Q4 2019 Earnings Call
Kim <unk>, Vice President Finance and Treasurer. Please go ahead.
Thank you joining me from the company today, I have Tony Allott, Chairman and CEO , Bob Louis ABTS, yet, so I don't really president and CEO .
Before 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.
Forward looking statements are made based on 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 describing the company's annual report on Form 10-K for 2018 and other filings with the FCC.
Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward looking statement, but that will turn to know what you Tony. Thank you Kim welcome everyone to soak in 2019 yearend earnings conference call. It's funny I feel like we were just here talking with one another.
Unfortunately, I don't like coffee has gone so bear with me through it I want to start by making a few comments about the highlights of 2019 to provide a brief update regarding our 2020 outlook.
Bob will then review the financial performance for the full year and the fourth quarter and provide more details Robert 2020, I Love afterwards as usual Bob Adam I'll be please answer any questions.
That's covered our press release 2019 was a good you're the company record financial performance in several milestones.
These included delivering net income per diluted share $1.74 delivering record adjusted net income per diluted share of $2 in 16.
Generating free cash flow of 271.7 million or $2, a 44 cents per diluted share providing a yield on our your own stock price of 7.9%.
Completing the issuance of our foreign money senior notes due 2028.
Reviewing several long term metal container contracts.
Shooting a multiyear metal container footprint optimization effort.
To continue our relentless pursuit to take cost out of our operation.
Injuries in the cash giving them by approximately 10%.
And continuing the acquisition portion of our growth plan, what the announcement of a binding offer to acquire a bad dispensing does [noise].
We're pleased with the performance of our business in 2019, we delivered another record year growing adjusted earnings per share by 3.8% to $2.16 in spite of significant patching headwinds and the negative impact of tariffs related costs and market volatility.
Well there were a lot of moving parts in the year, we're pleased with the outcome or metal container business improved on an adjusted basis, despite anticipated lower volumes due to prior year pre buys and lower pension.
Given the understandable focus on food can volumes, let me review, what we have said relative to volumes and what does occur.
In 2018, we indicated that we had benefited by a little over 200 million can purchase they had to be expected 2019, no price increases.
We indicated in this call a year ago, that's a reversal this prebuy, which would impact comparisons in Q1 in Q4 2019 would have a 3% negative impact on our full year 2019 going [noise].
We also expect to the overall food care market, just see [laughter] when you're in.
Further started the year, we indicated a large customer with likely continue to call some business and work on inventory, leading us to expect an aggregate of 4% decline in U.S. food can volumes in 2019 argue as he came on in 2019.
In the first and second quarter 2019, we indicated that that specific customer, we're still working down inventories, but not retreating market share. So we believed our decline would be it's only 1% to 2%.
In the N., we were down only 1% for the year, representing real growth when a job just for the impact of the Prebuy.
This result is better than the overall can market for the reasons. We also have historically pilot, namely that's still going is more representative the growing can categories and less so in the categories, which had been declining.
So we believe 2019 stanzas confirmation of our expected trend around Silgans Bali.
Therefore, we see no surprises in our volume information how it compares with industry toes.
Moving on the plastic container business posted another solid year over year improvement with volume growth and excellent cost control.
Adjusted for the negative pension impact to EBITDA margin achieved our multi year target of 15% and we expect more progress to comp.
Our closest business was down for the year and adjusted operating profit, but driven by previously discussed items, including lower pension income.
Unfavorable currency.
In exchange currency and the impact of weaker seasonal pack volumes from outflows.
The dispensing systems business kind of volume growth for the year and its operating a trough levels well ahead of its pre acquisition.
Our businesses are also well positioned in 2020 with several key initiatives underway to drive profitability in 2020 M. beyond.
We expect growth in our closures and plastic business is as a result of volume gains and continued competition.
In the metal container business, we expect little change in profitability as modest volume growth and pension benefits are expected to be offset by the unfavorable impact of lower average selling prices due to lower metal costs, yeah, approximately 15 million dollar price impact from renewals of certain significant customer contracts.
[noise]. Many of you may recall that we had a similar price impact six years ago as we've renewed in large group of contracts six years being relative period of averaged two our contracts.
Therefore, we view this is a fairly normal process in our food can business.
We also announced an expanded footprint optimization plan and our metal container business, which is targeted to reduce capacity by more than half a billion units and to continue to drive further cost reductions with intended clothing six.
Two of which closed in 2019.
Finally, as we announced on Monday, we've entered into a binding offer to acquire the dispensing business from a backdrop, which will enhance our product line to provide further opportunity to grow our closures business.
Bob will discuss in more detail, we're providing for your guidance for adjusted earnings per diluted share the range of $2.20 to $2 30 itself.
The midpoint of the range represents 8% increase over 2019, we also expect free cash flow to the can be around $275 million without sort of.
Thank you Tony Good morning, everyone as Tony highlighted 2019 benefited from several strategic initiatives, which leaves our business is well positioned for 2020 and beyond.
The results in 2019, we delivered adjusted earnings per diluted share of $2.16.
We delivered free cash flow of to 71.7 million inline with our target.
On a consolidated basis net sales for the year or 4.490 billion, an increase of 41 million, 4.9% over the prior year.
This increase was the result of revenue increases in metal containers, partially offset by lower sales in the closures and plastics businesses.
We converted these sales to net income for the year of 193.8 million or $1.74 per diluted share as compared to the 2018 net income of 224 million or $2.01 per diluted share.
In 2019 adjusted earnings per share benefited by adjustments that increased earnings per share by 42 cents for restructuring charges costs attributable to announced acquisitions and a loss on early extinguishment of debt.
Adjustment increasing earnings per share in 2018 totaled seven cents, including rationalization charges and loss on early extinguishment of debt.
As a result, adjusted net income per diluted share was $2 in 16 cents in Two Q2 019 versus $2, an eight cents in the prior year.
Interest expense before loss on early extinguishment of debt decreased 10.6 million to 105.7 million, primarily due to lower average outstanding borrowings lower weighted average interest rate and the favorable impact of foreign currency.
In addition, we incurred a loss on early extinguishment of debt of 1.7 million in 2019, resulting from the redemption of the 5.5% senior notes in August of 2019, and two and a half million dollars in 2018 as a result of the redemption of all the remaining 5% senior notes in April 2018.
And the amendment of the senior secured credit facility in May of 2018.
Our effective tax rate was 23.1% and 23.6% in 2019 and 2018, respectively.
Full year capital expenditures totaled 230.9 million in 2019, which is slightly higher than anticipated as a result of certain capital projects associated with the expanded footprint optimization plan and metal containers and capital investments in 2018 totaled 191 million.
Additionally, we paid a quarterly dividend of 11 cents per share in December the total cash cost of the dividend was 12.2 million and for the full year return returned 50.8 million to shareholders in the form of dividends [noise].
As outlined in table C., we generated free cash flow of 271.7 million.
Two dollar and 44% $2, a 44 cents per share versus a record 311.4 million or $2.79 per diluted share in the prior year.
The reduction in the year over year free cash flow is primarily due to higher capex and the sizable working capital benefit in the prior year.
I'll now provide some specifics regarding the financial performance of each of the businesses.
The metal container business recorded net sales of 2.470 billion up 95.2 million versus the prior year.
This increase was primarily due to the pass through of higher raw material and other manufacturing cost.
Partially offset by lower unit volumes of approximately 1% unfavorable foreign currency translation of approximately $16 million.
Less favorable mix of products sold.
The reduction in unit volumes was principally due to the unfavorable impact in the current year of the fourth quarter, 2018, Prebuy and lower volumes from fruit and vegetable customers, principally offset by continued growth in pet food as well as higher volumes and so.
Segment income for the metal container business was $160 million, a decrease of 38.8 million versus the prior year.
This decrease was primarily attributable to $44.1 million higher rationalization charges.
Lower pension income lower unit volumes and a less favorable mix of products sold.
These decreases were partially offset by production efficiencies in the U.S. due in part to the favorable impact from a larger amount of finished goods inventory produced in the current year.
Rationalization charges of 49.4 million were largely a result of a phase one of the footprint optimization plan and the withdraw from the Central States pension plan Rush pension plan rationalization charges in 2018 totaled 5.3 million.
Net sales in the closures business were 1.4 billion in 2019, a decrease of 51.2 million versus the prior year. The decrease was primarily the result of unfavorable foreign currency translation of approximately 34 million.
The pass through of net lower raw material costs.
Less favorable mix of products sold and lower unit volumes of approximately 1%.
Unit volumes decline principally as a result, the weakness in the fruit and vegetable pack and the unfavorable impact in the current year of the fourth quarter 2018 Prebuy.
These declines were partially offset by higher volumes in dispensing systems.
Segment income in the closures business for 2019 decreased 16.4 million to 173.5 million, primarily due to increased rationalization charges of 6.3 million principally related to the announced shutdown of the facility in Spain.
Lower pension income the unfavorable impact of foreign currency translation.
Less favorable mix of products sold and lower unit volumes.
These headwinds were partially offset by lower manufacturing costs and the favorable impact from the lag pass through of lower resin cost in 2019 as compared to an unfavorable impact from higher resin costs in the prior year.
Net sales in the plastic container business decreased 3 million to 611.1 million in 2019, principally due to the pass through lower raw material cost and the unfavorable impact from foreign currency translation of approximately $3 million, partially offset by higher volumes were approximately 2%.
Segment income increased 6.3 million to 48.9 million for the year largely attributable to higher volumes lower manufacturing costs.
The prior year unfavorable impact from the start up cost of the Fort Smith, Arkansas facility and a more favorable mix of products sold partially offset by lower pension income.
Taking a quick look at the fourth quarter, we reported earnings per diluted share of 31 cents as compared to 34 cents in the prior year quarter.
We recorded adjustments increasing income per diluted share by seven cents in 2019 and by four cents in 2018.
As a result, we delivered adjusted earnings per diluted share of 38 cents in each of the fourth quarters of 2019 and 2018.
Net sales for the quarter were 1 billion 1.050 billion down 22.2 million versus the prior year, driven primarily by lower volumes in the metal container enclosure businesses due largely to the unfavorable impact in the current year period for the fourth quarter 2018, Prebuy the pass through of lower resin costs in the plastic.
Container and closures businesses and the impact of unfavorable foreign currency translation of approximately $6 million.
These decreases were partly offset by the pass through of higher raw material and other manufacturing costs and the metal container business, a more favorable mix of products sold in the closures business and slightly higher volumes in the plastic container business.
Income before interest income taxes for the fourth quarter of 2019 decreased 5.9 million to 71.4 million, primarily due to lower unit volumes in the metal container enclosures business lower pension income $3 million of higher rationalization charges 1.8 million of cost attributable.
<unk> announced acquisition and unfavorable foreign currency.
Transactions of approximately $1 million enclosures business.
These declines were partially offset by production efficiencies in the metal container business due impart to an increase finished goods inventory produced in the current year period versus a significant reduction in inventory produced in the prior year quarter.
A more favorable mix of products sold in the plastic containers and closures businesses and the unfavorable impacts of cost associated with the startup of Fort Smith in 2018, as well as higher volumes in the plastic container business, which also benefited the quarter.
Interest expense for the fourth quarter 2019 decreased 4.3 million to 23.4 million as a result of lower weighted average interest rates and lower average outstanding borrowings.
Effective tax rate for the fourth quarter of 2019 was 27.5 as compared to 23.1 in 2018.
As we look at 2020, our estimate of adjusted earnings per diluted share for 2020, as a range of $2.28 to $2.38 the midpoint, representing an 8% increase over the record adjusted earnings per share of $2.16 for the full year 2018.
Assessment estimate does not include any impact from the recently announced binding offer for Albay as dispensing systems.
Reflected in our estimates for 2020 or the following segment income in the metal container business is forecast to benefit from higher pension income anticipated higher volumes and continued manufacturing improvements. These benefits are expected to be offset by the impact from the renewal of certain significant customer contracts.
And then the closures business, we expect to benefit from higher pension income anticipated higher volumes and manufacturing efficiency.
[noise], we're expecting the plastic container business to benefit from higher pension income anticipated volume gains.
And again manufacturing efficiencies.
In addition, we expect interest expense to decline versus 2019, largely a result of lower average interest rates and lower average outstanding borrowings.
We currently expect our tax rate to be approximately 24% as compared to the effective rate of 23.1% in 2019.
Also we expect capital expenditures in 2020 to be approximately 200 million down from 2019, but slightly higher than anticipated as we've allocated some spending to the expanded footprint optimization plan in metal containers.
In addition, our guidance also includes the recovery of nearly all the $20 million decline from 2019 for pension and this recovery is spread across all of the businesses.
We're also providing a first quarter 2020 estimate of adjusted earnings in the range of 45 to 50 cents per diluted share excluding rationalization charges. This compares to 46 cents in the first quarter of 2019. These benefits exclude rationalization charges cost attributable to announced acquisitions and loss on early.
Extinguishment of debt and the estimates for the quarter also exclude any impact for the recently announced binding offer to acquire out they as dispensing business.
Based on our current outlook for 2020, we expect free cash flows to be approximately 275 million virtually unchanged from 2019.
That will conclude our prepared remarks, so I'll ask Stephanie I will turn it back to you and let you provide directions for the Q and I.
Thank you if you like to ask a question. Please take note by pressing star one on your telephone keypad using the speakerphone. Please make sure immune function is turned off to allow your said no to reach our equipment again, you May press star one to ask a question I.
My first question comes from my cloud with bank of Montreal.
Good morning, Tony Bob Adam Kim.
Alright remark.
I wondered if I wonder you could just help us and thinking about 2020 increase in.
Can volumes, where that's coming from because it.
Seems like you're going to continue to be taking capacity out of the market, but I know you've also invested in a in the pet food can business you know through 19. So you can just kind of help us as we think about kind of volumes in that business.
Mr market data, there's a couple of things really driving the the outlets that we have for 2020 on I'm. So can volume, particularly in the U.S. market. The first being that we don't have the negative impact.
The Q4 2018, Prebuy. So we're looking for a more normalized year from an overall volume standpoint, secondly, as we spent a pretty good amount of time at our Investor Day, and we've just had a lot of dialogue on these calls about.
How as Tony mentioned, where we are heavily weighted to some of the growth categories of food cans. So items like pet food and protein, we're going to continue to see growth and even if you go back to our Investor day, we set at some point you can see that growth outweighing the.
General moves up the market for the food can business. So those are our two big items a third one I'd give you is our soup volumes I think what you've seen in the last two quarters certainly are positive trends on soup, we're not sure exactly where that's going to go but we like what we see right now from a promotional activity standpoint.
And the soup story will continue to play out as we had through the first quarter of the year. Finally, yeah. We've talked a lot about pack related volumes are there's two components. There. The first being look you know the shelf life as I can oh still can with either for.
It's from from pack related volumes are two to three years on the shelf and so our customers can can manage inventory of poor packs over the course of Oh, two or three year period, but at some point that volume's going to have to catch up and that's what we've seen historically so it's a little until it's a little rare for us to see.
A continued bad tax momentum of say more than two years. So yeah. We are thinking that we're going to have a more normal pack. This year. The last component of that is the one customer that we've been talking about for sometime now is now through their inventory reduction program and their usage will be more reflective of of our volumes too.
So we don't think Theres, a lot of downside and that volume in fact, there might be a little bit of upside. So big answer here to your question, but a lot of moving parts I think Mark Tony just and then then the capacity part you start added onto that I would just say that what we're doing is that as you pointed out we had added to be capacity as we added a plant couple of years.
So we had been indicating we were going to take some street need capacity out overtime. So really that's what we're just work.
The owning some access from our system, but but as you know silgans has not been out there trying to sell and fill that capacity our whole strategy score on with their customers et cetera. So that's that really there is no connection between the capacity coming out and our ability to meet the both our customers.
And then Tony if I could just a follow on that are the four remaining can plans that you've you've announced today are they all domestic plants and can you maybe just give us a little color.
You know what has changed in the last six months because I think you announce those other two closures back in June .
The market data again.
Again, we're still evaluating exactly which plants are going to be considered for the plant closures as Tony mentioned in the prepared remarks, where we're really targeting a certain amount of excess capacity that we have now on our three piece can making equipment and so that is primarily a domestic situation but.
We've got to a variety of plants.
As Tony said, we're always looking to take cost out of out of our manufacturing footprint and and better optimize its anything unique needs of our customers. So.
Primarily domestic and we'll we'll be talking more about this as we go forward through the course of the year as the evaluation is completed and we move forward and the only thing that's changed as and as we got through all these contract negotiations, we had more clarity to what our requirements. We're gonna be for the next coming five years or so.
Okay. That's helpful I'll turn it over [noise].
[noise] thinking if you find your question is that answered you may remember yourself from the coupon pricing start to our next question comes from Anthony Petrone with Citigroup.
Good morning on the footprint rationalization initiative is there anyway to quantify benefits from fixed cost reduction if any.
Sure again.
Said, we're really targeting.
Capacity reduction I think as you translate that back to kind of the direct cost associated with the business. We're thinking and then broad base now that overall savings will be something like $18 million here in the ballpark of that kind of magnitude.
When complete okay.
Okay, and then just shifting to plastics I mean, the segment spend recovering pretty nicely for I think three years now you know how do you think about that business is margins you know exiting 2019, and maybe sort of the incremental opportunities in that business.
Sure I you know again I'll, just say that it's been a journey with the plastics business and we feel really good about where we have ended now 2019 as Tony mentioned, we did achieve the 15% EBITDA margin.
Goal that we had several years ago when you.
Normalized for the impact of the lower pension income. So what we had always said is once we achieved that rate and get our cost structure, where we want us to be in our footprint, where we wanted to be it'll be about filling the assets it'll be about growth and kind of the existing footprint.
On the existing assets. So we're now probably turning the corner, where we are looking for more growth out of this business they've done a very nice job positioning themselves in the market.
Footprint and the cost structure is right and now we're gonna be looking for more growth across our footprint.
Okay. That's helpful I'll turn it over.
[noise] Punky. Our next question comes from Chip Dillon with vertical research partners.
Yes, good morning, and thanks for all the details could you talk a little bit about the the acquisition of the dispensing business and you mentioned that in on Monday, The 20 million in expected synergies and I was wondering.
Kind of how do you think about those in terms of being sort of cost rationalization synergies versus commercial opportunities does that include commercial opportunities and also what should we assume as the cost of the debt for that deal.
[noise] yet chip. This is Bob yes, so as we said roughly 20 million of synergies is the target. Some of that is coming from you know the procurement side. When we put all these businesses together you know there's an aggregation there that we think we can benefit from a there'll be some asked DNA opportunities.
There as we as we get the businesses consolidated there are some some opportunity to synergize best practices across the the plant, which will provide it but what we have not done in the synergy count is assume any kind of commercial synergy.
These are purely cost plays that that's really from that as we said on that call historic playbook of how we how we attack synergies so nothing new there.
In terms of trying to.
In terms of the debt profile. There you know obviously, we've got it we've got it committed with a delayed draw term loan, which admittedly is at relatively low interest rates. These days, we'll see what the fundamental capital structure looks like as we come through that acquisition. So you know I would say that it's going to.
On a comparative basis, it's going to be a relatively low cost of debt, but it'll be sub probably somewhere in that three and I have to 4% kind of range.
Mhm Gotcha Gotcha.
And then just a quick follow up when you look at the sort of you know you're involved in a number of areas and ball plastics and obviously, we've we've heard a lot of arguments or no arguments, but a lot of concern about plastics in a very general big picture sense and I know in the past you all have made moves to help or you know for promote the the up.
Food cans are you involved the efforts to Ah you know impact to the perception of the carbon footprint or other.
Aspects of or advantages of plastic based packaging.
[noise], Jeff it's Adam.
We work very closely with our customers and certainly there are involved in a wide variety of initiatives on packaging in general and specific to plastic packaging as well. So oh, we support them. We don't have any really direct involvement with with side any agencies or or entities around plastic.
Packaging that aren't directly related to our customers.
Understood. Thank you.
[noise] [noise]. Thank you. Our next question comes from the Shah Please JV with Robert W. Baird.
Hi, guys good morning.
Hi, how should you know first off I guess as part of your contract negotiations with the Middle food side did you pick up any new volume as part of the price give back.
[noise] consummate down no again some of those contracts are with products and customers that have growing categories. So I'm as Tony mentioned earlier again, our growth usually comes through our existing customer base. So it doesn't allow for growth, but nothing new if you will.
Okay, and then going back to the LP acquisition, you know obviously the corner buyers in the news now and you know duty for you think it's going to be impacted would travel et cetera, do you have a sense as to how big that end market is for Lps portfolio business and then separately on your free cash flow guidance of 275 million what do you have embedded in there for work.
In capital Thanks.
So.
Three questions <unk>, we're not going to get into kind of the subset channels. They sell into I think it is fair to say both for their business our business duty free is a part of the beauty sale is as you well no.
The so I think that's the simple answer I think the bigger answer. Your question is that well, we anticipate there could be some temporary impact to travel you know our view is that that's going to be more in the temporary nature and it's not long term. If it's a long term issue that I think the whole world has changed and I'd like you know, we're going to see that across every industry. We look at.
So it is a part of both of our businesses. They would have some impact temporarily but that's kind of our view on it.
Yeah, I got them out I'll take the a the free cash flow. So as it does we said to 75 is the target for next year.
There's puts and takes there, including a modest benefit from from working capital, but the main driver as to why the the free cash flow is not up year over year does the fact that we were going to have an incremental tax cash tax payments. It's required and that is essentially a result of of inventory accounting for.
For tax purposes, so its a.
To get technical is the impact of LIFO accounting around around tax payment. So that's that's a onetime.
Yeah, if you will it's not a permanent cash flow item on a go forward, but [noise].
Got it thanks, so much.
[laughter].
[noise] <unk>. Our next question comes from David <unk>.
Wells Fargo Securities.
Good morning, gentlemen, pointing to speak again [laughter]. The contracts can you give us a sense for what portion of the business was renegotiated and I'm not getting anything specific but just you know how much more there might be to do on a go for.
One basis, and the 15 million I think that you called out in terms of a headwind is that all going to hit in 2000 2020 or is that something that would be a couple of your headwind.
Hi, Good question, so a couple of things.
Tony said you know this is kind of normal for our metal container business sense and the jumping into the contracts that were specifically talking about.
And your those agreements that we just renegotiated we have about seven years on those agreements.
That's about 40% of our 2020 revenue so to take that 15 million Oh costs as Tony talked about your roughly talking about an average of something close to 2% as far as a a price impact. So that is the 2020 impact of the $15 million.
2020 impact of those renegotiations, so a big chunk of my business and we would consider that's much more of a normal process for us that we kind of get near the end of contracts, we tend to give some price and that some can you know incentive the customer and then what we tend to do is try to work from there to get ourselves in position to take cost out which is exactly.
What were lined up to do here as well.
Right well you guys have always also talked about trying to outrun inflationary pass through.
You know on a go forward years okay.
That's right exactly.
Maybe Bob a question for you on the tax side. This year as you pointed out was abnormally low sounds like 2020 might be a little bit higher.
And I'm trying to weave in a question about all day is that an asset purchases such that you get the benefit of no step up in basins and then is there a way to think about sort of what a normalized cash tax rate might look like.
Yeah, there's a there's a lot in that but oh, yeah. So so as we bring in Albania I think we will.
There's still some work to do but the thought is that you know, we'll probably end up with perhaps a slightly higher tax rate just given the international exposure there.
You know obviously, it's you know it's gonna be muted by the fact that you're bringing in higher tax in that in a larger portfolio.
So I don't see a significant change one way or the other from that perspective I think.
Our tax rate moves around sort of your earlier point just based on various true ups in certain jurisdictions and that's all we really felt.
In the year, so I wouldn't read anything into that change.
I would just say I don't think I think if you characterize 19 is unusually low tax or I think what we're really talking about is that 20 is gonna be and usually high cash tax year, because of the inventory ambac, right, which which basically the one time and its theoretically that's something you would get cash benefit for sometime in the future as you liquidate that inventory. So it's kinda prepaying, if you will that task, but it's not a recur.
Current cash type item at the onetime cash.
Okay. Thank you good luck.
Okay.
Thank you. Our next question comes from called <unk> with Deutsche Bank.
Hi, good morning extend the question.
Just focusing on the cat capacity reduction just curious what your views on supplied man and the overall industry. Following the excess capacity that you take out due to its kind of balance or how much more do you think could be taken out from others.
Sure. Good question you know I think is as we work through the capacity reduction on our side, obviously, it's not fully addressing the the overcapacity in the market. So we think that's something around <unk> billion units of.
Yes capacity it remains in the market and you know that will continue to too.
Be in the market until further would act reduction efforts are are made.
And I think I'm in the Q1 guidance you talked about shipping volumes, particularly in medical metal containers I'm going from the first half to third quarter I'm just little bit more details on this and why is this occurring and then anyway to kind of size this as well.
Sure. So it really is related to one of the agreements, but that Tony had mentioned as far as the renegotiation of a a long term contract and essentially what this does is it takes a supply of cans.
We have to a pack customer that we typically shift to all year long and they store those can we're now moving to more of a just in time relationship of supply of those can so doesn't really change when we make the cans. If you will but will be shipping the cans more in the pack season versus shipping.
As to them all year long so.
It really is first half the second half a that shift in it it's it's going to be shipments around the timing of the pack season.
Probably a bigger impact in Q2, but it will also impact Q1 as well.
Got it that's helpful I'll turn it over and good luck in there.
[noise]. Thank you. My next question comes from George Staphos with Bank of America.
Hi, everyone. Good morning, Thanks for the details I had a couple of questions.
Some shorter term and then some bigger picture longer term questions guys. So first question just more of an a net and that type of question. When I look at the press release and metal containers, and we have 44.1 million of higher rationalization charges that are called out and then a little bit later on this 49.4, I'm, probably missing something but what's the variance between those.
Too because they seem to come from the same source the rationalization charges.
Yeah, I'm not exactly following with you George I think what.
<unk> press release.
[noise] I still have the.
The chart, there's the charge and then there's the difference between the years from the chart 49.
The 40, I think that's right okay. Okay got it.
Thanks for that caused the second question I had on the free cash flow of to 75 <unk> I know you have the capex with the footprint rationalization in that.
Do you have cash outlays, yet related to any of the employment adjustments that you might make and that to 75 already or you know in theory would that.
Be something we need to account for later on or would that be happening later on past the forecast period anyway, because just to the nature of these sorts of things.
Yeah, well I think the answers that short yeah. So well have some of that that will impact 2020 and that is in our guidance for the for the period that'll be a relatively small number and again remember that this is this is a three year.
Project here, so some of that will roll forward from there nothing nothing meaningful in the a into 2020 timeframe.
Okay. Thanks for that Bob.
Bigger picture question, you know as you've gone through this renegotiation with your customers and yes. This is a normal sort of process for silgan over the years given that you. You know you know maybe more than anybody else in terms of food cans in North America, you've been the [noise].
The most stable largest most focused on providing metal containers for the food market in North America.
D N you've had other players come in and out of the market is that giving you any ability to perhaps get better terms over time and make these renegotiations, perhaps less pressurized early on in a and the tenure the contracts and what we've seen in the past or is that still.
It has to happen down the road as more of this excess capacity comes out of the market.
Yeah, George it's a good question I wouldn't broadly say that there's not a huge change I mean without doubt the point that we would stress to our customers is we are the long term player. In this market. We are focused we continue to invest for technology sustainability other opportunities and so without doubt that that's.
Still the focus you can imagine their customers of course your conversation of excess capacity you want to use that as they point to get leverage on Austin. The process. So I would say the net of all that it's kind of a balance which is why a kind of a 2% down makes perfect sense in that environment.
I probably that.
Seem to be similar the length seem to be similar the negotiations have.
Different items discussed, but every negotiation has attention on both sides and so that's what we really wouldn't care.
Massively different than the past.
Understood I mean look it's it's easier being an analyst and running a company as you guys do but.
At the end of the day, you're a company that had the most staying power you are the ones, who is who have been investing and the food can and there's always excess capacity food can business just because the nature of the manufacturing process. So I would imagine you know you know hopefully overtime.
That's something that you can and should.
Net leverage for my last question I'll turn it over you know it seems like maybe it's a good time that we're now into in 2020 to look back at can vision 2020, and can you remind us how you think that program played out what were some of the learnings what went well for you what maybe didn't go as well as expected.
We look at the food can EBIT, it's kind of flat to down over that period of time, but a lot of that's been pension some other things.
How would you say how would you great can vision 2020, thanks guys.
Thanks, sorry, so let's go back and remind ourselves the cameras and 2020 was always put out there as.
Value.
We always want clarity nodding and push for us, but what is good for us and certainly did they allowed us to its gotten contract in order to get at these big projects. So first what that seems to have.
Came to our customers. This time, we got long term contract.
Okay.
Value to our customers who had this problem.
Our box retailers and they couldn't get price through et cetera, so without.
Our customers have benefit a lot.
As we talk about right, yeah, no competition coming to market.
While.
Sure ill spend a lot of art.
Without value was delivered to our customers through those programs that for that allow them to get cost out.
I would like more and we're going to continue to you know try to find ways to do that but so we're pleased with how that worked out our focus on taking cost out and making the can more competitive never stop so even though we had an aim to Canada and 2020, we're still out there right now trying to find ways take cost out make can't more sustainable make our customers more competitive.
In a way off what were we worked please with the way we kept that add tuck in and they more broad program to our customers.
Very helpful. Tony Great work good luck in the restaurant.
Thank you. My next question comes from Adam Josephson like Keybanc capital markets.
Thanks, Good morning, everyone.
Bob just on pension for a moment I think a year ago. At this time you called out a a 13 cents drag on your 19 earnings guidance from a from pension I think you said earlier that the gain and 20 will be almost as much as what you lost as a 13 side could you just give us a precise number for 20.
Yeah, well I tried to give you as precise as an estimate as I could so that 13 cents is the 20 million. So the lions share of that 13 cents is coming back and in the year and again, it's gonna be spread basically on the same or the same percentage or the same dollar amounts that it was.
In the prior year, so the lion share that roughly half is going to the containers business and then the other half being split between plastics and closures.
Perfect. Thank you in terms of the cash costs associated with the six food can plant closures that you're planning I don't Bob you talked about some of those being and your 20 God, but can you give us any sense as to roughly kind of what level of cash costs, you're anticipating over the next three years as a result of that program.
Sure Adam it's out of it as we are still in the evaluation phase right. Now we're thinking that number is going to be roughly $25 million over the course of the next two years.
The next two years, Okay, yes, although we did and 29, yeah and I think again I said the last two years. So to Tony's point 2019 was the first year of up to three or program.
Right right you close with the toward the end of the year, yes in terms of that happened in terms of a half a billion cans that you're planning on.
Eliminating can you just remind us what roughly what percentage of your food can capacity that represents.
Yep got calculators like if you know, it's like a 3% something that ranch right. It's okay and then once your once you've done that Tony the 3% or so how would you think about the industrys capacity at that point no supply demand.
Balance obviously, there's overcapacity at the moment, you're gonna be acting to reduce that once you get rid of this 3% do you what do you expect the industry to be balanced at that point are you still expect there to be a or just hang over from what's been added over the past few years.
I I think Adams said I think we still think theres, probably something like a billion units out there.
We really don't think of this is changing it because we we are has not been the business of trying to sell this capacity, we as we shifted some things from two piece. Some Threepi Institute B, we added to be capacity, we indicated that we need to take three piece capacity out, but we weren't trying to sell that that by the way, it's not our nature of our business, what we try to do so.
Fly our customer so our customers growing marketplace. So I think while it does tighten the overall access I just want to be clear, it's not that it was out there chopping up the market. It really wasn't and so we still think that's probably roughly 1 billion out there.
We don't know perspective that number nobody there's no reporting of that but but that would be our view right now.
Right now I appreciate and just one last one Tony just yeah, you announced the acquisition on Monday, and you talk about how it's going to increase your closures you sales and EBITDA and reduce your.
Food can sales and EBITDA and then you announced this plant closure program and the lower food can't prices. So one could jump to the conclusion that you are trying to.
Going away from food can I know that's not the way you see it. So could you just kind of frame everything that you've announced this week for us in terms of how you think about the direction or which the company is heading toward closures and and away from food cans.
Great. That's a great question, yes, you're right I definitely would say, we're not running for food cans I would say that way or I guess, that's why we started Mondays presentation, just talking about how we view of value creation, so again without going through the silicon slogans I mean, we really do have this view that if you have strong businesses generate a lot of cash that's really valuable.
And we consider the food can exactly that if our highest cash returning business that we have a we invest in it to keep it there. So I don't want to make leave any impression that were running for making the right investments in fact, taking these six plants out they wait with best in that business and make it stronger and better for the future. So one before we get anything other.
One of the cast we make sure we take care about meeting in our franchise businesses can't is that the second thing is that we didn't take that money, we got to choose where we invest it and we really think that the dispensing side of the world has been a great one for US a business, we bought west Robbins performed very well well above where we bought it plus synergies so were.
We're highly accretive on what is done we like where is growing and kind of the product development that the people.
So really nothing more than we've seen opportunity just doing so it's always done which is too.
Make it back in rigid packaging businesses that we like.
A lot of talk about some of parts et cetera, and certainly we think you have to look at so in in the future web 50% dispensing have to consider that if we can just something but but are not suggesting that.
This needs to be broken down those elements silicon has always multiple businesses. These are all in packaging is all things. We know the skill set that we use a team bringing to rigid packaging adds value to all these businesses one of them. We do as a lot of share capabilities somewhat purposes are really going to marketing and they're sharing those marketing efforts with a fluke inside which slap on that summer.
Product development, we're sharing that try to get other areas the boot camp.
[laughter] operator of their plants were sharing those so southern power that comes from all of these and and it worked for so one of the path.
So absolutely not just can't at all I think we've been trying to be very clear with you end up at all I try to figure out our.
That's what can the absolutely happens declining we're not running from that's actually the case. It's why we are more in areas, where the growth is better because we saw new it reacted to it there are areas. This weekend that absolutely are growing and we see opportunities there the net of that might be flat. We made the point you. We think the growing becomes bigger and so you'll get a little bit of growth.
Overtime, so, but whether it's flat or up 1% were down 1%, we still like we can't business. It's a great area again, returning cash generation, but also.
Areas, where we can invest other skills, we have like marketing and product development and most importantly cross all these customer service one of the other hallmark. So we measure currently is how well we service needs for our customers and that an important all these markets. So I got it if not can you say play on the skills that we have and then deploying cash we think it.
Most value for shareholders.
Thanks, a lot Tony.
Uh huh.
Thank you. My next question comes from Daniel Myself with Jefferies and company [noise].
Hi, guys. Just one quick question are you mentioned that the next phase for plastic containers to kind of shifting to growth to kind of help with with huge margin expansion. I was just wondering if he pointed where specifically you see the growth will come from.
Sure Dan It's Adam and.
Really what I was talking about there is once we what we said previously is once we got to the 15% EBITDA margin really that's kind of a sustainable level in the rigid plastic packaging world. So you know we were looking at growth.
I don't know if its margin expansion beyond the 15% or not that's kind of hard target, where we think the market is but to the growth will come through kind of our core markets things like food pet food.
Personal care health care et cetera, but it's really not margin expansion. It's just more of what we do on the fixed assets that we have a surface in that market Hey, Dan. This is Bob one one thing I might add to that is I don't walk away with the idea that that business has not been growing because we've had actually really nice growth for for me.
Many quarters now in that business.
Likewise, it's not so much we're kind of half the sort of the big cost Takeouts and now it's just running this business efficiently and gaining those efficiencies in the operating side on a continual basis and we'd be happy at this margin with with incremental volume coming through the system, so that 2% to 3% volume that we've been seen on a pretty consistent basis.
Well, that's what we're looking for going for exactly.
Okay. Thanks. Thank you for that and then you know with soon I think having like the second or third quarter kind of improving I was wondering if this is a sustainable turnaround at how long you've seen it has legs for.
I think it's very early days. So it is it is really just two quarters, which are a positive trends I would say what were the activities that we see right now into Q1.
Our consistent with what we've seen in the last six months so.
We're not quite declaring victory, yet, but we'll see how the first quarter plays out so.
Oh, Thank you very much.
[laughter].
Thank you that's a good commander if he'd like to ask a question you May Press Star. One now my next question comes from kind of Lillingston with JP Morgan.
Hi, Good morning. Thank you Adam I think you mentioned right for 2020 in metal containers sort of 40% of business was.
Renewed and like seven years on those contracts do you have a offensive.
Yes, I mean for I guess for 2021 do you have a rough sense for how much.
The business could be up for renewal.
[noise] <unk> 20, Nigel it's funny.
No I don't.
Just off hand here I think again, there's just a normal turned that happens within the business.
Our large contracts are on.
A longer term basis I don't think that we have anything that's coming to us, it's really significant and 21.
As we sit here today.
I'd say.
775% of contracts are 2022 and beyond beyond.
Got it Okay. That's helpful. And then just closures I guess you know for 2019 volumes were down 1% for the year can just give I guess provide a little detail on its or what you saw within sort of answered a legacy close of business you know dispensing systems and just kind of how you view those markets are for this year.
Sure.
Again, you heard Tony mentioned earlier that we were really pleased with the performance of the dispensing systems business and maybe just jumping into the fourth quarter. Our dispensing systems had a nice quarter. They were up almost 3% on the quarter versus prior year and really what we had was the impact of of the pre buy on.
On the metal closure segments, I'm, mostly related to pack items for our metal closures, both in Europe , and North America, So and a full year basis again, good growth in dispensing systems, the pre buy impact of metal closures muted everything else that was going on in the closure segment from a volume standpoint.
Okay, and then just like a thought in for 2020 do you kind of expect you to dispensing and sort of the other legacy businesses.
It's kinda plus positive volumes.
Yeah, we are looking for good growth and and all components of our closures business in 2020.
Great. Thanks, so much.
[noise]. Thank you. My next question comes from Haven. This one is that with RBC capital markets.
Right good morning.
I'm just wondering questions I guess I'm just this last the last question on soup you know so yes, we have seen some positive trends here I guess [laughter] or your thoughts on the quarter's Q4 is little bit.
Muddy on the can side, just given the prebuy last year, but it seems like what turned out in metal.
Would you expect I guess continued improvement you know I know that there's a lot of moving parts, what the pack and so on but are you guys thinking about metal container through the year.
I thought you faded out there little bit you're talking about how do we feel about metal containers around show for the year.
Well just <unk>.
For the business.
Any quarterly commentary I guess, a you know outside of the package.
Just I'm, just asking because of the Q4 comparison being a little bit off because of the prebuy.
<unk>.
I think you know again, we continue to feel good about the food can business I think we didn't explain and go through quite a bit of detail about Q4, and the moving parts. There I think as we go forward into next year.
We are expecting modest growth and in the food can business and it's kind of be driven by our categories and pet food and protein.
So we feel pretty good about and the pack business, we talked about as well. So the only thing I was saying 2020 around the corner <unk> the quarter realization of the the food can volume as a shift from the first half to the second half of the one customer that we talked about earlier.
Yeah, I might add one more to that around it in that you might remember in 2019, we had 'em, we had that tomato pack that ran a little bit late into fourth quarter and then it came up a bit short so I would say if we're expecting a normal pack you drag that back into Q3.
Okay.
And and ER and then.
You mean, you know a couple of years ago. There was talk about soup converting into plastic pouches and just given the E.S.G. trends that we've all been hearing about has there been any retraction from that and back into metal containers that you're hearing from our customers.
[laughter] no I don't think so I don't think it ever moved far enough away from the food can.
I have a meaningful impact therefore, moving back didn't do much either so I just I think look these are all incubation ideas and you know we were talking earlier here. Just about you know are typically we talk about things that our commercial and that are actually results of what our customers are doing in the marketplace. So.
I think we didnt see a significant moves to sue alternative packaging away from the can particularly ensue.
So customers I broadly our customers are feeling better about the can then they worse I don't think we're not here at tighter launched a new stuff et cetera, but I think they're holding their had higher but can being a really good environmentally sustainable package and three or four years ago that may have than they were more conscious of other marketing ideas and getting to a new generate.
And with new packages et cetera, I think that is on balance a little less interesting to them right and I think the idea that.
The fact, I should say that that's who can't is the most recycled.
Consumer package in the U.S. market does have some staying power right now with our customers and whats consumers in general. So I think there is some messaging that's getting closer to the consumer about the infinitely recyclable attributes of the steel food cans.
And then I'm sorry to harp on it's not just another thing cans in soup do you think promotional activity has played into this at all you know I E and maybe even 'cause conns consumers I'm considering their pocket books or is there is there any kind of trade down.
Going on into lower price point products or promotions on soup.
Or any kind of other can't products that that's driving volume there.
Well, one thing I would say that I think over time, what we've seen is when there are promotions and canned food.
Doesn't move volume. So there is a lot of promotional activity right now and the supermarket and hey, we like it be we think it's having an impact so.
I don't know that there's a trade down per se, but they again, they're promoting and they are talking about soup as as part of consumers everyday eating habits. So it seems to be working in its driving volume in the category.
Okay.
Let's just take one or two more and then.
Good.
Thank you. My next question guys are buying Maguire with Goldman Sachs.
Hey, Matt Good morning, Thanks for fitting me in number I wanted to be clear on on the on the Oh, we already discussed as a lot I just wanted to be clear on it a the $15 million at 2% sort of a contract renegotiation that just steps down once the beginning of the contract and that it just started stayed flat at that level for the duration or you have all the pass throughs and everything.
No they want to make sure there aren't like continued de escalators through the life of the contract on pricing.
Sure it for the most part that's exactly right. So obviously, we have our normal pass through mechanisms for inflation or deflation I'm. The only thing that I would say that might vary over time as you know these are volume based contracts. So you know volume increases substantially there would be more value to our customers and vice versa volume was decreased.
The less value, so, but you've got it pretty much which is historically normal that's not there that's not a new point.
Right right, Okay, and then they just the point about timing on some of the cans are staying at the customer wants with Oh just in time. Since then you'll be something we'll be making into warehousing a little bit yeah. All else equal I guess that is pretty neutral for you or I guess, you just think about for modeling point of view they'll be a little bit more seasonal used.
Working capital as a result that I just had to do of course, it making get in and then recognizing the the revenue a cash flows.
Yeah, I don't think it's much of a change in the working capital standpoint, I think it's more about just when when profits are realized.
The volume sales of the product.
Okay. The cash flow would've thought he spoke up again the same time as to what has historically essentially then.
That's right.
Okay got it.
And I'm still a clean up one any a bob any thoughts on the DNA for 2020.
Yeah, there's there's nothing rolling off so I think if you just make your make your nothing significant rolling off I should say.
So it's just basically the additional capital that we put in what changes so to be probably up a little bit on a year over year basis, but nothing material, which remember on a new business like the spend like the permanent closures. It's been recently acquired that's more additive because you don't have any rolling off so you get a little bit more of the addition, not in that case.
Okay, Yeah, when I went out they have comes in obviously, there's a lot of changed a lot of pure but yeah. Just from a piece that was point of view sort of flat to slightly up a little bit okay.
Make sense, yet things like us.
That's right.
Thank you have final question will come from Cape with Wells Fargo Securities.
Thanks for squeezing in this fall off guys trying to be quick [laughter] with metal coming down did you I am I'm, assuming after we've talked about volumes seven times this might shouldn't come up but if not was there any delay of purchases from Q4 of nine indeed in the first half a point anticipation of lower.
Deal costs, and then second Bob if I missed that I apologize did you give specific volume for the fourth quarter by segment and if you did not could you. Please.
Sure I'll take the second question first this is Adam gave for the fourth quarter volumes again, I think we talked a little bit about closures will start their first volume was down one.
1% and again not good growth in dispensing of call it 3% being offset by the challenge as we talked about and metal close your volumes on the plastic side again, another really good quarter for the classics business, we saw a little over 1% growth.
Year over year in the fourth quarter and food cans again, a lot of moving parts that.
We were down.
Sorry, just grabbing Oh, we were down about 6% all told a with the impact of the Prebuy, which was expected which was expected.
On your steel question. There's you know there you do a little bond the edge, but there is just we buy so much steel there's not a lot you can do around that nor to the steel companies have a lot of interest in that so not not not a big there.
Okay. Thank you.
Thank you that is all the questions would happen I like to now I'll turn it back to our presenters for closing remarks.
Great. Thank you Stephanie. Thank you everyone. We appreciate your time and we look forward to talking to you about our first quarter late in a good day.
Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.
[noise] [noise].