Silgan Holdings Inc (SLGN) 2016 Q4 法說會逐字稿

Good day everyone and thank you for joining the Silgan Holdings fourth quarter and full-year earnings results conference call. Just a reminder today's conference is being recorded.

Now for opening remarks and introductions, I'll turn the call over to Kim Ulmer. Kim, please go ahead.

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

Before we begin the call today, I'd 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 condition of the Company could differ materially from those expressed or implied in the forward-looking statements.

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

Thank you Kim. Welcome everyone to Silgan's 2016 year-end earnings conference call. I want to start by making a few comments about the highlights of 2016 and provide a brief update on our ongoing efforts to position the Company to continue to deliver strong shareholder value.

Bob will then review the financial performance for the full year in the fourth quarter and provide highlights for our 2017 outlook. Afterwards as usual, Bob, Adam and I will be pleased to answer any questions.

As you'll have seen in this morning's press release, we delivered adjusted earnings per diluted share of $2.77 and free cash flow of $179.9 million. Each to the higher end of our expectations. Also as discussed in the release, among the milestones over the past year; we're delivering net income per share of $2.55, delivering adjusted net income per share of $2.77, generating cash from operations of $6.55 per share.

Commercializing one new container facility and two plastic container facilities. Increasing the cash dividend by 6%, completing a tender offer to purchase [$269.4 million of our common stock], and announcing an agreement to acquire the dispensing systems business. The extensive transition efforts of the last 24 months are winding down and we are pleased with how the business is positioned moving forward.

Our efforts were directed at improving customer service and eliminating excess cost throughout our system. The new metal can plant in Burlington, Iowa, completed its commercial qualifications during the fourth quarter and will contribute to the full-year 2017. This was a large driver behind our ability to close the LaPorte facility and will be the primary driver in the anticipated near-term improvement in our metal container business.

Our plastic container business continues to improve. In 2016, we commercialized two new facilities to better serve customers and over the entire project, we added or relocated more than 100 manufacturing lines to further optimize our footprint and be more cost competitive. While there is still work to be done to improve profitability to target levels and get back to top line growth, we do expect significant financial improvement in 2017.

The closures business got little fanfare as they completed the Portola integration and the related footprint optimization flawlessly. Successfully supporting record demand levels and positioning the business to leverage volume growth against a market leading cost position. With already a great business, it's positioned to become more important in terms of scope and growth opportunities, with a pending acquisition of the dispensing systems business.

We're providing 2017 guidance for adjusted earnings per diluted share in the range of $3.15 to $3.35. Which represents a double-digit improvement and adjusted earnings per share and excludes any impact from the pending acquisition. In addition, we expect free cash flow in 2017 to improve 22% to $220 million.

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

Thank you Tony, good morning, everyone. With the new plant startups and footprint optimization largely behind us, we have eliminated excess manufacturing and logistical costs, exited certain high-cost production facilities and are positioned to better serve our customers for the longer term. As a result, we delivered adjusted earnings per diluted share of $2.77 and free cash flow of approximately $179.9 million.

Slightly better than expected as inventory reductions offset slightly higher capital expenditures. On a consolidated basis, net sales for the year were $3.6 billion, approximately $151 million lower than the prior year, as sales declined in each business largely due to the pass-through of lower raw material costs. We converted these sales to net income for the year of $153.4 million or $2.55 per diluted share as compared to 2015 net income of $172.4 million or $2.81 per diluted share.

Adjustments increasing earnings per share in 2016 totaled $0.22, while 2015 included adjustments that increased earnings per share by $0.16 and as a result, adjusted net income per diluted share was $2.77 in 2016 versus $2.97 in 2015. Interest expense increased $900,000 to $67.8 million primarily due to higher weighted average interest rates.

Our effective 2016 tax rate was 33.9% as compared to the 2015 rate of 31.8%. The 2015 rate was favorably impacted by higher income and lower tax jurisdictions and the ability to fully recognize benefits in 2015 from the legislative extension of certain US tax provisions.

Full-year net capital expenditures totaled $180.3 million in 2016 as compared to $237.1 million in the prior year. Each driven by the new plant expansions and investments to support our footprint optimization plans. Additionally, we paid a quarterly dividend of $0.17 per share in December.

The total cash cost of the dividend was $9.6 million. For the full year, we returned $40.9 million to shareholders in the form of dividends and an additional $277 million in the form of share repurchases, including the tender offer completed in November. As outlined in Table C, we generated free cash flow of $179.9 million or $2.99 per share versus $117.4 million or $1.91 per share in the prior year.

I'll now provide some specifics regarding each of our three businesses. The metal container business recorded net sales of $2.27 billion, down $93.4 million versus the prior year. This decrease was primarily due to the pass-through of lower raw material and other manufacturing costs and a shift in sales mix to smaller can sizes.

Income from operations in the metal container business was $214.7 million, a decrease of $21.7 million versus the prior year. This decrease was primarily due to higher rationalization charges, the unfavorable impact from the contractual pass-through of index deflation, the unfavorable impact from current year inventory reductions versus inventory builds in the prior year, startup cost for the new manufacturing facility and a less favorable mix of products sold.

These declines were partially offset by better manufacturing performance. Net sales in the closures business were $797.1 million, a decrease of $7.9 million primarily due to the pass-through of low raw material costs, partially offset by a nearly 3% increase in unit volumes as the business benefited from strong demand in the US beverage markets.

Income from operations in the closures business increased $8 million to $99.8 million in 2016, primarily due to higher unit volumes, improved manufacturing efficiencies and lower rationalization charges. These increases were partially offset by the unfavorable impact from the pass-through of change in resin costs as compared to favorable impact in the prior year.

Net sales in the plastic container business decreased $49.8 million to $543.9 million in 2016, principally due to the lower unit volumes of approximately 3% as we continue to rebalance the customer portfolio along with the footprint optimization program. The pass-through of lower raw material costs and the impact of unfavorable foreign currency of $4.4 million.

Operating income decreased $2.6 million to $5.2 million for the year, largely attributable to startup costs for the new manufacturing facilities, lower unit volumes, the favorable impact in the prior year from the lagged pass-through of decreases in resin costs and foreign currency transaction gains in the prior year. These reductions were partially offset by lower rationalization charges and better manufacturing performance late in the year.

Turning now to the fourth quarter, we reported earnings per diluted share of $0.41 as compared to $0.44 in the prior year quarter. We incurred $5.1 million of rationalization charges in 2016, as compared to rationalization charges of $3.6 million in 2015. As a result, we delivered adjusted earnings per diluted share of $0.48 in the fourth quarter of 2016, unchanged versus the same quarter of last year.

Net sales for the quarter decreased $23.7 million versus the prior year driven primarily by the pass-through of lower raw material and other costs in the metal container and closures business, a less favorable mix of products sold in the metal and plastic container businesses and the impact of unfavorable foreign currency of $900,000 and $1.1 million in the metal and closures businesses respectively. These declines were principally offset by an increase in unit volumes of approximately 1% in [each of the metal and plastic containers businesses.

Income from operations] for the fourth quarter of 2016 decreased by $300,000 primarily as a result of declines in the metal container business, which was unfavorably impacted by a reduction in inventories in the current year as compared to an increase in inventories in the prior year, higher rationalization charges, a less favorable mix of products sold and the contractual pass-through of index deflation. These decreases were mostly offset by improved operating performance across each business and higher unit volumes in the metal and plastic containers businesses.

The tax rate for the fourth quarter of 2016 was 32.4% versus 26.2% in the prior year quarter; as the fourth quarter of 2015 was favorably impacted by the ability to fully recognize benefits from the legislative extension passed in December 2015, of certain US tax provisions and higher income and lower tax jurisdictions. As we turn to 2017, our current estimate of adjusted earnings per diluted share for 2017, is a range of $3.15 to $3.35 which excludes certain items identified in the press release.

This estimate also excludes any impact from the recently announced agreement to acquire the dispensing systems business. We will update our estimates once the acquisition is closed and the appropriate purchase accounting adjustments are calculated.

Reflected in our estimate for 2017 are the following. We're forecasting the metal container business to benefit from more efficient operations with a full year of commercial production in the Burlington facility and lower freight and logistics costs. These benefits are expected to be partially offset by higher depreciation expense, the unfavorable impact from the contractual pass-through of index deflation, and the unfavorable impact from further reductions in inventories.

The closures business, which is cycling over record profitability in 2016, is expected to benefit from improved manufacturing efficiencies. We are expecting the plastic container business to benefit from cost reductions resulting from the completion of the footprint optimization efforts in 2016 and modest volume improvement.

In addition, we expect interest expense to increase modestly versus 2016, largely as a result of higher average interest rates and higher average outstanding borrowings as a result of the tender offer completed in the fourth quarter of 2016. We currently expect our tax rate to be approximately 33.5%, largely in line with the prior year.

Also, we expect capital expenditures in 2017 to be approximately $140 million to $150 million, which is to the lower end of our normalized capital spending. We're also providing first quarter 2017 estimate of adjusted earnings in the range of $0.48 to $0.58 per diluted share, which also excludes rationalization charges. Based on our current outlook for 2017, we expect free cash flow to be approximately $220 million, up from approximately $179.9 million in 2016.

That concludes our prepared comments so back to Debbie and she can provide the instructions for the Q&A session.

(Operator Instructions)

George Staphos, Bank of America

Hello, this is actually Victoria Macklin. I'm sitting in for George Staphos. I have two quick questions. How are you today?

Good, thanks.

Good. I just had two quick questions. One, do you guys have any indications on the pack yet? And two, what are the next key mile markers for the three new facilities and related warehousing?

Okay. So on the pack, we really don't. It's way too early at this stage. So we will wait and see.

Our expectation as we said before, is that it was a pretty miserable pack almost across the board in Europe this year. Our outlook assumes improvement in the European pack but that's based more on what happened last year but -- any specific knowledge about this year.

Similarly, we really have no information either way on the pack this coming year in the US. The next key milestones on the new plants, first of all, on the canned plant; basically it's up, running and it's really there are no more milestones. It's got to deliver and is delivering, so that's where we are.

You did mention warehousing too. There is sort of two parts to that plant. There is the plant itself and we did get at warehousing for our Midwest region and as we had talked about, we're already benefiting from that in the fourth quarter. That's already in the numbers so we expect to continue to benefit from that.

On the plastics side, again, in one case, the new facility was for a customer, so that's up and running and supplying that customer. In one case, the facility was more a consolidation effort [of a lot] of footprint. As we talked about, we've gotten out a lot of that. What's good about that plant, is it continues to have room for us to continue to grow into it, as we look forward.

Okay, great.

Mark Wilde, BMO Capital Markets

Good morning, Tony, Bob, Tim. I wondered if you could give us just kind of it outlook on input costs in 2017, as you see them right now and what the impact on you guys will be?

Sure, I'll take steel and I'll let Adam take the resin world. On the steel side, we are definitely, after a couple of years of deflation on steel, we are absolutely seeing meaningful inflation. It varies a little bit by region but I'd put that at high single-digit into double-digit increases.

As you know, in the majority of our steel businesses, we have direct pass through of that to our customers. While that will have some top line impact on us, it should not really have any meaningful bottom line impact, as we look forward.

Now that's not entirely true in Europe. In Europe you need to get that price increase through annual contracts in that case. But as we sit here today, we -- our expectation is that we will do that with [our] increases in the market, we're not expecting any -- anything but passing through that cost on the steel side.

Then over on the resin side, Mark, for the year, we don't see really any significant impact from resin on the year. There is some volatility right now and certain resin markets that may put a little pressure on Q1 but I would say that's more of a timing issue as it flows through the year. On a full-year basis, no real impact.

Okay. And if I could, Bob, can you just talk about what you're factoring in, in terms of FX assumptions in your targets for the year?

Yes, actually, the targets are built on current rates and as we've talked about pretty extensively over the past history given the way we're financed, we have some geography changes when FX rates move but not really a meaningful impact to the bottom line.

With the exception of, if we get really sizable moves, like we had a year or so ago, that can have some impact but even then on a relative basis it's been pretty small.

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

Ghansham Panjabi, Robert W. Baird

Hello, good morning, this is actually Mehul Dalia sitting in for Ghansham. How are you doing?

We're doing great. Thanks.

How does the phasing of cost savings across both metal, food, and plastics look in 2017? Any sort of detail on a quarterly basis would be very helpful. Also, is there any cost savings that you are expecting that will roll through in 2018, from the efforts that you've almost completed now?

I'll start that in reverse order. I'll hit the can business and I'll let Adam ticket to on the plastic side. On the canned side, really the cost savings began in the fourth quarter of this year.

There's going to be no carryover of that particular set of activities. Now we're obviously off try to find other ones, but 2018 there would be no influence of that.

On a quarterly basis, essentially the line is in and running, so you get -- it should be fairly consistent in terms of the benefit that the line and the warehouse provide to us over the course of the year. Now as I said, you got a little bit of benefit from that in Q4, so if you want to look on a comparative basis, that will be loaded to the front three quarters because there will be less difference as you compare Q4 to Q4. You want to take plastics?

On the plastics side, we'll be ramping up those savings as we go through the course of the year. As we enter the year, we're not quite at the run rate that we'd like to be at. On a full-year run rate, if we jump back to EBITDA margins, it's the journey that we've been talking about; we should be right around 10%, maybe just a hair over 10% on a full-year basis.

We won't start that way at the beginning of the year. We will kind of ramp our way to it. I don't have the exact breakdown for you by quarter but it will be a gradual increase.

What we've seen from a financial performance for the plastics business is sequential quarterly improvement now for four straight quarters. We'll see that again as we head into 2017. It'll be on a ramp basis to that kind of 10% EBITDA level at the end of the year.

Thanks and just one last one. Is there any upfeed on the competitive backdrop in US metal food cans? Any share shifts worth noting or any actions by competitors that we should know about?

Sure. There's really not a lot new there, just the history. There obviously is some excess capacity in the market. That's 1 billion --1.5 billion units of cans if I understand it, call it 3%, 6% of market, something like that.

As a result, you are -- there is more culling effort going on as business comes up for bid. There is really nothing new to report on that.

As you know, the majority of our business is under long-term contract, but I think more important, we focus really hard on being superior on the service and quality delivery to our customers and try to stay out of the fray a little bit, if you will, because of that. That's our strategic bets on it too, is where possible, stay out of the fray and only when that activity directly affects us do we react and react accordingly.

Thank you so much.

Chris Manuel, Wells Fargo Securities

Good morning. Congratulations on a strong finish to the year.

Thanks, Chris.

I wanted to circle around a couple of the comments you made in the press release, where you talked index deflation running through the business in 2016 and again, hurting you in 2017. Bob, could you maybe help us put some -- how to qualify or how to think about the impact that had to you in 2016 and what you're anticipating it could be in 2017?

Particularly, I'm guessing 2017 could be even more meaningful because we're actually seeing inflation now as opposed to continued deflation, but how would we think about that?

First of all -- to cover off, it's Tony responding. To cover off, the way our contracts tend to work on that side, is we have pass through on, and really we're [kind time of] other; so we're clearly not talking about the metals side. We're not really talking about labor, where you've got inflation on both sides now.

Really, we're talking all the costs and you tend pass those through on some index like a PPI. What we've seen over the last couple of years is a negative PPI number depending on what period your contract works off of.

So you've got that deflation you're passing through and of course your costs are generally not deflating against that. If you scale that in 2016, there was some $6 million of impact in 2016 on that and I have to say, it's hard to get [pure]. Very easy to get at what's the pass-through impact. It's not quite as easy to pull out what did you, on the cost side, benefit from that. The numbers are not as quite as accurate as it might sound, but roughly $6 million.

The reason that it's not greater, as we see it right now 2017, is that the PPI has gotten better. In fact, some now show inflation.

Even though there may be more inflation in the market, the PPI is getting closer to reality, at least. We're thinking something in the range of $4 million is sort of embedded in the numbers right now, around that.

Just to help me with this, you pass that through, is that on about a 12 month lag?

Yes. The vary on what they look back at, but it's basically you're looking, for next year's contract, you're looking back at some period and doing the index on that. Certainly, it would look to us by 2018, we should begin to recover some of what we're talking about here.

Right. Okay. That's helpful. Adam, thank you for the color on -- directionally, the improvement in plastics. It sounds like it's moving from EBITDA in the 8% range 2016 towards, for full year, you said 10%.

Right.

To have a sense on, whichever one who wants to respond, on the metals side, I know that EBITDA and EBIT have come down a little the last year or two, but can you give us a sense of, how you look at improvement in that business?

Are we talking about, if I look back a few years back at least on the EBIT side, you're guys were in the 11%, 12% margin range. (technical difficulty) [Encana averting on 10% is a feasible to] get back closer towards 11%, 12% now that you have everything behind you and actually have the savings and improvement, you think?

Yes, there's a lot to the question. You have a lot of moving parts going on there. Obviously you are getting some improvement.

If you look back over the last couple of years, you have had these costs that we're investing against. The improvement that we're talking about this year is sort of straight to the bottom line. Now you've got inflation of raw material at the same time going on, so that mitigates some of it.

I think you're getting a bit of a step this year and what we're looking at all the time are other ways that we can take costs out of the system and improve that number but we really don't manage that number. What we manage to is cash in and cash out.

I'm not sure I can give you a much more specific answer on that. We're looking every day, finding those opportunities.

We will make some headway this coming year on it. We're always looking for ways to increase the -- mostly the return on capital we put into the business.

Okay. That's helpful. Just one last question on the new dispensing business. You have a best guess as to when that's going to close? Is that towards -- do you think that will close by the end of 1Q, anyway what's the targeted date?

We are targeting to get it done by the end of the quarter. Now it may be -- it may be right at the end of the quarter but that's our target, is that we'll come into Q2 with a clean end of the numbers.

Okay. Thank you, guys. Good luck.

Thanks, Chris

Anthony Pettinari, Citigroup

Sitting in for Anthony. Just two quick ones. With the Burlington plant largely qualified and running, is there a chance for additional plant rationalization on the metal container side, given the 1 billion to 1.5 billion in excess capacity floating around in North America? We'll start with that one.

We already did that. We already shut down a plant which roughly -- again, the 1.5 billion, which you are right to quote that number.

We basically took out nearly a billion of capacity already and what we said is, the rest will come out of the collection of our system, so we are working at that all the time and trying to get that out of the system. That is our intention, is to get the bulk of that out.

Okay. Just switching over to the plastics side. I think you've previously indicated that EBITDA margins could be somewhere around 10% in 2017 and then the long-term target is 15%.

I know, you stated that this [quarter] just passed, were a critical stage for this whole process. Are those targets still valid and can you just update us on the process as a whole?

Sure, the targets are still valid. We just said -- by the end of the year, for 2017, we're anticipating the next hurdle being a 10% EBITDA margin for the business, going to a 15% EBITDA margin for the business in the future and Tony alluded to this as well, is the business will need to see top line growth to achieve that.

One of the things that we've talked about over the course of time is that we really did slow our selling efforts in the business as we were focused on getting the footprint optimization complete and insulating our customers from many of the activities that were going on our side of the fence. We've now turned back, processed back on and we're back out actively selling in the marketplace and we're seeing our pipeline start to rebuild but as you would expect, that pipeline doesn't just simply appear overnight; so it does take a little bit of time for those to come through and commercialize.

We're feeling good that we've hit the objectives that we've set or the hurdles that we've established, and we do think will be back to that 15% EBITDA rate here in the not-too-distant future.

The 10% is the 2017 target that we've put out there pretty clearly. The 15% is not necessarily -- don't read that as a 2018 answer. Read it as we are embarked on the journey -- actually in 2017 we already beginning the journey but we're embarked on the journey in 2018 and moving forward.

As we can said, if we don't think this business can get to 15% over a period of time, then that takes it's own separate assessment. We think it probably can and that's our belief right now, but we got to deliver on that.

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

Scott Gaffner, Barclays

This is actually John Donigan sitting in for Scott. Good morning, how are you guys?

Good, John.

I first wanted to touch on the free cash flow. Maybe you can provide us with some clarity around the $58 million of other cash that you generated in 2016. And I see that the changing -- the outstanding checks balances was about 10% of 2016's free cash flow generation. I guess, just generally how should we think about those two items going forward?

Yes, and we've had this conversation before. If you think about the outstanding check's and the changes thereof, just think about that as accounts payable. It is a little bit of an odd presentation that we do, but essentially, it's nothing more than the timing of Accounts Payable.

It should be incorporated into working capital. Essentially what's driving it is a little bit of lower CapEx on the year-over-year basis and it's improvement in working capital.

You said obviously it was going a little bit higher this year in 2016 or imparticular in the fourth quarter than anticipated. With $140 million to $150 million expected in 2017, is that going to be the new normal or the expected new normal given the footprint optimization program is now winding down?

Yes, there's no question that both 2016 and 2015 were relatively higher CapEx as a result of the footprint optimization and the three new facilities that were being built out. We do expect it to come down to $140 million to $150 million, probably still has a little bit of room as we move forward, the low end of that range. It does get back to a more normalized level.

Great, okay. One last one on plastics and I'll turn it over. I'm sure you saw that the polypropylene prices jumped in January about 10%. Would you guys expect any impact from that? I guess, how should we think about that as the year continues?

Sure it's Adam. Obviously we did see the polypropylene spike in January and there is a lot of discussion going on right now about that increase. It goes back to the comments I made earlier about resin in general.

If you look at the full year, we're not anticipating much of a change year-over-year in polypropylene prices as well. There is a timing impact of that, so it could create a little bit of a headwind for us in Q1 but we'll see how it plays out. Before the end year we anticipate that coming back in line with historic levels or 2016 levels.

Understood, thank you.

Adam Josephson, KeyBanc Capital Markets

Bob, Tony, thanks a lot. Bob, just one on cash flow. You're guiding to $220 million for this year and that seems to be based on normalized CapEx for you, pre acquisition. You talked last week about the acquisition adding $40 million-ish of cash and then you separately mentioned, you gave a $300 million number that you would eventually get to.

Can you help us understand how you go from the $220 million to what you're guiding this year to the $300 million?

Sure, I think during the acquisition call, I referenced the ability to approach $300 million of free cash flow. I think in context, that was not necessarily set out to be a 2017 forecast or even a near-term forecast.

That was basically assuming that you had the acquisition fully integrated, fully synergized and that we were able to start to get the benefits of the delevering capacity of the pro forma business. I think if you build up from the $220 million, you're right.

I said $40 million plus of the free cash flow from the acquisition so that's get you the $260 million plus and then as you start thinking about the opportunities across the combined business to reduce CapEx, improve working capital, and lower cash interest to the delevering, you pretty quickly get there.

I get it. Okay. That $260 million is based on fully synergized acquisitions. You're talking a 2019-ish number right, for the $260 million-ish?

We said that the synergies would come in over the next 24 months or so. Yes, that's, depending on when it closes, it could drag you out into the 2019 timeframe.

Okay. Just one about your EPS guidance for this year. It's a decent range. Can you just walk us through how you got to the high or low end?

Is the pack the greatest source of uncertainty? Is it something else?

Yes, I think the pack is certainly one part of it that is very important, as we think about it. I think the other elements are going to be, around -- what's interest rate going to be?

Obviously we're going to increase our leverage as we did already through the buyback and that will give us even more acquisition. A little bit of tax rate volatility around it and volume broadly is always something that can move you.

This range is very typical for us and as you pointed out, in your write up, it moves even from that. We give you our best look at any point but we know it can move around, in fact we know it will move around.

Right. Thanks, Tony. Bob, this one back to what you on the last call about thinking plastics would be up 15%-ish, metal containers up 9%-ish, on EBIT that is, because you think anything different today and it sounds like based on the EBITDA margin target for plastics, you're in that similar 10% to15%-ish ballpark for plastic. I just wanted to see if any expectations have changed since last time?

No, I think that's what you're seeing reflected in the guidance that we've put forth. I think that is the benefit we're seeing on the operating profit line.

What's influencing that to the downside is, you've got change in interest expense, driven by the fact that we came in with incrementally more leverage because of the tender offer and the forward yield curve on interest rates is moving up. There's some $8 million to $10 million of incremental interest expense on a year-over-year basis.

I got it. Just on pension, Bob, how did things shake out such that -- what do you expect in terms of a change this year?

Moving into 2017?

Yes.

We've had really good asset performance in last year, some 12% plus returns on the asset portfolio, so that's certainly helping us. It's a little bit of a tale of two cities, depending on the geography.

As you think about the US, and I'm going to lump pension and post retirement benefits together here because they're moving in opposite directions to some degree. You probably have a pretty nice headwind spread across the US business on pension, offset by a little bit of, sorry, a tailwind of pension in the US offset by a headwind of post retirement benefits.

Then in the European businesses, which aren't funded, so they don't the benefit of returns, that's been a headwind or will be a headwind next year. There's some $4 million to $5 million of net benefit coming largely across the US businesses on a year-over-year basis.

I'll point out in pension, it is income for us, because of our funded status. We are some 116% funded. So it's not expense, but income.

Sure. Thanks. Just one last one on the macro. I know you are not the most economically sensitive business, but any thoughts you have about the macro outlook going into this year?

If you want to opine on Mr. Trump, by all means. Any thought you have about the degree of uncertainty heading into this year versus any previous year?

Well, certainly you'd have to say that foreign exchange is going to be -- has the risk of being more volatile and that you're right, that we are less exposed to that than others. That's got to be the number one the you would think about as it moves around.

Tax could be, who knows, a huge benefit. Don't really know. Trade restriction would have certainly some impact as product does move over borders, et cetera; I think all of that is to be seen.

And it is even harder to say which direction that hits. I think -- the main point is, if we compare ourselves against a pool of companies, we tend to be a little North American concentric, so probably that helps us on a comparative basis but those are still things to be built dealt with.

Thanks a lot, Tony. Best of luck.

Debbie Jones, Deutsche Bank

Good morning.

Good morning, Debbie.

I appreciate you don't want to speculate on the pack, just wondering, I'm reading a lot of reports about people declaring the drought is over in California and it's hard to imagine that this isn't positive for you. I was wondering if you could just walk through the puts and takes on that because I do understand this could adjust what some of your customers focus on by region or products. If you could just comment on that and also remind us of what you're West Coast exposure is?

Sure. Well first of all as a skier, when I hear all the snow reports out West, it does excite me, I will admit. I think that is what I understand, that the drought has come a long way to being behind us. That would have some impact.

We do have exposure on the fruit side and -- fruit side including tomatoes on the West Coast. It would be important except for the fact that most of our customers have irrigation and have been using that over that time. It really, the drought, even though we talked a lot about it, never had huge impact on the outputs.

I don't know that it'll be a meaningful change. It might help our customers, because from a cost side, it may give them some benefit, which is great but I don't know that has any other significant impact on this progress.

Thanks. That's helpful. If I could just returned to the comments you made about CapEx. A little under normal in 2017. Maybe it can go up in the outer years.

When I think about how to, where you are going to spend your money going forward in the legacy business; is it about projects for more efficiencies savings incrementally or is there some concern that you're going to need to continue to take capacity out in North America, just given the oversupply situation?

We already said, there will be some capacity opportunities. We have to keep looking at, but those are primarily embedded as part of plants and so is not obvious to us that there's an immediate another plant to be thought about here. Which is where you'd have more cost.

By the way, it would less be capital and more likely be restructuring cost anyhow. On the capital side, I think it is probably going to be around three categories. One, there is just the regular maintenance that's got to be done. Two, that we are always looking at productivity investment, so I think they will be back to the more normal level of just investing in productivity in order to drive the profitability of the business and service our customers, et cetera.

Then there's always an element of growth. We are always looking for opportunities to invest where our customers want to grow, so that always sits there as the third bucket. All of that has been true historically and that's why we're saying we think it will perform more at historical levels. We don't see big new plants necessary in our businesses as we sit here today.

Okay and one last one. I know you talked about this before but you talked about the smaller can sizes. Can you just remind me, it sounds like it's a negative impact but it's something you've been calling out for the year, so can you just walk through that? I just have trouble remembering that.

Sure, that's a great question. Because it does, and it bugs me every time I see it. It sounds negative but we don't mean it that way.

The problem is we give you a volume metric and then we have a mix point. On a per-dollar drop through, these are lower revenue cans. They're not necessarily, marginally, on a margin basis they are not necessarily different than the bigger ones.

So, really I would think of it as a almost an offset to the volume number when you hear it. It's more little cans rather than big cans. That's the way to think about it. The drivers there, as you know, we do more protein today than historically we had done.

We are more into areas that have been growing like pet food and protein, so those are smaller cans that have been growing. Through acquisition of VanCamp, we picked up, again small protein cans.

We picked up sterno cans, et cetera. The mix is more to -- more of a smaller can but it's not meant as a plus or minus in terms of the profitability mix of the business.

Okay. Thanks. That's helpful.

Thanks.

Chip Dillon, Vertical Research Partners

Hello, good morning. One area we haven't talked but I guess in awhile, is the European food can business in terms of, I know a couple of years ago, there were some struggles there with some of the political issues that were happening in Eastern Europe. It seems like things have settled down a bit. Could you just talk a little bit about how that whole area is doing for you and what kind of expectations; how much will that contribute to the metal container growth in 2017?

Sure. The -- you're right, that some of the issues we were dealing with have abated somewhat. Generally, they're pretty similar. For instance, we still have a plant in Jordan.

It is still very much affected by Middle East situation. Borders closing, opening, so I would say that one is definitely, while it's a great plant, great workforce, really interestingly situated; it's not been a big profitable performer for us thus far because of that. That situation still sits there unchanged.

Now it's also not a cash drag so there's logic for hanging on for a period of time. The question is for how long. I'd say [Iraq] has been stable around that. We're certainly seeing good growth in Russia but there's always political volatility that does affect that.

We've already moved ourselves out of Ukraine, so that's a case where it was impacted. If I tried to come back to your basic question and look at that business in total, I would say that it basically has, if you go back last year, it performed more or less where we wanted it to, had really done a nice job recovering, et cetera.

If you look at 2016, the big issue was a miserable pack across the region. I think we are expecting improvement. We are expecting improvement on the pack coming back, so in aggregate, we look at the business and say -- we like where is performing and positioned. I think that's it, the rest of that, we just had to deal with some of the national issues.

Okay. And Tony, I know you mentioned CapEx in 2017 would be a little below normal, which I would think is up closer to 160. If we look at, and I know it's early days, but if we look at the businesses enclosures that you are acquiring; I know that their CapEx has been about half their DD&A and I know there is some purchase accounting from before but they were spending around $25 million. Do you see that as a -- therefore, do you think that the company gets moved up to 180 to 190 as we look at what normal would be?

Secondly, I would imagine that just given the priorities of the seller of that business, not that they let it go, because I know the previous, before their merger, that they had spent a lot of money there. Do you think that there's any one time capital that will have to go in and that you have to put in there to get the facilities up to your standards?

Chip, this is Bob. As we look back at that business and the CapEx that's been spent. They did make some pretty sizable investments over the last several years, which we think positions it pretty well for the customer pipeline that they've got going right now. So that's the positive side.

I think as we look at it on a go-forward basis, as we said on the last call, kind of the 5% to 6% of sales range for CapEx which would get you to call it the $25 million to $30 million range, sort of makes sense to us. I think as we pull all that together, given some of the capital that we've spent and capital that they've spent; there is probably at least near-term, some opportunity to get to a consolidated number that is little bit lower than what you just articulated, at least for a short period of time.

Okay. Could you remind us what your -- you mentioned you getting your leverage back down from the 4.3 down to your target range. Can you just remind us of that target range?

Sure. It is unchanged from what we've said for a long time, the 2.5 to 3.5 times is sort of the spot where we think is the longer-term goalpost. That -- certainly the business could handle more leverage and the 4.5 doesn't necessarily concern us.

Particularly given the free cash flow profile of the business, but getting back into sort of meet the appetite for the equity investors and keep returns where they need to be and give us flexibility to look at future investment opportunities, is the discipline that we bring to the business. I see no reason why we can't and won't and our discipline will be directed at getting back into that range in pretty quick order.

Got you. Thank you.

Tyler Langton, JPMorgan

Good morning and thanks for taking my question. Just had a question on the plastics business. Could you quantify a little bit more about the type of volume growth you're looking for this year?

I know you said modest. Then, should those new volumes, should we see mix improve with sort of the customers that you're targeting? Just any details there would be helpful.

Sure, it's Adam, Tyler. Good question. I think as we talk about the business that we're growing in 2017, it would be at higher margins. I mean, obviously, that's what we're targeting as we go forward.

I think it would be a more favorable mix of product coming in. Our modest volume growth, whether that's 1% or something around that. We're not anticipating a significant growth year for 2017 as we're just turning back the pipeline back to on, if you will, for the business.

We anticipate -- we've had a very disciplined approach to how we're going back to the market and a lower cost platform to take with us. It should be good business as we bring it on board.

Great. That's helpful. Then Bob, just a question on the $220 million free cash flow for this year. Will working capital be a benefit to that number?

Yes, I think there are puts and takes there, I think it's certainly something that's a focus for us; so I think we're anticipating a little bit of a benefit on working capital -- a little bit lower CapEx.

Got it. Okay. Thanks so much.

Brian Maguire, Goldman Sachs

Hey, good morning. Thanks for taking my question. I just wanted to follow on that last question. It looks the most of the free cash flow guidance, most of the growth is based on the lower CapEx and you think maybe the working capital might a little bit of a benefit that your getting for some earnings growth.

Just wondering, what some of the offsets on the bench might be. If this is more of a pension contribution or are there any other buckets that would keep it from growing less than the CapEx cut.

Yes, no pension contribution required. As I pointed out earlier, interest expense is going to be a bigger hit to us, that's the big offset against those other items. Then obviously tax will be higher as well, given the profitability.

Okay, great. Then I think you mentioned some inventory reductions. I was little bit confused in the metal cans business. Was that your inventory or is that your customers? And what's sort of driving that?

Sure. That's our inventory. We have actually been doing some builds a year ago versus reduction this year, which is exactly what we said we do as the new line came on.

We had to build some inventory to be ready for the transition around that and shutting down a plant. Now we have the opportunity to start to work back some inventory. Also, I would say we had some of that opportunity in 2017 as well.

It does have P&L impact, so the rate at which we do it, we partly depend on what we can do and partly dependent on the impact to P&L.

Okay. Appreciate that. One last thing. On the dispensing business you'll be acquiring.

Just wondering how raw material [pans through] work there? Obviously you've got a pretty good mechanism in place on the metal can business. But a little bit of a different business there. Just wondering how sensitive to raw changes that business is?

I think we're going to hold anymore conversations until it's our business on that. So we will be happy to answer that question once the deals close.

Okay. Sounds good. Thanks.

George Staphos, Bank of America

Hi everyone. Good morning. I joined the call late just because of a duelling conference call and apologies therefore, if you've already answered these. Good morning, congrats on everything.

First question, when you look at how end markets have been developing for the food can over the last two, three years, Tony, and obviously there's been growth in pet; that's been certainly offsetting a lot the weakness that we see in other human food areas. Are there any issues that are concerning you at this juncture in terms of getting, not you, but the industry, too heavy in one end market and therefore, too susceptible to any kind of conversion that might or might not happen?

I know it's a broad-based question but I was interested in your thoughts, if there's anything that's in your mind right now?

Well, George, that's a good question. I think you are right. There has been shift where the food can goes.

I would tell you that sort of the history of the food can from the beginning of time. That's not new. Really, it's still predominately in retort areas and so there's huge infrastructure still whether that's pet or human food.

Huge infrastructure behind the particular package. It's growing in some of those areas for two reasons. There's protein, human protein.

It's a very cost effective way to get much-needed protein to a wide audience and so that's an area that's been growing and I think that makes great sense. It also suits the taste changes of the US market, particularly in that case.

Then you talk pet and it is a highly valued package for the consumer. I don't particularly worry more about it because I see the growth opportunities and I see how our customers feel about it.

Again, our business has always had a certain concentration to market. So, not really. It certainly deserves watching.

Okay. Appreciate the review on that. Just as a side, as you're mentioning it, triggered the question. There have been times in the past where aid, food aid in cans from merging markets has been raised as an issue.

Nothings ever really materialize, at least of significance that I can recall or remember. Is there anything in the works in that regard that you think might be helpful to the longer-term secular outlook for the food can down the road? That's real and not pie in the sky at this juncture.

I think, first of all, it is absolutely real and we do -- I won't name a customer. We have a customer who we do a very specific program on, that is a great program for doing that. But is that going to be huge unit volumes for the food can that's going change the course of food can? I sincerely doubt that. It's a good opportunity for humanitarian effort and we're happy to be part of it but that's, I think that's the length of it.

All right, well get working on that, Tony. Two last things then I'll turn it over. One, and I apologize if this is already been discussed.

What's the latest greatest on BPA? Do you think at all with perhaps a new administration and its views on regulation, whether that means anything or is it really more of a consumer perception issue? That's question number one.

Question number two, and perhaps as you answering Brian's question, maybe I've got my answer here. But back a couple of years ago, more than a couple of years ago the prior owner of home, health and beauty and dispensing had an analyst day on packaging and there were some really interesting, unique engines that they talked about for their dispensing business.

Have you -- clearly you've probably looked a little bit at them. Can you talk at all in terms of what the opportunities are there because they didn't really seem to have much volume effect, at least that we could see.

Here I'm thinking about things for fragrance and for pharma. Thank you.

Sure. Thanks. First of all, BPA, as we've said all along, our view is that the science was not well supported for the argument on BPA but there was always the consumer perception issue.

Now it is a little bit of a state regulatory issue as well, I think all that holds and we really don't see much change. New administration can't really stop that either, I don't think.

Our view is that the BPA shift is, the shift away from BPA added content into the lining of a food can is going to continue. Our expectation is, we're going to be primarily out of BPA by the end of 2017, so 85% plus of human cans will not have BPA added as a content in the system.

Of course, I phrase it that way because BPA is ubiquitous and it's in the food and everything. Hence that descriptor on it.

On home, health and beauty, I think two things. One, we want to be careful not to get too deep in a business again that we don't own. I think what we said on the call and we believe is that the business has made really good in roads in some very interesting higher value markets.

I think that they've done that through some of the unique engines that you're talking about and that's our view. There been other shifts in the business. Which again, we view as being partly just a bit of a focus issue for the business and a bit of it having to get at its costs situation and get its footprint the way it needed to be.

Over time, I think you actually did see a shift. While you may not see a top line that's moved as much you had expected our view of that is that there has been shift to good solid markets. And that what management's done over the last couple of years, plus the focus we think we can add, we think we can help that part where it's maybe lost some share and meantime let it continue to do what it is doing on some of those markets. A lot more to talk about that after it gets closed.

Understood. Alright, thank you, Tony.

Thanks, George.

With no questions in queue at this time, I'll turn it back to management for closing remarks.

Great. Thank you Debbie. We'll talk to you all at the end of April on our first quarter. Go Patriots.

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