Silgan Holdings Inc (SLGN) 2017 Q4 法說會逐字稿

Thank you for joining the Silgan Holdings Fourth Quarter and Full Year 2017 Earnings Results Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Kim Ulmer, Vice President, Finance and Treasurer. 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.

Thanks, Kim. Welcome, everyone, to our 2017 year-end earnings conference call. I want to start by making a few comments about the highlights of 2017 and then provide a brief update regarding 2018 outlook. Bob will then review the financial performance for the full year and fourth quarter and provide more details around the 2018 outlook. Afterwards, Bob, Adam and I will be pleased to take any questions.

As covered in our press release, 2017 was a very good year for the company, with record fourth quarter and full year results both on a reported and an adjusted basis and leaving us well positioned and continue to grow and create shareholder value. Among milestones for the year, we delivered recorded net income per share of $2.42, delivered record adjusted net income per share of $1.65, generated free cash flow of $224.1 million or $2.01 per share, enhanced the scope and growth opportunities of the company with the acquisition of Dispensing Systems, exceeded our targeted improvements in the plastic container business, initiated construction on 2 new manufacturing facilities to support customer growth, recognized $110.9 million net reduction in future cash tax obligations primarily due to the recently enacted U.S. Tax Cuts and Jobs Act, refinanced our debt portfolio to extend maturities, increase flexibility and increase long-term fixed rate debt to -- at attractive interest rates; completed our third 2-for-1 stock split and increased the cash dividend by approximately 6%.

As a result of these strategic initiatives and the contributions of Silgan's employees around the globe, our adjusted earnings per share were up 33% in the fourth quarter, 20% for the full year and free cash flow was up 25% versus 2016. Each of our operating businesses improved solidly over the prior year for the quarter and the full year. Perhaps more importantly, we've increased the growth opportunities for the company both organically and through potential future acquisitions with the significantly increased product capabilities in our closure business, as well as through successfully lowering the cost position and service performance of our plastics business.

The new Tax Act furthers this opportunity by increasing the anticipated cash generation from a majority of our businesses, which has historically been operating with a comparatively high cash tax burden versus many of our competitors. As a result of these factors, we're providing 2018 guidance for adjusted earnings per diluted share in the range of $2.03 to $2.13, which represents another 23% to 29% year-on-year improvement in adjusted earnings per share. In addition, we expect free cash flow in 2018 to improve by up to 34% to approximately $300 million.

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

Thank you, Tony. Good morning, everyone. As Tony highlighted, 2017 benefited from the successful completion of several strategic initiatives, some of which were initiated in early 2016. These initiatives were designed to eliminate excess manufacturing and logistical costs, exit high-cost production facilities and allow us to better serve our customers for the longer term. We also benefited from a strategic acquisition during the year and are positioned to eliminate a competitive disadvantage as a result of the recent enactment of the U.S. Tax Cuts and Jobs Act, which will fundamentally improve our future free cash flow of our business.

As a result, in 2017, we delivered adjusted earnings per diluted share of $1.65 and we delivered free cash flow of $224.1 million. On a consolidated basis, net sales for the year were $4 billion, an increase of $477 million or 13.2% over the prior year. This increase was primarily attributable to the inclusion of the Dispensing Systems acquisition and higher net sales in our legacy businesses. We converted these sales to net income for the year of $269.7 million or $2.42 per diluted share as compared to 2016 net income of $153.4 million or $1.27 per diluted share. Adjustments decreasing earnings per share in 2017 totaled $0.77, including $1 per share in net tax adjustments reflecting reduced future cash tax obligations under the newly enacted tax reform. In 2016, adjusted earnings per share benefited by adjustments that increased earnings per share by $0.11. As a result, adjusted net income per diluted share was $1.65 in '17 versus $1.38 in '16.

Interest expense before loss on early extinguishment of debt increased $42.4 million to $110.2 million, primarily due to the higher average outstanding borrowings principally as a result of additional borrowings to fund the Dispensing Systems acquisition in April and higher weighted average interest rates, including the impact from increasing long-term fixed rate debt through the February 2017 issuance of the 4 3/4% senior notes due 2025 and the 3 1/4% senior notes also due 2025 and rising short-term interest rates. In addition, we incurred a loss on early extinguishment of debt of $7.1 million as a result of the prepayment of outstanding U.S. and Euro term loans under the previous senior secured credit facility in conjunction with the issuance of the new senior notes and the April 2017 partial redemption of the 5% senior notes due in 2020.

Our 2017 effective tax rate was a negative 12.5% as compared to the 2016 rate of 33.9%. The 2017 rate was favorably impacted by the benefit from the effective tax rate adjustments totaling $110.9 million or $1 per share. These adjustments are primarily the results of the revaluation of net deferred tax liabilities to reflect lower future cash tax obligations as a result of the reduction in the U.S. corporate tax rates under the recently enacted U.S. Tax Cuts and Jobs Act of 2017. The effective tax rate exclusive of these effective tax rate adjustments would have been 33.8%, generally in line with the prior year.

Full year capital expenditures totaled $174.5 million in 2017, which includes additional capital investments for the newly-acquired Dispensing Systems operations. Capital investments in 2016 totaled $191.9 million, which included costs associated with the new plant expansions and investments to support our footprint optimization plans. Additionally, we paid a quarterly dividend of $0.09 per share in December. The total cash cost of that dividend was $10.1 million. And for the full year, we returned $40.5 million to shareholders in the form of dividends. As outlined in Table C, we generated free cash flow of $224.1 million or $2.01 per share versus $179.9 million or $1.49 per share in the prior year.

I'll now provide some specifics regarding the financial performance of each of our 3 business franchises. The metal container business recorded net sales of $2,280,000,000, up $6.2 million versus the prior year. This increase was primarily due to the pass-through of higher raw material costs and the impact of favorable foreign currency translation of $5.2 million, partially offset by lower unit volumes of approximately 2% attributable to lower soup volumes and a less favorable fruit and tomato pack on the West Coast of the U.S.

Income from operations in the metal container business was $230.2 million, an increase of $15.5 million versus the prior year. This increase was primarily due to lower manufacturing costs, lower rationalization charges and the favorable impact from an increase in inventories in the current year as it compared to a decrease in inventories in the prior year. These benefits were partially offset by the impact of lower unit volumes, the unfavorable impact from the contractual pass-through to customers of indexed deflation, an increase in depreciation expense, the unfavorable impact from the resolution of a past noncommercial legal dispute and foreign currency losses in the current year period as compared to foreign currency gains in the prior year period.

Net sales in the closures business increased $449.6 million to $1,250,000,000 in 2017, primarily due to the inclusion of the Dispensing Systems operations, the pass-through of higher raw material costs and the impact of favorable foreign currency translation of $6.7 million. These benefits were partially offset by approximately 3% lower volumes in the legacy closures operation as compared to record volumes in the prior year period. Unit volumes decline were attributable to the decline of single-serve beverages due to colder weather conditions in major markets served.

Income from operations in the closures business for 2017 increased $42.2 million to $142 million, primarily due to the inclusion of the Dispensing Systems operations and lower manufacturing costs, partially offset by the impact from lower volumes in the legacy closures operations. We also recorded a onetime write-up of inventory for purchase accounting totaling $11.9 million in the second quarter of 2017, which negatively impacted operating margin for the year.

Net sales in the plastic container business increased $21.1 million to $565.1 million in 2017, principally due to the pass-through of higher raw material costs, higher volumes of approximately 2% and the impact of favorable foreign currency translation of $1.2 million, partially offset by a less favorable mix of products sold. Operating income increased $22.6 million to $27.8 million for the year, largely attributable to lower manufacturing costs, higher volumes and lower rationalization charges, partially offset by higher depreciation expense and the unfavorable impact from the lagged pass-through of increases in resin costs.

For the fourth quarter, we reported earnings per diluted share of $1.31 as compared to $0.20 in the prior year quarter. We recorded adjustments reducing earnings by $0.99 per diluted share in 2017, largely a result of the net tax adjustments reducing future tax obligations. We recorded adjustments increasing income of $0.04 per share in 2016. And as a result, we delivered adjusted earnings per diluted share of $0.32 in the fourth quarter of '17 versus $0.24 per diluted share in the same quarter of last year.

Net sales for the quarter increased $189.8 million versus the prior year, driven primarily by the inclusion of the Dispensing Systems operation, the pass-through of higher raw material costs, the impact of favorable foreign currency translation and an increase in volumes of approximately 4% in the plastic container business. These benefits were partially offset by a decrease in unit volumes in the legacy closures operations and the metal container business of approximately 4% and 1%, respectively.

Income from operations for the fourth quarter of 2017 increased by $34.2 million to $86.4 million, primarily as a result of the inclusion of the Dispensing Systems operations, manufacturing efficiencies and lower costs in each of our businesses, the favorable impact in the metal container business of an increase in inventories in the fourth quarter of 2017 as compared to an inventory decline in the prior year period. Lower rationalization charges and higher unit volumes in the plastic container business also benefited the quarter. These benefits were partially offset by lower unit volumes in the legacy closure operations and the metal container business and the unfavorable impact from the contractual pass-through to customers of indexed deflation in the metal container business.

The tax rate for the fourth quarter of 2017 was a negative 159.2% versus 32.4% in the prior year quarter. The fourth quarter 2017 tax rate benefited due to the impact of the recently enacted U.S. Tax Cuts and Jobs Act. During the quarter, we recorded effective tax rate adjustments of $110.9 million primarily to revalue the net deferred tax liability to reflect the lower future cash tax obligations. Exclusive of this adjustment, the fourth quarter rate would have been 37.6%, which is somewhat higher than anticipated due to the settlement of certain outstanding tax disputes, partly offset by higher income in more favorable tax jurisdictions.

Turning now to our outlook for 2018. Our current estimate of adjusted earnings per diluted share for 2018 is a range of $2.03 to $2.13. Reflected in our estimate for 2018 are the following: Operating income in the metal container business is forecasted to benefit from continued manufacturing efficiencies and the lagged contractual pass-through to customers of indexed inflation, which are expected to be largely offset by the unfavorable impact from significant reductions in inventory, which we expect to be approximately $60 million over the course of 2018. Not all of this improvement will benefit free cash flow in the current year due to the timing of the inventory reductions and our corresponding payment terms with our vendors.

The closures business is expected to benefit from the full year of the Dispensing Systems operations, including synergies; the absence of the purchase accounting inventory write-up recorded in the second quarter of 2017; continued benefits of manufacturing efficiencies; and higher unit volumes. We're expecting the plastic container business to benefit from continued manufacturing efficiencies and volume growth. These benefits will be partially offset by costs associated with the start-up of the new Fort Smith, Arkansas facility.

In addition, we expect interest expense to increase versus 2017, largely as a result of higher average short-term interest rates and higher average outstanding borrowings as a result of a full year of borrowings to fund the Dispensing Systems acquisition, partially offset by the benefit from the portion of 2017 free cash flow used to pay down debt. We currently expect our tax rate to be approximately 24%, but it is subject to adjustments as more guidance is provided around the recently enacted Job Cuts Act. Also, we expect capital expenditures in 2018 to be approximately $200 million as we have chosen to utilize the portion of our cash tax savings to fund additional high-return projects, including the 2 new facilities announced to support customer growth largely in pet food.

We're also providing a first quarter 2018 estimate of adjusted earnings in the range of $0.32 to $0.36 per share, excluding rationalization charges, loss on early extinguishment of debt and costs attributable to announced acquisitions. This compares to $0.31 in the first quarter of 2017. This increase is primarily a result of the inclusion of the Dispensing Systems operation and the benefit of a lower effective tax rate, partly offset by higher interest expense, lower operating profit in the metal container business due to the unfavorable impact of the inventory reduction program and a very strong product mix in the first quarter of 2017 and the unfavorable impact from the pass-through of increases in resin costs.

Based on our current outlook for 2018, we expect free cash flow to be approximately $300 million, a 34% increase versus free cash flow of $224.1 million in 2017. This increase is expected to be driven by improved operating income in each of our businesses, including the benefit from a full year of the Dispensing Systems operation, net improvement in working capital as a result of the significant reduction in inventories in the metal container business and lower cash taxes. These benefits will be partially offset by an increase in interest payments and higher capital expenditures.

That concludes our prepared remarks. So I'll turn it over to David and he can provide directions for the Q&A session.

(Operator Instructions) And we'll take our first question from Mark Wilde with BMO Capital Markets.

Bob, I wondered if it's possible for you to just parse out in maybe a little more detail those swing elements in the free cash flow guidance? You've given some of it already. You've given us like the CapEx number is going to be up $25 million. I just wondered if you could help us a little more some of the other pieces.

Yes, sure. So if you're bridging that, basically, you've got roughly $40 million coming from the Dispensing Systems operation, which includes the synergy. It also offsets the acquisition cost that we had in 2017. And then, basically, you've got the interest hit there of roughly $10 million and some capital. And then you've got some legacy business improvement and EBITDA cost somewhere between $15 million and $25 million. And then you've got the working capital benefit that we talked about, and that's offset by incremental CapEx and higher interest, and then a bit of a cash tax benefit. So those are the primary pieces.

Okay. And Bob, is it possible to get a little bit more color on the 2 projects that you've announced with the release, the Allentown project and the Fort Smith project?

Sure, it's Tony. Yes, I think what we have in the release is mostly what we have for you. We have seen growth opportunities for both of those businesses. On the Allentown side, it's a relatively small 2-piece can plant and just supporting growth for a key customer in that region. I think maybe more importantly and slightly more -- and by the way, that -- the cost of that at this stage is some $15 million, so just to scale the size for you. I think the Fort Smith one is perhaps a bit more interesting. That is a plastic thermoform business. As I think you know, we had acquired the Rexam business several years ago and have been very happy with the free cash generation of that business and have been seeing some growth as it sort of filled up its capacity in a single plant. And really, our hope all along is that it would be able to grow out into a second plant. And essentially, what happened here is that it has had that opportunity with some really interesting growth opportunities coming forward that we're now building a second plant for it. That will be in the $30 million-ish range cost.

Okay. All right, that's helpful. And then, finally, Tony, I wondered if you could just give us some sense of how you'd see the path forward this year on the turnaround in the plastics business. I know now you're starting to focus more on selling new volume and trying to kind of increase the load on those plants. So if we could maybe get some sense on how that's going and how you think the cadence looks as we move through the year.

Sure. So we're obviously very pleased with the progress the business made on its cost side this year, which was our key focus. We needed to get the cost -- again, recall this all started with an effort for us to get the competitive cost position of that business in a better spot. That took a little longer than we thought. It was a bit more challenging as we went through it. And I would say that we've now come through that process, feel very good about the cost position of the business. As you know, we've called out sales through that process, a business that was less attractive to us. And so you're right that we are -- we now believe we're at a spot where we can begin to get back to growth. You already saw, for the year, up 2%. Quarter, up 4%. I wouldn't read too much into that discrepancy. By the way, that's kind of just the lumpiness of growth, if you will. But I would think that we'll be -- our expectation is something like that. 2% growth continues. Obviously, that's not enough to get us all the way where we want to go. But, a, it takes a lot to grow in that business. You've got to get capacity in place, get tooling, ramp up for customers. So I would -- we look for modest top line growth but increased backlog as we go and continued cost reduction and working on the cost side. So that will be a big part of the EBIT improvement. But as Bob said, our expectation is for improvement, not on the scale that you saw in 2017, of course, but meaningful nonetheless.

And next, we'll go to Chip Dillon with Vertical Research.

You mentioned in your press -- I'm sorry, in your comments in the press release about the volume for food cans this year and mentioned that there could be some potential declines in other can markets. I thought maybe -- I mean, perhaps, you're talking about soup, but maybe you could give us a little more clarity on that.

Sure. I think exactly what you said, we're not trying to signal anything there other than what we kind of generally say about the can business, which is that we see it as being broadly flattish over time and that's because there are some markets that are growing, and we list some of those. And then there are some that have had certain trend line, where it's been a little bit more challenging, soup being a clear example of that. I would not read that as saying we think that's a permanent answer for soup. I just think that the -- it's a much longer question of whether consumer preference and interest in the product and the package can change over time. But that's all that's really implying, that we see growth in some markets. We see a little bit of a recovery in the West Coast for vegetable pack, and we offset that with some markets that may well see a little bit of trended declines.

Okay. And then, speaking of volumes. When you look at Dispensing Systems, I guess, the acquisition kind of lapsed in the second quarter. And so what kind of volumes would you be looking for? Since then, it'll be all organic at that point. What kind of range should we expect for the rest of the year there and perhaps into '19?

Sure, good question. It probably won't surprise you in the call, but we've been very pleased with the Dispensing Systems business thus far. Not only they achieved every integration and synergy target, but they hit their numbers along the way. And there was some growth in the current year. Even though currently, 2017, even though we have seen some declines on the home and garden side, we're obviously expecting the home and garden to be better season in 2018. And some of those other markets that have been growing through '17, we expect to continue in 2018. So the number I'd put out there for you is something in that 3% to 4% range.

And next, we'll go to Anthony Pettinari with Citi.

Just following up on metal container volumes. I think in 4Q, the industry was up 2% and you were down 1%. And you talked about soup and then a less favorable West Coast harvest. I was wondering if it's possible to parse out how much of that was soup versus the weaker harvest. And then you had a soup customer that announced a plant closure in Canada. Is that something that's impactful for you going forward or is that just kind of part of the -- some of the long-term pressures you talked about?

Sure. And just to clarify, your question is really about the volume in the quarter, right?

Yes, yes.

Yes, okay. So I would say, right now, the impact of volume in the quarter for us, we were down about 1%, as you said. Europe was down a little bit. And then, as you pointed out, soup was down. And I would say soup, recall there were a couple of things going on in there. One, you had a customer who was moving a fill site, and so that had some impact that would have carried in the quarter, we believe. And then you had another customer within negotiations with their end customer, and so that had some impact on it. So those were the kind of 2 things that were going on in soup, not really a lot out there. There had been, as we talked about in Q2 or Q3, there had been fairly small competitive loss that we had incurred. So it's a little bit more of that in Q3 as well. So that kind of what happened. If you compare that to the rest of the market, which did have a little more growth, I would remind you that I think it was made clear in Q3 that some of the vegetable pack in the Midwest, I think particularly Southern Midwest, had shifted a bit from Q3 to Q4. That's a market we're underrepresented in. So it makes perfect sense of us that the rest of the market got some of that pack business in Q4 that we were not expecting to get the difference there. It is true that one of our customers have announced shutting of a fill plant. That really had 0 impact on us. We were importing cans to them from a plant in the U.S. and will continue to do that now to their moving base that fill to another one of their plants in the U.S. And it really won't change us at all for where we ship the cans to.

Okay, okay. That's extremely helpful. And then just a follow-up on Allentown and Fort Smith. It sounds like Allentown is serving an existing customer. In terms of Fort Smith, are you -- is that being built to serve a large customer or multiple customers? And do you have committed volumes as you ramp that plant?

Yes. On Fort Smith, the plant is not just to do any one thing. It is primarily being supported right now by growth for one existing customer. And yes, that particular customer, we have long-term contract with.

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

This is actually Gabe sitting in for Chris. One question that's probably a little bit higher level for you, Bob, just thinking about the change in tax rate. Does that in any way alter sort of the hurdle rate for you guys with respect to both kind of internal investment as well as M&A and maybe open up the pipeline of investments that you otherwise might not have thought about or considered allocating capital towards with a more favorable tax environment? And I asked that question sort of in the context of having some of your food can assets sort of co-located with customers and stuff like that and/or appreciating that some of them are somewhat older.

Yes, look, there's no question that with the lower cash tax rate, your after tax returns look better. So I think it's incumbent upon us to make sure that we don't open that gap too much so that we're taking on projects that we actually aren't earning the kind of return that we would be accustomed to. But I think on the margin, there's opportunity for us to put some good value creating projects on the list that benefit from the lower tax rate as well. So I think it does help the investment thesis over time. But the point is to not let the air out of that too quickly.

And Gabe, at the very end, you mentioned the asset somewhat older, I think I couldn't help but react to that a little bit. I think the -- while it's true, we would not look at our can asset and say that we see a whole lot of inefficiency sitting in our system that these are much slower, et cetera, lines. So I wouldn't want to leave you with the wrong impression on that. We have invested where it makes sense, as long as we've been in the business. Yes, the hurdle changes here a little bit, but it's not as if we're sitting with a huge amount of uninvested opportunity. That's not how we view it.

Okay. If I were to try to frame up a number and I think about legacy Silgan sort of stand-alone CapEx of $135 million, $140 million plus $15 million from the acquired Dispensing Systems business, could that maybe migrate closer to kind of the $175 million range for some period of time? Or is that just putting too fine of a point on it?

Yes, well, the $175 million is kind of where we would have targeted this year, right, 2017. And I think we're moving that up a little bit, which does include the new -- 2 new plants. And some of that is as we're taking on some new projects because of the tax benefit freeing up some cash. So I would probably put the number on an ongoing basis probably somewhere between that $175 million and $200 million as being pretty normal on a go-forward basis. Obviously, the $200 million is a little bit to the high side. But I think we will find opportunities to invest with customers and the likes. So it's kind of the norm, including Dispensing Systems. And that's pretty similar to what we said at the acquisition call as well.

Understood. One last quick one, hopefully, and I apologize if I missed it. Did you guys talk about the new Fort Smith plant coming online and servicing your customers as more of a 2019 event?

Yes. It's probably a '19 event by the time you see any benefit. So the plant will be under construction for most of the first half of the year into Q3. We'll probably go through some qualification in Q4 and have commercial volume being sold in '19. So that is a net drag of a bit on 2018 earnings as well.

And next, we'll go to Scott Gaffner with Barclays.

Just one first question is really a follow-up. When you look at some of these high-return projects, what exactly is the return hurdle or return threshold that you're looking for to take on this project today?

Well, typically, we've said that we look at whether it's a CapEx project or an acquisition or a restructuring. We all -- we look at all of them from a cash in, cash out basis. Typically, we've looked at a pretax return from an IRR standpoint that's been from an acquisition, it's probably been in the low teens. When we're putting new capital into the business, we're looking certainly above that, and that's kind of helped us maintain our average returns in the mid- to higher teens. So on a pretax basis, I'm not sure that return changes much, but obviously, you get a benefit on the tax side. So over time, I think it'll open up some opportunities for us to spread the edges just a bit.

Okay. And Tony, I think in your prepared remarks or maybe within the press release, you talked about being previously disadvantaged from having a high cash tax relative to your competitors. Can you sort of parse out that comment, what sort of competitors you were focusing on in that commentary? Is that in the plastics business?

Well, it could be across the board. I mean, we have lots of our competitors are more heavily on the international side on tax that we compete with. So it could be in plastics. Certainly, in the can side, that's true, too that we have a higher tax rate. I think even if you want to talk about who our equity competes with, I think across the board, we've been kind of comparatively at a relatively higher tax rate. Put another way, I think that Silgan is a poster child for a company that benefits from this tax change. We've been a highly profitable, high tax payer for a long period of time, heavily in the U.S., competing with a lot of companies that are in different jurisdictions to get the benefit of global tax structures, treaties that we didn't have. And so again, I think it gives us advantage against that entire population group versus where we were before.

Yes, Scott, I think one of the important things not to miss is that this tax change does permanently improve the free cash flow generation of this business, and that's comparative to the competitive landscape.

Right. No, that's fair. I guess, on the working capital benefit, though, I mean, Bob, you mentioned a $60 million -- I think you mentioned a $60 million negative impact to segment operating profit. Is that right? And if so, what...

No, no, no. The $60 million is the inventory that we plan to take out. Now that'll be impacted to some degree by inflation that we'll experience on a year-over-year basis. But that $60 million of inventory will come out and that will yield -- it won't all yield free cash flow in 2018 because of the timing of some of those reductions against the payment terms that we have with our corresponding vendors. So we're -- of that, we're expecting that we'll get some $25 million or $30 million of cash benefit on a year-over-year basis. And that probably has somewhere in the $10 million to $15 million drag on earnings over the course of the year. And that'll be split between Q1 and Q4 as we take the inventory out on the shoulder periods of the slower seasons.

All right, that's really, really helpful. Last one for me is just on transportation cost. Can you talk about -- I assume you don't use very much rail other than on the way in for steel. But can you talk about rail versus truck? And any sort of inflationary pressure you're feeling there and just your ability to pass that through? Is it mostly through the contracts? Or how should we think about that?

Sure, that's a good question, by the way. So transportation has been a bit of a challenge since the hurricanes of the fall. There is definitely a very tight supply for trucks primarily. So you're right that, that rail for us would be more inbound, and as a rule, it's truck outbound. And so there absolutely has been our inflation. It's in our numbers. Currently, we are assuming there will be inflation as we go forward. It varies across our business. As a general rule, a lot of it gets passed through but not all of it. And of course, by the way, sometimes we're moving things between our plants, too, and that's generally our growth. So it's a headwind for us and one that we're managing.

And next, we'll go to Ghansham Panjabi with Baird.

So first off, just as a clarification. Is the Allentown plant for metal food sort of part of your longer-term footprint optimization? As the end markets themselves are changing, growth in pet food declines elsewhere. And if that is the case, should we expect the capacity cut elsewhere in your production footprint as an offset over time?

No, that's -- it's totally fueling growth in a geographic region that best suits the customer.

And can you size the incremental business for us?

Yes, it's a $15 million capital investment. I think that's kind of the size. So it's nothing. I mean, it's -- mostly there were public announcements about the site. We wanted to be sure everybody understood what was going on. So we don't typically talk specifically about a single $15 million investment.

Okay. And then just in terms of the like-for-like volumes for the acquired Dispensing assets, I'm sorry if I missed it. But can you break that out for us? And also why is legacy Silgan closure still down on the heels of a pretty large decline in 3Q as well. Is this customer-specific, end market-specific? And how does that break down between metal and plastics?

Ghansham, it's Adam. I'll start with the last question first on the legacy closures. Again, as we had talked about in Q3, really, the cooler weather and wet conditions in the U.S. market really did affect our single-serve beverage business. And at the time that we were talking about that in Q3, we expected Q4 volumes to be down versus prior year as well, remembering that 2016 was a record year in volumes for our single-serve business. So it was a tough comp anyway. But I would say our volumes were roughly in line with what we expected. And as we look at the business, we feel great about where our legacy closures business is and it's well-positioned for growth in 2018. It won't be back to the record levels of 2017, at least we don't expected it to be at this point, but we're well-positioned for growth in that business. For the most part, it was on the plastic side of our metal plastic distribution because it was the single-serve beverages again, sports drink, ready to drink teas, these types of products. Like-for-like Dispensing Systems business, unit volumes were up slightly. The business has performed well, as Tony said. We had a market that was challenged in 2017 in the home and garden market. That was really offset by growth in a variety of other markets, probably led by fragrance and health care. And again, well-positioned for growth, well positioned for recovery in Home and Garden in 2018. So across the board in our closures business, I think we're feeling really good about the prospects of 2018.

And next, we'll go to Tom Narayan with RBC Capital Markets.

Actually, my first question is follow-up on Mark's question, and thanks a lot for providing that bridge to the free cash flow guide. When I do the math on the numbers you gave, I'm getting a $50 million source of cash on working cap. I know you guys said $25 million to $30 million was from inventory takeout. Just curious what was causing the rest of that? And also, the $20 million on the EBITDA benefit. What was behind that expectation? How does that compare to what you've gotten previously?

Yes, I think the working capital difference there is we had some benefit in 2017 from working capital improvement as well. So the $25 million to $30 million that I gave you is the net year-over-year benefit. So it depends upon from where you're starting bridges.

Okay. And then the $20 million EBITDA expectation, what was behind that?

Yes, that's just improvement across the businesses.

Okay. And the -- on the 1Q guide, there were 3 components you called out in the release: the year-over-year seasonal inventory build, lagged resin prices and higher interest. Could you maybe rank which is the biggest contributor and maybe what's really behind that first component?

Yes. I'm not sure I got the first. So the big components on the Q1 in comparison are, first and foremost, is the inventory reduction that Bob has been talking about. Again, we're going to be looking to take $60 million of inventory out on a pre-inflated basis, and we'll do that roughly 1/3 in the first quarter and 2/3 in the fourth quarter. And so you're going to have it -- there's a $15 million overall overhead cost. And for those that aren't tracking with us, basically, you just have a lot of fixed cost in your business and less inventory leaving your balance sheet in means those costs flush through your P&L. So you'll get roughly 1/3 of that in the first quarter, I'll call it, $5 million-ish in the quarter. The second part of it, in the container, the food can business, is if you look back at that quarter a year ago, we had a really good mix because we were getting a lot of the pack cans out early in that year. And so we're comparing that, and that's got some $3-ish million impact as well. So the most sizable when you compare it to the total business is the bulk of this is going to sit in our metal food can business, which could be down. I just gave you some $9-ish million in total. The rest of the inventory, spread amongst our businesses -- sorry, would be resin impact spread amongst our businesses, although the bulk of that is probably going to be in closures given kind of which resins are doing what.

Okay. And then so the inventory adjustment, that's the primary cause for the 1Q?

That's number one, yes.

And next we'll go to George Staphos with Bank of America Merrill Lynch.

So I wanted to go back to that question Tom was teeing up earlier. So the -- if we tried to equate the $50 million effect to earnings to volume or the $60 million working capital, I was very roughly and probably incorrectly coming up with maybe a 4% to 5% drop in production. Is that reasonably accurate for the year for the food can business?

Yes, it's reasonably accurate, but I think you're a little high.

Okay. Understood. And I guess, one question, not that anyone is perfect. Certainly, we're not. But if we ask the question, what was it that caused you to have to take the working capital out, recognizing it's a good thing in some ways and it'll help fund your CapEx. What happened that you had to take this sort of one-off adjustment in working capital in prior periods?

Yes, it's a great question, George. And I kind of wish we could redo this call all over again and say this to us is totally expected. Maybe we should have signaled it much sooner. But basically, we went through a major footprint optimization of our can manufacturing assets. We improved the layout of those assets for our current needs, et cetera. We had indicated that left us with excess capacity in 3-piece at this stage. We had indicated that, that's not one plant that goes out. That's across lots of plants. And so the net of all, it means that we've got better served capacity, if you will, and therefore, less need to carry quite as much inventory. And that's been known to us for a long time that at some point we'll do it. Also, as we went through this rather major process of rationalizing our footprint, we had to build inventory. We had to have inventory ready from the old assets before the new assets came on. Then we had to run off the new assets. And so over the course of last 3 years, we built inventory mostly at the beginning of the project. But so that's kind of what happened. So to us, this is kind of a natural extension of where we are now that we work this inventory down. It's our intention that this is a more permanent level for the business going forward. It will not only produce cash for us this year, but it will also reduce overall operating costs for the business going forward -- less packaging materials needed, less warehousing, more efficient in terms of moving items around. And so it's just the right thing to do for the business. It generates cash. And oh, by the way, it has a noncash P&L hit in the process of doing it.

Sure, Tony, that's very clear. I appreciate that. One thing again, everyone in Washington should be happy with what you're doing in terms of using the tax proceed, at least some of it, to invest for growth. The investment this year in plastics and also in metal, I didn't hear if you call that if there's any kind of operating cost negative from those investments in this year. Would it be more of a '19 event after you're done with the capitalizing then you start running the equipment?

No, no. Bob did mention it, but I can understand that may not have heard it. But particularly in the plastics business, there is a couple of million dollars or so of costs associated with the plant. That's embedded in our outlook for that business. And the can side -- a little less. So just because of the scale of it against the can business, it's not really worth discussing.

Okay. Two last quick ones. I'll turn it over and try to come back. So a $15 million food can plant, I don't know that I've ever heard of one, that, that is so bite-sized. Now are you utilizing a pre-existing line or is that new equipment that's going into the $15 million plant? And the plastics plant, is that aimed at a food processing-based customer? Or is it -- is the customer more in fresh product? Just curious on that.

Sure. So on the food can one, you're right about that. It's possible this plant will get bigger in time. But it certainly, this plant relies upon the infrastructure, the entirety of our can business. So it's making a particular can, it needs [ending] supply from somewhere else. It's better. So it's more about a geographic play that's good for the customer and good for us. And it's a very discrete operating cell, so it's reasonably efficient to do it in that manner. The plastics business, it will be for kind of anything that our thermoform business, barrier thermoform business tends to sell to, which are food-based, either for humans or for pets. So it is not -- your question, is that personal care, anything else like that? No, it's human or pet food-based is the market that will be served.

Okay. But it sounds more processed on plastic and then on food cans, it sounds like it was a new line.

That's right.

Yes.

And next, we'll go to Debbie Jones with Deutsche Bank.

My question is actually looking to Europe. We're focusing out more in the U.S. because of the tax reform. But I didn't quite catch what your volume expectation is in Europe metal food. And then, I just wanted to ask, what's the strategic direction of your business there? What's your capital spend? Is there an M&A pipeline or is everything really now just being directed towards plastics and other U.S. businesses?

Okay. So Europe food cans, good question. The expectations for modest growth in that market is they had a reasonable year this year, and so there's not any kind of major change there. Again, for history, I'll recall for everybody that when we acquired the business, the idea was really to move heavy into Eastern developing markets. Those markets, in some cases, are not as developing and interesting as they once were, so we kind of slowed that down a bit. In some of those markets, that's less true. For instance, in Russia, we continue to grow and have an interesting operation, although we're doing that kind of modestly and in a disciplined manner, if you will. So we continue to like what the business is doing but are really assessing kind of where that growth goes. We're happy just leave it where it is and growing a little bit more organically right now and watching the overall market.

Okay. That's helpful. And my second question, maybe too many steps ahead here. But I've seen a number of consumer analysts taking down their margin assumptions for some companies, including some of your customers. And the idea being wage inflation increased marketing spend, and in some cases, pricing moving down on a competitive level. Is there risk, and do you think about this as a risk that, that kind of has a trickle-down effect to your margins?

Well, there's certainly -- there's a lot to that. I mean, in many of our businesses, we have pass-through of our inflation of labor, at least on an index-basis, can business, as an example. So in that market, it's actually been the deflation of last couple of years that's been a problem for us, as we talked about, because we weren't deflating what we paid our people or other costs, et cetera. And so deflation pass-through was more of a challenge for us in the past. If you get to inflation on an index basis, you pass that through. And if you pay it to your employees, then you're kind of -- you're whole on that. Not all of our business does that, of course. So in other cases, we do have wage inflation pressure on our business. And we have plastics as an example. There we absolutely have it. And we've been experiencing this for some period of time. One of the things that made the footprint optimization plan so hard for us for so long was the challenge in hiring qualified people in the markets that we were adding capacity, et cetera. So we're very familiar with the challenge to hire good people and the fact that we need to pay a strong wage for that. So yes, there is absolutely going to be some inflation on wage in that. Our expectation is that we'll keep trying to push that into the market and that we and our competitors need to get that. Again, as you say with plastics, margins have been pushed down so low in that market. Our belief is that over time that you're going to have the opportunity to get that back out through the price. We then move that, of course, to our consumer goods customers, which is what you're hearing from them. And then, the problem that they have is can they get that through to the consumer.

(Operator Instructions) Next, we'll go to Brian Maguire with Goldman Sachs.

Tony, I think you've mentioned a competitive loss in the third quarter. Just was hoping to get a little bit more detail on anything you could provide, any insight into what happened there and how much of a one-off that might be and if you think you can kind of make it up with some competitive wins in other parts of the business.

Yes, just again to review that we -- this is something that we had talked about, I think, in the second quarter, if I'm not mistaken. So this was a relatively small customer that had to have moved supplier. So we do view it as being kind of an isolated item. But we've also said that you do have excess capacity in the market. You've got new lines that have been built, and players are trying to fill those lines up. So I can't tell you it won't happen ever again for sure. We feel very good about the quality of value that we bring to our customers. So we feel like we're in a really good spot as all of that kind of competitive activity unfolds. But this is just one example where there's bound to be a little bit of give-and-take through that process. And we have scaled it. This was kind of 1%-ish to our business. So really, I was just sharing it again today to help everyone bridge our volume move for the year.

Okay. And just hoping to get some updated thoughts on the balance sheet now that you had the Dispensing business for a couple of months and have been generating some cash off of it, and it sounds like a pretty good free cash flow outlook for 2018. Just wondering when we might get to the second stage of that acquisition, which is maybe some of the platform for growth that it gives you from an external growth point of view and how close we might be getting to that point?

Sure. We're executing just as we would have expected. I think in previous calls, we kind of indicated that we thought we'd be, from a leverage standpoint, down closer to 4. As we exit the year, we're kind of right there. And then, with the free cash flow profile of next year that's roughly another half a turn of leverage coming off. So that would put us right back kind of in the range, which is kind of what we anticipated and what we communicated through the deal announcement. So I think we said that our preference was to demonstrate free cash flow was there, that we wanted to delever. We're certainly through step 1 of that with a very good path to step 2. I think through all that, we were also at least endeavoring to be pretty clear that, that didn't mean by any sense and circumstance that we were not looking at the acquisition pipeline, that we were going to stay active, that where we found strategic opportunities, we would pull the trigger for the right value-creating one. So I think we're well positioned as we move into next year to continue -- or into '18, to continue to look and where the right opportunity presents itself, we're happy to pull the trigger if the economics look right. And as you said, that's a good opportunity set for us around the Dispensing Systems business because of the quality the team that we have on the ground there. The broader profile of closures generally is an area that we certainly would look to grow out. So yes, I think by all intents and purposes, we're kind of there with step 2. And now, obviously, we've got to move along the path of generating that free cash flow but feeling pretty comfortable that it's there and for the right opportunity would move forward.

And next, we'll go to Adam Josephson with KeyBanc.

Bob, just a couple questions following up on Mark's on the free cash flow bridge. Just want to make sure I understand. So the working capital benefit, I think, is around $50 million and then the year-over-year growth or the year-over-year net benefit is about $25 million, $30 million, right? Is that what you were saying earlier, Bob?

That's right, yes.

And then what's the cash tax benefit in '18 versus '17?

So there's some $25 million or so, maybe a little bit more than that in the year.

And that would be...

Timing of payments.

Yes. Then we've got timing of some tax payments that moved between Q4 and Q1 between '17 and '18 will offset that a little bit. But the gross benefit of the tax change is the $25-or-so million.

Right. And then beyond '18, the $25 million to $30 million is what we should think about as the recurring benefit you'd have from this tax cut, right?

Yes. So well, actually, if the business grows, it will get bigger, right, because it's the flat rate against the taxable income. But yes, that's a permanent cash flow benefit that we'll get on an ongoing basis.

Okay. And then just, Adam, on the Dispensing business, can you just help me with what the resin buy there is and then what your outlook is for polypropylene and other resins?

Sure. I think you identified it. The resin -- the primary resin material that Dispensing Systems use is polypropylene around the world. Obviously, as we sit here today, polypropylene is undergoing a significant increase here at the beginning of the year. Really, since the hurricane season of 2017, polypropylene has increased, and so we've been passing that through to our customers with our contractual mechanisms throughout the businesses. Where we don't have contractual pass-throughs, we've gone out with price increases, et cetera, to offset that resin cost increase. As we look to the full year of 2018, it will absolutely be a headwind in polypropylene for Q1. But we think that with the forecasts that are out there through CDI and other indices, that resin prices for polypropylene will fall towards the latter half of the year. And ultimately, we're expecting somewhat of a flat resin market for the entire year even though we've got the headwind in Q1.

Got it. And then just what's the nature of the pass-through? I know you said not all of it is passed through. But can you just help me with what percentage of sales are passed through and just the average length of the pass-through?

Sure. I think that on the contractual business, what we say is it's a broad majority of the pounds that are purchased for Dispensing Systems. So I'm saying pounds versus the unit volumes shipped because of the broad breadth of products that they have. The pass-through mechanism for the majority of those pounds really looks a lot more like our plastics business, and you've kind of got a quarterly pass-through mechanism that's pretty standard in the plastics world. For the business that is not covered by a pass-through mechanism, again, much smaller volume, more unique parts. And those are kind of -- those are negotiated on an annual basis with the ability to impart price increases, if necessary. But again, the volume's so small on the pounds that we feel pretty good that we're covered from a total polypropylene perspective.

And next, we'll go to Tyler Langton with JPMorgan.

Just on the Dispensing Systems acquisition. Are you still targeting the $15 million of synergies and we sort of assume you kind of earned half in '17 and you will earn the remainder this year?

Yes, we're actually -- the number actually is going to improve, be even better than that, a bit better than that. And we got more of it in the current year, a little bit more. Certainly, by the first quarter, we've got most of it into the run rate of the business.

Okay. So you earned the majority of it in '17 and kind of after 1Q '18?

No, no, the majority is in full run rate. And so you've got something in the range of $10 million of it in '17. $5 million more are coming in, in '18. And that's already in the run rate you'll see in Q1.

Got it, okay. Perfect. And then just about, I know you got a higher interest expense for the year. Can you just give kind of a range of what you're assuming? And then I don't know if you have any sort of sensitivities of that expense to interest rates moving higher.

Sure. We would kind of guide towards something that looks like $124 million for the year. That's probably a little bit higher than what we would have been expecting. And essentially, what you've got versus the $110 million that we had in 2017, and that $110 million is excluding the loss on our extinguishment, obviously. But the bridge between the $110 million and the $124 million is essentially you've got another quarter of Dispensing Systems, which is roughly $10 million of that. And then the $4 million, which is the piece that maybe is a bit higher than where we would have expected, is largely driven by increases in short-term rates. So on a year-over-year basis, looking at the forward curve, the expectation is that short-term rates could be up somewhere between 75 and 100 basis points. And so what we did do, however, is offset the incremental 2 months of the bonds that we issued and the negative arbitrage on the rate differential there is we used our free cash flow in 2017 to pay down a portion of our debt. So that's kind of how you net to the $124 million. I think the risk in opportunity there is really just driven around what rates ultimately do. Right now we're basing it on the forward curve.

Got it, okay. And then just a final question. I think you said sort of passing through inflation this year would be a benefit. Can you kind of give a rough sense of what that could amount to?

Well, what I really said is that the deflation of the past is more of a headwind. So basically, what happens is if we experience exactly what index inflation is, we pass that through and we're whole on that. If we could be a little bit better than that, then we gain. And so, historically, we managed to be a bit better, but I'm talking about fractions of a percent difference between the inflation you pass through. So I would scale that as a reasonably small number, a couple of million dollars in 2018.

And next, we'll go to George Staphos with Bank of America Merrill Lynch.

This is actually [Molly]. George had to drop off for another call. But basically, we're working on a bridge analysis for revenue. And basically, we found that it suggests that price mix of the segment was up about 4% to 10%. Was there any of this margin created from pricing?

Yes, for sure, price mix. It depends on how you do your math. Absolutely, the revenue line is going to have pricing in it. No investments, [call initially] but we have meaningful inflation in our raw materials for next year. We talked resin, but we didn't talk steel is up double digit, kind of whatever region you want to look at. Aluminum is up. And so that all is being passed through in our top line as well.

And next, we have a follow-up from Chris Manuel with Wells Fargo.

Just one question, maybe for Adam. You mentioned 3% or 4% growth in the Dispensing Systems business. I just want to confirm that was in fact in the acquired business and does not include anything from legacy. And then, two, if you can comment at all to the extent that anything has changed in the competitive landscape with one of the larger players changing hands here recently. Maybe it's too early.

As far as the 3% or 4% growth, that was specific to the Dispensing Systems business. And again, we feel good about that. That was not in relation to our overall closures business.

Okay. And the second part?

Can you repeat the second question, please?

Yes, just if you've seen anything in early days in the competitive landscape in the closures business in general with one of the competitors changing hands.

Got it. No, at this point, no, we have not. Again, there's a broad array of markets that the business in Dispensing Systems serves and a broad geography as well. So lot of different competitive sets out there for the business as we go forward. But at this point, no change in competitive landscape or activity with that acquisition specifically.

And I show that we have no further questions at this time. I'll turn the call back over to the speakers today.

Great. Thanks, David. Thank you, everyone. We appreciate your time and we look forward to talking to you about the first quarter in late April.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.