Silgan Holdings Inc. (SLGN) Q3 2013 Earnings Report, Transcript and Summary

Kimberly I. Ulmer - Vice President and Controller Anthony J. Allott - Chief Executive Officer, President and Director Robert B. Lewis - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Adam J. Greenlee - Chief Operating Officer and Executive Vice President

Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division Alaxandar Wang - BofA Merrill Lynch, Research Division Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division Phil M. Gresh - JP Morgan Chase & Co, Research Division Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division Mark Wilde - Deutsche Bank AG, Research Division Chip A. Dillon - Vertical Research Partners, LLC Scott L. Gaffner - Barclays Capital, Research Division Albert T. Kabili - Macquarie Research Anthony Pettinari - Citigroup Inc, Research Division Alex Ovshey - Goldman Sachs Group Inc., Research Division George L. Staphos - BofA Merrill Lynch, Research Division Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

Thank you for joining the Silgan Holdings Third Quarter 2013 Earnings Release Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Kim Ulmer. Please go ahead.

Thank you. Joining me from the company today, I have Tony Allott, President and CEO; Bob Lewis, EVP and CFO; and Adam Greenlee, EVP and COO. Before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company, and therefore, involve a number of uncertainties and risks, including, but not limited to, those described in the company's annual report on Form 10-K for 2012 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'd like to turn it over to Tony.

Thanks, Kim. Welcome, everyone, to our third quarter 2013 earnings conference call. This morning, we'll review our financial performance for the third quarter, make a few comments about our outlook for the fourth quarter of 2013 and then we'll take any questions that you may have. As you saw in the press release, our adjusted earnings per share for the third quarter of 2013 were $1.23 as compared to $1.17 in the prior year. These results represent yet another record for the company but were below our previously communicated expectations. Our Food Can business, particularly in North America, continues to perform well. Revenue, EBIT and margins are all up versus the prior year third quarter, with volumes up 2% for the quarter and nearly 6% on a year-to-date basis, largely on strong pet food and recovering soup sales. However, we also had anticipated a strong recovery pack after suffering a lackluster growing season in 2012. Unfortunately, the fruit pack in the West Coast in the U.S. and in Greece were well behind our expectations. Our Closures business continues to operate very well, but cooler-than-expected weather conditions in the U.S. negatively impacted volumes in the single-serve beverage market. Both businesses did an excellent job in reacting to these volume shifts and remain focused on enhancing our competitive advantages and driving continued growth in our markets. Our Plastic Container business continued its transition program in the quarter and increased revenue and operating profit largely on the inclusion of the plastic food container business. Given our year-to-date performance, the remaining volume impact of the weaker pack conditions and higher interest in resin costs, we are revising our full year estimate of adjusted earnings per diluted share to $2.75 to $2.85 per share. With that, I'll now turn it over to Bob to review the financial results in more detail and provide additional explanation around the earnings estimates for the remainder of 2013.

Thank you, Tony. Good morning, everyone. As Tony highlighted, we delivered favorable year-over-year financial performance, with record third quarter 2013 adjusted earnings per share of $1.23 versus the prior year quarter of $1.17, an increase of 5.1%. In addition to the weather-related headwinds that impacted the quarter, we also incurred higher-than-anticipated interest expense as a result of the senior notes issued in September to take advantage of attractive long-term interest rates and the tax rate for the quarter was significantly higher than the prior year quarter. On a consolidated basis, net sales for the third quarter of 2013 increased 2.5% to $1,168,000,000 as net sales improved across all of our businesses. Net income for the third quarter was $77.2 million or $1.21 per diluted share compared to third quarter of 2012 net income of $78.7 million or $1.13 per diluted share. The net impact on the bottom line from foreign exchange was immaterial as we continue to be effectively hedged, having financed the international businesses in their local currency. Interest expense for the quarter was $17 million, up $1 million from the same period a year ago as a result of higher average interest rates resulting from the September 2013 issuance of $300 million of 5.5% senior notes due 2022. Capital expenditures for the third quarter of 2013 totaled $26.6 million compared with $24.2 million in the prior year quarter. On a year-to-date basis, capital expenditures totaled $73.2 million in 2013 versus $83.3 million in the prior year. And we estimate capital spending for the full year to be in line with the prior year. Additionally, we paid a quarterly dividend of $0.14 per share in September, with a total cash cost of $9.1 million. Moving now to the details of our individual businesses. The Metal Container business recorded net…

[Operator Instructions] We'll take our first question from Chris Manuel with Wells Fargo.

A couple of different questions for you. First, an easy one with the tax rate, Bob. In the third quarter, it was pretty high. Was there anything unusual here this quarter that did that? And what's your anticipation for the full year?

Yes, not really anything unusual. I think it's climbing over a very low rate in the prior year, largely because of that had to do with the timing of tax rate changes in certain foreign jurisdictions. Probably the one thing that did impact it a little bit is just the mix of where, jurisdictionally where revenue -- or where earnings are coming from. So we were expecting a rate that was kind of 34-ish percent anyway. So up a little bit from our expectations but very significantly up versus the prior year.

Okay. And then my second question has to do with if we were to look through the metal food business, could you maybe give us a sense as to how volumes were different in different regions? So what were volumes like in Europe maybe with your legacy business and then with what was added? And then North America, it sounds like the strength must have all came from pet food. What -- so if you can give us a little color there. And then as well, what's early conversations you've had as this has come in below your expectations and your customer expectations for what 2014 might shape up like?

Okay, Chris, Tony. First of all, in terms of kind of where the volume, it's fairly consistent in that we're up both in the U.S. and in Europe, fairly similar percentages, call it that 2% range in both locations. It is different within each of those, of course, as you picked up, the pack in the West Coast was where the weakness was. By the way, I'll make a point now, it'll probably come up later, but we will feel that more than the rest of the market because we have a higher concentration on the West Coast. So if you look again in the U.S., that's the spot. Pack, in general, is down a bit despite our expectation of being up a bit, and it's going to be down for the year despite our expectation of being up. All that being to the U.S. side. So you're right that pet food was good. That's one of the kind of the offsets to it. Soup was fine as a category. In Europe, it's essentially, you got growth coming from the new plants that is being essentially fully offset by Greece. And in the case of Greece, which is a sizable part of our non-new plant part of Europe, we were down some 20% on volume on the peach fruit pack. And that, just to close a loop, is primarily the result of hail that had been experienced. And unfortunately, when they finally got to harvesting, the fruit was pretty severely damaged. And so there was a sizable call-down in the harvest in that region. As to 2014, nothing would be getting communicated yet. I can hypothesize with you that you had a pretty tough 2011 pack, a kind of normal-ish, but disappointing to us 2012 pack, so our early expectations would be that there would be an effort to want to kind of restock against all that, and that there'd be increase of acreage in 2014. But we don't know that.

And we'll take our next question from George Staphos with Bank of America Merrill Lynch.

It's actually Alex Wang sitting in for George. Our first question, can you talk about the Portola, acquisition, the impact in fourth quarter, and then also maybe about the accretion you guys expect in '14?

Sure. As you saw, the acquisition just closed, so there'll be some dilution that we're expecting albeit modest in the last quarter here largely to do with the write-up of inventory for purchase accounting. As we move into next year, we view that business as being modestly accretive for the year. What we've said so far is, we've paid roughly $266 million for that business. Coming along with that is an NOL that we would say has a value of about $20 million, so our view is that it's something around $246 million, $250 million for the base business. That business on a run-rate basis does something like $34 million of EBITDA. I'll point out that that's giving it the pro forma benefit of a restructuring that was undertaken prior to the acquisition, so that restructuring is done and complete. The wildcard here from a real accretion number next year is going to be where does the D&A out, and we've got to kind of work through the valuation analysis there. We are expecting that there'll be some synergies around this business and that obviously, we'll have to cover the incremental interest, which is largely the new notes that were issued at 5.5%. So all that kind of netting to a modest accretion for next year.

Recall the synergies ramp up over 18 months. You won't get all of those in 2014.

Great, that's helpful. And then just next, can you describe -- I mean, obviously, we've heard about the strong soup volumes coming back and also pet foods but what was the impact of the weaker-than-expected pack in 3Q, is there any way to quantify that?

Yes. I mean, if you talk on the volume side, it shaved a couple of percentage points off of the quarter. It'll do the same to the year basically broadly across the total business. But to be clear, we are up now almost 6% on food cans in total across the system, and our expectation is it will be up for the year. We will be down in Q4 for everything that Bob said, but our expectation is that we will be up kind of 2% or better than 2% on the year. So another second year in a row of growth on can volumes.

Great. That's very helpful. And just lastly, if you could just talk about what -- I've turned to plastics, what volumes were x acquisitions?

Sure. It's -- when you look at the legacy business, our volumes from a pounds perspective were down kind of mid-single digits. We've talked a lot in the prior calls also about units and how that fits in with our portfolio rebalancing. Interestingly, units were not down nearly as much as pounds. So it does go towards our ongoing program of rebalancing the portfolio and moving towards our target markets and getting in the new business that is focused on better returns than where we've been. And obviously, what we had in this quarter is a little bit of a lumpiness that we've also talked about, with business kind of falling off the backside as the new business coming in didn't fully offset what we knew was going to be leaving the franchise.

We'll take our next question from Adam Josephson with KeyBanc.

How would you characterize the status of your contract negotiations with your large soup customer and do you expect the customer to extract significant price concessions given the competitive pressure in the U.S. food can market?

Interesting question. Status is that we are under negotiation fairly actively as you would expect at this point in the process, not much more I can say on that. No, I don't expect that. I think -- first of all, I think that customer and most of Silgan's customers enjoy an incredible value from Silgan. I'll remind you that the kind of the model we have is sort of -- is unique to the business in that we have a long-term relationship with our customers where we have a -- an initial kind of understanding of the returns we're going to get on capital spend, often because it was self made takeout, and a direct pass-through of our materials going forward. So many times in this call, we would get the question of why aren't your margins -- in a tight market, why aren't you getting enhancement in your margins, et cetera, and we would always say, but that's not our model. Our model is that our customers have certainty of price pass-through, et cetera, and we have certainty of long-term relationships. So we don't expect any change there because we think that customer and all of our customers enjoy an incredible value situation from Silgan, particularly considering we believe we have the lowest cost production in the world for food cans.

Just 2 others. One on the fruit and veggie packs. So you've now experienced 3 consecutive years of disappointing fruit and veggie packs in the U.S. At what point do you become concerned that these suboptimal packs might be the rule rather than the exception, and what, if anything, can you do about it?

Well, it's a good question. It's part of why I reviewed that -- and just to remind that '12 was -- it wasn't everything we had hoped for. It was also not a washout by any means. So we definitely expect to do better than that, but '11 was worse. All I can tell you on that is that our customers go out and they contract for more acreage. So it seems to us that our customers want more stuff in cans. Is weather more volatile? I'm not smart enough to help answer that question. Others are on it. But it does seem like there's been a little more volatility of late. There's no question, this year, we set ourselves up a little bit and so did the industry. The expectation was high on the West Coast. There was a lot of planning for a very big tomato harvest and when you look at the curve of the harvest, it never crossed last year to, I think, everyone's surprise. It was lower week after week. So best answer I can give you is our customers seem to want the product, they just haven't able to get it.

And just one last one. Tony and Bob, how would you compare the Portola acquisition to your U.S. food can acquisitions over the past decade? And to what extent does this acquisition represent a move away from top line growth oriented acquisitions as the 2 previous acquisitions were?

I got to think about the second part as I start. I would say that it has some similarities to some of our food can acquisitions in that it is a fairly synergistic opportunity for us. So it fits in nicely with the business that we have. We've got a good opportunity to share footprint, share overhead cost, et cetera, which is true about some of the historical food can opportunities. On the growth side, again, I'd say if you look at the markets that are served by Portola business, I would say that it's -- they're not growthy markets either. And so I would say it has some of the normal attributes for us, which is markets where we think you can really deliver sustainable competitive advantage and build out through your customer success rather than really a growthy market that attracts a huge amount of capital.

Yes. Adam, the only other thing I would probably add to that is as you look at the Portola acquisition, this is one that's a bit more synergistic versus the other 2, in the sense that it's -- it fits right into our existing infrastructure and there'll be things that we can get to from that perspective. So yes, I think there's opportunities on that front. But I don't ever think that we had deviation in our strategy to say, let's go find growth markets. It just happened to be that in the case of Vogel & Noot, there's an opportunity in a foreign market that we found attractive. And sure, on the PFC acquisition, it was a little bit more growth oriented for various reasons, but that was never the strategy to move toward that kind of acquisition.

And we'll take our next question from Phil Gresh with JPMorgan. Phil M. Gresh - JP Morgan Chase & Co, Research Division: A couple of questions. The first one is just looking at the fourth quarter guidance on the metal food side. Last year's fourth quarter was a tough quarter on the cost side of the equation. You had the Sandy impact. I believe there were some inventory reductions as well. It appears your guidance would perhaps suggest that the EBIT in that segment is roughly flat with last year. So I guess, correct me if I'm wrong there, maybe just help me understand the moving pieces, is it just volume declines in the fourth quarter that's here that's kind of creating that situation?

No, it's -- I would say that volume is a big part of it. It's also somewhat a continuation of what we've said on -- Europe will continue to be a bit of headwind we think as well. Again, the pack there kind of ended for -- in Greece, example. So there's a volume element to it. And then the overhead cost that we've been talking about on the new plants will sit there. So I think those are kind of the 2 main components on it. Recall that -- you did last year have a -- you had -- Campbell was shutting down a plant, so you had a lot of buy of soup that we attributed to inventory at that point in time. We're not expecting a repeat in that side. So the were a few other factors going on in Q4 a year ago on the can side. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Got it, okay. I guess, to take the questions, slightly bigger picture. I guess, if I look at your EBIT this year with your guidance and compare it with last year, it looks like it's going to be roughly flat as a total company. You do have contribution from the Rexam acquisition. You have kind of low single-digit volume growth in the Food Can business. If I look ahead to next year, it seems like the playbook is pretty similar. You acquired Portola just now and so you should have some benefits there, perhaps some of the harvest will be better next year. So maybe I'm just hoping you could talk about some of the puts and takes that led to this flattish EBIT this year despite those positives and how we should think about '14 with respect to any puts and takes that we should be thinking about from this year?

Sure. I think you said it right. There were -- I would characterize it as a lot of moving parts this year and probably a few more of them went against us than the normal balance of pluses and minuses. So I think as we drop back, what we focus on is that we're seeing growth in metal food cans in the U.S. outside of a pack that's going to be down. So you can only view that as sort of a positive future aspect. We see a U.S. business that's cost position, which was a little tougher last year. It's been excellent this year. So we feel very good about the operation side of that, et cetera. As we look to Europe, we can't, and for the life of us, imagine Greece having the same kind of situation again. So you have to feel that you get some of that back. You do think your new plants will continue to improve over time. We are very cautious about that, though. That's going to take time. We always said that was -- this was kind of a long-term play for us. So it's clear to us that building a new plant in a developing market is not a 1-year thing, it's a multiyear effort. And we're committed to it, but that's going to take time. So I'd be more cautious on that one, but it should be somewhat positive as we move forward. On the Closures side, as you mentioned, we had -- it just was not a very good weather season this year for energy drinks, to use that term for it. Last year was particularly good, so the comp is a little bit tough. But we would certainly expect that, that would be better. Meantime, Portola comes in…

Sure. I -- unfortunately, I can't say anything more than the last call because really, projects develop. Our work with our customers develop, but as we've always said, this is a pretty long-term effort we're working on. There are definitely, and I said it last time, there are some projects that are already in the process of coming up. They're not big enough to change the curve much from next year. So right now, I can't yet say that '14 is going to be a bigger capital because of it. I can say the same as I did last time which is, it could be. And so could '15, but we're -- there's nothing more to declare on that yet.

And we'll take our next question from Ghansham Panjabi with Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Not to beat a dead horse here on North American metal food can but, Tony, you gave us some parameters on how to think about volumes for, for example, fruit and vegetable out in 2014. But soup had a pretty strong year so far, and some of your other categories did as well. Do you expect that same sort of momentum to flow through in 2014 as well for those categories? Or do you think that would be some sort of a headwind as we kind of think about our full year estimate for volumes next year?

That's a great question. I don't -- I'm not sure I would go to the camp of headwind yet. I think the -- it's a little harder to figure out is that how sustainable is the progress we've seen. I think we -- it surfaced right from the beginning that Campbell was going to -- bound to be going through some inventory moves as they dealt with their reduction down to 3 fill sites. So it's still hard for us to gauge that. I think we feel very good about the focus that Campbell and others have on a markets. I think all, as we've talked about before, all the advertising is quite positive in that regard. I think the promotional efforts are positive. We even think the other packages that they're trying to do and the other consumers that they're trying to pull in by means outside of the can is a plus for us, as we've said before. So I think we feel like things are moving in the right direction, but it's a little early for us to gauge what that means against the volumes of '13. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then maybe a question for Bob, who's been kind of quiet. As you think about free cash flow, Bob, for next year, '14 versus '13, is there any reason that cash flow, free cash flow shouldn't be higher year-over-year just based on your revised guidance here?

Well, I think ultimately, we're going to have to dig in and see where working capital ends up the year. Remember, we came into the year in our initial guidance and still embedded in what's there, is some incremental improvement over very good performance in working capital in 2012. So the question is does that start to flatten out and sort of mute, if you will, some of the free cash flow growth? I certainly don't see it being worse. Particularly with the acquisition, we should start to get some benefit there. But I wouldn't necessarily sit here today expecting a step-change in the growth of free cash flow for that very reason.

And we'll take our next question from Mark Wilde with Deutsche Bank.

Is it possible, either Bob or Tony, to get some sense of what the impact of that unabsorbed fixed cost is on those new plants in Eastern Europe and the Middle East and how much improvement you might expect as we look into next year?

Sure. It's Tony again. By the way, that's the first time I ever heard Bob being accused of being quiet. I want to go on record of saying that. But if you look at the new plants right now, you'd say on the quarter, they were comparative year-on-year, they cost us a little over $1 million on the quarter. And so that's kind of been the storyline, if you will, this whole year. So I think the opportunity to improve if you annualize that is something in that range as we get the overhead absorbed. And again, that will just take time and a lot of that's coming from 1 or 2 of these locations. Some are fine and up to speed. Some are just going through qualification and they sit on the overhead cost until they do it. And then Jordan, we already talked about with Syria, which is sitting and waiting for a resolution.

Okay. And it sounded like, Tony, from what you said earlier, that you wouldn't expect this drag to completely go away next year because you said the improvement in some of these emerging markets is going to take a while. Is that right?

I think that's a fair view of what I said, yes.

Okay. All right. And then I just wanted to turn to plastics for a minute or 2. It just seems like the restructuring of the North American plastics business is taking a little longer than I might have thought going back 2 or 3 years ago. Can you give us your thoughts on that?

Sure, Mark. It's Adam. I think I would generally say that the business is about in line with where we thought it would be at this point, as far as the restructuring and the rebalancing of our portfolio and kind of the vision that we had for the business going forward. I think one thing to talk about particularly for the quarter, not only was cycling over some of the volume issues from last year that we've rebalanced. We also had a negative impact of resin. So resin was unfavorable in the quarter by about $2 million and it's hurt the year as well. So we didn't necessarily anticipate that. And if you go back to prior forecasts from CDI and other mechanisms, they were calling for a more favorable impact of resin this year. And frankly, it's been a hurt. So I think we feel good about, I'll repeat what Tony said, feel good about the team, feel good about what they're working on and feel good about where the business is going, it just is going to take a little bit of time.

Yes. If I can tag on, I think the -- and we've said this before. I don't think Adam just said it now, but we've always talked about 2 steps. One was sort of an operational step and then one was a markets step. And I think you're right, if your expectation on the operational step, you thought we could do that fairly quickly, us too, and we have. We feel very good about the operational position of the business. There's still some cost to be gotten at, but in terms of the issues that we had around our own operations and stubbing our toe, as we used to call it, that's well behind us. It's just slower this idea of which markets and which customers do you want to service and growing with them, and providing the unique competitive advantage that's going to allow you to grow in those markets. That is going to take time.

Okay. And, Tony, you really -- you're not -- you guys are not the only ones to be seeing some weak volumes here. I'm wonder if you just -- if you take out sort of any portfolio moves that you're making where you're kind of choosing to step away from business, what kind of underlying demand are you seeing from your customers?

Well, I think what you said is right. I mean, I think there were some just broad-based weakness across the spectrum. So the big point was we walked away from a particular piece of business that affected the quarter. But underneath that, sort of across-the-board, things were just a little bit softer. And then we picked up against that some more strategic business, but not nearly enough to offset those 2 points.

Okay. And then the last thing just on plastics. There's a big consumer goods company that seems to have set up its own kind of plastics. I don't know whether it's machinery, whether they're actually going to do any fabrication, but they've put up a website and they seem to be hiring people. And some of the claims around this would suggest that they found ways to take a lot of resin out of some types of plastic containers, do you have any view on them?

Mark, it's Adam again. What I'd say is we've read mostly some of the same reports. Obviously, it's a customer of ours, a small customer of ours. But what we've gleaned at this point is that it does look like a manufacturing technology. If you kind of rifle through the patent applications, it looks like it might be for products that aren't necessarily the type of products that we sell to them. And I'll focus specifically on parts. Several of the patent applications talk about items like toothbrushes and mascara brushes, tampon applicators, et cetera. So I just -- it's not necessarily packaged goods like what we provide them. It's more high-velocity, high-speed injection molded parts where the benefit of this technology may indeed come from.

And we'll take our next question from Chip Dillon with Vertical Research Partners.

First question is just making sure we kind of -- I understand the contribution of the Rexam business to plastic. Was that a -- you bought it, I think, about 1/3 of the way through the year-ago quarter, so is it fair to say that was pushing $20 million in terms of the revenue change year-over-year? In other words, if you had known that you would have had -- that's the increment that you got for the 2 month -- additional months you owned it?

In the quarter, we had only owned it for 2 months. So I think in the quarter, it was about $14 million of additional revenue for the business, dropping through the bottom line, I'll tell you what we have said before was kind of $2 million, $3 million of EBIT associated with that business. They're right in line with where we expected them to be. So they're performing well. They're doing what we anticipated they'd be doing.

Got you. So that $14 million is in addition to whatever you got in that month you owned it a year ago?

That is correct, yes.

That's correct.

Okay, that's very helpful. And then in terms of the Portola acquisition and I don't know how much you said, but you mentioned it would be accretive next year and I know that their last numbers, I guess, that I saw were from about 5 years ago and it looks like the revenue run rate declined from that, probably because you all or they made themselves more profitable. I suppose I'm trying to -- what I'm sort of backing into is it would look like that the EBIT contribution next year should be somewhere in the ballpark of $20 million, kind of given the interest expense you're incurring or said differently, maybe you could weave what you expect from that business into what you see in synergies?

Yes, I think in terms of getting to an EBIT contribution for next year, I'm going to want to be a little bit careful because as I said before, we're still doing sort of the valuation work to figure out what the D&A for that business is going to be. But the run rate of the business from an EBITDA perspective is about $34 million. And then you'll have to layer on that any synergies that we can garner out for next year. What we've said is that we do see pretty sizable synergies in this business, but it will take us 18 months or so to get to it. Back to the first part of your question. The business had been dramatically changed in the time period you're talking about. They had gotten out of some businesses on the cosmetic side that were not very profitable for them. They had changed some of the markets they were servicing on Closures and they invested heavily on new assets and new technologies. So it's a pretty different business than 5 years prior.

Got you. And the EBITDA number again was $30 million flat, you said?

$34 million.

$34 million, okay. And then last question. We've been hearing about new technologies in the food can world, obviously, there's that new plant in Virginia being built. And maybe you alluded to that a little bit in terms of variability on what CapEx could be next year. But as we think about lighter weight food cans, could you just help us understand how much of the market that could apply to in your opinion? Is that something that, as contracts come up, you would see most of your customers perhaps trying to get you to invest in such technology and would that require whole new plants or would it just be small components of plants?

Well, there's -- it's a lot your question. I think the plants you're referring to are two-piece plants. So the lower cost technology that I understand of that is only as compared to three-piece. Some 3 quarters of what we do is already two-piece. So to us, that's kind of a yawner in terms of the comparison on cost. If you're referring to the idea that maybe there's a lower metal technology that, that particular supplier might be bringing in the market, we don't believe that's the case. We don't believe the U.S. market that, that particular technology is going to work in. So -- and nor do we really believe that's what's behind the investments. So -- as to that specific point, I would just say what we understand as coming in as two-piece technology. It's something we know extremely well. Most of what I said are already -- we're already heavily in two-piece. So there's not a huge amount of investment for us around two-piece, three-piece. Most of the things that are in three-piece today are there for a reason. Around the edge of that, there might be a few opportunities but not a lot. As to down-gauging more specifically, we do think there are opportunities in down gauging. But they do take a lot of technological change. They are -- the perfect answer is you can do those with the same basic plants you have in place. You know how we think about capital. So we're always thinking how much capital is going to go in, and what's the return on that. And our main goal is to try to help drive cost reductions to our customers to continue to expand the competitive advantage of the food can. And so for us, if we have to spend a lot of capital on it, we got to get a return on a lot of capital, then we can't drive a lot of benefit to our customers. So we very much are trying to figure out to the extent it can work, how do you do it with the existing assets in place.

And we'll take our next question from Scott Gaffner with Barclays.

Just going back to your West Coast exposure within metal food can. You mentioned -- and you mentioned in the past, sort of your -- how your exposures -- you're overweight, the West Coast. Can you sort of quantify that for us? How you think about your food pack exposure, West Coast versus the industry?

Yes. Well, like I said, I mean, we're -- we are the largest player on the West Coast. So -- and particularly, to the pack markets. Again, recall our history and kind of the self-make takeouts of Del Monte, of PCP, et cetera. So those are kind of main players on the West Coast. So we're just more heavily skewed to that region. And so if you have a -- either a boom or a bust kind of a harvest, we're going to feel that much more directly.

Okay. You mentioned tomato, specifically. Is there -- are there any other items that we should be thinking about on the West Coast? And also, it seems as if things are coming to an abrupt end not just in Europe but in the U.S. as well as far as the pack, no bleeding over in the fourth quarter. Can you just...

Yes, that's basically correct. The 2 main harvests -- there's a fruit harvest and in that case, the fruit just came in smaller in size, so the yields were lower. So it was a down -- down year-on-year and down even more so from our expectation on the fruit side. On the tomato side, you had a combination of issues. We had a curly worm virus that we knew about, didn't think it was going to have all that much impact. It, in the end, had a little more impact than we expected. Then you had rain coming, which is of all the things we worry about, rain at harvest time is the worst because you can get mold that sets up on the tomatoes. And that just stops the tomato process cold. It -- some of our customers experienced some of that, so it was not broad across the market, but it did impact in certain regions. And so yes, the net of all that is that those packs were pretty much done fairly early into Q4. The only pack that continued on in a more normal manner was corn in the Midwest, which was -- that was probably the best of the harvest. And Midwest was fine, broadly. Corn being better, green bean and peas being down a bit.

Okay. And then when we move to -- over to mix, does the weak pack season negatively impact the mix? Meaning, I would think if there was an overabundance of a harvest that maybe more of the harvest would end up in larger cans, which I assume is higher-margin. Is that something we should be thinking about as well?

Almost. Yes, absolutely the pack does have negative mix effect. The only thing I'd take exception for in your question is to the margin point. It's more just about a unit of volume. You're talking about small cans, you're talking about pack versus big cans of tomato as an example. So it's not that the margin rate is necessarily higher, but per unit, you get a lot more dollar contribution from a big can. And so yes, that is correct. That has a negative mix impact against the volume number.

And we'll take our next question from Al Kabili with Macquarie.

Question, Tony, on -- you mentioned the third quarter of '11 was a pretty weak pack and if I look at the earnings, the EBIT in your metal food business, you're down $3 million of EBIT versus 3Q '11. So I was just wondering if you can talk about what drove that. It seems to me that Europe is a lot of it, but if you can just kind of help us bridge that gap there.

Sure. Yes, Europe is the biggest piece of the answer to that question. I'd have to go back and analyze that quarter a little bit more on margins. But I don't recall that being a particularly bad margin rate quarter. So I think the big part is you get Europe where you're negative comp, a couple of million on that. Oh, I'm sorry, and if you go back to '11, Europe is a lower margin business in general, so including Europe against that and as Europe grows, that, by definition, is going to bring that margin rate down some. So if you look U.S. to U.S. we feel fine about where our margin rates are, again, recognizing the mix impact already discussed.

Okay. And I wasn't even just talking about margins, I'm just talking about EBIT, right, it's -- you're down $3 million EBIT-wise, despite since then you bought the Nestlé pet food business, you bought a small Turkish Food Can business in there as well. So it just seems like there's been some underlying pressure in the business since then and -- but help us with that, is that, again, Europe that's driving that?

Well, Europe is contributing EBIT, so the answer to that is no, it's not. I'd probably have to get back to you and look closer at that. But there's -- it's definitely something about that quarter. I mean, there's nothing inherent in the business. It's going to have to do with mix or the timing of the pack. In fact, anybody remember the timing of pack in '11? We'll come back to you. But there's nothing inherent in the U.S. business that is driving that down nor is the European business a negative on the EBIT line.

Okay. And you mentioned the vegetable kind of pack being a little bit less than you expected, but if I look at the CMI data, in the third quarter, I think vegetables were up 2.5% year-over-year on -- at least on the CMI reported data. And so are you guys saying that you're well below that, like flat versus that or -- help us just with that one.

Yes. Well, you're talking about the vegetable line. I think what we've said is vegetables is primarily Midwest and vegetables were fine. Corn has been fine, as I said, peas and beans were down a little bit. But so just the rest, they were just kind of whose [ph] customer and region, et cetera. So vegetable in the U.S. has not been all that much of the storyline. It's had much more to do with what's happened in the West Coast on broadly fruit.

Okay, all right. And then, if you could just help us with the pricing outlook in Europe, how you're feeling about that at this juncture for next year given some of the weakness in Europe. How are you feeling about competitive dynamics there and -- as you're going into new price negotiations?

Well, the -- if you look at kind of Central Europe. The west, I can't speak to as much. I'm leaving the new plants in the east out because that's sort of a different storyline, if you look to Central Europe, probably the price pressure was -- seemed greatest a year ago, a little less this year. And so, right now, I'm not expecting a huge amount of that. I think the -- I think all the players in the market are trying to deal with the capacity situation in as a responsible manner as they possibly can. So at this point, our expectation is it will be okay around that but there -- it definitely is competitive, there is too much capacity in the market. And so, you'd rather that not be the case.

Okay. Last question, I guess, for Bob, just housekeeping question on interest expense. How should we be thinking about the fourth quarter interest expense?

Well, it's largely going to be up as a result of the incremental borrowings of the 300, right? The cash flow kind of comes in the late part of the quarter so you're not really going to get the benefit of that. So year-over-year, you should be expecting interest to be up.

Right. And are we thinking like $18-kind-of million with the amortization? I'm just trying to get a flavor for the book interest expense because you did the notes in September and then we've got -- so we've got a full quarter of that. Then we've got some amortization of fees, et cetera, in there. So I don't know if you have a sense for what we should be thinking, sort of a quarterly run rate is pro forma for the recent refinancing.

Yes. Well, you're probably up some $4 million or $5 million versus the prior year.

And we'll take our next question from Anthony Pettinari with Citi.

Just a follow-up question on plastics. As part of your guidance, you called out weaker 4Q volumes, and I was wondering if the volume weakness that you're referring to is -- is that purely a function of a weaker expected demand, or when you talk about efforts to rebalance the portfolio and your transition plan there, is there any acceleration of those efforts that might make you give up some volumes or let go of some business that you don't see as strategic?

Well, it's a combination of both. We are seeing a bit of softness in consumer demand, in general, as Tony alluded to earlier. And then as we've also talked about, we did -- we're cycling over a piece of business that we had for all of last year that essentially we stopped shipping those products in July of this year. So we'll have a negative comp for the entire back half on our portfolio rebalancing effort because of the size of the products that we were shipping last year, the volume of the products.

Is that business sort of the vast majority of the volume weakness or is it 50-50, or is there any way to quantify?

I -- boy, we can take a look at it and get back to you, I wouldn't even be able to give you a good guess at it right now.

That's fair. And then maybe just a follow-up on Portola. You called out expected synergies to be realized over 18 months, just wondering if you can give us any color on where the synergies are coming from, maybe what integration activities you're undertaking or expect to undertake? And then very rough-cut, if there's any initial take on what 2014 CapEx might be up as a result of Portola?

As to the synergies, we're just -- we're kind of just working through that with the Portola business now. So I don't want to be too specific on that, but I can say that when you look at the footprint of the business there, certainly, is some overlap between our Closure business and the Portola business. When you look at kind of the SG&A side, there's clearly opportunities that sit there. In Europe, there's opportunity for us, a little less synergy, a little bit more complement here, but there's opportunity for us to have good technical plastic presence to combine with our strong food and beverage relationships through our whitecap business. So there's quite a few levers. But we'll give more clarity as we kind of allow everyone a chance to work through the specifics.

Yes. And as you look at CapEx, I wouldn't necessarily expect the addition of the Portola business in and of itself to create incremental CapEx for us next year. I think what you should expect though is that as we work through some of the synergies in the integration, there'll be some cost associated with that integration and any restructuring that may get done. So there'll be a little bit of incremental cash spending that, until we work through those detailed plans, is a bit premature to try and give you an answer, but I don't expect that to be necessarily on the CapEx line.

We'll take our next question from Alex Ovshey with Goldman Sachs.

I wanted to go back to the metal can business in North America. From an outsider's perspective, it seems that over time, there's been a lot of value that's been created in that business by driving productivity ahead of non-raw material inflation. Can you provide some color on how your productivity initiatives have trended relative to your non-material -- non-raw material inflation in 2013 and how you're thinking about that for next year?

Sure. We think about it kind of similar to every year, which is we're constantly looking at ways to drive out waste in the system through lean initiatives, et cetera. That continues to be on path. What you try to do is mitigate the inflation as best you can in that process. And often, you'll do that to a point where you'll pass more inflation to the customer for a period of time in the contract. That's sort of been the history and then when you get to contract renewals, then that's the bit of the discussion on it. So we continue on that. We see continuing opportunities. I think probably the more interesting one will be as we go through the Can Vision process, I think on top of what I just said, we'll have opportunity, I believe, to spend capital at certain points of time and get further returns on that capital. That's more interesting to us, as we think about spending the capital and getting the return on that to drive further advantage to our customers.

Okay, Tony. Got it. And then on the European side for food cans, a number of players in Western Europe have talked about negative mix out there as a result of just the softness in the macro over the last couple of years. You're not necessarily in that part of Europe. But I'm just curious, for your business in Europe, what kind of impact has mix been? I'm sure it's been negative. But to the extent that the overall macro environment does improve out in Europe, what kind of benefit could you potentially see from that?

Well, it has been negative. But there's so many -- Europe is that much tougher because you got mix in the countries you're selling in. You got mix in the fact that you're growing in certain markets that in our case, many instances we're growing in agricultural regions where it's a fairly basic can you're shipping out, so it's going to be a lower average selling price can now and in the future. And it's one that you make more cheaply, of course. So you ought to still get fair returns on that. But the simple answer to your question is mix was a negative impact as well in Europe. And probably that will continue as we grow in those other regions.

Okay, got it. And then just last question. With the Portola acquisition, I think [indiscernible] covers the higher end of your longer-term leverage target that's out there. But I think one could argue that for a short period of time, you could certainly run this business at a higher leverage level than 3.5x. In that context, what's the appetite for share buyback at the current leverage level for the company?

Yes. Alex, this is Bob. I think you -- in calculating what you're viewing as the leverage ratio, you may be ignoring the fact that the free cash flow generation is coming in the back part of the year. We would expect to be closer to the middle part of that range by the time all is said and done at the end of the year. We've kind of ebbed and flowed around that range and remember that, that range has really been more of a sort of a longer-term view of how we look at our balance sheet, that we've operated both below it in times where the credit markets haven't been very robust and in times of acquisition where we saw opportunity to deploy capital. With good free cash flow, we would have been above it. So I wouldn't look at that so hard and fast as if we're on one side or the other. There's something to be done. I think our balance sheet is in fine shape, and we'll continue to look at all opportunities to deploy capital for future shareholder return.

And we'll take our next question from Chris Manuel with Wells Fargo.

Just a couple of quick follow-ups. First, some thoughts on tinplate heading into 2014, how it may be different here versus, say, in Europe?

Okay. You want to get the other ones out or you want me to answer that one first?

Do that one first and the second one is a whole new topic.

All right, fair enough. Tinplate, broadly what I would say is that you've got a steel industry that's had a fairly tough time of it that, obviously, they want to try to get some price, both markets, they're trying to get some price. So our view, and we're kind of in the heat of that, so I don't know where it will end up, our view is there probably would be some inflation in both markets. But again, we are heavily engaged in protecting the can and ensuring that, that spread remains against all alternatives. And so we're in the fight for the future of the can, which, by the way, we think is in the steel suppliers' interest, too, because it's been a very good steady consumer of steel for a long period of time. And so we just got to keep raising that point.

Okay, that's helpful. My second question, if we could talk about the Closures business for a moment. Your base Closures business, I think you said it was down mid-single digits, maybe -- I forget the total number overall, but if we could dissect that piece a little bit and talk about maybe how that's different in North America versus -- for metal versus the plastic side? And how that might be different regionally through Europe as to what you're seeing in some of the underlying markets?

Well, I'll start with Europe first. And Europe, generally, has been performing pretty well for us this year. So there's really not a whole lot to talk about. In Europe, really, our volume issue for the quarter and really for this year does reside in the U.S. business, and it's in the plastic single serve side of our Closures business. If you look back a year ago, the warm weather that affected most of the U.S. really started very early in the year in February and kind of ran late in the year as well. So in our release, we talked about cooler weather, it's really the comparative to last year. Last year, it was just hot for a very long period of time. And our sports drinks and nutraceuticals and energy drinks had a terrific year last year. And so consumer demand is down a little bit for those products, I think. We talked about on the last call that one of our largest customers did do an inventory correction at the end of Q2 that spilled over a little bit into the early part of Q3. So outside of that, that's really the story with what happened with Closures. We feel very good about how that business is operating. It's customer based, and it's prospects for the future.

Okay. So -- and then with Portola, can you help us with the mix, what's in North America, what's in Europe? Will that all tuck into Closures, or is there a small portion of that, that will end up getting tucked into the base plastics business as well?

You've got 2 plants in Europe, the remainder are in North America. So the -- and in North America, we've got -- there are also in there, 3 plastics bottle plants. So when all is said and done, the bottle plants will end up in our Plastic Container business and then everything else will end up in the Closures business.

Chris, just to give you some perspective there. About 80% of the revenue of that business comes out of North America. So the predominant piece of that will be plastic closures going into our Closures business.

Okay, that's very helpful. And then do you have a rough assumption at this juncture as to -- or a target, I should say, as to what you anticipate those 18-month synergies could be?

Yes, I think we would tell you that they are $5 million to $10 million kind of range, $10 million is certainly the one we're trying to get to.

And we'll take our next question from George Staphos with Bank of America Merrill Lynch.

Just one quick follow-up mostly around food can margins. Do you guys see current levels as being or you being able to hold the levels? We're hearing about competitive pressures that we've heard over the call. And also, on the other side of the equation, Can 2020. So just wanted to see over time, do you see margins declining slowly or how would you have us think about that?

Sure. I think the -- I'll start with a general answer, which is we really don't think to margins because we think to capital and return on capital. And so if we see an opportunity to invest capital and get a good return on that, that might drive margins up or down depending. And so that -- again, we're thinking all about the returns from it. With that said, there's nothing about the margins to us that seem out of line particularly at all. Again, I think it's a -- we give a great value proposition to our customers and I think the margin makes perfect sense where it is. But I'll go back to the caveat, that's not really how we manage the business.

We'll take our next question from Adam Josephson with KeyBanc.

Tony, 2 questions. One on the Rexam acquisition, you're about a year into it. How do you characterize its performance relative to your initial expectations?

Good. I mean, I think we've talked before about the fact that there's one component of the business which serves the military/government. That is definitely off a little bit. So we'd rather have that than not, but that -- we understood at the time, that was going to be kind of hit or miss. So what we don't get this year, we think we'll get next year. Aside from that, we feel very good about the -- in the U.S. the businesses are performing as we expected. It's -- again, there's a lot of rotation in the customers that use this product, and so you're seeing that rotation where it's working for some products not for others, but you always have other customers that are coming in, launching new products. And so the capacity utilization is quite high against all of that. Internationally, it's a high price point product, so some of the business that was in place is not robust as you'd expect right now. Against that, we're finding other opportunities to bring into the business. So right now, it's performing just about as we expected, with maybe the currency [ph] around the military piece of the business. But we expect that to come and go over time.

Tony, just one last broader question. I mean, it seems as though weather conditions have become more volatile, demand has become more volatile, political conditions have been more volatile than in years past. Would you agree with that characterization? And if so, how do you manage the business any differently than you're accustomed to?

That's a good question. I think the -- it certainly feels that way. Certainly, we have made the business a little bit more exposed to volatility. We're in many more geographic regions than we were 5 years ago or so. So there's more of that. Weather, I really don't know. I was almost kidding before. I think weather always had ups and downs. So I'm not so sure that one is as real. But clearly, we are in many more countries with many more product line capabilities. Would we manage it differently? I don't think so. The -- kind of the milestone of Silgan is this idea that we've got really good operators, individual businesses out in the field and our job is to basically help focus that, et cetera, but really allow the people closest to customers to have as much authority, for a lack of a better word, to run their businesses. And we continue to believe that's the right way. So in each of those regions, we believe that we've got a very tight focus on customers, what those markets need and we're doing the right things to get that accomplished. If we were a very central organization, that would be much harder, right? It would be much harder to meet the needs of those customers. Now the net of that might be, there's a little more volatility around our forecasting, et cetera, I think we do a pretty good job of working through that and I think we'll continue to do it. But does that mean there could be a need for slightly wider ranges over time on earnings estimates, or -- I suppose that's possible. But the important thing is how are we building the business? How are we building long-term, sustainable competitive advantages? And I think the way we're structured is exactly the right answer for that.

We have time for one more question. We'll take our last question from Robert Kirkpatrick with Cardinal Capital.

Could you guys talk about the M&A environment going forward? And whether Portola takes you out of the operation of that for the next couple of quarters, the next year?

Yes, look, I think -- I probably got myself in trouble a quarter ago, trying to -- talking about how I viewed the market. I would say that right now, the overall atmosphere is kind of a normal pipeline for us. I don't think that depending upon where an acquisition might fit would depend upon whether we're ready to take it on now or whether we need some digestion period in the various businesses. But I don't think there's anything unique about the market that gives me any pause about future opportunities, nor do I think our capital structure prevents us from being active in the M&A front where it's appropriate for us to find value for shareholders.

And that concludes our Q&A session. I'll turn it back over to our presenters for any closing remarks.

Great. Well, thank you, everyone. We appreciate the time and we look forward to talking to you about our year-end numbers in the new year.

And that concludes today's conference call. We appreciate your participation.