terms of what is BPA non-intent versus not.

Customers are all over the board on their view of this. Many are just waiting to see it play out because they see the science argument the same way I just portrayed it. Some see it as we've got to react to the consumers' view on this and make changes.

So, it's a bit over the board. I would agree with you that the activity seems to be building a little bit. Certainly, the French law has some impact on that. Prop 65 in California has some impact on that. So, we're hearing more about it. We'll do some conversions next year. It looks kind of like 50/50 by the end of the year, including the pet food side.

Our next question comes from Debbie Jones of Deutsche Bank.

Hi, good morning.

Good morning, Debbie.

I was wondering, industry data this quarter there's a big shift from three piece to two piece, and I think a lot of it is the new capacity that's come on. But can you just talk about the trends that you are seeing in your Business? You said there's kind of a bifurcation how your customers feel about BPA, but maybe talk about how they feel about those two different can sizes or cans.

Sure. What we have said before is the case is that the majority of what we make are some form of a two-piece can. Almost three-quarters of what we make is a two-piece can. So, there's very little change in our system, because whatever could be a two-piece can is a two-piece can. There are some areas where it's going to be three-piece because of the size requirement or other reasons for that.

So, more or less what is in three piece today is there for a reason. There's not a real shift on that. Customers are not looking for a shift. The reason it converted over time is it is a lower cost solution on two piece, but it does have some trade-offs for certain applications.

I don't see any big shift on that. I think you're right, the main change is that you had new two-piece line built in the US to service a particular customer who had been primarily serviced on three piece. That was a can that could make a change. But there's not -- in our system, there's not a lot of cans that meet that description.

Okay. And then my second question, not to beat up on plastics, but the $2 million you called out in volume, is that something that was specifically related to the moves you were making, or is that something we should expect is lost and will not come back?

It's actually a couple of things. One, we see some continued weakness in certain markets that we serve, and that has continued, for the most part, throughout the year and will continue in our expectation in Q4. We also have gone out and secured volume for our customers in some cases. We've also turned some business back to customers. So, a little bit of it is self-inflicted with our footprint rationalization as well. It's a combination of both.

Okay. Thanks. I'll turn it over.

Thank you.

Our next question comes from Anthony Pettinari of Citi.

Good morning. Just following up on plastic containers, outside of the footprint optimization efforts, which are internal, are you seeing external pressures in any plastic container categories -- healthcare, consumer, et cetera -- or changes in competitive behavior that are impacting the business outside of some of the internal headwinds?

No, Anthony, not at all. I think what we see is, again, the target markets that we're intending to grow in are actually doing quite well. There is some softness in other markets. Some of our household and ag chem business is a little bit softer, but for the most part, the target markets that we're focused on are doing fine -- food, healthcare, personal care, et cetera.

Okay. That's helpful. And then just following up on Debbie's question, the $2 million in volumes in this segment, is that business that was just where you saw a volume decline, or did you walk away from business because it became less attractive from a margin standpoint, or are you shedding volumes? If you could give any color there?

That's a good question. It's a combination of things, because the answer for Debbie was really versus our expectations. If you go back a step and talk about our portfolio rebalancing efforts that we've been doing the last couple of years, I think that's maybe a better answer for your question.

We have left certain pieces of business back to the market because of the profitability of that business. Part of our year-to-year comparison is that we rebalanced our portfolio. Another part is market softness in certain markets, and then obviously, by giving certain orders back to customers, they've gone out and secured that business elsewhere. It is a combination of those three attributes.

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

Our next question comes from Scott Gaffner of Barclays.

Thanks. Good morning.

Good morning, Scott.

Just following up a couple of questions on the plastic container business, can you talk a little bit about your competitive advantage within the segment? I think you mentioned there was no other large, high-quality competitor, but what is it that really makes you stand out there?

I don't know that I said that. I think what I said is that we don't think anybody has really nailed the service model that this market needs. And I intentionally said -- I didn't say other than us. I believe it's still open for many to grab. We'll see who gets it.

I think that what we have said all along is what we are very good at is new product launch for almost any kind of package that you need in the plastic bottle market. We've got diverse technology sites, decorating capabilities, et cetera. So, when you are trying to get a new product out launch, et cetera, we've got the right capabilities to get that done, and that's been a really good opportunity for us. But that becomes more and more of a service model.

The customers need it quicker, they need it better, they need certainty. They need you to help them more because they've got a lot on their agenda, and so they need you to be bulletproof in providing that capacity and doing it in a very timely manner. We have to enhance ourselves there as well. I was not trying to imply at all that we necessarily have that solved. What I said is I think we've got the right people in place, and once we're done here, we've got the right assets in place that I believe we can do it.

Okay. And if I go back a few years -- well, just now on this call you said you made some management changes within the plastics business. Did you make management changes a few years back? I remember this business was having some margin difficulties then as well.

Yes, we did.

Okay. So, I guess my question is more around, then, organizational support for this segment. Obviously, metal food containers is a much larger piece of the total Company, and you're making optimization changes there as well. How much of this do you think is current management change that you had to make within this segment versus maybe lack of support from the broader Organization for the changes?

I would not -- my view is that it's not the latter. It's not immediately clear. I think what the broad Organization could have done is insisted on a slower path here, but that had its own trade-offs. Even on that, it's not clear to me that that would have been the right answer, but that's probably the only thing.

In terms of support, et cetera, let's remember this is a $600 million business. It's got full capability. We have 2,300 people who have been in this business most of their careers. So, it's not -- even though it is not our largest business, it's not a fly-by-night operation. They know what they're trying to do.

Again, I've got to repeat, we knew problems were going to come up. We don't really know how to forecast them and budget them, but we knew problems were going to come up. These are worse than we thought. It hit us a little quicker than we thought, but this was -- some level of this was inevitable in what we're trying to accomplish.

Finally, management change, I think really the key there is, our view that the changes we've made will just make us that much stronger for the kind of customer service model that we want to get to.

Okay. Fair enough. Last question: Couple of people asked about the working -- I'm sorry, the CapEx shift into 2016. But when you think about the businesses there, any significant changes to working capital maybe in the first half of 2016 because of these slower shifts to the new capacity, or maybe even it's lower because you're buying more in the outside market?

Yes, I think we kind of came into the year thinking that working capital was probably a little bit of a use of cash for the reasons that you just suggested, kind of around managing the conversion here. If anything, that probably shifts a little bit to the first quarter, but I don't see that as really being a meaningful change one way or the other.

Okay. Thanks, Bob.

We'll go next to Chip Dillon with Vertical Research Partners.

Hi. Yes, good morning. The first question is: Obviously you, from what you are saying, you are going to be quite busy from pretty much the next year. I think by this time next year, a lot of this will have sorted itself out in both the plastics and the container division. But as you think about the next six months or so, does the challenges of making sure that a lot of these operations do get back to their correct footing or where they need to be, with all the changes, does that make any difference in terms of your view toward M&A at this point, in terms of perhaps entering a different type of rigid business?

No, we -- again, we knew we were in the -- again, the amount of work involved here is not a surprise to us. There's no news there. Again, I don't want to make light of it. We're very focused on it, but we're in the business of focusing on a lot of different things and different businesses who are always active in doing something. So, it does not change our view on that either way.

Okay. So, you still feel you have the same capacity as you always did to look at what's out there?

Yes, we do. And further, we're quite optimistic on the long term for our businesses. That's why we're making these investments. I want to go further even and say we feel, while there may be bumps along the road that we're feeling, what we're doing we believe in, and we believe that it's a stronger business on the back end, and that business will always have the opportunity to improve through the right M&A, which is how we have grown all along.

I got you. And maybe I'm simplifying this too much, but it looks like both the third and the fourth quarters are about $0.15 less than maybe what we would have thought back in July. So, if I guess you would verify that and then clarify that. Then, as we look at next year, would you expect that rate of impact to start to be reduced in the first quarter, and then maybe be down by more than half by the third quarter and pretty much go away by the fourth quarter next year? I'm not trying to hold you to that, but I'm just saying, is that roughly the pattern you would expect to see?

First of all, you're correct in your analysis. You're kind of $0.14 in the third quarter and $0.14 or $0.15 in the fourth quarter. So, that part is right. I would say one thing: There is a little bit about the pack season in the food can business that affect that Q4. So, that's not all incremental spend, but the majority of it certainly is. And I think the answer to that is that we are expecting a reasonable amount of continuation into Q1 and Q2.

The only other point there is we have a little bit of cost around this in Q1 in the food can business already in 2015. So, now you are going to cycle against a couple of million of those costs that were already in the comparative period.

Okay. So, maybe $0.10 to $0.15 in each of the first two quarters of next year, roughly, and then it starts to drop back?

That's correct.

Actually, in the third quarter, it might even go the other way, right? Because you had that sort of full $0.14 impact this year's third quarter, and by next year the impact should be less. So, it actually might be a tailwind for you.

That's correct.

Okay. I see. That's very helpful. Thanks, guys.

Thank you.

Our next question comes from Mark Wilde of Bank of Montreal.

Tony, I hate to beat plastics to death, but I got one more question here.

Fair enough.

I think I heard you guys say earlier in the call that you had actually expected the plastics restructuring to actually carry into 2017, and now you are also talking about delaying the near-term moves a bit. So what kind of headwind can we expect to be there yet in 2017 for plastics?

Yes, I wouldn't view it that way. It is true that this program is going to take us into 2017 for sure. Again, this is a pretty major footprint (inaudible). That's not a surprise, either. We knew that, that to finish this we had more still to do.

But I think what you are -- right now, you're going through a lot of excess costs, more than we thought, in view of customer issues. At some point we believe that's going to fade away as we get lines moved and stable again. So, I think through 2016, as Adam said, we expect that we will see that fade away. Yes, it's true that the comparison in the back half, if that is what happens gets helpful, plus you start to get some savings. So I think as you get out into 2017, you're going to get some of the savings, which you've already done, you are going to be shedding the incremental costs that you have been incurring, and then you'll be doing some other stuff that will create some of its own costs. But the net of that ought to be helpful to us in 2017.

Okay. All right, I got it. Then just in both plastics and metal, by the time we get into 2017, would you want to quantify about how much actual benefit we're getting?

Well, we did, when we started all this, what we said is that we're going to be getting kind of our 15% to 20% type returns on the capital that was being spent, and that capital was some $25 million on the plastics side and $100 million-ish on the can side. So that's kind of the magnitude of improvement we were out working on. But I think, again, on the plastic side, there's a lot more to it than that. It's the savings, but it's also kind of getting ourselves positioned for the future. It was going to be a hard, long-term answer for us for some of these plants, given where they were and where the customers were.

Okay. That's fair. Just one last one, if I could? I think it's been about four or five years since you did Vogel and Noot. We haven't heard a lot about that. It seems like it's generated less leverage than you would have expected. Any lessons you take away from that one?

When you say less leverage, maybe I'll come back to you, but first of all I'd say that business was certainly -- did very well at first, then Europe went through whatever Europe has been going through, and then we had a very rough path. So, it was definitely disappointing to us, let's say, two years ago. Last year it actually came back quite a bit, had a really good pack. In fact, what we said was we didn't think we were going to be able to compete against that pack. In fact, that's not true, and the business is going to actually -- should improve itself just a bit this year. FX is going to mitigate a lot of that.

I would say that the big story line in that business is it's been pretty good for us. We think it's good for us to have exposure in those markets. I think the big story line there was growing into developing markets, where we really believe that Russia, for example, had a very sizable market that they were going to be can consumers, et cetera. Clearly, we're much more cautious about that right now.

That doesn't mean we're not watching it and looking. We've got two plants there. It's pretty hard to say we've got this strategy now where we're going to become the dominant player in Russia and invest in five new plants. That doesn't seem as obvious. So, the strategic element of it is a little bit different, but we've got a really good team. They're very entrepreneurial. They find ways to get it done. We see it as a plus to the overall portfolio.

That's really helpful, Tony. Good luck in the fourth quarter and good luck going into next year.

Sure thing. You sure you don't want to talk about plastics anymore?

Good.

Our next question comes from Alex Ovshey of Goldman Sachs.

Good morning, guys. Actually, I have a few plastics ones for you, late in the call. The two plant closures, I may have missed that, but I think that's a new data point. Was that always in the cards, or did something change in the quarter that precipitated the decision to close the two plants?

Yes, those two plants have always been part of our overall program. Again, it was a much broader multi-year program, but the rationalization that we talked about in the press release, those have been planned and implemented.

Got it, Adam. And then just thinking about the market exposure in the plastics business, so the targeted markets -- personal care, healthcare, food -- can you say what the growth rate has been for you there, and ultimately what percentage of the business that currently represents, and over time, where you see that number going to, as you execute on this restructuring program?

Sure. We've talked about -- first, one of the two new plants is a new piece of business with a new food customer, so there has been growth in there. If you talk about the relative market, these are low growth markets. The food market is pretty low growth, and personal care is pretty low growth. It's more about position in that market. Because Silgan is such a sizable food and packaging supplier across our portfolio of product, we view that as a really good area where we can help the customer, we can work closely with customers to forge longer-term solutions.

So, that's an area where we see growth opportunity on our own side, but the market will be a couple percent growth. Personal care is kind of that same level of growth. But again, we were seeing very solid sales growth. We're slowing that a little bit while we go through the optimization program right now. But we do see the opportunity, a good sales force in place, and if we're successful in having service model that I'm describing to you, we'll have a really good solution to sell.

Got it, Tony. Thank you. I will turn it over.

We will go next to George Staphos of Bank of America.

Hi, guys. A couple of last questions on plastics. Can you remind me, the reimbursement impact in the third quarter, what drove that, and was that something you called out in the second quarter? I don't recall. That's question number one. Then a question on level of competitor activity there, but I'll come back in a minute.

On the customer reimbursement, we called that out last year in Q3 of 2014.

Oh, that's right.

What that was, was a contractual obligation of payment for the reimbursement of historical costs in the development of a new product that the customer ultimately decided not to take to market.

That's right. I do recall that. Sorry about that, Adam.

Now, I want to come back -- I think you were answering Debbie's question, or maybe Anthony's, in terms of the volume factor. So you said there were three components. You said you rebalanced the portfolio, and then you reintroduced some volume back to the market. That was number two. And then customers then found alternative supply. Did I get that all correctly?

Yes.

Okay. So what's the difference between the second and the third? Is it that because you reintroduced some volume back into your market, the customers were affected, chose to then find alternative supply for business that you already had and wanted to keep, but they wound up moving elsewhere?

That is correct, yes.

Okay. Again, not to be pedantic, but isn't that a sign of maybe competitive activity being more intense, and if not, why not?

No, I don't think so. I think this is us identifying the challenges that we were facing and going proactively to our customers saying -- this is going to be a problem for you. In order for us to, again, help protect our customers from the challenges that we're facing, we've asked them to go out and secure the other business. So, I don't view it as a competitive activity at all. This is just us doing our best to protect our customers.

Okay. Even though it was some piece of business you would have wanted to keep if you could have?

That's right, sure.

Okay.

Knowing that we're going to hurt the customer if we don't give them room to go solve the problem.

Okay. Fair enough. Thanks for the clarification there.

Then last thing, can you update us on what you think the cash impact of all the rationalization and realignment is going to be this year, and what you think the cash -- not talking about capital expense, now, I'm talking more about people costs and the like, what it will be in 2016? Thank you, guys, and good luck in the quarter.

George, there's roughly $9 million of rationalization charges that we have recorded. The majority of that in both plants in plastics are equipment write-downs, so non-cash. There's about -- leaving about $2 million of cash charges for that. That kind of comes in two big slugs. There's a lease that will be ongoing over a period of time that will capture some of that. And then there's the severance payments that will be paid out to the folks that are let go.

Okay.

And then I think we said, in the metal food can side, we said when we announced the new line that there could be another, we estimated, $10 million of spend as we get to shutting down some capacity.

Okay. Thank you very much.

Sure.

We'll go next to Adam Josephson of KeyBanc.

Thanks for taking my follow-ups. I appreciate it. Just one more on next year just to make sure I'm square on these incremental costs. You talked about plastics costs being flattish next year compared to this year. I think metal can, you said, might be $10 million lower or so. Is that correct, roughly?

Yes, that's what I said, but don't forget that I said on the metal food can side that I don't have that exact number. We haven't really done that.

Sure.

But, yes, that is the guess that we made, yes.

Just aside from that, Tony or Bob, anything, aside from uses of cash, any notable items next year that might move the needle -- tax rate, interest, anything else?

Pension may be the only one that I would point out as being probably still unknown at this point, (inaudible) because we have to wait till the end of the year to see what the discount rate is. I think it's anybody's guess as to what direction that's going right now. The underlying feeling right now is that pension expense is probably a bit of a headwind for us next year, largely because asset performance this year hasn't been what we would have expected, and that's been true across the market. I don't think we're unique in that case. Order of magnitude could be, call it, $3 million to $5 million. So, still income, but less income.

Got it. Thanks, Bob.

Tony, one last one: Just in terms of managing the Business, you're obviously in three business lines, numerous geographies. Has the Business gotten any more difficult to manage than it was, say, 5, 10 years ago?

Well, good question. Certainly, as we went international, that added a scope to it. Beyond that, I don't really think so.

I think it's good to remember how Silgan manages. We run a holding company. We've got very complete management teams in each of our businesses. So we have the luxury here where we don't have to sweat the day-to-day details. We can think more strategic. We can certainly stay involved with the important points that are happening.

So I think our structure is perfectly suited for increased complexity as we go forward. So to the extent it has, I think we're very well structured to deal with that. I don't think there's anything about that and what's going on right now -- the plastic issue that we're facing, as we said, was going to come up in some form in any case. It's a little more expensive than we thought. But I don't attribute that to the fact that we've got more complexity and more issues to deal with.

Thanks a lot, Tony. Best of luck.

You bet.

We have no other questions at this time. I would like to turn it back to our presenters for any additional or closing remarks.

Great. Thanks, everyone, for your time. We appreciate it, and we look forward to talking about Q4 and 2016 in more detail early February. Thank you.

That does conclude today's conference. Thank you all for your participation.