Silgan Holdings Inc (SLGN) 2016 Q3 法說會逐字稿

Good day and welcome to the Silgan Holdings third-quarter earnings results conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Kim Ulmer, Vice President and Controller. Please go ahead.

Thank you. Joining me from the Company today I have Tony Allott, President and CEO; Bob Lewis, EVP and CFO; and Adam Greenlee, EVP and COO. Before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward-looking statements.

These forward-looking statements are made based upon Management's expectations and beliefs concerning future events impacting the Company, and therefore involve a number of uncertainties and risks, including but not limited to those described in the Company's annual report on Form 10-K for 2015 and other filings with the SEC. Therefore the actual results of operations or financial conditions 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 our third-quarter earnings conference call. The agenda for this morning will focus on the financial performance for the third quarter, and then we'll review our outlook for the fourth-quarter of 2016. After the prepared remarks, Bob, Adam, and I will be pleased to answer any questions that you may have.

As you saw in the press release, we delivered adjusted earnings per diluted share of $1.23 for the third quarter, which was in line with our expectations and slightly lower than prior-year adjusted earnings per share diluted share of $1.26. We remain on track with our footprint optimization plans. The qualification process in the Burlington plant is going well, which allowed us to shut down the LaPorte plant earlier this month.

We've completed our internal startup processes, and are well under way with commercial qualifications. A majority of the customers who will be supplied from this plant have completed commercial qualification, and most others are in receipt of cans or preparing to make qualification runs.

Our plastic business is proceeding according to the revised footprint optimization plan. We completed key incremental line moves during the quarter, allowing for the closure of the Cape Girardeau plant at the end of September. This is the second plant closed this year as we continue to rightsize this business.

Volumes in our metal container business were flat for the quarter as compared to the prior year, as a result of stronger sales for pet food offset by a weaker than anticipated seasonal harvest in Europe due to unfavorable weather conditions across the region. Our closure business experienced strong volume growth due to demand for single-serve beverages in the US, partly offset by softer demand in Europe as a result of poor weather conditions.

As anticipated, operating performance in our plastic business continued to improve sequentially as we moved through a critical stage of the footprint rationalization program. Based on our year-to-date performance and our outlook for the remainder of the year, we're narrowing our full-year estimate of adjusted earnings per share to a range of $2.70 to $2.80.

This estimate is within our previous range, but is to the low end, to reflect the completion of the pack seasons in both US and Europe by the end of the third quarter. With that, I'll now turn it over to Bob to review the financial results in a bit more detail and provide additional explanation around our earnings estimates for the fourth quarter and 2016.

Thank you, Tony. Good morning, everyone. As Tony highlighted, we delivered quarterly results in line with our expectations. While there is still work to be done, we're making good progress on our footprint optimization plans that will allow us to better serve our customers in 2017 and beyond.

On a consolidated basis, net sales for the third quarter of 2016 were $1.140 billion, a decrease of $63.9 million as sales in each of our businesses were negatively impacted by the pass through of lower raw material costs. Net income for the third quarter was $69.8 million, or $1.15 per diluted share, compared to third-quarter 2015 net income of $70.3 million, or $1.16 per diluted share.

Results for 2016 and 2015 both included rationalization charges of $7.8 million and $9.1 million respectively for a total increase to adjusted earnings per diluted share of $0.08 and $0.10 respectively. As a result, we delivered adjusted income per diluted share of $1.23 in 2016 versus $1.26 in 2015.

Interest and other debt expense and the effective tax rate for the third quarter were largely in line with the prior-year quarter. Net capital expenditures for the third quarter of 2016 totaled $39.7 million, compared with $53.1 million in the prior-year quarter. And year-to-date net capital expenditures totaled $142.6 million versus $151.2 million in the prior year.

Additionally we paid a quarterly dividend of $0.17 per share in September with a total cash cost of $10.5 million, and repurchased shares under the stock authorization plan during the quarter for a total purchase price of $7.2 million. Share repurchases for the year-to-date period were $9.6 million.

Turning to the specifics of our individual businesses, the metal container business recorded net sales of $797.4 million for the third quarter of 2016, a decrease of $48 million, or 5.7%, versus the prior-year quarter. This decrease is primarily a result of the pass through of lower raw material and other manufacturing costs and a less favorable mix of products sold.

Volumes were essentially flat compared to the same period a year ago, as higher pet food volumes were offset by a decrease in European volumes as a result of poor growing conditions for fruit and vegetables. Income from operations in the metal container business was $98 million for the third-quarter of 2016 versus $106 million in the same period a year ago.

The decrease in operating income was primarily due to the unfavorable impact from the contractual pass through of indexed deflation, higher rationalization charges, and a less favorable mix of products sold, partially offset by better operating performance. Net sales in the closures business decreased $3.8 million to $211.9 million for the quarter, primarily due to the pass through of lower raw material costs partially offset by a 2% improvement in unit volumes.

Unit volumes increased largely as a result of continued strong demand for single-serve beverages in the US, partially offset by negative volume impact from wet weather and poor growing conditions in Europe. Income from operations in the closures business for the third quarter of 2016 was $28.4 million, up $1.3 million versus the prior-year quarter. This improvement was primarily a result of higher unit volumes and manufacturing efficiencies.

Net sales in the plastic container business were $130.3 million for the third-quarter of 2016, down $12.1 million versus the prior-year quarter. This decrease was largely due to lower unit volumes of approximately 6% as we continue to rebalance our portfolio in line with our footprint optimization program and the pass through of lower raw material costs.

Operating income increased $8.1 million to $800,000 for the third-quarter of 2016. This increase was primarily attributable to lower rationalization charges and improved manufacturing performance, partially offset by the lower unit volumes.

Turning now to our outlook for the fourth quarter and the rest of 2016. Based on our year-to-date performance and the outlook for the remainder of the year, we're narrowing our estimate of adjusted net income per diluted share in a range of $2.70 to $2.80 per share, which excludes the impact from certain adjustments outlined in table B of the press release. We're also providing a fourth-quarter 2016 estimate of adjusted earnings in the range of $0.43 to $0.53 per diluted share.

This estimate compares to $0.48 in the fourth-quarter of 2015, which was favorably impacted by a lower effective tax rate and the absorption benefit from a sizable inventory bill in the metal container business. Consistent with prior guidance, we continue to forecast free cash flow to be approximately $175 million, largely a result of incremental capital spending across the various footprint optimization programs throughout the business along with the construction of the three new operating facilities.

That concludes our prepared remarks. We can open it up for Q&A, and I'll turn it back to Ruth to provide the directions for the Q&A session.

Thank you.

(Operator Instructions)

Chris Manuel, Wells Fargo Securities.

Good morning, gentlemen. I wanted to start if I could and maybe just think a little bit about the -- I know you're not excited right now talk about 2017, but we're wrapping up here in 2016. If I look at a lot of the USDA data, it would suggest that plantings and food that was packaged, processed in North America were really big the last couple of years.

And perhaps that inventories of finished goods that your customers have sitting already canned or ready to be canned are pretty heavy. I guess our interpretation of that is that perhaps plantings might be down the next year or two to get things in balance.

If I look at Europe it's almost the opposite impact. How would you think about any discussion you've had with your customers or what not as to what plantings and thoughts regarding that for 2017 are, appreciating that most of the stuff is done this year so they are already thinking ahead to what they would have to do next year to get to where they want to be?

Sure. Chris, Tony. I will respond first on that. A really good question. As to conversations, I would say that has been pretty light.

We would have not gotten a lot of specific items from the customers on what they are thinking there. I think on general trends what you say is probably about right. The pack in the US broadly was a pretty good pack.

We had a couple of customer-specific things that made it a little less than we had been expecting, but there was nothing about the growing season in the US that was anything other than what we would call normal. I think generally customers have the inventory that they want on the US side. I think you're absolutely right on Europe, which of course is much smaller to us, so it will have less impact when you think about 2017.

But it was pretty soundly a bad pack in Europe everywhere. And certainly when I speak to the markets we serve I'll say everywhere, it was just off across the board. I do think inventories are low for our customers. I would expect that they would be planning on more pack next year.

Definitely in Europe I grew the completely, US I think a little bit more to be seen. But your question, it's very possible the answer to that is yes. That you'd see a little bit less on the plan for next year in the US because of inventory.

Okay, that is helpful. Second question I had was if we were to -- I'm sure you're going to get a lot on the plastics business. But if we're taking a look at the -- I know over the last few years we've often talked about lumps being where you had business that was planned and going to be kind of in/out, move stuff around, that wins would take a little while to materialize.

Seemingly over the last two years or so all the lumps have been pretty big and pretty down, this quarter, again, following that trend. Do you feel we are close to the business losses that you've planned in there being done? And when do we hit an inflection point perhaps that we see some of your new business wins and hard work begin to materialize?

Chris, it's Adam. Good question.

I think that the 6% unit volume decline versus prior year is about where we expected, and is very similar to what we saw in Q3. I would say we are essentially at the bottom point of our balancing of the portfolio, our rebalancing of the portfolio activities.

As we talked previously as well, we had pulled back a little bit on our sales effort as we were going through some of the operational challenges. We are now out in the market actively selling and winning business today. I think that we're just cycling over a period of time where we did decide to walk away from some business, and as we go forward you will start to see some growth in our plastics business.

Okay, thank you. Good luck.

George Staphos, Bank of America.

This is Victoria Martin standing in for George Staphos. I have a couple of questions. Going back to the plastics, we're wondering if the 6% volume decline that you are seeing is purely driven by the rebalancing work that you mentioned, or is there any kind of volume attrition that you would've rather not had?

It's almost entirely attributable to the balancing of the portfolio. Again, as we've talked about on the previous calls, we have spent a great deal of time and energy this year insulating our customers from some of the challenges that we faced.

Those customers have stayed with us. We've done a nice job on the customer service side maintaining our relationships and in some cases strengthening them. Really it's about the rebalancing of the portfolio and the balance of the business is in fairly good shape at this point.

Okay great. Thank you for that.

Also, how do you stand on your inventory heading into 2017? Were you able to produce at a level to maintain cushion for the remaining integration and offboarding work with new plants and customers?

I'm going to assume that question goes to all parts of the business. So I think I'll start on the can side and say that the -- certainly in Europe because the pack was shorter than we thought the inventory was a little high, so we probably need to work some inventory off. That's part of what we're thinking about in our fourth quarter numbers for Europe.

In the US inventories are high. These, you'll recall as we were getting ready for Burlington plant, we had to drive up inventory a fair amount. That will be a little bit longer process for us to work off those inventories, and probably into and through all of next year we'll be slowly working inventories down in that business.

In the closures side because volumes have been so strong, inventories are actually quite light. We'll need to work on inventory balance, particularly on the plastics side of our closures business.

And then on plastics I would say there's really no significant shift around that. As we had to move lines we did built some inventory for those lines moves. That's a pretty select part of the market. I don't know that there's a big inventory story there; perhaps a little bit of work off as we get that ramping back up.

Okay great, thank you. One more and I will hop back into the queue. What are your thoughts on steel prices for tinplate and where that is headed, as well as on resin?

Okay, we'll take that one and then we'll move on. On steel price we are definitely everywhere all markets we are hearing a fair amount of effort towards inflation of the cost. A lot of the underlying costs have inflated.

I will say this is very early. We are not through our negotiations, so we really don't know the answer, but I think there's no question that steel is going to be up. It's going to vary a bit by region.

Beyond that I would just say if you take what we know right now it would sound sizable numbers, mid-single digit all the way up to perhaps double digit, again depending on region. That is what we're up against at this stage, and we're working that as we can. I'll let Adam on the resin side

Sure, and just starting with Q4 on resins, there are price increases that are in the market right now for our primary resins. We'll see how that plays out through the fourth quarter.

So it could be a slight headwind for Q4, but as we look out into 2017, the expectations are that our primary resins will be essentially flat. There is additional capacity that is slated to come on board in 2017, and we will see how that is on boarded and participates in the market for next year. But at this point we're assuming essentially a flat resin impact for 2017.

Great, thank you for that.

Adam Josephson, KeyBanc.

Good morning, thank you. A couple on the tender. Can you, Tony, talk about the timing of it? Obviously you announced it a week before earnings.

I think the last tender in early 2015 was after 4Q results, after you generated the cash at year end that you always do. Can you help us understand why now in terms of the announcement of the tender?

Sure. Although I wouldn't read too much into that. I think basically there is narrow windows of time that work for us. We have to have a pretty good sense around earnings so there are no surprises on that.

We have to have a pretty good sense around free cash availability. In this particular case because our leverage is to the low end of our range, there is little bit more room in any case to do it. So it seemed to us it was the right time. The leverage was low, the cost of capital is pretty cheap.

It seemed like the right decision for us to do to return some cash back to shareholders. Again, it should not be read as anything more than that about what do we view of acquisition opportunities, et cetera.

This fits very well in our overall capability in terms of borrowings for the growth we want to do for the business. It's just we've got multiple levers as we've always said and we're pulling this one at this stage because it really doesn't get in the way of acquisition or organic investments that we want to make.

Adam, this is Bob. What I would add to that, you benchmarked it against the last one, but in fact if you look back over the course of our history of doing share buybacks we have done them at the end of the year in previous situations as well. I think it's exactly what Tony described. It married up from a timing perspective where it made sense.

Thanks. Just two related to that, One on leverage comment. I think you are range is 2.5% to 3.5%, and as of the end of 2Q I think you were at 3.8%, but presumably you were expecting to get 3%-ish by year end. Am I in the right ballpark?

Yes, that is pretty typical. 2.5% to 3.5% is the range that we talk about often. We do lever as we go through the year for working capital. We're right at the height of that peak right now, so to speak.

And all the free cash flow gets generated in Q4. So we would come back. And even with the impact of the tender, assuming that it got fully subscribed, we would be well in the stated range.

And let me just add, this is Tony. I just want to add one thing, that 2.5% to 3.5% has always been meant to be a bit dynamic. And I'm not trying to say we're leaving that number completely behind. But that was always established based upon a balance between what we thought the equity market could stand of leverage versus a business that is highly predictable, highly strong cash generative.

We've always said that the business itself could sustain much higher levers numbers, it's a question of what is the equity market willing to bear on that. I think on balance the equity market is obviously more willing to accept leverage right now at low-cost capital. So my own view is that you'd want to be a little bit higher in that range now on leverage and that you get pretty inefficient as you drift down to the low end of that range.

Thanks, and just one more related to that. If you end the year at call it three times posted tender, you're saying that would not in any way impede your ability to do large-scale M&A if you felt compelled to do so? Would that be a fair characterization?

Could not have said it better ourselves. Absolutely.

Okay. The tender says nothing about your view of M&A at the moment, it seems like.

That is correct.

Okay. And one on back to 2017. Bob, can you remind us what you've said in terms of the cost takeout opportunities in metal container and plastics for next year? What kind of EBIT benefit you are expecting next year from those cost improvements, as well as any offsetting impact from potentially higher pension expense next year?

Sure. It's Tony, I'll response to that. What we have said primarily is around the Burlington investment, which is the most important discrete item on the can business. And what we basically said about that is that we've spent $100 million, we expect our returns on that, which would be something in the range of $20 million I think is a reasonable EBITDA expedition from that.

That is our expectation, but you've got to consider what we've already experienced in 2016. I'm going to take you back for a minute and say that we had basically inefficiencies that came into our system for a variety of reasons of some $20 million that we talked about in 2015. That number we have said will be more in the range of $15 million in 2016.

That $15 million includes start up costs, et cetera. So if you ignore start up you had inefficiencies of $20 million in 2015. That moves to $10 million-ish range in 2016, plus the $5 million of start up. The increment you'd expect on EBITDA line from the line would be something in the range of $15 million in 2017 as compared to 2016.

That is EBITDA, that's not depreciation. Take depreciation out and you're looking at something like $9 million of EBIT. And those numbers nothing is new in any of those numbers. That's the one thing we talked about. I think obviously against that we're always try to be more efficient and find ways to take cost out.

What we also know against that is that we will have -- it looks right now like we will have -- PPI index will be down again for next year. So that creates a little bit more of a price headwind for us in the way our contracts pass that through. We know we'll have to overcome that.

And then pension I think is a who knows right now. You look at discount rates and how low they are and it's a little unclear which way pension will cut at this stage. I think that's the broad view of what is in front of us.

Thanks for that, Tony. On plastics, if you're talking call it $9 million up, in metal containers you've got some price headwind from PPI index going down, pension who knows. And just close -- finish it off with plastics?

Sure. I will let Adam do that.

As we've stated before we're looking for a $15 million year-on-year improvement in our plastics business. As we sit here today we feel very confident that is the number that will be cycling through for next year.

Thanks to all of you and best of luck in the quarter.

Ghansham Panjabi, Robert W. Baird.

This is actually Matt Krueger sitting in for Ghansham. Just want to touch on the sustainability of the margin improvement in the plastic segment. Can you break out the improvement between operational performance and then any market-driven demand improvement?

Sure, Matt, it's Adam. To squarely focus that conversation on the operational improvements, it all came from our operational improvements. Our volume was down 6% as we talked about before, and what you are seeing is we still have some duplicative plant costs that we carry through the quarter.

But really this is getting back to the basics of blocking and tackling in our business and good executing across our platform in plastics. We're not where we need to be yet, but we're taking the right steps and we're going down the right path.

(Technical difficulty) driving the strength across the US beverage market?

You broke up there, Matt.

Sorry, the front of that broke up.

Can you talk a bit more about the strength that you're seeing in the closures segment? And then what specifically is driving the strength across the US beverage market?

Actually the answer might be the same for both of those questions. What is driving the growth in the US closures market for our particular business is on the hot fill side again, as we've talked before ready-to-drink teas and sports drinks are growing faster than other segments of the beverage market in the US.

We also had a very long very hot summer for most parts of the United States. So our customers started filling early this year into the first quarter, and honestly have been running hard all the way through, I will say, mid-October.

It's been a very long filling season for the US. We would expect that to continue for next year, as well, as we look at our customers winning in their markets and our markets outperforming the overall beverage market.

Great, that's really helpful. And then switching back over to the plant closures. How did the timing of those closures compare to your own internal expectations? And then can we expect any further rationalizations moving forward?

We're always looking to rationalize cost wherever we can. We think it's only way for long-term sustainability of the business. So on a long-term scale, absolutely. In the near term I think you have seen the bulk of it on the plastics side at this stage.

In terms of the timing, clearly the Cape Girardeau close was much later than originally planned. That speaks to the entirety of the slowdown of the process. But it was very much on-time with our recent reconsidered plans.

I think we are quite pleased that we got through that. There were a lot of lines in motion to get that done this quarter. We had talked about it last quarter call that presented a real risk to us again even though we had had some issues in the last year. We had to get the inventory built and get these lines moved. It's definitely an important step for us, and it was on the revised plan.

The LaPorte plant was a little later. We had talked last quarter about being a month behind on the new Burlington plant. It was within a relevant range. There was a little bit of hope that we would get it done in time to actually that the Burlington plant could generate a little bit of income off can supplies for this busy season. That was a wish if you can, and we didn't quite get to that. But it was within a month or so of what we had expected.

Great, that's it for me. Thanks a lot for taking my questions.

Chip Dillon, Vertical Research Partners.

Good morning, gentlemen. A question is drilling in a little bit on the food can business. You mentioned the expected $9 million EBIT contribution from the new Burlington plant.

But there are other moving parts, and I wanted to get a feel for this. If we have a more normal season in Europe next year versus this year, and I guess you also not have some of the restructuring costs; so if we ballpark everything, could we be looking at a $20 million or $25 million EBIT improvement when you look at all of 2017 versus 2016? Just assuming some of the things that you saw this year don't repeat next year.

If your number is just on the food can side, I would say that seems pretty high to us. One point of clarification I want to make is the $9 million I'm talking about for next year is not the entirety of the value of the line. It's only the increment over what was embedded in 2016.

So just a point of clarification. But as to your question what does 2017 look like versus 2016, $9 million is the right number to think about. You are right that Europe should be better. I think it's hard for me to imagine that won't be the case or that certainly will be a very bad pack year on the side of Europe.

Against that if you look at what else is going to happen in the US, again the cost savings that we're talking about from the Burlington line are essentially getting rid of those costs that you're referring to. The benefit is taking out all of that friction cost that came into our system in 2015. There's really nothing beyond that that we pick up out of the new line coming on.

We will continue to try to do things better, more efficiently, so there will definitely be some other operational improvements that we're going to make on that side. You may have a better pack, and really that's about our customers. So it's not really about the growing season. I don't think we should expect much better than this year.

But perhaps the customer that we had who worked down inventory this year will be back to building inventory next year. I think Chris' question is relevant on that, which is what's the broad background of inventories and consumer demand for fruit and vegetable.

Against that, I think all that probably nets a slight positive perhaps, but not a big number. To be clear, your number is a little high on containers. Now, if you add in the benefit that Adam talked about on the plastics side, I think you're getting into the right range.

Right. And what I mean to say is you have the $9 million swing from Burlington, and it would sound to me that you would be disappointed if you didn't see the whole segment up $10 million, and if you got more than $15 million you'd probably be pretty happy with that

Yes, say it's about $15 million you mean there is on the plastic side. Yes, I think you're in the right range.

No, I'm talking food cans. You got $9 million of improvement from Burlington, but what I'm saying is if everything else might add $1 million to $6 million you would be happy with that kind of range.

Yes, I think that is true. We've got a lot to work through here and pension stuff would affect that. But I think what you are -- that sounds right, that if you saw $15 million total improvement in that business that certainly seems like a reasonable performance against our expectation as we sit here.

Okay, that's very helpful. Thank you.

Anthony Pettinari, Citi.

This is actually Rain Tole sitting in for Anthony. Just quickly, can you just parse out volumes by segment regionally?

Sure. You're talking about in the fourth quarter?

Yes.

Sorry, in the third quarter. We were basically flat on the food can side. We were down 6% on the plastic side and we were up a couple percent on the closures business.

Okay. And then following up on resins, can you remind me of the pass through mechanisms you have in place for your plastics business?

Really the pass through mechanisms are industry standard. They're customer by customer, so I don't think we'll go into a lot of detail here, but typically it's just a lag pass through of some short window of time. And so again, just the impact in Q3, really we didn't have any impact from resin as it was relatively stable throughout the quarter. No impact in either plastics or closures for the quarter.

Okay, that's very helpful. I will jump back in the queue.

Mark Wilde, BMO Capital Markets.

Good morning. I wondered either Tony or Bob, can you help us with both the plastics improvement and the metal improvement next year? Just thinking about how that might cadence as we move through the year.

Sure. Again, I'm going to caveat I've already said it once, but we have not done detailed budgets and we do always have learnings as we do that. I would caveat all of that. I think the cadence -- certainly the improvement that we've seen on the plastics side we do believe is sustainable. And so that should begin to sequentially flow through the numbers as we go into the year.

I would expect that to be in the numbers by Q1 and going forward. In the can business I think because of the seasonality of our business I think it's bound to be that you're going to get a little bit more of that in the mid-part of the year.

You'll get the benefit of the Burlington line making cans and going into inventory, but again the bulk of that is going to be ending up in inventory. I think you'll see more of that in mid-part of the year.

Okay, fair enough. And Tony, over on the M&A side, this closures business continues to perform so well. Are you seeing more opportunities out there to expand that franchise, or maybe even to move it a little bit horizontally into maybe some adjacencies?

Well whether we're seeing more opportunities is a different question. Do we see that as an opportunity, the answer is yes we do. Again, it was predominantly a vacuum closure business when we first got into it; actually it was predominantly a metal vacuum closure when we got into it.

We went a bit of adjacency to plastics vacuum closures. And then we've moved a little bit more in other areas around beverage, cold fill, et cetera. And then we moved into the dairy side through a few acquisitions. And so we have certainly moved vertically.

And yes, we do -- we think we've got a really good team, we think we have an excellent footprint around the world. And so we would very much like to find other closures and acquisitions that could help us, and we would move vertically on that.

Okay. Last question I had, Bob, can you quantify the impact of FX if anything in the third quarter? And what you're thinking about in the fourth quarter?

Basically there was very de minimis impact. And that's typically the case for us. Without very significant rate movements, FX is not much impact either on the top line or on the bottom line. Given where rates are today, we would expect much the same for Q4 as well.

Okay, that's helpful. Thanks a lot.

Debbie Jones, Deutsche Bank.

Good morning. I wanted to talk a little bit about pet food, and that's clearly been a positive for you. How are trends in that going versus what you are seeing a year or two ago? I'm trying to get a sense of how sustainable this growth is for Silgan, if there's anything also about your footprint that makes you the main beneficiary of pet food growth.

Good question. Pet food continues to grow, and again, we are primarily here talking about wet pet food versus dry pet food. Some this could be mix shift between the two and the can is basically wet pet food.

We are seeing that growth across our business, both in the metal side and in the plastic side. We also do pet food packaging. That has been sustained for some lengthy period of time. We do view that as a sustainable trend from the consumer.

Okay. And moving on to plastics, to focus on one word I think you said you're at a critical point in the opening statements. Is there anything there that is different coming up in the fourth quarter in terms of the optimization? And then, two, just once you do get to the point where you've gotten things where you want them to be, what should we expect the growth rate for your plastics exposure to be?

To be clear, what I had said in the front comments is that we went through a critical stage. That statement I was just referring to, that we had several lines that were pretty important to a few customers in motion in Q3. So that was very important to us. And so to be clear we are through that critical stage.

We're on ramp up, so I shouldn't overstate that, but the most risky part of that is behind us. There are a few more lines moving in Q4, so it's not as if there is not still some important work to be done. But what I was trying to convey is that we -- it was a very important third quarter for us and we did get ourselves through that.

As to the growth, again, the markets that we are in, historically our plastic business was heavy in personal care; it's also in household chemicals. What we've been doing of late to some extent is moving a little more towards food. None of these are particularly high-growth markets.

I would not describe it as a real high-growth opportunity. But there are big customers in there that Silgan has long relationships with that present opportunities for us in the future to capture share, if you will as those customers move forward in various markets.

We do see opportunities, but again it's going to be modest on the growth side. We're much more focused on our cost picture right now and getting the right footprint, and then in time we will drive that growth stronger. But that is more of 2018 and beyond. 2017 is much more about holding the gains that we've got and being sure that we get the $15 million that Adam's talking about, which is primarily out of the cost side.

Okay, thanks very much. I'll turn it over.

Brian Maguire, Goldman Sachs.

Good morning, this is actually Kia Pourkiani sitting in for Brian. The first question I had was could you provide us with an update on how the competitive dynamics have changed in the US food can business over the past quarter?

Sure. Really not much has changed over the last quarter. We continue to have some excess capacity. As you know, capacity was built in excess of what was needed for a particular customer contract. That capacity still fits there and is still moving around the market.

But again, to scale that, that is something like 1 billion units capacity. Maybe 1.5 million units capacity against a nearly 30 billion market. So I don't want to over-portray that, but nothing really has changed around that.

Got it. And then in the press release you said that the mix in metal containers was a little bit less favorable. I was wondering what is driving that? Is it mostly just the pass through, or is it something that's a little bit more -- might have a little bit more cost into 4Q?

To be clear, when we talk mix there we're talking about dollars of contribution per unit of volume. It doesn't -- it sounds like it's meant as a derogatory concept of mix, it's really not. It's just that if you sell a small can, like a pet food can, versus a large tomato can there's a lot less dollar contribution per unit sold.

That's really what's happening is you are seeing growth in pet food, which is a good thing, but on a per-unit basis that's not as good as if you have bad pack and you don't sell large cans to the pack region. And that's really what's going on.

And just a point of clarification, we had talked in Q2 about the fact we had good mix in Q2. It's not -- most of this is not a surprise, that the mix was a little less positive in Q3.

Got it, thank you, that's helpful. I will turn it over.

(Operator Instructions)

Tyler Langton, JPMorgan.

Good morning, thanks. Just in metal container, could you provide a little bit more detail on what's driving the unfavorable pass through from the index inflation?

Sure. This is not new news. Essentially the way our contracts work is we have a pass through for steel or metal pretty much as we experience it.

We have pass through for labor, which is based upon indexes and would pass through on that. And then we have pass through in many cases for other costs on something and index, generally a PPI.

Really all that's happening historically you get PPI and if you do a good job you can keep your inflation down below that and you improve profitability through the contract over time, which we've always said is essentially what we give back to the customer at time of renewal to get renewals. That is a long, long story of how our contracted work.

What is news that we're in a deflationary time. And so when you get deflation in a PPI index, it's not so easy necessarily to get actual deflation in your costs. That may be around coatings, compounds, rent, there's a variety of things that don't necessarily deflate as the PPI does.

And that's what's happening is that we've got contractual pass through of deflation in excess of what we can necessarily get through our cost. And as long as PPI deflates we will suffer a bit of that, and when it inflates we ought to get that back over a period of time. In either case they tend to I think to reset when the contracts renew.

And so this carries forward into Q4, early 2017, or it depends on a quarterly basis?

It will keep carrying forward until you see inflation in PPI and get to a year reset of contracts where you get to pass that through.

Final question with the I guess at the midpoint, the $0.05 reduction in the guidance. Can you talk about rank order the factors that are driving that?

There are basically three. This is really what are we a bit surprised by, remembering that we're staying within our range. Even surprise is the wrong word, it's just where we think more of the negative of what we were thinking versus the positive. And the answer there is basically that in one case in the US we had a particular pack customer who we were hoping and believed would take a little bit more than they chose to do. They were doing inventory management; that's one.

Two is the pack in Europe, which we talked about in the second quarter call as being negative, was decidedly more negative than we thought. So less cans shipped in Q3, less cans will ship in Q4. Packs are done in both places.

Which brings up the third point, which is that raises an inventory question. So in the case of Europe there is probably an opportunity for us to burn off some inventory, which has negative impact on us as we absorb the cost they're sitting on that inventory. Those are basically the three things that take us to the low end of the original range that we had out there.

Great, thanks so much.

Chris Manuel, Wells Fargo Securities.

Good morning, gentlemen. It's actually Gabe real quick. If you continue to see the type of growth in the pet food business, might that necessitate some sort of an investment? I'm not sure how interchangeable some of the equipment is to make those cans. I mean I appreciate the mix shift in terms of profitability or profit per can, but just relative to where filling capacity is for that stuff and how it gets packed, would you have to invest if it continues to grow or -- .

Yes, you do have to invest if it continues to grow. I think the question about attracting capacity is more of a broad can question. Essentially you still have can assets that can convert around. So the question is if you bring that in you're just creating more excess capacity into the can market. Is that a good idea for the overall can market that already has excess capacity?

We would certainly hope that it does not attract more investment of capital, but do we have to invest as it grows over time? We do and we have.

Those are relatively small investments because you've already got the plant in the location you want it. And so these are fairly efficient investments on the growth.

Makes sense. Thank you.

This does conclude today's question-and-answer session. I will turn the call back over to Tony Allott with any closing comments.

Great, thank you all for your time and we look forward to talking about our year end and bit of outlook on 2017 in more detail in the end of January. Thanks.

This does conclude today's conference call. Thank you for your participation, you may now disconnect.