Silgan Holdings Inc (SLGN) 2017 Q3 法說會逐字稿

Good day, and welcome to the Silgan Holdings Third Quarter Earnings 2017 Conference Call. Today's conference is being recorded. At this time, I'll turn the conference over to Kim Ulmer. Please go ahead.

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

Before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and, therefore, involve a number of uncertainties and risks including, but not limited to, those described in the company's annual report on Form 10-K for 2016 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.

Thank you, Kim. Welcome, everyone, to our Third Quarter 2017 Earnings Conference Call. The agenda for this morning as usual will be to focus on the financial performance for the third quarter, to review our outlook for 2017. After that, Bob, Adam and I will be pleased to answer any questions that you have.

As you saw on the press release, we delivered adjusted earnings per diluted share of $0.66 for the third quarter, an increase of $0.05 per share or 8.2% versus the prior year quarter and within our quarterly expectations. This improvement was largely attributable to the acquisition of the Dispensing Systems operations, which continued to perform strongly and benefited from improving demand, good operation performance and an integration program that is on track to confidently deliver the expected synergies.

Operating performance in our plastic container business continue to improve as the business once again delivered sequential improvement in the quarter with operational progress and some volume growth.

Finally, each of our businesses performed well in serving their markets and driving operational productivity. These benefits were partly offset by a variety of weather conditions impacting our business. In our metal food container business, fruit yields were lower than expected, and cooler wet conditions in the West Coast led to an abrupt stop to the tomato pack in the quarter. The cooler summer weather across much of the U.S. led to a lower single-serve beverage season as compared to a record year in 2016 with the correction to filling activities largely taking place in the third quarter. Additionally, several of our plants were impacted by hurricanes in the quarter resulting in unscheduled shutdowns and incremental logistical cost in supporting our customers in a seamless manner. So despite the many puts and takes year-to-date, we're maintaining our guidance but tightening the range of our full year estimate of adjusted earnings per share to a range of $1.62 to $1.67.

With that, I'll turn over to Bob to review the financial results in a bit more detail and provide additional explanations around our earnings estimates for the rest of the year.

Great. Thank you, Tony. Good morning, everyone. As Tony highlighted, we delivered quarterly results within our expectations and 8.2% above the prior year quarter. While there is still work to be done, we're making good progress on integrating the Dispensing Systems operations and unlocking the targeted synergies. Our plastic container business is benefiting from the recent footprint optimization program and continues to make progress on improving its financial performance. While weather-related issues negatively impacted both the metal food container business and the legacy closures business, they both had strong operating performance in the quarter.

On a consolidated basis, net sales for the third quarter of 2017 were $1,270,000,000, an increase of $127.3 million as our closures business benefited from the Dispensing Systems acquisition and our plastic container business had higher sales for the quarter.

Net income for the third quarter was $72.4 million or $0.65 per diluted share compared to third quarter of 2016 net income of $69.8 million or $0.57 per diluted share. Results for 2017 include a rationalization charges and acquisition costs totaling $1.4 million, and 2016 included rationalization charges of $7.8 million for a total increase to adjusted earnings per share of $0.01 and $0.04, respectively. As a result, we delivered adjusted income per diluted share of $0.66 in '17 versus $0.61 in 2016. Interest and other debt expense for the third quarter of 2017 increased $13.3 million to $30.6 million, primarily due to higher average outstanding borrowings related to the acquisition of Dispensing Systems and higher weighted average interest rates, including the impact from increasing long-term fixed rate debt in February 2017.

Net capital expenditures for the third quarter of 2017 totaled $42.9 million compared with $39.7 million in the prior year quarter, which did not include the Dispensing Systems operations. Year-to-date, net capital expenditures totaled a $123.7 million versus $142.6 million in the prior year. Additionally, we paid a quarterly dividend of $0.09 per share in September with a total cash cost of $9.9 million.

I'll now provide some specifics regarding each of our business units.

The metal container business recorded net sales of $772.4 million for the third quarter of 2017, a decrease of $25 million or 3.1% versus the prior year quarter. This decrease is primarily a result of lower unit volumes of approximately 5% and a less favorable mix of products sold, partially offset by the pass-through of higher raw material costs and a $5 million favorable impact from foreign currency translation. Volumes were down due to a less favorable fruit and tomato pack as a result of poor weather on the West Coast and the adverse effect from certain customer market activities, which resulted in lower soup volumes.

Income from operations in the metal container business was $92.2 million for the third quarter of 2017 versus $98 million in the same quarter a year ago. The decrease in operating income was primarily due to lower unit volumes, a less favorable mix of products sold, the unfavorable impact from the pass-through of index deflation, higher depreciation expense and foreign currency transaction losses in the quarter. These decreases were partially offset by lower rationalization charges.

Net sales in the closure business increased a $145.4 million to $357.3 million for the quarter, primarily due to the inclusion of the recently acquired Dispensing Systems operations, the pass-through of higher raw material cost and the impact of favorable foreign currency translation of approximately $4 million, partially offset by a 7% decline in volumes in the legacy closures operations.

Volumes declined largely as a result of cooler weather conditions, which negatively impacted demand for single-serve beverages. Income from operations in the closures business for the third quarter of 2017 was $45.3 million, up $16.9 million versus the prior year quarter. This improvement was primarily the result of the acquisition of the Dispensing Systems operations, partially offset by lower single-serve beverage volumes in our life legacy closures operations.

Net sales in the plastic container business were $137.2 million for the third quarter 2017, an increase of 16 -- $6.9 million versus the prior year quarter. This increase was largely due to the pass-through of higher raw material costs, a 3% improvement in volumes and the favorable impact of a foreign currency translation of $1 million. Operating income increased $5.7 million to $6.5 million for the third quarter of 2017. This increase was primarily attributable to lower manufacturing costs, lower rationalization charges and higher volumes. These benefits were partially offset by the unfavorable impact from the lagged pass-through of higher resin costs and incremental depreciation expense.

Turning now to our outlook for 2017. Based on our year-to-date performance and the outlook for the remainder of the year, which assumes some tax volume carryover to the fourth quarter, higher anticipated resin cost in the fourth quarter and continued strong performance in our Dispensing Systems operations and plastic container business, we are maintaining our estimate of adjusted net income per diluted share but tightening the range to $1.62 to $1.67 per share. This estimate excludes the impact from certain adjustments outlined in Table B of the press release. We're also providing a fourth quarter 2017 estimate of adjusted earnings in the range of $0.30 to $0.35 per diluted share, and this estimate compares to $0.24 in the fourth quarter of the prior year. As previously discussed, we continue to forecast free cash flow to be approximately $220 million.

And with that, I conclude our prepared remarks, so I'll turn it back to Jessica, so she can provide directions for the Q&A session.

(Operator Instructions) We'll first go to Mark Wilde from BMO Capital Markets.

Tony, I wonder if you could help us just put a little more color around this certain customer market activities in food cans and what you mean by that.

Sure. So you're talking about in the soup markets specifically. So we had kind of 2 events that I think are a little unusual in the quarter. We had one customer who has not yet negotiated their retail contracts and promoting contracts with a customer. So that had impact on their demand level, and that's obviously a customer of ours. We have another customer that is in the process of moving a filling line. And as you can imagine, as you go through that process, that has some demand disruption to it. So those are kind of the 2 items. I know it -- there's a temptation, I think, this is a broader point about soup and volumes in soup. I really don't think it is in this quarter, I think we probably all have our opinions of where soup's going on can side? But I think, most of what happens here are kind of a unique disruptions to it. I think what the longer-term trend we see in soup is a little bit better, not I wouldn't say, everything is back to the races, but I think, if you look at kind of the take at the retail level that looks a little bit better, promoting activities seems stronger right now. So I would just -- one more time just that I think this is kind of unique to Silgan specifically because in essence these are our customers doing this and unique to this time period. It could have some carry-on into next quarter. So I'm not trying to say, it's just third quarter, but I don't think it's kind of a long-term soup story.

You anticipated my follow-on there. Just a couple of other ones. Bob, is it possible to quantify the drag that you had in the third quarter from the kind of the lags in the resin pass-through and how you're thinking about that for the fourth quarter?

Sure, Mark. It's Adam. As far as resin in the third quarter, really for our closures business, the increase came late in September, as everyone know. So we didn't have much of an impact to our closures business in Q3. It did impact our plastic container business in Q3, something to the tune of around a $1 million. It will be a headwind in Q4. As you mentioned, our primary resins across the board have seen that September increase around the hurricanes and are expected to also increase in Q4 as well. So as we sit here today again, the Q4 is just a projection at this point, but I would say, we'll be a couple million dollars unfavorable in our closures business and likely a couple million dollars unfavorable on our plastics business as well.

That's helpful. And then finally, Bob, I just noticed, when we look at the balance sheet, you're both carrying a lot more cash than you were a year ago. But also, your inventories are up about 35% or 40% -- your receivables, sorry. Can you just put a little color on what's going on there?

Yes, so as to the cash balance, we got a couple of things. One is we've got some incremental cash in some of the foreign jurisdictions that came just as a consequence of the Dispensing Systems acquisition, so we're just not as clean and as tight on the cash side with them just yet as we would be with our other businesses. And then, as we ended up the quarter, we got a little bit of timing effect in terms of the way cash was collected from customers and the way we had to prepare for some metal payments or some raw material payments that would carry over into the very beginning of the next year, so -- or the next quarter, sorry. So it left us with a little more cash on the balance sheet, but that's just a timing issue. And I think what you're seeing -- yes, I think, probably, if you're just looking at the balance sheet, a big part of that is going to be just the impact of the Dispensing Systems business being on boarded.

And we'll go to Anthony Pettinari from Citi.

You mentioned in the release that the hurricanes negatively impacted each of your businesses. I was wondering if you could maybe put a finer point on what you think the net impact across the company was in 3Q from hurricanes. And I think you indicated the correction in filling activities was really, really happened in 3Q. Is there any residual impact in 4Q and if you can quantify that as well?

Sure, Anthony. I'll take the first one, and Adam, I'll let you take the second one on filling of beverage side. So on the hurricane side, I think, first of all, just to cover off that we have 3 plants affected. We do have a plant in Houston. We do have a plant in Puerto Rico. So there were quite a series of downages. The good news is employees are all safe. And while there's a lot of property damage, that's the bright side. So the impact on the quarter is a little hard to accumulate for you because it ranges from plant shutdowns, which are easy to inability to get trucks and so instead of taking our preferred carrier on a particular shipment, we got to get down to third, fourth carriers so you pay more for every shipment you make. That's going to continue for a while, by the way. So I -- we would roughly quantify it for you a $1 million to $2 million in the quarter, and there'll be some lingering effect of that certainly in the fourth quarter. And then, of course, the resin impact, which Adam talked about is also going to be hitting into the fourth quarter.

And Anthony, on the filling activities for our customers on the single-serve beverage side, going back to kind of the start of how our year plays out in the closures business, really we start the pre-fill season in February, March, to prepare for the summer months consumptions of hot-filled beverages. Those are things like sports drinks, ready-to-drink teas, et cetera, and our customers run really hard, really through the spring and early part of the summer to prepare for, again, those higher consumption months during the summertime. What happens typically is our customers around the July 4 holiday, early part of Q3, they do an assessment of where they are with their retail activities, market activities, inventory, et cetera, and adjust their filling schedules going forward. So in prior years, really, we hadn't seen any adjustment. We just continue to have those filling locations running at or near capacity. This year was the first year, in a long time, where we saw our customers pull back on their filling operations in Q3. So as Tony alluded to, that's not just a Q3 issue because we were running hard from really February until July. So we kind of have this cumulative effect of the filling operation up until the third quarter. So the Q4 impact will also be a little bit lighter than what we have seen in previous years. But really, it's a Q3 and a cumulative effect of what carries into the quarter as well from a filling standpoint.

Okay. That's very helpful. And then during the quarter, one of your competitors announced the closure in food cans, I think, roughly 0.5 billion cans. In the past, you've talked about the industry may be running with a 1 billion, 1.5 billion over -- can over capacity. Do you think that closure could meaningfully tighten the market or given where it is and the customer exposure, is it maybe less impactful for you?

I think it's a little less impactful. I think, certainly, it helps. Recall that we shut down a plant as well late last year, and so it certainly helps, but there is definitely still capacity lapse. Again, we scaled that in the past. So it's -- let's say, maybe, it's 1 billion on the industry. So it's not a huge amount of capacity, but I think there still is some capacity out there.

And we'll go to Chris Manuel from Wells Fargo.

I just wanted to maybe get a little sense, you talked about volumes being down mid-single digits for food can total and that would -- there's maybe some temporary transitory stuff here in North America with soup and such, but kind of 2 points. One, what were volumes broadly like in U.S. versus Europe as an example? And then kind of as you're thinking ahead of next year, do we kind of get back to maybe, perhaps flat to down 1 point or 2 sort of environment but just, a, to understand the difference in geography, and then b, kind of how do you think that plays out full year if there's any follow-through?

Yes, on the geography side, it was basically all to the U.S. We were kind of flattish in Europe, and so this really all about the U.S. I think the bulk of what we saw, we would think would come back next year. So when you say transitory, I think you mean year-to-year. Let me go through it because I don't -- there's been -- from what I've read some confusion about kind of what this means for Q4 as well. So if you look at the kind of 5% down in food cans, about 2/3 of that has to do with pack, right? And the pack, there's sort of 3 things going on. One was the fruit, peaches primarily, in the West Coast, the yields were not that good so that was a little bit less of the pack this year than we had anticipated. The bigger one is on the tomato side. It got cool and wet as tomato harvest was going on. And that is the one event in tomatoes that our customers can't really fill around, they can't go to bulk, et cetera. Once there's mold on tomatoes kind of the whole process stops. And so on the tomato side in the West Coast, that's what happened to us and that will inordinately impact Silgan, because it's a larger share for us. So that is our kind of 2 things. The third in the Midwest, you had some light pack. Some of that will shift so we will see some of that into Q4. And so those are kind of the 3 elements that are going on there. All of that should kind of I would think, in a typical year, next year, you ought to see kind of recover and same -- around what we saw in soup, we would think that would not necessarily be in play this time next year.

That's helpful. And then, just to kind of confirm, so Europe is generally flattish as a whole? Or you're seeing a little bit of growth there? And North America is down, say, 7% or whatever is kind of the offset?

Yes, so you're talking markets in general. So the -- if we're down 5% in the U.S., the -- if you look at the market in the U.S. is probably more in the 3.8%, is what I'm reading on kind of industry, and so that kind of supports what I said to you that the things that happened to us in the quarter are going to be disproportionately on us, which is why we're the bulk of the decline in the North American market, I think. In Europe, I think, the -- probably, what you would see is growth, the pack you'll recall was not very good last year. The pack was definitely better this year, and so others will have -- had a net positive impact of that. We had some share shift in kind of Southeast European markets that offset some of that, but I think the market in total probably saw some growth in Europe.

And we'll now take a question from George Staphos from Bank of America Merrill Lynch.

Tony, you already preempted one of my questions with your Q&A with Chris. But if I look at the split of the impact of 5% down 2/3, say, West Coast and I guess 1/3 being -- would that be the storm in terms of the 5% down? Or is that something else?

No, it's more 2/3 all of the pack issues combined and 1/3 is sort of the soup items.

Okay, forgive me. So on that front, I mean, I was just doing some pencil on paper here, that looks like it could be like a couple or $3 million of effect in the quarter of the pack. Would that be a fair calculation?

Pack alone be, I would put that -- this is rough, but it's going to somewhere in that $3 million, maybe pushing towards $4 million.

Okay. And then, when -- I just want to be clear on one of the items that you disclosed in soup and then, frankly, thank you for the clarity in the first place on that. You mentioned I think a customer has yet to sign up on or renew their contract. Did I hear that correctly? And to the extent possible, can you provide a little bit more detail on that? And is there any, really what am I asking more than anything else is, is there any competitive activity that we should be mindful of there or is it just timing?

Well, this has nothing to do with at the retail levels so I think, as I -- that is a very competitive space, and so all of our customers have to fight for shelf space, et cetera, spend promoting on package that helps both the retailer and the brand. So this is not an unusual process, if you will, and I -- so our expectation is ultimately it will be worked out, but that takes time.

And then, I guess the last question I had, and then I'll turn it over and come back into queue, you mentioned a couple of times that you're clearly pleased with the integration, with the Dispensing business and from what we can see from the result, it was a good quarter even with the volume decline in the segment overall because the legacy business. Can you comment in terms of, now that you own this business, what kind of pickup are you getting in the market in terms of new markets, new customers, new contracts? Are you moving the ball at all in any of the higher-end markets in Dispensing like pharma? Any color there would be great.

Firstly, your reading us right, that we feel very good about where we stand on the business. We feel really good about the team and the integration that's underway. So all that, I can spend more time if you want to. But as to your question, our expectation here, and there are a lot of product areas, markets that this business sells into. There are a lot of geographic regions, so growth is going to be very different by each of those. Our view is sort of in this 2% to 4% is sort of the area we're looking at when you blend all that out. I would say that in this quarter, the business performed above that range, partly because of pipeline products coming in, partly because there were just some of the markets that we're serving were pretty brisk during the time. So all of that makes us pretty pleased and the growth is exactly where the management is trying to grow in markets that they think we got kind of a good competitive opportunity and position. So all of that, it feels really good to us against our expectations at this stage.

And we'll now move to Debbie Jones from Deutsche Bank.

I actually have a question about metal containers. If I kind of look prior to the disruption from the new can plant, you were kind of running at $240 million, $250 million in EBIT. And I realize that some things have changed, but I think there's some productivity that should be rolling through. My question is if I take like a 2 or 3-year view, is this a business that can return to that type of level? How should I think about that?

Well, I would say that it's the kind of question we've had before. It's definitely a business we think we'll continue to improve over time. It -- you got a take all those things into account, right? You've got to kind of win contracts renewals, what concession do you give on those, what's happening on the cost structure, a big impact for this business over the last 3-plus years has been deflation passed through on our contracts. That's kind of a steady erosion for us until we get back to inflation. So if we get back into a good inflationary environment then obviously, that will start moving us forward. We put in the new plant with the expectation of kind of 9, 10-ish EBIT improvement from that, that is absolutely embedded in our numbers right now. This year, you had kind of a onetime employee settlement, noncommercial settlement in there that's against that number. So you got a lot of moving parts but absolutely, we think we'll continue to move back towards a higher profitability lever over time, but inflation would be helpful.

Okay. And then just 2 quick ones. Just kind of your longer-term outlook for growth in plastics, number one. And then, did you have any impact from the exposure to Puerto Rico?

Sure, Debbie. On the plastics kind of long-term outlook, number one, again, as we said all along, 2017 was really about getting cost out of the business, and that's been our plan and to deliver the $15 million of earnings improvement. So the good news is, obviously, we're on track to do that, and we feel good about where the business is heading as we kind of turn the page and look forward in 2018, we expect to see continued improvement in the business from a financial perspective. You won't see the same magnitude of the year-on-year improvement as you saw in 2017. And our long-term target of 15% is still -- 15% EBITDA margin is still where we're tracking to and we're aiming for in that business. That won't occur on January 1 of 2018, but as we get -- are successful in the market. You saw the 3% increase in unit volumes for the quarter. As you see unit volumes begin to grow in the plastics business, we'll be leveraging a lower-cost operating platform and that will help us achieve our longer-term objectives.

And on Puerto Rico, we've -- the plant we have there is single-line small plant so while we do have some exposure it's not meaningful overall.

And we'll go to Ghansham Panjabi from Robert W. Baird.

This is actually Matt Krueger sitting here for Ghansham. Sticking with the plastics theme, can you provide better detail and what exactly is driving the higher volumes across the plastic container segment? And then how do you view the sustainability of that volume growth, what's driving that growth, is that share gains, industry volumes, et cetera?

Sure. Matt, it's Adam. A couple of things. Number one, again, we had been on a program of portfolio rationalization in our plastics business for some period of time. So we are cycling over exiting some business. So as we bring new business on, it's against the lower base. So the 3% volume growth, while we feel good about it, it's important to realize what we're starting from as well. I think the sustainability of that is actually quite good. We're executing well in our markets that we serve. We think there's still a broad opportunity to grow in the plastic space as we serve our customers and the markets with superior service and quality of products and delivery performance, et cetera. We think there's a broad opportunity there. So we do think as volume comes on, it will impact the overall performance of the business due to the drop-through in the lower-cost platform that we've established.

Okay. And then looking at kind of the headlines surrounding inflation heading into 2018, what are your cost inflation expectations for next year? And can you kind of answer that with a particular focus on things like can coatings, tinplate wages, et cetera?

Sure. A lot to that. First of all, every indication is that steel is going to be pretty significant inflationary in all of our markets, so that's one. Two is I think on coatings, et cetera, I think that will broadly follow some kind of a fuel oil plastic curve. So you just got to figure out what that curve is doing. It would be the bulk of how that would move. Wages are definitely in our mind going to be inflationary, I think both in the cost side but also on our pass-through to customer side, which is good news for us on that bit. But definitely, wage inflation is very real. I'm sure you hear it everywhere. But hiring talented people is hard right now, and it seems to me inevitable that, that has to get into wage inflation at some point in time, and that's certainly our thought on it. So I think we are coming back to some inflation. Other than the commodities, I don't know if that will be significant inflation or whether it's little more modest, but I do think we're back to inflation as we go forward.

And our next question will come from Adam Josephson from KeyBanc.

Tony or Bob, you talked about a few issues, the disruptions with a couple of your food can customers, the inclement weather adversely affecting the West Coast pack, the cooler weather affecting single-serve beverage consumption, the hurricane issue, the resin issue, so those are 5 issues right there yet you're maintaining your full year guidance despite all of that. So I guess, how are you able to do so?

Good question. A couple of things. First of all, we did tighten the range. So we did take -- unfortunately, we had to take some of the top off of the possibility for the business. So that's in our mind a real loss. Secondly, as I think, somebody said on the call the Dispensing Systems business is performing very well, so that's helping us. Thirdly, we'll get some of the pack back in Q4. I don't want to over make that point, but there is some benefit coming back in Q4 on that. Last year, this is sort of a comparison point, but last year, in the food can metal container business we were working inventories down, and so that had a negative impact on that as a comparison quarter. This quarter we'll probably be building inventories some, given my comments on steel inflation, et cetera. And so that helps a bit. So as there were many things that affected the troubles in Q3, there are many things that affect why we think Q4 could be a little bit better.

Got it. And just related to the Dispensing Systems, have you upped your synergy guidance at all? Or is it still $15 million?

We haven't. I inserted the word confidently, so I think, we feel very good about the $15 million but we've not increased that number.

And just one last one, just broadly about the food can market. As mentioned earlier, one of your competitors seized some of their production in the U.S. and said that overall food can demand is declining. Obviously, that the market year-to-date is down a couple of points. I know some of those factors could be transitory, but there have been previous years, as you know, in which weather adversely affected the pack as well. So this is not the first time that's happened, so what is your view of the longer-term volume trajectory for this market and why?

I think, we've -- it's a good question. It's one of the main questions. I would still -- our view would still be kind of flattish going forward, maybe even a little bit of growth. The reason for that is sort of the -- a couple of things. If you look at food cans today versus 20 years ago, the majority of the human food is all is [retort]. There was a period of time when that wasn't true. But -- so the things that are left in cans now are in a very cost-efficient infrastructure system. They are very good for our customers in terms of the profit and the cost at which they can get a food product to the consumer. So we feel pretty good about that base what is in the food can. You're also seeing protein cans that, on general, are in growth, I believe, you're seeing pet food cans that are in growth so it's changing more and more what is -- a can is consumed for which markets. So I think all of that, we feel pretty good. I think on things like fruit, you'll probably see continued decline. I think tomatoes, it's a great package. So I think you'll see kind of its constancy of how much people cook at home probably in that case. So -- but some vegetables you'll probably see some declines. I think you'll continue to have an evolution of where the food can is consumed and in what markets, but our view is that it probably should be kind of flattish over time.

And we'll now go to Scott Gaffner from Barclays.

When I look at the CapEx for the business, Tony, I think you mentioned some of your soup customers were moving filling lines. And I just wanted to get a sense, is this a situation again where you have incremental customers significantly moving their filling locations such that you might have to move some of your manufacturing production as well or is that taking it a bit too far?

That's too far. If you're referring to kind of one of the reasons why we built the new facility in Iowa, and that has a lot to do with West Coast moving to the Midwest. So West Coast is -- you've got a lot more alternatives than Midwest, et cetera. So in this case it's not that same kind of a situation where you're sort of abandoning capacity. So while it does create moves and contortions in our system, that's kind of what we do all the time. So I don't think that's an automatic point. Now with that said, with this Can Vision 2020 Project, we are always looking for ways to enhance the efficiency of our system that always includes looking at the facilities that we run and facilities that we could run. So I don't want to make it sound as if we aren't always thinking about is there a footprint change that would be more efficient? but this particular set of moves does not precipitate it on its own.

Okay. And when you look at the closures business, similar kind of question but in a different way. If you just look at the Dispensing Systems versus the legacy business, how much opportunity is there over the time to have those in the same facility so that when you do have this seasonality in the legacy closures business, you can offset that with the Dispensing Systems business and maybe avoid some capital in either one or both of those businesses on a go-forward basis.

Yes, it's a nice idea. Very little. That was not our synergy thought and among other challenges if you look at our closures, both of those [that's] a closure businesses, they are quite full, and so there's not a lot of excess capacity in them anyhow, and so there's not much to that unfortunately.

Okay. And then, just last one for me when you look at the leverage, I mean, obviously, you've been doing deleverage as you come through to the end of the year, and you'll still be above the range as to where you like to be normally. Do you envision 2018 as another deleveraging year? Or you already feel comfortable here at maybe a higher level of absolute leverage on a go-forward basis?

Yes. Scott, this is Bob. I think, we've sort of covered this ground in previous calls but look, we, very clearly, said that we were levering up to acquire the Dispensing Systems business and that we like the cash, free cash flow profile of the pro forma business and that we would intend to delever. That certainly -- if we could paint a perfect picture, that's the way we would execute, but we all know that, that's not exactly the way opportunities present themselves around this industry. So by the time, we get to the end of the year, we'll be back down closer to the 4, a tick or so above that, but certainly down from where we are now. As you know, it takes us a full year to generate incremental cash flow because it all happens for us in Q4. So I think, given the fact that we feel pretty good about the integration of the SDS business, we feel really good about the cash flow generation profile. We have not stopped looking for opportunities to continue to invest in M&A by any stretch. So now it's just a timing of when those things might happen and what the order of magnitude are. So I think we'll be opportunistic where we can and it makes sense and the free cash flow profile supports it and we'll be disciplined when it's not.

And our next question comes from Chip Dillon from Vertical Research.

First question is, you did mention the resin issue, which obviously is out of everyone's control with the hurricanes and that hitting, I believe you said in the fourth quarter, when does that start to turn the other way in terms of either the pass-through mechanism or as some people expect to notice quite a bit of capacity coming on, especially on the Gulf Coast and let's just say that the prices do start to ease in the first half of next year? How should -- should that have some impact from the lag that you experienced in your plastic space businesses?

Sure, Chip. It's Adam. I'm going to answer kind of on a closures basis and on the plastic bottle basis just because the pass-throughs are a little bit different. But I think you're right. Largely, what we're expecting are increases across the board and primarily resins for Q4. Some will carry into next year, but the longer-term forecast for our primary resins are that they will come back down in price. So when that happens, is yet to be seen or be known. But on our closures business -- our legacy closures business, we have a pass-through that's roughly in the 30 to 60 days kind of time frame. So we'll be passing through those increased resin costs on a fairly rapid basis as they occur and then as prices decrease or resin costs decrease going forward, we'll also be passing those decreases through when -- as they occur on that same lag basis. The new Dispensing Systems business and our plastic bottle business both sort of operate on a 60 to 90-day pass-through based on quarterly basis. So again, you look at a Q4 resin increase being pass through sometime in Q1 of 2018 and kind of subsequently thereafter as well.

Okay. And then second question is probably more for Bob is, as we look at our screens and see at least a long end of the curve move up and there's expectations of several short-term rate increases, what is your exposure to changes in interest rates and in terms of what floats and what doesn't? And if you do have some that's swapped out, do the swaps last for even like showing, I guess, nominally is short-term debt, how long will those swaps protect you if there are multiple increases in interest rates?

Yes. As you know, Chip, back in February, we went to the market and kind of fixed out a bunch of our debt by issuing the 2 note offerings that we did. So I think as we sit here today, we're some 55-ish percent fixed. Now obviously, at a year-end basis, that will be significantly higher than that as we pay down our revolver. So I think as we sit here today, we feel pretty comfortable that we can manage through that and we're certainly more fixed today than we have been over the last -- certainly last 5 or 6 years anyway. So I think we've done some things to protect ourselves against the rapid rising rates, should that happen, and we'll continue to evaluate that and be opportunistic where we can.

And so maybe, said differently, if once you get the debt paydown from the Dispensing Systems acquisition, maybe the normalized fixed percentage is more in the 70s, not in the 50s and so obviously, is that kind of a fair guess at this point?

That's probably a pretty big order of magnitude in terms of the move. But yes, there would be a move towards more fixed, but getting to 70 is probably outside of the scope.

And we'll go to Tom Narayan from RBC Capital Markets.

I guess piggybacking off George's question earlier. You'd mentioned that Dispensing Systems growth was, typically, it's about 2% to 4%, but you guys did better in 3Q. Did you disclose the Dispensing Systems specific revenue contribution in Q3 or its growth?

We did not. We can certainly do that. To the order of magnitude, it's about equal to what the growth in the segment was. It's some pushing up to $140 million of scale.

Got it. Okay, that's perfect. And just in talking -- thinking about the kind of return on invested capital of metal containers versus your -- now your closures and plastics business, how would you compare the 2 from a ROIC framework like, just trying to gauge your guys' appetite and potentially increasing your plastic's exposure through M&A. Where do you find the return of invested capital dynamics of metal containers perfect for what you guys want, based on scale or what have you?

Rephrase the question for me, if you would.

Just trying to understand your guys appetite for increasing your exposure to plastics or outside of metal containers.

I would say all investments that we make stand up to the same criteria. So we would do it in plastics if we saw a good return, cash return, whichever metric you want to use on that. I think what we have said is that we want to get ourselves a little further in plastics before we do anything significant in that context, be sure that we feel like we've got the right team and the right solution to be kind of a premier player in that marketplace. I think the progress we've seen to date certainly makes us feel a little bit better than we did 18 months ago in that regard, but I don't think we're done with that yet. That's sort of this whole discussion around the 10% EBITDA margins to 15%. I think, certainly, 15% would make us feel pretty good if we could get there and sustain there that we have something bridging on unique in that market space. We're not there yet. So today, it would be the return on capital plus a little bit more on the strategic fit to it. But really, we think about each capital investment on its own return. And so if we get to where we would we think we can on the base of the plastics business and we see the right investment opportunities, we would do that in that case.

Got it. My last question, you guys maintained your guidance for 2017 on EPS. I know you guys gave out a free cash flow guidance in your fourth quarter call for 2016 of $220 million. Is that also being maintained? How should we think about that?

Yes, we did. I did, in the opening remarks, confirmed that we are holding our guidance at the approximate $220 million.

(Operator Instructions) We'll now go to Brian Maguire from Goldman Sachs.

Just wanted to come back to George's earlier question and some of your remarks -- in the prepared remarks about a customer in soup cans, and they're re-upping their retail contract. I guess, it's no surprise that the retailers and supermarkets, in particular, facing a lot of pressure these days. Amazon coming in, and Lidl coming in now as well, seems like a generally deflationary environment for food. Presumably, there's more competition for shelf space. And ultimately, it seems like a lot of this is going to end up with lower prices for the end consumer. Just wondering your thoughts may be more broad than just this particular contract or this particular customer. But as some of that deflation kind of works its way back in the supply chain, how do you think about Silgan's position there and any contribution that you guys might have to make in deflationary kind of food environment?

Well, it's a great question. It's -- first of all, let me just start by saying that it's not new. E-commerce might be new, but you look at kind of the big box brand, retailers have been coming up over the last, let's say, 15, 20 years. Our customers have been under intense cost pressure for a long period of time. That is exactly why we kind of went out with a significant target ourselves on our Can Vision 2020 take costs out of our systems. So we've been very focused on this long before e-commerce was part of the common language, and it's all about we got to get costs out of our system, out of our customers' system, out of our suppliers' system, and we're looking at every way we can possibly do it all with, that program was all with the idea of delivering that value to our customers, getting return on our investment but delivering the net total value of that to our customers, and that's what we're very focused on. So to your specific question, I think Silgan is incredibly well positioned for that kind of a situation because we already are kind of a low-cost provider in the market of a low-cost product for our customers to deliver food to the end consumer. So we feel really good about that [chain]. We're spending a lot of time with our customers just making sure that they are really running hard numbers on the value of the low-cost delivery they can do through canned product to the consumer and making sure everyone's thinking about that because that system is so advantageous against other opportunities out there. So we feel really good about it. We feel really good about our cost structure. We're still working on our Can Vision 2020 cost-reduction program. The new plant in Iowa was part of that, which is to keep driving down our costs to make a low-cost solution for our customers. So I think a lot is going to change. Things are going to evolve here and it won't come out the way I think, but we feel really good about how we're positioned on it.

Okay. That makes a lot of sense. And on the closures volumes, just wondering if that -- I know the weather was a factor there, but wondering if it's more an issue of a tough comp a year ago or if you think like the volume this year are sort of temporary artificially low and are ripe to bounce back next year.

It's Adam, Brian. But I think, yes, to all of the above. So yes, we are cycling versus the record period last year in Q3 and a record year in 2016. Yes, the market in total for our hot-fill products was down year-on-year for the first time in quite a while in the third quarter. And one of largest categories in our hot-fill segment is sports drinks and the sports drinks market was off 8% to 10% in the quarter. So we do think that provides us a bounce back opportunity for 2018. We are expecting that volume to come back and normalize next year. We think it's a one-off period for 2017.

Okay. That makes sense. One last one for Bob. Just any thoughts on the tax rate in the fourth quarter or interest expense relative to where it was in 3Q?

Yes. I think on the tax rate, we're probably at this point in the year kind of zeroed in on where we're going to be so I don't -- barring any changes in tax law or something that we're not foreseeing right now. I think a consistent tax rate is what we're expecting. Interest for Q4 probably comes down a little bit on a sequential basis versus Q3 just as we start to delever. So that's the way we see those 2 items.

And we'll take a follow-up question from George Staphos from Bank of America Merrill Lynch.

So Tony, you hit on one of my next questions on Can Vision 2020. Can you give us maybe not 20 minutes here, but just a quick update on status, what you've been able to accomplish and what's the next on the horizon in the next 18 months or so.

Sure. First of all, George, everybody else followed on your question so I wasn't sure you should get a follow-up on that.

If you want to bounce me from queue that's fine.

So Can Vision 2020 is ongoing. I think we've had significant success. It's all over the board. So again, it's not all that similar to what I thought when we first started talking about it. So for instance, the new plant in Iowa is a big part of that and really looking at footprint, et cetera. The things we've done on the freight side have been very impressive. And yes, I know there's a lot more still to go there. We are -- lots of downgauging projects kind of throughout our system, and that's sort of ongoing. So in that case I think I've said before we always get some of that, we're just doing a lot more of it, getting our customers more focused on it. So all of that is underway. I think the things that I -- we talked earlier about, that have been a little slower to take root, getting deeper in kind of the system contact between us and our customers and suppliers and helping each other get more efficient. That's been slow to build the trust of everyone opening their books to one another on that. I think we're seeing headway now in some cases. So I think that's some of the future opportunity that sits out there, so I would say that we are right on track of what we would like to have delivered so far although, it looks a little different than we would've said at the beginning and still see really good avenues to continue to press forward and take costs out of the system for everybody.

And I recognize why you might not want to put a number on this, but is there a way to put a number nonetheless, on what the benefit might look like in 2018?

Well, again, recall that, that the bulk of this goes to our customers. That was the whole idea of it. It was never intended to be a huge investor program. It was return on capital. So I don't really have a number on that. I would think maybe something in the range of $10 million to maybe the high end of $20 million of the capital we invest next year might be somehow associated to that, maybe even a little higher than that if you say somehow associated, but it's that kind of scale, but it's sort of what happens all the time. On the integration issue, we do have -- today, there's an active project with a major customer on, kind of finding costs throughout our system, and so I don't know what the outcome of that will be, but that will certainly drive some value. Again, the bulk of that will go to the customers' account.

Okay. And I just want to come back to an earlier question, I think Debbie had posed, and we chatted about it last quarter with you. So I wasn't quite clear. So getting back to round numbers $110 million in EBIT in food cans, last quarter my takeaway was that's really aspirational, not likely in the current world. If you do get the inflation, does that change the answer? Or you need something else beyond getting the pass-throughs to start working in your favor for a change?

Yes, and I'm glad you asked that question. I think there was -- we had lot of internal debate about my answer to you and maybe it did come across more that, that was aspirational that we weren't going to get to in the near term. I think I -- what I meant to convey is don't look for that next year. I think it's a continual progress point to get to it. There's nothing fundamentally different about our can business today than there was about our can business 5 years ago. Yes there's competitor came in with some new lines and that caused some shuffle. But really, I'd say it's the same business with the same opportunities, and the problem for us is we focus really day-to-day on driving costs out, servicing the customer better rather than a 5-year plan on a shelf to get this to a number, so what I can assure you is, we're thinking every day about how do we drive value? How do we get a fair share of that out and make it good for our customers? And that will move us back in that direction, but it is going to take time. It's going to take inflation back in. It's not even the inflation in and I don't want to misrepresent that. The problem is our contracts are really great in a lot of ways. The one thing about them that's hard for us is in deflation time. When we're giving out a lower price and that's hard, you -- we just cannot take that cost out of our systems, so just stopping that would be helpful. Inflation maybe even a little bit more on that. That will help us and we'll keep driving the cost out, and we'll continue to try to find ways to help our customers win in their markets. That's sort of how we got there in the first place.

Tony, that latter point, and I apologize for the repetition, is that just -- as contracts come up for renewal and you hopefully are doing that in a more inflationary environment, that's helpful? Or is there a different interpretation, I should have on that?

No, there's a different interpretation. It's the every year function of our contract, so every year if there's a deflationary index, we give a price concession every year within a contract, and so we [can't] take those costs out. So it's not about the at renewal. I think at renewal, it would be -- I can't imagine -- it's easy to imagine, we're going to greatly enhance the situation, given that there's capacity left in the market. That's not our point.

Okay. My last one and maybe taking a different approach on Brian's question from earlier, I mean, I looked back at the volume in closures last year in the quarter. And I think it was up maybe 2%, and recognizing that's an average number and there are different end markets within that 2%. If I very simplistically -- maybe that's the answer to the question, take 2% and then back out 7% to a very simple average, I still wind up being down. So is there anything else in your view affecting the secular outlook on your key market? Or in your view, is the 2% plus, what was going on with hot-fill last year, really the answer?

Sure, George. I think Adam answered this before if -- that you get the cumulative effect. So in a good year, you're running hard in Q2 -- late Q1 into Q2, and Q3 continues that curve. So call that a plus 2. In a bad year, you run pretty good up until the July break, and then everything stops. So it's more just the Q3 as a little bit of the shock absorber to the system, if you will. And so you get more correction in Q3 in a bad year than you get upside in Q3 in a good year.

So that would also suggest that you actually get a much bigger decremental margin effect this year from that in comparison...

Absolutely. Yes, yes.

And it appears there are no further questions. I'll turn the conference back over to you, Tony, for any additional or closing remarks.

Great. Thank you, everyone, for your time and we look forward to talking to you about the fourth quarter and a little bit more on 2018 at the end of January. Thank you.

This concludes today's presentation. Thank you for your participation.