© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for joining the Silgan Holdings Third Quarter 2018 Earnings Results Conference Call. Today's call is being recorded.
At this time, I would like turn the call over to Kim Ulmer, Vice President, Finance and Treasurer. Please go ahead.
Thank you. Joining me from the call today, I have Tony Allott, President and CEO; Bob Lewis, EVP and CFO; and Adam Greenlee, EVP and COO.
Before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including but not limited to, those described in the company's annual report on Form 10-K for 2017 and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements.
With that, I'll turn it over to Tony.
Thanks, Kim. Welcome, everyone, to our third quarter earnings conference call. Our agenda for this morning will focus on the financial performance for the third quarter, review our outlook for 2018 for the remainder of the year, and then after that, Bob, Adam, and I'll be pleased to take any questions.
As you saw on the press release, we delivered adjusted earnings per diluted share of $0.76 for the third quarter, an increase of $0.10 per share or 15% versus the prior year quarter and in line with our expectations. This improvement was largely attributable to continued volume growth and solid operational performance in our plastic bottle business and improvement in the closure business as a result of year-over-year synergy benefits and growth in the target markets of Dispensing Systems in the U.S. single-serve beverage markets.
These benefits were partly offset by the negative impact from a 6% volume decline in our metal container business. Similar to the second quarter, these declines were driven by one seasonal customer working down inventories and deselecting certain business, a closure of a fruit processing plant on the West Coast, and the competitive loss of a previously discussed customer.
Additionally, soup volumes were lower in the quarter due primarily to one customer. Our metal container business did a good job controlling costs in light of these lower volumes. Based on our year-to-date results and our outlook for the fourth quarter, which includes the unfavorable impact of lower overhead absorption resulting from a planned inventory reduction, we're narrowing the range of our full year estimate of adjusted earnings per share to $2.03 to $2.08. The midpoint of this range represents a 25% increase versus prior year earnings.
With that, I'll now turn over to Bob to review the financial results in a bit more detail and provide additional explanation around our earnings estimates for the rest of the year.
Thank you, Tony. Good morning, everyone. As Tony highlighted, we delivered quarterly results within our expectation and 15% above the prior year quarter.
Both our plastic container and closures businesses performed well in the quarter. Despite lower unit volumes for the quarter, the metal container business did a good job controlling costs and benefited from not reducing inventory in the quarter. The full inventory reduction is now planned for the fourth quarter of 2018. 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 2018 were $1.3 billion, an increase of $40.1 million, as each of our businesses had higher sales for the quarter. Net income for the third quarter was $84.7 million or $0.76 per diluted share compared to third quarter of 2017 net income of $72.4 million or $0.65 per diluted share. There were no adjustments to earnings per diluted share in 2018 and 2017 included acquisition costs for a total increase to adjusted earnings per share of $0.01.
As a result, we delivered adjusted income per diluted share of $0.76 in 2018 versus $0.66 in 2017. Interest and other debt expense for the third quarter 2018 decreased $2.4 million to $28.2 million, primarily due to lower weighted average outstanding borrowings, largely as a result of the partial prepayment of acquisition borrowings at the end of 2017.
Capital expenditures for the third quarter of 2018 totaled $43.3 million compared with $42.9 million in the prior year quarter. Year-to-date capital expenditures totaled $134.6 million versus $124.2 million in the prior year. Additionally, we paid a quarterly dividend of $0.10 per share in September with a total cash cost of $11.4 million.
I'll now give some specifics regarding each of the businesses. The metal container business recorded net sales of $797.8 million for the third quarter of 2018, an increase of $25.4 million or 3.3% versus the prior year quarter. This increase is primarily a result of the pass-through of higher raw material and other manufacturing costs and a more favorable mix of products sold, partially offset by lower unit volumes of approximately 6% and the impact of unfavorable foreign currency translation of approximately $1 million.
Volumes were down due to the continued impact of previously announced customer initiatives, including inventory adjustments at a seasonal customer, a customer plant closure in the fruit market, and a competitive loss of a smaller lower margin customer, as well as lower soup volumes in the quarter.
Segment income in the metal container business was $86.9 million for the third quarter of 2018 versus $92.2 million in the same period a year ago. The decrease in segment income was primarily due to lower unit volumes at higher freight expense, partially offset by the contractual pass-through of indexed inflation versus a contractual pass-through of index deflation in the prior year quarter, a more favorable mix of products sold and foreign currency transaction losses in the prior year period.
Net sales in the closure business increased $3.5 million to $360.8 million for the quarter, primarily due to the pass-through of higher raw material costs, partially offset by the impact of unfavorable foreign currency translation of approximately $1 million.
Segment income in the closures business for the third quarter of 2018 was $47.3 million, up $2 million versus the prior year quarter. This improvement was primarily a result of lower cost, largely due to synergies realized from the Dispensing Systems acquisition and a more favorable mix of products sold, partly offset by the unfavorable impact of the lagged pass-through of higher resin costs.
Net sales in the plastic container business were $148.4 million for the third quarter of 2018, an increase of $11.2 million versus the prior year quarter. This increase was largely due to the pass-through of higher raw material costs and a 3% improvement in volumes, partially offset by the unfavorable impact of foreign currency translation of $1 million.
Segment income increased $2 million to $8.5 million for the third quarter of 2018. This increase was primarily attributable to higher volumes and lower manufacturing costs, partially offset by the unfavorable impact and the lagged pass-through of high resin cost and cost associated with the startup of the Fort Smith, Arkansas facility.
Turning now to our outlook for 2018, based on our year-to-date performance and the outlook for the fourth quarter, we are narrowing our estimate of adjusted net income per diluted share from a range of $2.03 to $2.13 to a range of $2.03 to $2.08 per diluted share. This estimate excludes the impact from certain items outlined in Table B of our press release
At the midpoint of our range, the estimate reflects a 25% increase versus the prior year adjusted net income per diluted share of $1.65. We're also providing a fourth quarter 2018 estimate of adjusted earnings in the range of $0.34 to $0.39 per diluted share, which includes approximately $15 million of unfavorable impact from lower overhead absorption, resulting from the planned inventory reductions in the metal container business to be completed in the fourth quarter. This estimate compares to $0.32 per diluted share in the fourth quarter of 2017.
While we continue to expect free cash flow to be approximately $300 million for the year, we do note that persistent inflation, the timing of year-end customer collections, and the completion of the inventory reduction, all pose some risk to this forecast. As a result, we see $300 million as the high side of our free cash flow.
That concludes our prepared comments, so we can turn it over for Q&A and I'll turn it back to Jessica to provide instruction for the Q&A session.
Thank you. We'll go and take our first question from Scott Gaffner with Barclays.
Thanks. Good morning, guys.
Hey, Scott.
Bob, just focusing on the inventory reduction for a minute, is there any reason why that would have gotten shifted a little bit from 3Q into 4Q and then now maybe goes into 1Q versus 4Q? What's sort of the driver there?
Yeah, remember that we were – we came into the year thinking that we were going to get a part of it in Q1 and a part of it in Q4, that we were going to be on the shoulder side of it. As we came through the second quarter, basically, we were net neutral. So thinking we had to get some of that in Q3 and Q4, I think with the volume declines in Q3, that's primarily what's driving it into Q4. So, we still feel good about the operational plan, it just drives it into Q4 versus some of it, otherwise being in Q3.
Okay. And then, if I look at it, the soup weakness that you had in 3Q, is 3Q normally a big quarter for shipment of soup cans? And should we expect more weakness in that category as we move into 4Q based on what you're seeing?
Hey, Scott. It's Tony. No, not really. I would call Q3 more of a transitional quarter in that business. It kind of depends on what they're thinking for the cold season on filling. And so, I think that's part of what's happening. It's just sort of what decisions about filling time, et cetera, are in the plan. So, we don't see it necessarily as any significant change to the conversations we've had about soup. We do think there's a lot of change going on in the soup markets. The players are going through lots of different decisions about what's core and what isn't.
And so, I think there's a lot that we're watching right now about kind of the future of soup. So, I think we're – I would put out the same as I think most people on the call, we're just watching it and trying to see where the future goes.
Okay. One last one for me, Tony. Just if I look at it, I mean clearly, debt pay-down is a focus of a lot of your cash right now. But with the shares where they are, is there maybe any consideration of just balancing some debt pay-down with share repurchase at these levels? How do you think about that?
Sure. I mean, we have done buybacks from time to time. We certainly have authorization to do buyback, so I wouldn't signal anything about that either side, but I think that's always been something that's available to us. I think in terms of kind of major tenders and stuff, I think we've been pretty clear that right now our thinking is about debt reduction. We levered up to do what we think was a great acquisition in Dispensing Systems. We said that we would delever that fairly quickly. In fact, we're delivering on that and we just need to finish that, getting that done before we think about any kind of more long-term capital prospects.
Fair enough. Thanks, Tony. Thanks, Bob.
Thanks, Scott.
Thank you. We'll now go to Chip Dillon with Vertical Research.
Hi, guys. This is Salvator Tiano filling in for Chip. How are you?
Good. Good, thanks.
Great. Yeah. I have a few questions related to volumes, and firstly on the metal container side. Firstly, is there a way to kind of quantify the impact of the soup volume decline as part of the 6% that's dropped? (00:12:46) And in the customer destocking that is something you brought up last quarter, has the impact been bigger than what you expected three months ago?
Sure. Two good questions. So, as we said in the opening remarks, we were down about 6% in the metal container business. I'll reverse the order of your question, but about a third of that, 2% of that is related to the seasonal customer who's going through an inventory reduction and a portfolio management program.
And so, to your question, is it bigger? First of all, to be clear, we did not expect that to be a negative on this quarter. We really did believe that the customer – and we were talking to the customer, and thought that they were kind of through it for this year through the second quarter. They had been pretty clear and we had indicated that we're going to try to do the same next year, but I think that customer found opportunities to go a little further. And so a little bit to our surprise, we did see again a negative comparison in the current quarter.
So, our expectation of that going forward is to wait and see a little bit. They have indicated an intention to get inventory down again next year. So, I think as we think about 2018 going into 2019, there may not be a whole lot of recovery on the horizon for us. If they do the same kind of reduction that it probably would be more flattish, would be our expectation on that.
And then, I think the question around the parts of the business that they portfolio managed, whether that comes back or not, I don't know. That's not clear to us right now. So, I think we can fairly say, it's probably going to be somewhere near this volume for next year at least and maybe there's a little bit of recovery in 2020, not too sure.
The second part of your question is the soup also made up about 2% of that 6% decline in the quarter. And so, that scales up for you. I think I already said. I think we don't really know what that means about trends. Certainly, condensed soup has been in decline for some fairly steady period of time. That's a little more than half of the total volume that we do in that category. And then, the ready-to-serve market has been less declined, some brands up, some brands not so much. So, those are kind of the elements that we'll keep watching and talking about.
Perfect. And on the closures side, with the volumes there. Firstly, can you provide a little bit of the breakdown like you sometimes do about the volume in the Dispensing Systems business versus the legacy closures first of all? And secondly here, I think last quarter, the organic volume was negative despite the Dispensing Systems adding to organic volumes, and you indicated you were against a very tough comp in 2Q of 2017. So, can you describe a little bit what happened in 3Q of 2017 with regard to legacy volumes and if it was again near record levels?
Sure. I'm going to have Adam answer the questions on the volumes around closures. I think just in the interest of the flow of the call, I think we're going to try to hold everybody to two questions per, so we can then go ahead and move on after this answer, just to keep the process going.
Sure. So, total volume for the closure segment was flat versus the prior year. And as you saw in the release, we did see growth in our target markets and we also had a favorable mix of products. So, when you get into the Dispensing Systems markets that we serve, we did see a couple of percent of growth through the Dispensing Systems market primarily in healthcare, in our pumps and sprayer markets, etcetera, offset a little bit by some softness in our lower value-added Dispensing Systems closures market. So, good performance in Dispensing Systems, good targeted growth in the markets that we serve for that business.
And then, when you talk about the U.S. single-serve volumes, again, we've talked about sports drinks and ready-to-drink teas on this call for quite some time, that volume did recover as expected. We were up approximately 3% versus the third quarter of last year. So good growth, again, on a relatively easy comp.
Now, the question back to 3Q of 2017, we did have a softer volume for our closure segment, specifically the U.S. single-serve volume. So, we're coming up over that, but again, I think, a 3% volume growth on the U.S. single-serve business, we were in line with our expectations.
That growth for both Dispensing Systems and the U.S. single-serve market was offset primarily by some softer volumes related to the food pack primarily in Europe. So, I think in our target markets, we saw the performance that we were expecting. And we're a little bit surprised, there's some weakness out of the European food pack markets.
Perfect. Thank you very much.
Okay. Thanks.
We'll now take our next question from Mark Wilde with Bank of Montreal.
Good morning, Tony. Good morning, Bob.
Good morning, Mark.
Hi, Mark.
Tony, I wonder just coming back to the food can business, if you can talk in light of this weakness that we're seeing here in the second half of the year, whether you think you have room for maybe some additional capacity rationalization?
Okay, sure. Good question. Let me answer first by saying, as we've been pretty clear on the call, that we've had a couple of unique things happening to us. I think if you look at the industry in total, last I saw it was flat and might be down 1%, something like that. So, there's sort of this broad question of what's going on in food cans. And I think what we're seeing right now is very separate and distinct. If the volumes for our business were to hold at this level, we absolutely would look at our footprint and opportunities. We do that all the time anyhow, but for sure, if this is the volume that we think is the sustainable volume for the business, we do expect to go find costs out in our system and absolutely believe we'll be able to find them.
Okay, and then as my follow-on, Tony. Could you just talk about how you're viewing the progress in reloading the plastics business after all the recap activity? 3% looks pretty good to us, but I don't know what you guys are really looking for in that business over the next couple of years in terms of incremental volume to get your margins up?
Hey, Mark. It's Adam. Look, we're very pleased with the performance thus far with the plastics business. We're now delivering the ninth consecutive quarter of year-on-year improvement. So, the business is delivering what they've promised and what we're expecting here. So, the 3% volume, as we've said before, really, we've done a good job of getting the cost out for the most part of that business. And where the growth and income generation's going to come from is putting volume across those fixed cost assets that we have.
So, we've got core markets that we focus on, like food, healthcare, pet food and personal care that are continuing to grow. We're doing a nice job of winning in the market. We've talked before that we don't think anybody is necessarily hitting it out of the park from a service and customer support standpoint. We've made tremendous strides on that front and I think we're being rewarded with volume growth in the market.
So, as we look forward in that business, we continue to talk about our 15% EBITDA margin target. We're not there yet. The drop that we saw in this quarter, back to 11.9% from the prior quarter, was right in line with our expectations. We had the Fort Smith startup costs and we also have seasonally our smallest quarter that we have for the year in our plastics business.
So, we feel good about where we are. We're on track with where we want to go. And I think we're having success in the market and we expect to continue to have more success as we go forward as well.
Super. Thanks, Adam.
Sure.
We'll now take a question from Debbie Jones with Deutsche Bank.
Hi. Good morning. I wanted to follow up on the plastics business. Your volumes have been great this year. I just wanted to get a sense if there was anything going on with margins in the quarter. I know that there's some pass-through related things on timing that you did see lower margins quarter-over-quarter. I want to get a sense of what you think they can be sustainably going forward.
Sure. I'm going to repeat a little bit of what I just said to Mark's question, Debbie. But we – on the last call, we did talk about the 14.3% EBITDA margins that we delivered in Q2, that that was going to reduce by a couple of points in the back half of the year because we had the Fort Smith start-up costs. And then, we also had a little bit of a resin headwind in the quarter. So, I'll scale both of those to about $1 million apiece and that really is the bridge that gets you from the 14.3% to the roughly 12% EBITDA margin.
So, as we go forward, the sustainable margins that we're targeting for this business is right at that 15% level and then we'll see where we go from there, but we need to get there. We're on path. We're on track. We're doing a good job. We're now winning again in the market. We're seeing the volume growth that we wanted to see and we're well on our way to getting there.
Okay. Second question just on what is going on with food cans. If we take a look going forward here, what are the things that you are most concerned about for the volume trajectory or potential upside risks? It would seem to me that the narrative around plastics is actually good for you. It's also just not clear to me how much more you might expect in share shift for categories or customers going forward. Could you give us like an order of magnitude about what you are concerned about?
Sure. I think we did talk about this last call. I think our feeling is that the food can – any benefit from the plastic issue, I think's going to be pretty small. I hope I'm wrong about that, but I certainly don't think that's a major theme that we're thinking about. So, what makes us still feel pretty good about food cans, and remember, good for us, we've always viewed this more or less a flattish market, I think, and we still view it that way.
The first point I would say to defend that is just look at what's going on in the market rather than our numbers and that would say nothing's changed there particularly. If I focus a little more on us, I would just say that nearly 40% of the food cans we sell today are pet food cans. The pet food market is growing in the 2% to 4% rate, has for a long time and we see no reason why that wouldn't continue. Another 10% of what we do is in kind of protein areas, which have interesting growth opportunities around them. So nearly half of what we sell today in North America are in markets that we think have very interesting growth prospects going forward.
The second largest category we have after that is the vegetable category, which is nearly let's call 20%, but that category is really split into two groups. You've got – the largest bit is tomato and corn. And our feeling is that you look at who uses tomato and corn and why they use it, and we see that as a very solid future. I'm not saying necessarily great growth, but I also don't see really serious decline risk for that market.
The remaining 30% peas, beans, et cetera, have been declining at some pretty low rate and probably will continue to do so. Fruit has definitely been declining. The can is not the preferred package for sending your kids off to school with their fruit. We understand that. That's down to 4%. So, we're going to talk about fruit declines, et cetera, from time to time, but if you think about kind of the future of Silgan, it's not a really big point to where we're going. And then that leaves the 20% that is soup. And even soup, as I said earlier, is sort of split between the condensed side, which you have to assume is going to continue to decline, and the ready-to-serve side, which is I think a little bit more uncertain in that regard.
When you take all that and you take those growth rates, you roll it forward, I think you'll see pretty quickly why we think that we're going to be fine on our volumes because those growing ones are taking bigger, bigger share. The things that we spend a lot of time on these calls talking about that are declining are becoming smaller and smaller to who we are.
And then finally, as we've said before, really, everything we sell today is in a retort process. And so it's even the ones that are declining, it's not easy for those customers to shift. They've got to go to a more expensive package or a more expensive process. So, that's kind of why, because I know this question sits out there in lots of different forms about food cans. I thought it was worthwhile to just tell you kind of why we think the way we do about our food can business.
Yeah. No, thank you, that's very thorough on. I'll pass it on.
Thanks, Debbie.
Thank you. We'll now take a question from Anthony Pettinari with Citi.
Hi. Good morning.
Morning, Anthony.
Morning, Anthony.
Just following up on the free cash flow guidance, I think you indicated $300 million for the year might be the upper end of what you could realize with some risk. I think you referenced year-end collections and maybe rising costs. Is it possible to frame what could be the range, or the downside? Would it be $10 million, $20 million? Just trying to understand kind of the upper and lower end of what you might be able to realize.
Yeah. Sure. The things that I pointed out to the risk side would have been inflation, the year-end collections and the pending inventory reduction, right. So, some of those are new risks, some of those are risks that sits with us year in and year out. As to the inflation, that continues to persist. On a year-to-date basis, we've incurred roughly $10 million of incremental freight across the business. Given the tariff situation, we've got working capital up at the end of the third quarter between $20 million and $30 million associated with those tariff costs. And so, that's kind of new risk as it relates to this year, if you will.
And then, as to the inventory reduction, as I said in my earlier comments, we've got a good operational plan to get there, but it is a sizable inventory reduction in a relatively small quarter, so that heightens the risk a little bit. And as to the timing of the cash collections, as I said, that's always a risk. And given the holiday and vacation schedules, payments could move a day or two around the year-end cycle. And again, we've got some fairly large customers that make sizable payments at year-end.
So, that sort of hopefully gives you a little bit of an idea of the types of things that can move around. But again, our focus is on delivering to the $300 million target, but again, it's got some risk against it.
Got it. Got it. That's very helpful. And then, apologies if I missed this, but any early read on 2019 CapEx, given Allentown and Fort Smith are kind of behind you?
Yeah. Look, I think we're – as we said, this year $200 is kind of the number. I think we'd look to be lower than that going into next year. Again, it's really about the type of return projects that come through the budget process. But I think our view is that given that we have had some fairly large projects this year and certainly prior to that we ought to see a little bit of decline in the CapEx in the aggregate.
I think, Anthony, if you're trying to think forward on cash, though, you also got to remember, we were counting on a significant benefit from inventory reductions this year. You won't have that next year. I don't think we have any idea of inflation, but I think if you ask me today, my guess is inflation will be further a cash headwind next year. And so it depends what you're trying to do with that information.
Yeah. No, that's very helpful. I'll turn it over.
Thank you. We'll go now to Ghansham Panjabi with Baird.
Hey, guys. Good morning. As you sort of sit here today and you think about 2019 from an operating income perspective, can you just give us some high level variances to think about, are you planning for operating income to be higher year-over-year? And if so, what are some of the drivers associated with that?
Sure. Figured this question will come up at some point. To be very clear, we have not finished our budgeting process, and so we reserve the right to come back and change some of these answers as we go through it. But with that said, I think as you look at the container business, we certainly are expecting that we would not have the same scale of inventory reduction, which has a sizable P&L hit to us. Recall there's, we're saying something like $15 million cost charge that comes with that.
So, I certainly wouldn't expect that. I think when you listen to everything we've said about volumes on this call, you'd say they probably would be flattish, right, because we're saying you're not going to see recovery in that particular customer. You're obviously not going to see recovery in the piece of business that was lost to a competitor. We still would believe you get a little bit of recovery from the fruit business that was closed out last, as other customers picked that business up.
And then, you've got the question of kind of where is soup headed. Against that, you've got the benefit of we're pretty confident that pet food will continue to grow. So when you take all that in, I think we still think probably flat is not – even though it was down this year in an unusual amount, the primary drivers of that are going to hold with us for another year at least.
Closure business, I think we would continue to expect that we'd see good operating performance and continued growth in those markets. A little bit of recovery in Europe on the food that goes into glass with closures on it. And then in the plastics business, I think we expect to see, as Adam said, continued headway plugging out on the commercial side and on the cost side. And then, you add to that the fact that we have this Fort Smith plant that would be coming up in the first quarter, which would be helping us as well.
So, yes, I think as we sit here today, we would think the businesses would need to be up and those would be the primary drivers of that. Offsetting that a little bit is your interest will move around a little bit, we'll get the benefit of the debt reduction, but you can predict rates probably better than we can.
So, those will be the big moving pieces as we see them right now.
Okay. And then just going back to North American metal food, just to sort of tie in to the early questions on capacity and also growth. I mean, you're making a good case for volumes to be relatively stable for North American metal food, but you generate a couple of percent of productivity here, at least I think you do, and the base businesses probably will not grow materially going forward. So, what exactly are you waiting for from a footprint sort of optimization standpoint? Or do you just feel that this is sort of the utilization you should run based on what you see at this point?
Yeah. We're not waiting on anything. I think we've took a plant out a year ago. So, we've been at that all along. We took out some capacity, not full plant, but out of our three P's (00:32:10) side. So I wouldn't describe us as waiting. I think there is a question on the table of what is the – for us, what is the right volume in 2020, let's say? Where does this particular pack customer come out in terms of sustainable volume? I think we can't get rid of all the capacity for that and then have them come back and say, oh, that was just a two-year program.
So, we need to be sure we have that figured out, but we're not waiting on anything. We always are looking at our costs every day. And kind of a relentless focus on where is cost, where is capacity and where can we take it out. And so, we're at it.
Got it. Thank you.
Yeah.
We'll now take a question from George Staphos with Bank of America Merrill Lynch.
Hi, everyone. Good morning. Thanks for taking my questions and the detail so far. I want to do, again, a kind of bigger picture question on food cans relative to some of the other ones Ghansham and the others asked earlier.
So, Tony, with Can Vision 2020, that was at one point in time talked about as lowering the cost structure, perhaps opening up new opportunities for the can. And perhaps, it has, and it's just being covered up by some of the other trends.
Are you seeing Can Vision 2020 deliver what you had expected it to be? And taking it from a different standpoint, what are you seeing from your customers using perhaps this lower cost position of the can to innovate and maybe find new places for growth for the food can, as opposed to it being a – it's been a steadily declining category when we look at the CMI data going back a number of years. So your thoughts on that and then I had a follow-on.
Okay. Sure. So, if you look at Can Vision 2020, just to be clear, again, the primary focus there was to drive cost out of the system for our customers. It wasn't about re-innovating, although we certainly talked about innovation could drive other things, but the basic effort was not to reinvent new packages and new markets, because we really don't – there's maybe a bit on the fringe on that but, George, that's not ever really been what we've been about. Our idea is to be the lowest cost, highest quality supplier to the market. Let our customers win in their markets. And inventing new cans is not a huge part of what we're trying to accomplish, nor was it. So we...
Yeah. And Tony, I wasn't necessarily saying that or saying the fact that you'd have a lower cost position would allow more growth for the can and perhaps innovation on the marketing side, but in any event keep going. Sorry about that.
Yes. Yes. Fair enough. So, as we look at the program, Can Vision 2020, a lot of value got delivered to customers, a lot of customers signed up for new contract periods for us to invest in new opportunities. So, when we look at it, we say it's actually quite a long collection of successes in doing what we want to do which is drive value to customer and re-link Silgan to that customer in terms of that we were in this together against a pretty harsh environment that our customers who we're dealing with, which takes me to the second part of your question is, I would tell you that I think the environment for our customers has only gotten harsher since then. And so, while I do think it delivered value, I do think there's something there for the customers.
The world has changed much more than our customers would have ever imagined at that stage. Many of them are not the same ownership structure they were. And so there's a lot of change happening on that side as well. So, in no way is this mission accomplished and that there everything is great for our customers, that's not the case.
Add to that, now we're looking at significant inflation. And so, the tariffs alone are going to undo all the good we did with Can Vision 2020. And so you got a lot of cost now coming in this year and I think next year into the can business, which is going to be a headwind against the point you're making.
Tony, that's very helpful and a fair point on the costs in particular. I guess the other question that I had, and it's maybe partly answered by what you just mentioned, but having looked at the returns on Silgan over a couple decades, you saw a very steady improvement in return on capital from the early 2000s through really around 2010 is when returns peaked. And in particular, the return on invested capital, which takes into consideration acquisition prices, has declined more, even then kind of just returned on kind of a net asset figure.
What that suggests is, one, you're having to and probably everybody else to pay more for growth whenever you have an opportunity to buy it. Would you agree with that? And I guess, really more importantly, what do you think will be the things that ultimately trigger an improvement in the trend on return on capital for Silgan going forward? Thank you.
Thanks, George. I think the metrics are a funny thing. It's what you measure, right? So, 2010 roughly marks the time when we started doing share buyback. So the answer to the question is if we had invested all that money into our assets, we would have had better return on assets I believe at that point in time. I would ask you to go look at return on equity and tell me how we stack up and how we moved our return on equity over that time.
So I think what we've tried to always be is a balanced management team focused on being the best in what we do. And so, sometimes we say, we're generating cash, let's buy back shares. That's good for the shareholder and we do it. Sometimes we say, let's build a new can plant because that's what the market needs for the can plant. So, that's just one backstop is that we try to move all the levers to the best answer over time and, frankly, we feel pretty good about what's been delivered over time on that.
The second part of your question is an excellent question, which is, yes, certainly acquisitions are more expensive and which is the other half of your question. The thing that drives down return on asset, and we've said this many times, is when you do an acquisition you buy everything up to the current value and that drives down your return. So, one of the things driving our returns right down is the dispensing systems business.
Now, if you ask me, do I regret in any way that decision? No. It's one of the best things we've done for shareholders in a long time. But it does drive down our return on assets right now. So I think, again, we take the long-term, we think that's a great business to add to our family of franchise businesses. It's the right thing to do, definitely going to drive down return on capital for a period of time, as would a share buyback. But over time, we think it's the right spot for us to be and to move for.
Okay.
But things are expensive right now. I'm not denying that one.
Yeah. I wasn't necessarily calling out dispensing because the trend had happened prior. And on return on equity, you're right. Although your stock tend to have a fairly high correlation with return on invested capital as well on the relative performance and that's why I was bringing it up. I'll turn it over. Thanks for listening. Thank you.
Thanks, George, for your question. (38:56)
We'll go now to Adam Josephson with KeyBanc.
Thanks, Tony and Bob. Good morning.
Morning.
Forgive me, I think on the last call, Tony, you said you expected your food can volume for the year to be down about 2%. Correct me if I'm wrong there. What are your expectations now?
That will be down more than that, since we were wrong in the third quarter and we're not really changing the 4%. So we'll be down in 4-ish percentage range (39:27), maybe even a hair more than that, we'll see.
Okay. And just, Tony, on your comment about the volume issues you had are not really reflective of what the broader market is experiencing at the moment. I mean, you're the largest and lowest cost producer. So I would think in a vacuum, if anything, you would be taking share, not losing share, just given your low-cost position.
So, can you just – because you also talked about how some of these categories that are declining are becoming less consequential for you, such as fruit, but yet your volume declines are much more significant this year than they've been in previous years. So I'm just trying to square those things. Can you just help me kind of put all those things together?
Sure. I'll try to. We're also the leader of the market. And so we have to – there is a market, there is excess capacity in the market. So there is some business that we're going to choose to not defend, in some cases, for a period of time. And so you've got a bit of that in there. The biggest move, as you talked about, is you've got this one particular customer is going through something that's very unique to that customer, right? They're making a change about their balance sheet.
And so I think there's a little bit of this is about us just letting the market calm itself down. The bigger part is really just a couple customers going through pretty unusual circumstances right now. But you're right. So, we're unique. I mean, if you look at what we should have done to the market, it tells you that the rest of the market looks pretty okay, right?
Our decline should have brought the market down by more. So the rest of the market is picking up, by the way, some of what we've lost, which makes sense. Even in the case of the customer who's culling inventory and some business, the business they walk away from, somebody else picks that up and those cans go somewhere else.
Okay. If I can just ask one last one about the ROE comment you made earlier, Tony. I mean, your leverage has obviously gone up over the years, which is partly why your return on equity has gone up. I think you said you'd end the year about 3.5 times, which is at the higher end of your target range.
Do you still think, just given all the uncertainties you've been talking about, that 2.5 to 3.5 times is an appropriate leverage range for you? Do you think you should be lower than that, just as we go later into this cycle and these uncertainties grow and grow? Thank you.
Yeah. Good question. I think that range still makes pretty good sense and I don't want to be dogmatic about it. It was always meant to be sort of a flexible thing. But nothing I see right now would make me think it should change a lot. Obviously, rates are concerned to go up, but against that our competition is more levered than they were. So we need to keep that in mind as well. And I don't see our business as more volatile. I mean, again, the perfect example, we were down 6% in our largest business and we'd still hit our numbers here.
I think we've still got a model that is incredibly stable. We've got a management team that is able to take costs out when the volume's not there. We think cash. So we know how to – we'll work inventory off when that makes sense. We're dealing with a lot of inflation and challenges around that in our market well. And so I just think we continue to be exactly as we always were, which is we're very focused on our markets, we think more so than our competition, and we generate a lot of cash and we stay focused on that.
Thank you, Tony.
Yes. Thanks.
We'll take our next question from Daniel Rizzo with Jefferies.
Good morning, guys. Just a quick question. On your freight costs, are your freight costs based on spot rates or are costs locked in, in like some type of contract?
The freight cost, your question is freight cost. It's basically negotiated rates. The fuel is set by a standard but it's individually negotiated rates. The problem with rate, of course, is it's can you get a truck, can the guy you contracted with get you a truck, or how far down your rate schedule do you have to go to get a truck to show up and make the delivery you need.
So, I mean, there's showing certain things of freight cost spot prices going down. I was wondering if you're seeing that at all, or freight costs for you at least continue to rise.
Yeah. I wouldn't say – I think last I've looked at it, they're kind of at an elevated level but not necessarily rising. There's a little bit of seasonality to all of that as there is to our business unfortunately. So it was high at our peak shipping time. But I think that one of the things that's driving it is a scarcity of drivers, and I don't see any change in that coming at all.
Thank you very much.
We'll go next to Arun Viswanathan with RBC Capital Markets.
Great. Thanks. Good morning.
Good morning.
Just a question on the food can business. I was wondering have you guys experienced any price elasticity there of customers, i.e., you noted that corn and tomatoes seems pretty solid. I'm just wondering if the tariffs stick and we see those sustained for a while, would that cause further declines in demand across the whole category of food cans. Thanks.
Yeah. I don't know that we've seen that yet. I think, for sure, customers are in a tough fight with retailers to get price through. Some have been successful, some haven't. And so it's not really clear to me there's a huge amount of price on the shelf right now that would change the demand pattern, nor is there an easy price comparable switch the customer can make, because the food that typically is in a can is so price-advantaged to its next best choice that it's not obvious the consumer would shift all that much. But definitely the retailers are playing hard about what's going on on the shelf. And so it's probably really more happening at the retailer right now.
Yeah. Just to clarify, the reason I asked the question is there's been discussions around maybe heightened promotion to kind of reenergize the category, especially in soup. And I guess just wondering if the tariffs kind of remove that. So, maybe you can just address that. And then, just as a follow-up on the freight side, any thoughts on if you'd see continued inflation in your P&L next year due to freight or should we just assume stable? Thanks.
So your question is a little more specific. I think soup's a great product. I think it should get promoted. I think there is a understanding gap between the consumer and the power of the product. So I think that would be good. And I think it could offset some of the tariff issues. I don't think the costs of tariff are in the way of that to your point, I don't think it's enough.
And I'd go back to what I said, which is the next best alternative is so much more expensive that I just don't think the tariff would be the driver of that point. If I were in the soup business, I would still want to push the most profitable means by which I can sell it. And that's, I think, soup in a can.
On your freight question, if I look forward, I would think – so we pass through a lot of our freight or else you'd hear us screaming a lot more than you are right now. We absorb everything in our inventory that gets moved around. We absorb the stuff we're moving around in our system. And in some contract cases, we pass through on an index, not on an actual.
And so I think that my expectation for next year, as I sit here, would be kind of flattish on the costs of freight. So, staying up where they are now would be my best guess at it. And we would absorb a small part of that and we would pass through the bulk of that to our customers.
Great. Thanks.
Yeah.
We will now take a question from Edlain Rodriguez with UBS.
Thank you. Good morning, guys.
Morning.
Morning.
You've talked about what customers are walking away from. I mean, you've talked about yourself walking away from some businesses and you've had a loss of a customer. Given your low-cost position, like how would someone else be able to serve those customers better? Or is that something that maybe over time that those customers will realize that and then kind of come back to you?
Yeah. It's a good question. We did talk about before that there's sort of two things, that there's extra capacity, there's extra capacity, it's going to seek some place to go. And so, as a leader in the industry, we need to acknowledge that there is a capacity out there. That's one part of the answer.
The other part is, there's a lot of regional to that, because freight is so important to the product. So while we may have the best overall system of cost, there could easily be a competitor in a local area, who has a as good or a better cost in that play – in that case, excuse me. So, that's kind of where this happens, you've got somebody else who's got a geographic similar or better position and then they can be competitive on it.
Okay. And one last on raw materials. Like have you been successful in passing through all your resin costs? Like, if resin costs don't go up from now, have you finally caught up with them?
Sure. This is Adam. We typically have a short lag in the pass through of our resin cost. So we're typically, I'll just use a broad term, a quarter behind in the lag of passing through resin. So, it will take one more quarter to catch up to kind of the current spot pricing on resin. So if resin didn't move from this point forward, we would theoretically be caught up one quarter from now.
Okay, thank you.
We'll now go to Brian Maguire with Goldman Sachs.
Hey, good morning, guys.
Good morning, Brian.
Hey.
Most of my questions are already asked and answered, but just one or two modeling ones, if you don't mind. On the inventory rundown, the fixed-cost absorption hit, I think you've talked about $15 million in 4Q. It sounds like the volumes are going to be a little bit lower than down 2% you had thought of before. So, just wondering if some of that won't bleed until 1Q 2019. And if not, why wouldn't it be a bigger fixed-cost hit than you were sort of thinking about before?
It's the same fixed-cost hit. So, the $15 million relates to the same inventory reduction we talked about at the beginning of the year. We just – instead of getting it done one-third in the first quarter and two-thirds in the fourth quarter, we've now got it all to be done in the fourth quarter. So that same $15 million hit should drive us somewhere $50 million-ish of inventory reduction. I don't think that should have any impact going into the first quarter. I've seen that question out there, but there's nothing that hits me that should be affected by that.
Okay, great. And then just last one. What's the updated tax rate assumptions for the full year and for 4Q?
Yeah. So, this is Bob. As you saw, we came in to the lower end of the range. We kind of put 23% to 25% out there. Q3 saw a little bit benefit against that. I think I'd probably be guiding more to the 24% kind of range on a full year basis and for the quarter.
Okay, great. Thanks so much.
We'll go next to Gabe Hajde with Wells Fargo Securities.
Good morning, gentlemen. Thanks for taking the question.
Hey, Gabe.
Hate to beat on it. Maybe just drilling down a little bit into this $50 million of under-absorbed overhead and then Tony to your comment about 2019. Is any of that coming, I guess, from reduced production on the soup side? Just trying to understand, normally, we would think that most of that might come back where you guys will be producing at a normal rate, but given where some of the softness is and the comment you already made about the fruit customer, perhaps, that might not be the case next year where this is sort of the new production rate that we should be thinking about going forward.
No. So, the $50 million cost of the $50 million reduction was always in our plan. So, that has much more to do with we had – because we had built a new plant now 18 months ago, we've been doing various footprint moves. We had built the inventory up to cover us through all of that. And so, we came into the year and said we've got an opportunity to take inventory out. It didn't really have to do with any particular market, specifically. It was just more general inventory around geographic things we were trying to solve.
And that's still the case. We're changing a little bit about whose inventory, but not a lot. And again, I want to be clear, I'm not – my point doesn't say that we think something about the line of soup has changed. I don't believe that to be true. It was off more this quarter than is typical. So, it's worth saying that we're watching it. But if you ask me right now, I think soup's going to be on the same kind of a curve, which is a fairly slow decline. And if they get promoting it, et cetera, maybe they can bend that curve a little bit.
Okay. Thank you, Tony. And then, I guess, on the plastic side, having sort of approaching where acceptable, or what your target is, 15% EBITDA margins are. Might that business warrant additional investment? And if so, how would you envision that playing out?
Yeah. Look, I think we've been pretty clear over an extended period of time that this business had to prove itself and earn its stripes from the operational efficiencies in the profitability side. As Adam said earlier, we think we're well on track to get to the margin profile that we looked at. I think as long as it continues to perform, then the idea of us allocating some capital to it probably does sit there for the right business, with the right return profile. So, I don't think – that's not a change from where we started this whole thing. So yeah, that's kind of where we'd be.
Thank you, Bob.
And we'll take our next question from Mark Wilde with Bank of Montreal.
Yeah. Just a couple of clean-ups here. I wondered, Adam, is it possible to get any sense for kind of what you think kind of combined resin, steel, tinplate headwind might have been for you in the third quarter, just from unrecognized or un-passed-through input costs?
Sure. I'll maybe try to answer the question specific to plastic just for a second. But for resins in the quarter, I think we're probably something in the $3-ish million across the entire Silgan platform. I've mentioned $1 million specific to the plastics business. So, the balance over to closures, both in our legacy closures and in the Dispensing Systems business.
And then, I don't think you gave this, Bob. But freight was probably about $2 million inflationary headwind to us in the quarter. And then on top of that, steel, I wouldn't put that – or metals, I wouldn't put that way. We've got, as you know, a very solid pass-throughs. So essentially, we pass that through and there's no meaningful P&L impact.
And Tony, that carries through to kind of metal that goes into the closures as well?
Yes, it does. Yeah.
Okay. Yeah. Okay.
Bob made the point, but the one exception is, of course, they're on a cash basis, again just to come back to that, that's a different matter entirely, right? You don't necessarily get the – what's in your inventory. You've spent cash on that, you haven't collected that from customers yet.
Yeah. Okay. And then the other one, I wanted just to kind of clean up. Sounds like most freight is passed straight through, but I wondered whether you have freight or other costs, which you really just try and recapture through an index. And then, the kind of question is whether the index, whether it's a PPI or whatever, is really moving in line or kind of out of line with your actual costs.
Yeah. I have tried...
I'm trying to get a sense for that next year.
Yeah, I have tried to answer that. So, the answer is, it's all of the above. So, yes, it is true that some is done through an index. And so, it is true that that will lag, like other inflationary costs that we have in our contract pass-through. And then, there are others where it's a direct, either the customer picks up or the customer pays you the direct bill.
Okay.
So, it's a variety. And I don't have the spread mix of that, and I'm not sure – it would still be hard for you to know what to do with it even if I gave it to you. But it is true that in an inflationary time, we will eat some freight.
Yeah. Okay. I think a lot of people – a lot of contracts indeed (56:27) just use a PPI, and I think freight has been – in particular, has been moving up much, much faster than the PPI in aggregate.
That's correct.
Yeah. That's right.
That's correct.
Yeah. Okay. All right. Good luck in the fourth quarter and into next year, guys.
Thanks, Mark.
We'll now take additional questions from George Staphos with Bank of America Merrill Lynch.
Thanks, guys. Just one quick one to finish up. Again, back to the can and whether customers or their customers are attempting different marketing strategies. Back a number of years ago, there was a – it was largely a paperboard company, but they had a dispensing system that they were trialing at some of the retailers that would be favorable for the can, and the benefit was in terms of loading and restocking. And more recently, at some of the trade shows, there has been a lot of focus on retail-ready packaging. Is any of that beginning to move the needle at least from your vantage point for your customers and, therefore, in particular, for the can or still not enough yet anyway? Thanks, guys. Good luck in the quarter.
Thanks, George. Really interesting question. So, it's one that we've been pushing around ourselves and with our customers. So, the answer is yes. We definitely have customers who actually have packages out in that kind of group bundled format and doing more of it, doing distribution that's better for e-commerce or other outlets. So, I think the answer is still unfortunately where you ended, which is I don't think it's enough to move the needle yet. But I do think it's sort of an important trend that we want to support and keep engaged with our customers on.
We do think e-commerce is – in food, it's underrepresented versus many other products, but we do think e-commerce will become bigger to food. We do think that packages are going to have to be favored to e-commerce, even if they end up going through the old traditional channels. So, I think – and I remember vividly when you raised it, George, I think at the time, we were not all that interested. I think comparatively, that packaging – secondary packaging choice makes more sense today than we thought it did three or four years ago.
All right. Well, we'll keep a lookout. Thanks, guys.
Thanks.
We'll now take a question from Chip Dillon with Vertical Research.
Hi, guys. Salvator Tiano again filling in for Chip. Just very quickly since we're already at noon. I noticed last quarter that you didn't highlight the resins as a headwind for the plastics business, only the closures. And this quarter, again, you actually – as you said, it was a noticeable headwind in plastics and closures. So, can you elaborate a little bit on what has changed? And why it became, again, a headwind year-on-year in that business? Is it the type of resins you're using or what else happened over there?
Sure. It's Adam. It's a combination of things and one you just mentioned. It is the variety of resins that we use. So, resins move at different times with different drivers as far as the resins that we purchase. But there were announced increases that took place in the quarter that drove the unfavorableness year-over-year. So, it's just the variety of resins and the price moves on those specific resins that drove the year-to-year change.
Perfect. Thanks.
And it appears there are no further questions at this time. I'd like to turn the conference back to Mr. Tony Allott for any additional or closing remarks.
Great. Thank you, Jessica. Thank you, everyone, for the call. We appreciate it, and we'll talk to you at the end of January about our year-end results. Thank you.