Q3 2019 Earnings Call
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[noise]. Thank you for joining US Silgan Holdings third quarter 2019 earnings results Conference call. Today's call is being recorded at this time I'd like to turn the call over to Ken Almer, Vice President Finance and Treasurer. Please go ahead.
Thank you joining me on the company today, Tony Allott, Chairman and CEO , Bob Louis VP, and CFO , and Adam Gridley, President and COO.
Well, we begin the call today, we would like to make it clear that certain statements made today on this conference call. Maybe forward looking statements. These forward looking statements are made based on management's expectations and beliefs concerning future events impacting the company and therefore it is all the number of uncertainties and risks, including but not limited to those describing the Companys annual report on Form 10-K .
For 2018, and other filings with the us.
Therefore, they actually doses operations financial condition of the company could differ materially from those expressed or implied in the forward looking statements.
I'll turn it over to Tony Thanks, Kim welcome everyone to our third quarter 2019 earnings Conference call.
Good morning will focus on the financial performance for the third quarter and then a review of our outlook for the remainder of 2019.
<unk> prepared remarks about 'em I'll be happy to take any questions.
As you saw the press release, we delivered adjusted earnings per diluted share of 76 cents for the third quarter in line with our estimates and matching our record performance the prior quarter.
We also overcame a three cents decrease and non cash pension income the current your four.
However, pap volumes were little short of our expectations and challenging economic environment in Europe , both kept us a little short of that high end of our range for the core.
Our classic business once again delivered volume growth a solid operational performance leading to another quarter of improved results.
The metal container enclosure businesses were largely in line with our prior year.
However, another relatively weak bring back conventional pack in Europe combined with a late start U.S. resulted in volumes below our initial expectations.
Despite the both businesses did well and controlling operating costs and achieving profit objectives.
Based on our year to date results and our outlook for the fourth quarter, which includes an earlier than anticipated down to the fruit and vegetable pack in early October we're maintaining our guidance and tightening the range for full year.
Estimate of adjusted earnings per share to $2.12 to $2.17, which includes the unfavorable noncash pension headwind of approximately 13 cents per diluted share.
With that I'll now turn over to Bob's review the financial results in more detail and provide additional explanation around our earnings estimates for the major tier.
Thank you Tony good morning, everyone.
So any highlighted we delivered an inline quarter as adjusted earnings per diluted share of 76 cents was consistent with the record performance in the prior year quarter and inline with our earnings estimates on a year over year basis, the quarter benefited from production efficiencies in the metal container business as inventories declined less than expected due to the curtailed sales.
Volume, resulting from lower pack sales.
Also benefited from volume gains and strong operating performance in the plastic container business. The prior year startup cost in Fort Smith, Arkansas, which did not recur and the favorable impact until like pass through of lower resin costs in the closures business.
Compared to the unfavorable impact from higher costs in the prior year [noise].
Less favorable mix of product sold primarily related to pack movements fire rationalization charges and lower non cash pension income across all businesses of approximately $5 million for the quarter more than offset these games.
In addition, the quarter also benefited from lower interest expense and a slightly lower tax rate.
On a consolidated basis net sales for the third quarter of 2019 were 1.320 billion an increase of 14.3 million primarily due to the pass through of higher raw material cost and the metal container business and improved volumes into plastic container business, partially offset by a less favorable mix of product sold the.
Pass through of lower raw material cost in the plastic container business and an unfavorable impact from foreign currency translation of approximately $12 million.
Results for the third quarter 2019 include charges totaling three cents per diluted share attributable to the announced shutdown of two metal container facilities and a loss on early extinguishment of debt.
There were no adjustments to earnings in the third quarter of 2818. Therefore adjusted earnings per share were 76 cents in each of the third quarters in 2019 and 2018.
Interest and other debt expense before the loss on early extinguishment of debt for the third quarter 2019 decreased a million and a half dollars to 26.7 million primarily due to a lower average outstanding borrowings largely a result of the repayment of debt at the end of 2018 and lower weighted average interest rates due in part.
For the redemption of the 5.5% senior notes on August Onest of 2019.
The loss on early extinguishment of debt of $1.7 million was result of the redemption of the 5.5% notes.
Capital expenditures for the third quarter of 2019 totaled 50.6 million compared with 43.4 million to the prior year quarter.
Year to date capital expenditures totaled 166.8 million versus 134.6 million in the prior year.
Additionally, we paid a quarterly dividend of 11 cents per share in September with a total cash cost of 12.2 million.
On a year to date basis cash dividends totaled 38.6 million.
Moving onto the specifics around each of the businesses.
The metal container business reported net sales of 822.3 million for the third quarter of 2019, an increase of 24.5 million or 3.1% versus the prior year quarter.
This increase was primarily result of the pass through of higher raw material and other manufacturing costs, partially offset by lower sales of larger pack related cans and the impact of unfavorable foreign currency translation of approximately $4 million.
Unit volumes were flat versus the prior year as lower volumes with pack customers were offset by volume gains with other customers including for suit.
Segment income in the metal container business was 81.1 million for the third quarter of 2019 versus 86.9 million in the same period a year ago.
The decrease in segment income was primarily due to lower sales of larger pack related cans challenging economic conditions in Europe higher rationalization charges and lower pension income, partially offset by production efficiencies in the U.S. due impart to higher finished goods inventory produced in the quarter in anticipation of higher.
Acs sales.
Net sales in the closures business decreased 7.4 million to $353.4 million for the quarter, primarily due to the impact from unfavorable foreign currency translation of approximately $7 million and a less favorable mix of products sold.
Unit volumes in the quarter were flat as compared to the prior year as higher volume demand in the U.S. beverage market was largely offset by lower volumes in the international markets.
Segment income in the closures business for the third quarter of 2019 was 44.8 million down two and a half million versus the prior year quarter.
This decrease was primarily a result of the net impact from higher sales of plastic beverage closures and a decline in pack related metal closures challenging economic conditions in Europe , and lower pension income, partially offset by the favorable impact from the lag pass through of lower resin costs in the current period as compared to the unfavorable impact.
From higher resin costs in the prior year period.
Net sales in the plastic container business were 145.6 million for the third quarter 2019, a decrease of 2.8 million versus the prior year quarter.
This decrease was largely due to the pass through a lower raw material costs, partially offset by a 3% improvement in volumes primarily related to the growth of pet food containers in Fort Smith, Arkansas.
Segment income increased 2.9 million to 11.4 million for the third quarter of 2019.
This increase was primarily attributable to higher volumes strong operating performance and the prior year unfavorable impact from cost associated with the startup of the Fort Smith, Arkansas facility, partially offset by lower pension income.
As we turn now to the outlook for the remainder of 2019 as is typical for the seasonally smaller fourth quarter. We're tightening our range of estimate to a five cents range as a result, and based on our year to date performance and the outlook for the remainder of the year, we're providing an estimate of adjusted net income per diluted share in the range of $2 in 12 cents.
To $2.17, which remains consistent with the midpoint of our original estimate.
This estimate excludes the impact from certain adjustments outlined in table via the press. Please.
We're also providing a fourth quarter 2019 estimate of adjusted earnings in the range of 34 cents to 39 cents per diluted share, which includes the unfavorable noncash pension impact of approximately three cents per diluted share and reflects an abrupt end to the fruit and vegetable pack in early October .
This estimate compares to a record adjusted net income per diluted share of 38 cents in the fourth quarter of 2018, which benefited from a strong pre buy in metal containers ahead of significant steel inflation.
In addition, we continue to estimate free cash flows to be approximately $275 million for the year.
That concludes our prepared comments. So we can open it up for Q1 day.
And once again I'd like to ask everyone to keep their questions to one question and one follow up.
With that I'll turn it over to Chloe who can provide directions for the Q and a session.
Thank you if you would like to ask your question. Please signal that pressing star one on your telephone keypad, if you're using speakerphone. Please make sure. Your mute function is turned off how you're saying no to reach our equipment again press star one to ask a question well past for just a moment to allow everyone an opportunity to say.
No for questions.
Well take our first question now from Anthony Pettinari from Citi.
Morning.
In in metal containers, there was a wall Street Journal article that came up during the quarter around the vegetable pack being historically bad and may be generating a 2 billion cans of excess capacity.
Maybe could negatively impact the market you referenced the weakness in your comments I'm just wondering if you're seeing this weakness kind of create knock on effects in terms of excess supply in the system or maybe some competitors getting more aggressive on price. Just just wondering if there's any color you can provide on the competitive environment you know after this difficult pack.
Hi, Anthony tell me I'll try a little bit alike that can't really reconcile all the points there as we said the packwood's, what's a little shy of our expectations as you can see our volumes were flat over the time periods. So.
Yes, even when you look at our our vegetable embedded we know in there there was a little bit of inventory correction for a sizable customer.
Yes case I'm talking about now inventory that until we have complete visibility to the difference between what got build on what that shifted so we have good visibility to that piece of volume in that area. So I really cannot for life. It may explain a billion can that yet.
Actually I, just I think it incorrect data when it probably has more to do with is where steel is coming from the field Tam I think that if that coming from the steel industry. For example, it probably has more to do with that could damage steel out of the system because of the pricing of the domestic steel versus important steel slightly in no way too I think there.
And like a billion cans and so therefore the over the rest your question that I don't think that has any impact on the basic fundamental to what's happening in our market pricing et cetera.
Okay. That's that's very helpful. And then I'm. The CEO my data that came out last night for Threeq, you I think showed pet food or shipments down 6%.
And again that doesn't seem to really tie with your flat volumes I'm. Just wondering if you could talk about what you saw in pet food wasn't a tough comp for the quarter or you see any inventory shifts kind of any color there.
Sure Anthony it's out maybe you should take a quick step back and talk about the pet food market in general do you go to a year to date basis, and you look at our volume our volumes up about 6% versus prior year. So.
Maybe even a little stronger than what we had initially signal to you folks earlier. This summer. So we feel really good about not only our position in the market, but the future prospects for continued growth as well when you get back to the third quarter, one thing that that certainly habit of with our customers.
And our volume for the quarter was essentially flat and pet food, but our customers.
I've been investing significantly to support their growth going forward. So we were in a situation in Q3, where our customers had taken lines down should we work them to increase their filling capacity. So we've seen significant investments both in the reworking of existing lines. The addition of new lines and in some cases.
The addition of new operating facilities for our products and what that food. So we think that you know maybe some of the year to date results for our volume up 6% a was a little bit of a pull forward in advance of of shutting down those lives to to make these capacity enhancements at the customer level. So we see.
Really good about it we feel great about our position our customers are winning in the market and you know we're excited nothing's really changed our view for the rest of the year lower for 2020.
Okay. That's helpful I'll turn it over.
Thank you for your question has been answered you may remember yourself from the Q by pressing star to once again, if you would like to queue up for a question press Star one.
Well now take our next question from Chip Dillon from vertical research.
Yes, good morning.
Tony and Bob appreciate all the income I appreciate all the details I guess my first question is you know we saw a huge sell off in the in the equity markets at the end of 2018 and now we've seen pretty much set fully recovered and if that stays the case through year end, we see this 13 cents of lower pension in.
Come likely or that went away this year come back next year.
Yes, if it's it's Bob I think there's a lot to that question then still time to go right. So your point is is accurate that the markets have have recovered.
Pretty nicely in terms of the games that they suffered in the last year. The however that gain as against the a lower base from a return perspective, so you need to significantly outperformed the prior year to make up all of that game and then the other the other piece of that equation that that folks tend to want to look past is what happens to the discount rate.
Right and that will have import on what how the liability grows or shrinks. So I think as we hear day, we would say if if this was the point in time that you measured it we would we would certainly have some benefit against that 13 cents headwind that we've been suffering.
But the fact is a matter as we won't know where the discount rate shakes out until the very last day of the year. That's the way the accounting for pension works, so depending upon which way that moves that will either improve where we sit today or it could erode a bit so a long winded answer to say look where we're optimistic but we've got to let it play out.
See exactly where it ends at the end of the year.
Okay. That's super helpful. And then quickly could you just talk a little bit about how the pet food.
Sector of the food can business is going versus.
You know other other types of can usages.
Sure, Jeff It's Adam I think I, just went through a little bit of detail on the peptides market, but again I would say what weve communicated previously was that we continue to expect pet food can continue to grow when our market space.
We've got a pretty sizable share were over weighted to pet food and you know our customers are continuing to win in that space at the retail level just to repeat yeah, I'd say, we're up 6% year to date, our Q3 was flat.
Our growth is going to play out for the year essentially exactly as we thought it would add will be up and the kind of the the threeish, 3% to 5% range for the year and pet food.
Thank you.
Well take our next question from Mark Wilde <unk> from bank of Montreal.
Morning, Tony Bob Adam.
Uh huh.
Adam you've talked about the sort of the mix issues in the food can business I wondered them.
If you guys could put a little more color on the mix issues in the caps and closures and also in the plastics business.
Sure I think when you start with the captain closures to to begin with.
What we did see was was nice nice growth in our plastic closure is primarily for beverages in the United States. So that's the old historic kind of hot fill volume that we've been talking about so good growth as expected there.
Where we saw some weakness was in metal closures and I would say most of that weakness was around pack related items and pack related products, so things like jams, and jellies, which are created from the fruit harvests thing like fruit juices vegetable juices, etcetera, and then vegetables themselves.
They go in glass packaging with a metal closure, so really outside of that in the metal side of the business everything performed fairly well outside of pack related items, and then you've got dispensing systems and so.
You think about those three main product lines plastic closures metal closures in dispensing systems, There's obviously a mixed variation across those three so.
With plastic cleanup metal being down that is less favorable mix for us and then dispensing systems.
It is also a very highly engineered a set of products that we take the market that is very mixed favorable when volumes are up and amongst the dispensing systems product lines are we getting some softness and in Europe in particular and in some of our core markets, but I'm afraid.
Chris was up other other product lines were up to offset that so volume was essentially flat and our dispensing systems. Therefore, the mix is really around metal and plastic and me about closures.
Okay, and then over plastic and there and then mark just to jump over to plastics quickly and most of our growth as Bob said was related to the new Fort Smith plant and that growth is primarily related to pet food. So those are typically smaller packages that are traditional plastics business and I'm, a little less favorable from a mix.
Standpoint for the overall product line.
Okay, Alright, then as a follow on I just I note that there was a recent sale of them of a major competitor and caps and closures and I just I wondered if you had any perspective on that sale.
Also it seems like they didnt sell the entire business I wonder if there are pieces of that franchise.
Would be of interest to you in a point.
Sure I I assume I know you're referring to.
So there was a business all of that business is primarily in the single serve beverages market for that market as you probably have picked up from us on this call.
The past that's not a high interest area for us and so.
Not particularly business that suited us in that case.
Let's say it could be set for any assets that might still be a round that they may have held on that so I don't think ads.
Huge correct point to us on either side I think when you mentioned tickets are I think that was more directed to water and carbonated soft drink criteria.
That's helpful. Tony Thanks, very much I'll turn it over.
And we will take our next question from Debbie Jones from Deutsche Bank.
Hi, good morning.
My first question I I wanted to ask about European they don't disclose margins. They can you give us a sense that went into materially up or down year over year, how their impacting your total global margin and then the capital needs for the business going forward, so weak demand kind of spread that question about the base.
And if you could just around the business for cash.
Yeah.
Okay. All of those Debbie are related to the European business and cans for clarity.
Yes, I cut off okay.
So just for profitability in European cans, I think the challenge. We have this year is that we were expecting a very strong pack off of very poor pacsun and that previous year. So there's a pack was better than than the prior year, but not nearly what we expected. So I think that the results where it.
Little disappointing so margins were not quite what we we were expecting them to be they were below our expectations. As we go forward. He has a capital needs of the business there or.
Our not really impactful to the overall capital that we spend for the balance of the business. So no real change and then you know as we look at the volume in the units going forward, we just need some opportunities for growth.
We've got some committed growth with specific customers as well, but yeah, some challenges and broad Europe for all of our businesses, including if they can going forward.
Okay, and well question you noted some softening in certain markets on your Q2, Paul you discussed admitted it here, but if they can isolate how things like whether would you say that things are materially different in Q3 are you seeing kind of much more at the same.
Specifically like you mentioned last quarter, and personal care markets, where shopping kind of a similar trajectory.
Or things about stabilized.
So I take that question I mean, all of our businesses. So I would say that first of all.
Just to be clear as you mentioned a bit around the Bakken so everything about food can it exactly as we thought from the beginning of the year. Our full year guidance is very close to where we thought but I'm going to me in here. So.
Basically as we sit here today, despite everything we read about boot camp named played out exactly as we expected. Thus far this year there was a little bit a chance were going to do better that's a disappointment that I highlighted in my comments.
Because in some other areas like pet food that I'm talking about it looks good.
But we need is actually a little stronger than it was.
Back to other questions briefly on Abbvie and tells US our exit page in the past ultimately won't come back, but the market still has the same demand level for that both in Europe , and the U.S. and so.
At some point it would seem like you can't have these unusual path. So now back to that broadly if you're talking about revpar business I think it's so that we certainly on the personal care side. So I have seen some slowing.
Maybe particularly around branded areas.
And so I think that seems to be a trend that we're saying little bit more and then the second one Adam already alluded to which is Europe , just probably feels a little weaker to us and kind of every one of our businesses.
And that's been happening over the course of the year I wouldn't say anything abruptly occurred in this quarter, but that seems to be a trend watching carefully.
Well, we were ready for another one.
Well take our next question from Adam Josephson from Keybanc.
Thanks, Good morning, everyone.
Yeah, Hey, guys, Tony just one or one or Adam on dispensing systems I think Adam said volumes were about flat year to date in that business correct me if I'm wrong. There I think when you announced the deal I think it was January 17, you talked about I think the developed markets as being mature but.
There are being growth opportunities in the emerging markets like I think the growth growth profile that business at the time was.
Two threeish, if I'm not mistaken.
How would you compare what you've seen volume wise in that business year to date to what you were expecting or what you were saying at the time of the deal I'm just trying to get some sense of what you think the volume volume profile that businesses in the context of what has been a flattish closures business for you have like.
Sure and I think just to talk about the year to date basis or for your expectation. We are just for clarity expecting growth and dispensing systems. So I think you'll have over time, some lumpiness between quarters as our large CPG customers are promoting or maybe not promoting part.
That's quite as much but the core markets, we still don't feel very good about so you know if you look at Q3, specifically they are trigger business, which is one that I think we have a lot of discussion about.
On these calls and other conversations about the business, but Ah we saw nice growth and you know we expect to see continued growth going forward items like fragrance lawn and garden were all up in the quarter. So we feel good about those I think what impacted the dispensing systems business in the quarter was really more softness in Europe .
Than anything else and again just to Tony's point earlier, so at broader conversation about Europe , then it'll may be in any one specific market, but as I sit here today I'd say, we feel great about the business our expectations haven't changed well expect 2% to 3% growth again next year and we will have growth this year, we'll see.
Exactly what that plays out here in the fourth quarter, but well have growth year over year.
And now that the other half of it because this is an engineered product line. If there is a pipeline aspect to it and so where there's a reason we're saying that's beyond just a oh and that's what we have a very robust pipeline. We feel really good about the products that are coming on development efforts et cetera. So what's been happening that continued right along the path and some of the base.
He doesn't that personal care Europe et cetera.
Yes in copper and what we know we have solid.
Then there is down and that off that kind of the regular grow the business. So we still feel very good about prospects.
And just one follow up on that Tony and thanks for that answer about it. So I think closures for the year are down slightly volume wise.
If if dispensing is going to be up.
For the year, what can you just help me with again, if you expect closures for the full year to be flat or down volume wise as was the case. The last couple of years, what do you expect to offset that growth exactly in dispensing.
So just first let's remember what as and when we had ran off me. We gave you a little bit more cut into the scale of itself and in terms of volumes. They dispensing systems business is relatively small part of the volume for the business. So it could be up 3% and you could have you know a 1% decline in either of the other.
They're flat top closer markets that we serve and that would more than overwhelm the dispensing system on a volume base ONIVYDE on the profit or revenue base correct correct. So so that's where the thats why mix becomes an important part of the topic not so much on the volume side.
And again to be clear our talk about what we think dispensing systems. You know it was more about future I'm not saying by ended if you're never going to get positive necessarily we're just saying we see a trend line that over time that ought to get positive. The bobs point that that high margin really good business for us, but it could get overwhelmed by just the pack season could more than.
Overtake all that on a volume conversation.
Right got it thank you.
Yeah.
Well now take our next question from George Staphos from Bank of America Merrill Lynch. Please go ahead.
Hi, This is actually I'm only by on the line for George at My first question on a metal containers can help US bridge, what the various puts and takes will be specifically for you know the fourth quarter and and more specifically you know in the press release you talk about you know larger amount of finished goods inventory. So you know in Four Q1 8.
You talk about an $18 million negative impact from unfavorable absorption you know should we expect to see any of that in the fourth quarter of 2019 any I thought you have that would be helpful. Thank you.
Sure I think they get started I'll just talk about the volume comparison versus prior so you have to recall that we are are cycling over a fairly significant pre buy from from fourth quarter of 2018. So volume is expected to be down considerably as Tony said as we kind of communicate it all throughout the year.
Thats whats kind of happening fourth quarter.
And as far as the finished goods that we're carrying out of Q3 into Q4 related to the pack. These were at the end of the pack, we have essentially our largest candles being filled at the end of the pack. So when the the pack goes away or the pack.
Moves into Q4.
Can you need to be ready to be filled for our customers. So we've we've made those cans already in the quarter and then the volume doesn't materialize due to the abruptness of of the end of the pack. We did carry some of those larger Canada into Q4.
From an inventory standpoint.
So the other half that is if you'll recall last year. We did we got a major in third option, which ended up Im all fourth quarter that was at some CNL impacts in the range of $16 million net.
Negative impact on the fourth quarter last year. So the the good news as we get the benefit of not having that this year. The bad news what Adam just that is we're now going to do some reduction this year. So instead of getting an incremental that 16 million that incrementally more in the range of 10 million.
Roughly on the inventory alone and then the volume that I'm talking about is more than enough to compensate for that and that's why you kind of look at what looked a bit more flattish to down a bit on the core.
Got it.
Yeah got it. Thank you appreciate that and then just just a follow up so.
You know recent trade press has talked about I somehow customers, perhaps reducing their footprint. So to the extent that you can comment I'm you know what effect might just have on your business in 2019 or how might this impact you know plan for 2020. Thank you.
Sure. They so you see there had been some of that I think the I'm really the question more about what the demand requirement to the market and who is going to fulfill that demand and so as we sit here today, we don't necessarily see that that would have impact it does depend.
Exactly went up with capacity and so I don't have all the answers for you, but as a rule we've got in the market that we're supplying we've got a meaningful share position as we have a sense that we would keep that it's all about contracts require that indicate sort of depends on what my thing gets sold off et cetera. So again as we sit here today without all the.
The answer is we feel like that would not have any you know two meaningful impact.
Well take our next question from Ghansham Panjabi from Baird.
Hey, guys good morning.
I guess first off and sort of a follow up to the last question you know Ah Tony how you're thinking about steel tinplate for 2020 versus 19, it seems like most.
Industrial commodities are down I would imagine stimulate is down and that related to that you know do you see a briscoe destocking by your customers going into 2000 and done 20 apart from the comp you have that's very difficult in the fourth quarter.
Sure I got Soomit Datta, you're right. So you know this has been a bit of a roller coaster from from like a steel pricing standpoint for our customers. So yeah. The significant inflation that we brought into 2019 from 2018.
Did it in Boca Prebuy for our customer base, we're not planning on anything as far as a de stocking up we ended the year at this point and you know we worked very closely with all of our customers to try to understand what their exact requirements are so we don't see anything material in Q4 push into Q1 as we sit here today.
I think as we look out it's a 2020 steel pricing.
First of all worried the throws of those negotiations right now so.
We're working very hard every single day to get the maximum.
Benefit for our customers that we pass through to our contracts. We're looking at inflation not nearly I'm, sorry deflation not nearly to the level of the inflation that we thought that but we will see and deflation in 2020 were expecting something in the upper single digits.
So maybe low low double digits on a percentage basis.
Okay. That's helpful. And then just in terms of the metal food can business in the U.S. do you have any big contracts coming up for renewal at the end of this year for next year or the word for 2020 going into 2021, and just more broadly how should we think about volumes for for silgan across the various segments in 2020. Thank you.
Sure so the.
Yeah, I would call it a typical gear nothing, particularly unusual in the coming year on contracts or.
So volumes you know it first of all.
We have not been through our budgeting process as Adam just said, we don't have steel nail down which would have some impact and so.
You know what I can give you is nothing more than sort of a.
A sense directionally going based on what we know so far and so I think is that food cans, our expectation would be very modest.
Improvement or that would be driven by as he said, we would expect sooner or later, you're going to get a real pack in Europe . If we did not get again this year.
The U.S. back by the way with.
It ended abruptly but at this was not like a terrible back it was a fair path, so but that could be a little bit better I suppose as I said before we have a particular inventory reduction at one customer that we are we know so expect to get some improvement on that.
Adam talked about pet food growth, if we'd expect and then against all that you just had the vagaries of you know what you know what's happened in the supermarket in somebody other markets and so.
You can kind of pick your answer here from flat to up modestly on but we can't side closures again, we would expect to see growth as we said dispensing systems, we expect growth. Similarly on a lot of our food and beverage side. He wouldn't packet better we benefit I'm not a closure side as well.
And so that that ought to help us.
And then plastic had been growing and so we wouldn't expect to see modest continued growth there.
Thank you Tony.
Well take our next question.
Hi, James from Wells Fargo Securities.
Good morning, everyone. Thanks for taking the question.
I think before Bob you've talked about a slightly inflationary environment is often better for the food can business in terms of contractual pass throughs and what have you I think I heard some deflationary discussion I wasn't it wasn't clear to me if that was specific to steel or in general.
The contract May pass through next year, knowing that typically you know there or pay raises and health care costs go up so I'm curious just directionally speaking I guess to piggyback off from conscience questions about volumes.
Would you expect.
Metal food profitability beat up or down or flat next year, given kind of inflationary comments you're talking about.
Got it there's a lot of parts to that question. So let me start with the the easier part which is.
We were talking about the metal side of that in our previous conversation, which we would expect will be deflationary.
We certainly expect things like labor or inflationary right now as you know labor is very tight.
And so that takes you to the where you started the question, which is what we would generally say is injury the inflation of the other costs, we got hurt a little bit because we delay in patent that off. So if you have accelerating inflation of labor for him and sensible pass that through and I can't contract, but not until a year out.
So I would say that that's a little bit headwind for us on it.
And that's in our candidate and most for other business. We actually don't don't have pass through of labor inflation. So I think that is a bit of a headwind for us and a lot of injury for next year.
So and then beyond that on the container side I would just say that you know you probably continue to see a little bit more of what we've seen which as you know some amount of competitive activities with the excess volume.
Assay and U.S.
And frankly with a volatile.
We all cost market that make.
The market a little more confusing and that in Europe , we talk about their done some aggressive move some of the larger players in Europe and so if you assume those continue you're going to get submitted again again, the volume improvement, but I just talked about with ghansham on the margin side.
Okay. Thanks, and then add on my sense, some optimism in the pet food business I guess, a couple of doesn't come and talk to that effect might that warrant additional investment for person capacity or were they.
Just one thing you've made or investments I should say recently enough to compensate for that.
Sure, Yes, I think you read the optimism correctly, it's it's been a nice growth market for us and we expected to continue to grow going forward. We've been investing all throughout this growth cycle with our customers for additional pet food can capacity on our side, there's a variety of projects underway.
Right now to increase our capacity. We've also got some hard capital going and to overall increase our capacity as well so it's a little bit of both I'd say nothing significant as far as no new plants anything like that that enhancements to increase our capacity or or what were looking out in the near term.
And gave I would just go back and finished in the previous comments I've got nothing that would get side I didn't really finish that I think you know closures as I said was that volume up we ought to be able to continue to improve profitability of that business.
Same on plastics is done in the past and then I think the third thing and kind of the whole reason, we got our analyst meeting and one of things we didn't really trying to talk a lot about as we sort of two levers to pull our business lever. One is we run these franchise businesses well add we run them for free cash and that our second levers, we deployed free cash and so again.
Think about still get next year, and you think about kind of the comments I made about.
The container business or the metal container business. For example, I would just remind you that we are back now into the mid point range roughly by the end of year above our leverage level and so our own view is that next year.
During the two levers that might be a little bit more lever the cash deployment side.
Thank you if I could sneak one last one for Bob the tax rate came in a little bit lower are you still guiding to 20, 324% or.
Yeah, I'd say I think we'll probably we did see a benefit in the quarter that we'll obviously have a bit of an impact on the on the full year rate as well, although a bit more muted against the full year I think if we're looking forward kind of in that that 23% kind of range is probably is as good as I could get it we.
Probably do maybe a hair better than that for the full year. This year, just given the benefit that we saw that seasonally larger.
Q3, that'll carry over a little bit today to the full year, but I wouldn't I wouldn't think it'll be meaningfully different.
Thank you.
Well take our next question from Iran. This one lesson.
PC. Please go ahead.
Hi, This is David page on for Rune.
Hi, David.
Hi, I wanted to a you know in your metal container segment. You discussed you mentioned two volumes increasing I just want to know if you think you know the soup.
Category in general is stabilizing and where do you see future growth in the soup category.
Sure. Good question I think.
For starters I think when it we're looking at the soup category in the quarter. It was a difficult year last year, the third quarter. So where we are today, we saw some nice growth year over year, but you know we feel pretty good about what's happening right now in the soup business and and we're at the early part of the season Phil.
We will pursue but yeah, we think the activity in the market the promotional activity that focus our two products I think it's been good and canned soup has been good for us. So we feel good about where it's going.
Okay. Thank you that's helpful.
Yeah.
Well take our next question, Brian Maguire from Goldman Sachs.
Hi, Good morning, Thanks for taking my question I happen a little bit late so apologize. If this is already asked but just wondering if you could comment on what you're seeing a in the pricing environment over in Europe or in the middle cancer.
Sure I alluded to a little bit.
We certainly saw yeah. This is going to be up 2019 comment not really about 20 at that stage, but.
We saw a little more competitive activity in Europe than we've seen in the past we saw.
Some big players were really looking hard for volume.
And.
Didnt seem to have like it was getting full cost recovery of what was happening on the steel side. So.
We're we're hopeful that that'll change certainly the the cost dynamic is continue to change.
But that'll be we won't know that about 20 until we get into it a bit in Europe you have some that happens at the beginning of year you had some that goes into negotiations first quarter. So you clarity takes a while to get there.
And the mix of contracts there as it is it roughly like half the resets annually at half the time longer term contracts anyway to think about the how much of it has kind of impacted by recent weakness.
Yeah, I know last under contract I would guess what are you able to here, but something like 20% probably under multi year contract that more like 80% as annual negotiations.
Got it okay.
Last for me just Tony.
And your comments around the leverage kind of being back in the range you want it to be in.
I just wonder if you could comment on your thoughts would be the tradeoff between M&A and buybacks you've been pretty active in both arenas in the past maybe you can just kind of comment on the general M&A environment, and where multiple sit versus where you think fair value is and you know any specific parts of the portfolio I know you talked about dispensing in the past.
Being a fragmented market that you can you think that there's some room to pursue M&A and is that that's still the case are there any other parts of the portfolio really you're looking at.
Yeah, Brian This is a Bob speaking I you know look at as Tony said, we're kind of right square back into a range that gives us a lot of flexibility around how we deploy capital.
No difference in strategy from where we've been for quite some time that you know our interest in desire is to first allocate that capital deployment toward M&A activity.
You know I think as we as we look through the segments that we operate in.
You know, obviously, we would love to continue to find opportunities to build out the closure segment and particularly build out around the dispensing system side of that.
If there are ways to talk things in around the can business that would be interesting to us, but perhaps a little more.
Challenging, giving given the the market share. If you will and then you know look the plastics business that has turned the corner nicely right in line with what we would have expected to have happened over time. So the idea that we could see some capital allocated there is not off the table I'm not trying to signal that that there's something.
And that we're going hard after but it certainly.
The team has has earned at least the opportunity for us to be thinking about capital deployment. There all of that in the backdrop of of the same kind of discipline that that children has historically look forward on the M&A side and that is if the cash on cash returns or not there then we'll drop back and look at all of those are.
Auctions against what happens from a return of capital to the shareholder So I would not at all rule that as off the table and quite frankly, as we look forward into 2020 as Tony said, you know the idea of allocating capital to one or the other are those is it remains pretty high and we will benefit the year.
Okay. Thanks very much.
Well take our next question from Chip Dillon from vertical research. Please go ahead.
Yes, yes. Thank you very much for taking my follow up Mike. My main question is <unk> to one is there any update and I don't think you all are involved at all but I know that there's some kind of up of an investigation about the food can business in Europe and any thing you can tell us about that and then secondly, this is a very broad question, but.
You know Weve continued to hear more and more about of the ban of plastics and single use plastics and in various places certainly nothing on a wide scale involving containers, but I do know that's an important market for both closures and plastic containers and just any any kind of update you have on that and maybe.
Moves that you and others are taking to try to you know to counteract some of the the the PR that's out there going the other way.
First of all the we are in Europe , and you can business and basically everybody who is in that jurisdiction. The can business got pulled in so we are part of that which we haven't disclosed or that really there's no updates to that to offer.
The other plastic side, the there's a lot there I think you're asking like why so there's there's there's perception of plastic which one whole issue and I think we all know that there is there's a heightened awareness around it as we speak I do still think that is primarily around single use applications and as Adam I know.
Particularly things like thing we use water. We're at a lot of dealer sent out themselves why does it make sense. So I think that continues to percolate, a and so we watch it very carefully again I think your question was very pointed in that bands are particularly important to us because that sentiment moved a little more slowly bam given fairly quickly. So we.
Do watch that I think.
Where that most likely you've seen it on surprise.
You may see it around the back I'm not sure the band, but that the closure needs to be together or somehow tied to the bottle.
Certainly in Europe , you're seeing that and I think you'll probably see in other jurisdictions. We instead of this call before that that is not necessarily a bad thing for us things up the scale. We are the development capabilities et cetera, we feel.
That weren't really good spot to work on that with our customers to come to a good solution on it and so and that'll add some complexity and engineering content to the closure. If you will so those are the kind of moved that we're focused on is how do we addressed the real challenges that are out there.
And help but where you don't end up at the ban of the entire product there right now I'll remind you that back to this whole so singles or average is less than 2%.
What we are so not a big point in any case, our plastic bottle business. As you know is primarily around household use health care personal care et cetera.
So those are multi use applications are in home care kitchens and bathrooms. So the idea of moving to class or other if it's just a little hard to imagine any major change or so our belief is that that is an area that will be fine for them that needs to be it'd be response and part of solution, we need to keep working up post consumer resin.
In our products, which we are whether its end buyer biodegradable and so there's a whole variety of bio resins that we're all looking at working on so we're doing all of that around it but I really think the heart of this problem with can be more around single serve particularly probably single serve water areas.
Okay, which again is less than 2% that's very helpful. Thank you.
Thanks.
Okay.
Oh, Okay. Another question for Mark lobby from bank of Montreal.
Yeah, I just wanted to actually Tony to follow on on the plastic so first of all.
Can you give us your EBITDA margin in plastics in the third quarter.
Yeah, it's like if somebody looking up but it's just sub 15 14, eight I think from memory how did your guys.
Yes, just give me a thumbs up by the way that Ah I think fourteeneight. The so your August question. How you do it I think you had to do how we're doing up to 15. If you just put the pension back on your above the fit at or above the 15 or so to that topic. If I guess forget that you correctly, we view that we.
More or less acute first hurdle here, which is that we got the business back to what we think as they sustainable level hurdle to its kind of what are the growth prospect at that level, where do we go.
And what do you think about that.
[laughter] well work that you're seeing growth for the business now so I think we're feeling a little bit better about it we feel really good about the team and how they've gotten us to where we are.
So we're going to watch the pipeline a little bit more we're gonna stay where the business can develop a before we kind of declare a you know on all clear and that were necessarily going to try to keep pushing in in the market space at the other than we have said as we think consolidation needs to happen in the plastic bottle.
Supplier community.
There are a lot of players and so I think it's got to mean important aspect to it and so either we feel like we need to be part of that process or at least one at watch that happened around us before we can finish the thought process on what's the long term.
Okay and is it possible timing just give some sense.
How much volume runway you have in your existing footprint and also you know what the upside might be there kind of a 15% margin since you're you're basically there right now.
Yeah. It's you know theres always a little bit of room, obviously within 15%, yes things are higher a business a higher business at lower so you can always looking in fact, I can do better but that will always be true and so we really aren't thinking about it if you let me take the.
Mark that we serve today and the way we serve those market. We think that's rough wrapped up and right spot data you can get a good return on capital at that level.
So I think that the got where it stands and therefore that you can read that also said we don't have a huge amount of capacity, we could fill with the drive that number up there is some capacity we've got to be exactly the right kind of bottle et cetera, and we are working and doing that in this part I. We've improved this level, but not enough and move 15 by by Big number.
Okay, Alright, that's really helpful. Good luck in the fourth quarter and through the year.
No.
Okay. Then next question from Adam Josephson from Keybanc.
Yeah. Thanks, everyone. Tony just one follow up for you.
Back on sustainability, so some of your competitors and paper and packaging have obviously been.
Talking about that subject quite a bit and to the extent they can show volume growth and tied to say to sustainability. There multiples have been getting a nice spot because obviously investors are star for for growth stories.
Bearing in mind that volume growth isn't in of itself would be on end all how do you think about the relationship between volume growth and multiples that we're seeing in the sector. These days I ask because you had your analyst day, a few months ago and you talked about your multiple discount to the group and I think a large part of the reason for that is volume growth.
Yeah, So look where we fully understand that in the public company growth, it's somewhat like multiple without doubt the point, we keep trying to raise is that if you're a disciplined deployer of free cash flow and you've got a lot of free cash flow that it seems like the market ultimately audit rewards I think over the history of Silgan we.
I would say it has for that right not always that every moment in time, but and we do seem to be at a point now where the organic growth being incredibly high enough bucket level on it but I I, we're hopeful that battle fade over time and people will start saying about the cash deployment is really important so that's a big answered your question but of course.
More organic growth there is a value benefit from that and yes sustainability can play a part of that and yes, you're probably right that we do not meet that drum add loudly, perhaps zone, which is ironic because nobody has a better story than a steel can right or does it against it so fully recycle more recycled.
In ALS magnetically pulled out of the waste stream, so far preferred by now the weights processors.
And low energy to recycle just like aluminum can and so it's got a great story there. The only reason we've been a little quieter in you know when we have actual sales that are from that we promise. We'll tell you that it's just it's a long lead time on it when there's a lot of customers who were talking to us.
About a whole bunch different ideas steel packaging.
But really.
It's not like up talking up until it actually in the numbers and so we'll wait for that.
Tony just one follow up on that.
See steel and aluminum have a good recycling story plastic has a much better carbon footprint story, because obviously mining bauxite converting into aluminum is incredibly energy intensive relative to P.T.. So how do you think of or the actual environmental impact of say P.T.R. or single serve plastic bottles or is the steel or aluminum.
Cans.
Okay Great question.
Thank the steel can is a different animal entirely it does not have that same bauxite energy. So is it more energy the plastic but not a lot more it because it is so recycle you have to address that recycling content itself, you know that essentially the steel can't keep going round and round and so its way lower energy when you consider that.
Yeah.
And therefore, I I believe even just on that straight point once you consider the cycling of it it's better the thing with plastic beverage forget is in order to you use it in order reflect we've got a ship all classic all over the play to wherever she had recycled et cetera. So there's a lot of cost and energy that gets consumed in that process as well.
And so.
I think there is an argument for plastic on that side of the problem classic there's a waste issue.
More than anything and I'm not sure that that is gonna be quickly Saul.
Yeah. Thanks, so much county.
Yeah.
It appears there no further questions on that and I question answer session for today, It's time I'd like to turn the conference back over to Tony Allott, President and Chief Executive Officer for any closing remarks.
Thank you Chloe. Thank you everyone. If we look forward to talking to you about our yearend results late in January .
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This concludes our teleconference. Thank you for your participation.
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