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Silgan Holdings Inc (NASDAQ:SLGN)
Q3 2019 Earnings Call
Oct 23, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for joining the Silgan Holdings Third Quarter 2019 Earnings Results Conference Call. [Operator Instructions]

At this time, I'd like to turn the call over to Kim Ulmer, Vice President, Finance and Treasurer. Please go ahead.

Kimberly I. Ulmer -- Vice President of Finance & Treasurer

Thank you. Joining me from the company today I have Tony Allott, Chairman and CEO; Bob Lewis, EVP and CFO and Adam Greenlee, President 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 2018 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.

Anthony J. Allott -- Chairman and Chief Executive Officer

Thanks, Kim. Welcome everyone to our Third Quarter 2019 Earnings Conference Call. Our agenda for the morning will focus on the financial performance for the third quarter and then a review of our outlook for the remainder of 2019. After prepared remarks, Bob, Adam and I'll be happy to take any questions.

As you saw in the press release, we delivered adjusted earnings per diluted share of $0.76 for the third quarter, in line with our estimates and matching our record performance in the prior year quarter, noting that we also overcame a $0.03 decrease in non-cash pension income in the current year quarter. However, pack volumes were a little short of our expectations, and a challenging economic environment in Europe both kept us a little short of the high end of our range for the quarter.

Our plastic business once again delivered volume growth and solid operational performance, leading to another quarter of improved results. The metal container and closure businesses were largely in line with our prior year. However, another relatively weak fruit pack and vegetable pack in Europe, combined with a late start in the US, resulted in volumes below our initial expectations. Despite this, both businesses did well in controlling operating costs and achieving profit objectives.

Based on our year-to-date results and our outlook for the fourth quarter, which includes an earlier-than-anticipated end to the fruit and vegetable pack in early October, we're maintaining our guidance and tightening the range for our full-year estimate of adjusted earnings per share to $2.12 to $2.17, which includes the unfavorable non-cash pension headwind of approximately $0.13 per diluted share.

With that, I'll now turn it over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimates for the remainder of the year.

Bob Lewis -- Executive Vice President and Chief Financial Officer

Thank you, Tony. Good morning, everyone. As Tony highlighted, we delivered an in-line quarter, as adjusted earnings per diluted share of $0.76 was consistent with the record performance in the prior-year quarter, and in line with our earnings estimates. On a year-over-year basis, the quarter benefited from production efficiencies in the metal container business, as inventories declined less than expected due to the curtailed sales volume resulting from lower pack sales. We also benefited from volume gains and strong operating performance in the plastic container business; the prior year start-up costs in Fort Smith, Arkansas, which did not recur; and, the favorable impact from the lagged pass through of lower resin costs in the closures business, as compared to the unfavorable impact from higher costs in the prior year. The less favorable mix of products sold primarily related to pack movements, higher rationalization charges, and lower non-cash pension income across all businesses of approximately $5 million for the quarter, more than offset these gains. In addition, the quarter also benefited from lower interest expense and a slightly lower tax rate.

On a consolidated basis, net sales for the third quarter of 2019 were $1.320 billion, an increase of $14.3 million, primarily due to the pass through of higher raw material costs in the metal container business, and improved volumes in the plastic container business, partially offset by a less favorable mix of products sold, the pass through of lower raw material costs in the plastic container business, and an unfavorable impact from foreign currency translation of approximately $12 million.

Results for the third quarter of 2019 include charges totaling $0.03 per diluted share, attributable to the announced shutdown of two metal container facilities and a loss on early extinguishment of debt. There were no adjustments to earnings in the third quarter of 2018. Therefore, adjusted earnings per share were $0.76 in each of the third quarters 2019 and 2018.

Interest and other debt expense before the loss on early extinguishment of debt for the third quarter of 2019 decreased $1.5 million to $26.7 million, primarily due to the lower average outstanding borrowings, largely a result of the repayment of debt at the end of 2018, and lower weighted average interest rates due in part to the redemption of the 5.5% senior notes on August 1, 2019. The loss on early extinguishment of debt of $1.7 million was a result of the redemption of the 5.5% notes.

Capital expenditures for the third quarter of 2019 totaled $50.6 million, compared with $43.4 million in the prior-year quarter. Year-to-date capital expenditures totaled $166.8 million versus $134.6 million in the prior year. Additionally, we paid a quarterly dividend of $0.11 per share in September, with a total cash cost of $12.2 million. On a year-to-date basis, cash dividends totaled $38.6 million.

Moving on to the specifics around each of the businesses, the metal container business reported net sales of $822.3 million for the third quarter of 2019, an increase of $24.5 million or 3.1% versus the prior-year quarter. This increase was primarily a result of the pass through of higher raw material and other manufacturing costs, partially offset by lower sales of larger pack-related cans and the impact of unfavorable foreign currency translation of approximately $4 million.

Unit volumes were flat versus the prior year, as lower volumes with pack customers were offset by volume gains with other customers, including for soup. Segment income in the metal container business was $81.1 million for the third quarter of 2019, versus $86.9 million in the same period a year ago. The decrease in segment income was primarily due to lower sales of larger pack-related cans, challenging economic conditions in Europe, higher rationalization charges, and lower pension income, partially offset by production efficiencies in the US, due in part to higher finished goods inventory produced in the quarter in anticipation of higher pack sales.

Net sales in the closures business decreased $7.4 million to $353.4 million for the quarter, primarily due to the impact from unfavorable foreign currency translation of approximately $7 million, and a less favorable mix of products sold. Unit volumes in the quarter were flat as compared to the prior year, as higher volume demand in the US beverage market was largely offset by lower volumes in the international markets.

Segment income in the closures business for the third quarter of 2019 was $44.8 million, down $2.5 million versus the prior-year quarter. This decrease was primarily a result of the net impact from higher sales of plastic beverage closures, and a decline in pack-related metal closures; challenging economic conditions in Europe; and lower pension income, partially offset by the favorable impact from the lagged pass through of lower resin costs in the current period, as compared to the unfavorable impact from higher resin costs in the prior-year period.

Net sales in the plastic container business were $145.6 million for the third quarter 2019, a decrease of $2.8 million versus the prior-year quarter. This decrease was largely due to the pass through of lower raw material costs, partially offset by a 3% improvement in volumes, primarily related to the growth of pet food containers in Fort Smith, Arkansas.

Segment income increased $2.9 million to $11.4 million for the third quarter of 2019. This increase was primarily attributable to higher volumes, strong operating performance, and the prior-year unfavorable impact from costs associated with the start-up of the Fort Smith, Arkansas facility, partially offset by lower pension income.

As we turn now to the outlook for the remainder of 2019, as is typical for the seasonally smaller fourth quarter, we are tightening our range of estimate to a $0.05 range. As a result and based on our year-to-date performance and the outlook for the remainder of the year, we are providing an estimate of adjusted net income per diluted share in the range of $2.12 to $2.17, which remains consistent with the midpoint of our original estimate. This estimate excludes the impact from certain adjustments outlined in Table B of the press release.

We're also providing a fourth quarter 2019 estimate of adjusted earnings in the range of $0.34 to $0.39 per diluted share, which includes the unfavorable non-cash pension impact of approximately $0.03 per diluted share, and reflects an abrupt end to the fruit and vegetable pack in early October. This estimate compares to a record adjusted net income per diluted share of $0.38 in the fourth quarter of 2018, which benefited from a strong pre-buy in metal containers ahead of significant steel inflation. In addition, we continue to estimate, free cash flows to be approximately $275 million for the year.

That concludes our prepared comments, so we can open it up for Q&A. Once again, I'd like to ask everyone to keep their questions to one question and one follow-up. With that, I'll turn it over to Chloe who can provide directions for the Q&A session.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We will take our first question now from Anthony Pettinari from Citi.

Anthony Pettinari -- Citi -- Analyst

Morning. In metal containers, there was a Wall Street Journal article that came out during the quarter around the vegetable pack being historically bad and maybe generating up to 1 billion cans of excess capacity that maybe could negatively impact the market. You referenced the weakness in your comments, but I'm just wondering if you're seeing this weakness kind of create knock-on effects in terms of excess supply in the system, or maybe some competitors getting more aggressive on price? Just wondering if there's any color you can provide on the competitive environment, after this difficult pack.

Anthony J. Allott -- Chairman and Chief Executive Officer

Hi, Anthony. It's Tony. I'll try a little bit, although I can't really reconcile all the points there. As we said, the pack was a little shy of our expectations. As you can see, our volumes were flat over the time period, so. Yet even when you look at our fruit and veg, we know in there, there was a little bit of inventory correction for a sizable customer. In this case, I'm talking about now inventory that is unfilled, so we have complete visibility to the difference between what got billed and what got shipped, and so we have good visibility to that piece of volume in the period. I really cannot for the life of me explain the billion cans. Actually, I just think it's incorrect data. What it probably has more to do with is where steel is coming from to build cans. I think that, is that coming from the steel industry, for example? It probably has more to do with, there could be that much steel out of the system because of the pricing of the domestic steel versus imported steel. But in no way do I think there is anything like 1 billion cans. And so therefore, no to the rest of your question that I don't think that has any impact on the basic fundamentals of what's happening in our market, in pricing, etc..

Anthony Pettinari -- Citi -- Analyst

Okay, that's very helpful. And then the CMI data that came out last night for 3Q I think showed pet food shipments down 6%. And again, that doesn't seem to really tie with your flat volumes. I'm just wondering if you could talk about what you saw in pet food. Was it a tough comp for the quarter, or do you see any inventory shifts? Kind of any color there.

Adam Greenlee -- President and Chief Operating Officer

Sure. Anthony, it's Adam. Maybe just to take a quick step back and talk about the pet food market in general. If you go to a year-to-date basis and you look at our volume, our volume is up about 6% versus prior year. So, maybe even a little stronger than what we had initially signaled to you folks earlier this summer. So we feel really good about not only our position in the market, but the future prospects for continued growth as well. When you get back to the third quarter, one thing that certainly happened with our customers and our volume for the quarter was essentially flat in pet food. But our customers have been investing significantly to support their growth going forward. So we were in a situation in Q3 where our customers had taken lines down to rework them to increase their filling capacity.

So we've seen significant investments both in the reworking of existing lines, the addition of new lines, and in some cases, the addition of new operating facilities for our products in wet pet food. So we think that maybe some of the year-to-date results for our volume, up 6%, was a little bit of a pull forward in advance of shutting down those lines to make these capacity enhancements at the customer level. So, we feel really good about it. We feel great about our position. Our customers are winning in the market and we're excited, and nothing has really changed in our view for the rest of the year, nor for 2020.

Anthony Pettinari -- Citi -- Analyst

Okay, that's helpful. I'll turn it over.

Operator

[Operator Instructions] We'll now take our next question from Chip Dillon from Vertical Research.

Chip Dillon -- Vertical Research -- Analyst

Yes, good morning. Tony, Bob, and Kim, I appreciate all the details. I guess my first question is, we saw a huge sell-off in the equity markets at the end of 2018, and now we've seen pretty much that fully recovered. And if that stays the case through year end, could we see this $0.13 of lower pension income likely, or that went away this year, come back next year?

Bob Lewis -- Executive Vice President and Chief Financial Officer

Chip, it's Bob. I think there is a lot to that question and still time to go, right? So your point is accurate, that the markets have recovered pretty nicely in terms of the gains that they suffered in the last year. However, that gain is against a lower base from a return perspective, so you need to significantly outperform the prior year to make up all of that gain. And then the other piece of that equation that folks tend to want to look past is, what happens to the discount rate, right? That will have import on how the liability grows or shrinks.

So, I think as we sit here today, we would say if this was the point in time that you measured it, we would certainly have some benefit against that $0.13 headwind that we've been suffering. But the fact of the matter is, we won't know where the discount rate shakes out until the very last day of the year. That's the way the accounting for pension works. So, depending upon which way that moves, that will either improve where we sit today, or it could erode a bit. A long-winded answer to say, look, we're optimistic, but we've got to let it play out and see exactly where it ends at the end of the year.

Chip Dillon -- Vertical Research -- Analyst

Okay, that's super helpful. And then quickly, could you just talk a little bit about how the pet food sector of the food can business is going versus other types of can usages?

Adam Greenlee -- President and Chief Operating Officer

Sure, Chip. It's Adam. I think, I just went through a little bit of detail on the pet food market. But again, I would say what we have communicated previously was that we continue to expect pet food cans to continue to grow in our market space. We've got a pretty sizable share. We're overweighted to pet food and our customers are continuing to win in that space at the retail level. Just to repeat, I'd say we're up 6% year-to-date. Our Q3 was flat. Our growth is going to play out for the year, essentially exactly as we thought it would, and we'll be up in the kind of the 3-ish, 3.5% range for the year, in pet food.

Chip Dillon -- Vertical Research -- Analyst

Thank you.

Operator

We will take our next question from Mark Wilde from Bank of Montreal.

Mark Wilde -- Bank of Montreal -- Analyst

Good morning, Tony, Bob and Adam.

Bob Lewis -- Executive Vice President and Chief Financial Officer

Hey, Mark.

Mark Wilde -- Bank of Montreal -- Analyst

Adam, you've talked about sort of the mix issues in food can business. I wondered if you guys could put a little more color on the mix issues in caps and closures, and also in the plastics business?

Adam Greenlee -- President and Chief Operating Officer

Sure. I think when you start with caps and closures to begin with. What we did see was nice growth in our plastic closures, primarily for beverages, in the United States. So that's the old, historic, kind of hot fill volume that we've been talking about, so good growth as expected there. Where we saw some weakness was in metal closures. And I would say most of that weakness was around pack-related items and pack-related products. So, things like jams and jellies which are created from the fruit harvest; things like fruit juices, vegetable juices, etc., and then vegetables themselves that go in glass packaging with the metal closures.

So really, outside of that in the metal side of the business, everything performed fairly well outside of pack-related items. And then you've got dispensing systems, and so you think about those three main product lines -- plastic closures, metal closures and dispensing systems -- there is obviously a mix variation across those three. So with plastic being up and metal being down, that is a less favorable mix for us. And then dispensing systems is also a very highly engineered set of products that we take to market that is very mix favorable when volumes are up. And amongst the dispensing systems product line, we did see some softness, in Europe in particular, and in some of our core markets. But fragrance was up, other product lines were up to offset that. The volume was essentially flat in our dispensing systems. Therefore, the mix is really around metal and plastic, and the balance was closures.

Mark Wilde -- Bank of Montreal -- Analyst

Okay. And then over in plastic --

Adam Greenlee -- President and Chief Operating Officer

And then, Mark, just to jump over to plastics quickly, and most of our growth, as Bob had said, was related to the new Fort Smith plant. That growth is primarily related to pet food. So those are typically smaller packages than our traditional plastics business, and a little less favorable from a mix standpoint for the overall product line.

Mark Wilde -- Bank of Montreal -- Analyst

Okay, all right. Then as a follow on, I note that there was a recent sale of a major competitor in caps and closures. I wondered if you had any perspective on that sale? Also, it seems like they didn't sell the entire business, so I wonder if there are pieces of that franchise that could be of interest to you at a point?

Adam Greenlee -- President and Chief Operating Officer

Sure. I assume I know who you are referring to. There was a business that sold. That business is primarily in the single-serve beverage market, closures for that market. As you probably have picked up from us on this call, in the past that is not a high interest area for us, so it was not particularly a business that suited us in that case. The same could be said for any assets that might still be around that they may have held on in that. So, I don't think it has any huge direct point to us on either side.

Anthony J. Allott -- Chairman and Chief Executive Officer

I think when you mentioned single serve, I think that was more directed to water and carbonated soft drinks.

Adam Greenlee -- President and Chief Operating Officer

That's correct. Yeah.

Mark Wilde -- Bank of Montreal -- Analyst

That's helpful, Tony. Thanks very much, I'll turn it over.

Operator

We will take our next question from Debbie Jones from Deutsche Bank.

Debbie Jones -- Deutsche Bank -- Analyst

Hi, good morning. My first question, I wanted to ask about European food. I know you don't disclose margins, but can you give us a sense of whether it was materially up or down year over year? How they're impacting your total global margin? And then the capital needs for the business going forward, the weak demand kind of sparked a question of optimization, or if you could just run the business for cash.

Adam Greenlee -- President and Chief Operating Officer

All of those, Debbie, are related to the European business in cans, for clarity.

Debbie Jones -- Deutsche Bank -- Analyst

Yes, sorry if I cut off.

Adam Greenlee -- President and Chief Operating Officer

Okay. So just for profitability in European cans, I think the challenge we have this year is that we were expecting a very strong pack off of very poor packs in the previous year, so the pack was better than the prior year, but not nearly what we expected. I think that the results were a little disappointing. Margins were not quite what we were expecting them to be. They were below our expectations. As we go forward, the capital needs of the business there are not really impactful to the overall capital that we spend for the balance of the business, so no real change. And then, as we look at the volume and the units going forward, we do see some opportunities for growth. We've got some committed growth with specific customers as well, but some challenge in broad Europe for all of our businesses, including the food cans going forward.

Debbie Jones -- Deutsche Bank -- Analyst

Okay. My follow-up question, you noted some softening in certain markets on your Q2 call. You discussed a bit of it here, but if we kind of isolate out things like weather, would you say that things are materially different in Q3? Are you seeing kind of much more of the same, specifically like you mentioned last quarter, the personal care markets were softening, it's kind of a similar trajectory? Or, are things about stabilized?

Anthony J. Allott -- Chairman and Chief Executive Officer

I take that question in all of our businesses. So I would say that, first of all, just to be clear, because you mentioned a bit around the pack and so everything about food can is exactly as we thought from the beginning of the year. Our full-year guidance is very close to where we thought the line was going to be in the year. So amazingly, as we sit here today, despite everything we read about food cans, they have played out exactly as we expected thus far this year. There was a little bit of chance we were going to do better; that's the disappointment that I highlighted in my comments because in some other areas, like pet foods that Adam was talking about, it looks good, but we needed the pack to be a little stronger than it was.

Back to your other question, briefly on that. So, our expectation is the packs ultimately will come back, that the market still has the same demand level for that, both in Europe and in the US. And so at some point, it would seem like you can't continue to have these unusual packs. But now back to -- then broadly, if you talk to the rest of our business, I think it’s so that we certainly on the personal care side, have seen some slowing, maybe particularly around branded areas, and so I think that seems to be a trend that we're seeing a little bit more.

And then the second one Adam already alluded to, which is Europe just broadly feels a little weaker to us, in kind of every one of our businesses and that's been happening over the course of the year. I wouldn't say anything abruptly occurred in this quarter, but that seems to be a trend we're watching carefully.

Chloe, we're ready for another one.

Operator

We will take our next question from Adam Josephson from KeyBanc.

Adam Josephson -- KeyBanc -- Analyst

Thanks, good morning, everyone. Tony or Adam, just one on dispensing systems. I think Adam said volumes were about flat year-to-date in that business. Correct me if I'm wrong there. I think when you announced the deal, I think it was January 17, you talked about, I think, the developed markets as being mature but there are being growth opportunities in the emerging markets. So I think the growth profile of that business at the time was up 2, 3-ish, if I'm not mistaken. How would you compare what you've seen volume wise in that business year-to-date to what you're expecting or what you were seeing at the time of the deal? I'm just trying to get some sense of what you think the volume profile of that business is, in the context of what has been a flattish closures business for you of late.

Adam Greenlee -- President and Chief Operating Officer

Sure. I think just to talk about the year-to-date basis, or our full-year expectation, we are, just for clarity, expecting growth in dispensing systems. So I think you'll have, over time, some lumpiness between quarters as our large CPG customers are promoting, or maybe not promoting, products quite as much, but the core markets we still feel very good about. So if you look at Q3 specifically, our trigger business, which is one that I think we have a lot of discussion about on these calls and other conversations about the business, but we saw a nice growth and we expect to see continued growth going forward. Items like fragrance, lawn and garden, were all up in the quarter, so we feel good about those. I think what impacted the dispensing systems business in the quarter was really more softness in Europe than anything else. And now, again, just to Tony's point earlier, it's a broader conversation about Europe, than it may be in any one specific market. But as I sit here today, I'd say we feel great about the business. Our expectations haven't changed, we'll expect 2% to 3% growth again next year. And we will have growth this year. We will see exactly what that plays out here in the fourth quarter, but we will have growth year-over-year.

Anthony J. Allott -- Chairman and Chief Executive Officer

And now the other half of it, because this is an engineered product line, there's a pipeline aspect to it and so there's a reason we're saying this beyond just a hope. And now that we have a very robust pipeline, we feel really good about the product that are coming on, developing efforts etc. So what basically happened is that continued right along the path, but some of the base business, personal care and Europe, etc., of existing customers, what we know we have solid position, they're just down, and that offsets kind of the regular growth of the business. So we still feel very good about prospects.

Adam Josephson -- KeyBanc -- Analyst

And just one follow-up on that, Tony and thanks for that answer, by the way. So I think closures for the year are down slightly volume-wise. If dispensing is going to be up for the year, what -- can you just help me with, again, if you expect closures for the full year to be flat or down volume-wise, as was the case over the last couple of years, what do you expect to offset that growth exactly in dispensing?

Anthony J. Allott -- Chairman and Chief Executive Officer

So just first of all, let's remember -- and we had our Analyst meeting. We gave you a little bit more cut into the scale of it. So in terms of volumes, the Dispensing Systems business is relatively small part of the volume of business. So it can be up 3%, and you could have a 1% decline in either the other flattop closure market that we serve and that would more than overwhelm the Dispensing on a volume basis.

Bob Lewis -- Executive Vice President and Chief Financial Officer

On a volume basis, not on a profit or a revenue basis.

Anthony J. Allott -- Chairman and Chief Executive Officer

Correct, correct. So that's why mix becomes an important part of the topic, not so much on the volumes side. And again, to be clear, our talk about what we think [Indecipherable] more about future. I'm not saying by the end of this year or how that's going to evolve necessarily, we're just saying we see a trend line that, over time, that ought to get positive. To Bob's point, that's high margin, really good business for us, but it could get overwhelmed by just a pack season, could more than overtake all of it on a volume conversation.

Adam Josephson -- KeyBanc -- Analyst

Right. Got it. Thank you.

Operator

We will take our next question from George Staphos from Bank of America Merrill Lynch. Please go ahead.

Molly Baum -- Bank of America Merrill Lynch -- Analyst

Hi. This is actually Molly Baum on the line for George. My first question on metal containers, can you kind of help us bridge what the various puts and takes will be specifically for the fourth quarter? And more specifically in the press release, you talk about a larger amount of finished goods inventory. So in 4Q '18, you talk about an $18 million negative impact from unfavorable absorption. Should we expect to see any of that in the fourth quarter of 2019? Any thought you have there would be helpful. Thank you.

Adam Greenlee -- President and Chief Operating Officer

Sure. I think to get started, I'll just talk about the volume comparison versus prior year. So you have to recall that we are cycling over a fairly significant pre-buy from fourth quarter of 2018, so volume is expected to be down considerably, as Tony said, as we've kind of communicated all throughout the year. That's what's going to happen in fourth quarter. And as far as the finished goods that we're carrying out of Q3 into Q4, related to the pack, these were at the end of the pack, we have essentially our largest cans being filled at the end of the pack, so when the pack goes late or the pack moves into Q4, those cans need to be ready to be filled for our customers.

So we've made those cans already in the quarter, and then the volume doesn't materialize due to the abruptness of the end of the pack. We did carry some of those larger cans into Q4 from an inventory standpoint.

Anthony J. Allott -- Chairman and Chief Executive Officer

So the other half of that is, if you recall last year we did some, we’ve had major interruption which ended up being all in the fourth quarter. That had some P&L impact to the range of $16 million of negative impact on the fourth quarter last year. So the good news is we get the benefit of not having that this year. The bad news is what Adam just said, is we're now going to do some reduction this year. So instead of getting an increment of that $16 million, that increment looks more in the range of $10 million, roughly, on inventory alone. And then the volume that Adam talked about is more than enough to compensate for that, and that's why you kind of look at what looks a bit more flattish to down a bit on the quarter.

Molly Baum -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you. I appreciate that. And then just a follow up. So recent trade press has talked about some pack customers perhaps reducing their footprint. To the extent that you can comment, what effect might this have on your business in 2019, or how might this impact plans for 2020? Thank you.

Anthony J. Allott -- Chairman and Chief Executive Officer

Sure. There has been some of that. I think really the question is more about what's the demand requirement to the market, and who is going to fulfill that demand? And so as we sit here today, we don't necessarily see that that would have impact. It does depend exactly who ends up with capacity, and so I don't have all of the answers for you. But as a rule, we've got, in the markets that we're supplying. We've got a meaningful share position and so we have a sense that we would keep that. Some of our contracts require that in any case. It sort of depends on what way things gets sold off, etc. So again, as we sit here today without all the answers, we feel like that would not have too meaningful of an impact.

Operator

We will take our next question from Ghansham Panjabi from Baird.

Ghansham Panjabi -- Baird -- Analyst

Hey guys, good morning. I guess, first off, as sort of a follow up to the last question, you know, Tony, how are you thinking about steel tinplate for 2020 versus 2019? It seems like most industrial commodities are down. I would imagine tinplate is down, and related to that, do you see a risk of destocking by your customers going into 2020, apart from the comp you have that's very difficult in the fourth quarter?

Adam Greenlee -- President and Chief Operating Officer

Sure, Ghansham, it's Adam. You're right, so this has been a bit of a roller coaster from a steel pricing standpoint for our customers. So, the significant inflation that we brought into 2019 from 2018 did invoke a pre-buy for our customer base. We're not planning on anything as far a destocking at the end of the year at this point, and we work very closely with all of our customers to try to understand what their exact requirements are. So we don't see anything material in Q4 push into Q1 as we sit here today.

I think as we look out at 2020 steel pricing, first of all, we're in the throes of those negotiations right now. So we're working very hard every single day to get the maximum benefit for our customers that we pass through to our contracts. We're looking at inflation not nearly -- or, I'm sorry, deflation not nearly to the level of the inflation that we suffered, but we will see deflation in 2020. We're expecting something in the upper single-digits to maybe low double-digits, on a percentage basis.

Ghansham Panjabi -- Baird -- Analyst

Okay, that's helpful. And then just in terms of the metal food can business in the US, do you have any big contracts coming up for renewal at the end of this year for next year or for 2020 going into 2021? Just more broadly, how should we think about volumes for Silgan across the various segments in 2020? Thank you.

Anthony J. Allott -- Chairman and Chief Executive Officer

Sure. Yeah, I would call it a typical year, nothing particularly unusual in the coming year on contracts. So volumes, first of all, we have not gone through our budgeting process. As Adam just said, we don't have steel melt down, which would have some impact. And so what I can give you is nothing more than sort of a sense directionally of where we're going, based on what we know so far. I think that food cans, our expectation will be very modest improvement. That will be driven by, as we said, we would expect sooner or later you're going to get a real pack in Europe, which we did not get again this year. The US pack, by the way, it ended abruptly, but this was not a terrible, it was a fair pack. But that could be a little bit better, I suppose. As I said before, we have a particular inventory reduction at one customer that we know, so we expect to get some improvement on that. Adam talked about pet food growth which we'd expect. And then against all that you just had the vagaries of what can happen in the soup market and some of the other markets. You can kind of pick your answer here from flat to up modestly on the food can side. Closures, again, we would expect to see growth, as we said in dispensing systems, we expect growth. Similarly, on a lot of our food and beverage side, we're going to pack it better, we benefit on that on the closures side as well. And so that ought to help us. And then, plastics has been growing, and so we would expect to see modest continued growth there.

Ghansham Panjabi -- Baird -- Analyst

Thank you, Tony.

Operator

We will take our next question from Gabe Hajde from Wells Fargo Securities.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Good morning, gentlemen. Thanks for taking the question. I think before, Bob, you've talked about a slightly inflationary environment is often better for the food can business in terms of contractual passthroughs and what have you. I think I heard some deflationary discussion. It wasn't clear to me if that was specific to steel or in general what contracts may pass through next year, knowing that typically there are pay raises and healthcare costs go up. So I'm curious, just directionally speaking, I guess to piggyback off of Ghansham's questions about volumes. Would you expect metal food profitability to be up or down or flat next year, given kind of the inflationary comments that you're talking about?

Bob Lewis -- Executive Vice President and Chief Financial Officer

There are a lot of parts to that question, so let me start with the easier part which is, we were talking about the metal side of that in our previous conversation, which we would expect would be deflationary. We certainly expect things like labor are inflationary right now. As you know, labor is very tight, and so that takes you to where you started the question, which is what we would generally say is in periods of inflation of other costs, we get hurt a little bit because we delay in passing that on. If you have accelerating inflation of labor, for instance, we'll pass that through in our can contracts, but not until a year out. So I would say that's a little bit of headwind for us on it. That's in our can business.

In most of our other business, we actually don't have pass through of labor inflation, so I think that is a bit of a headwind for us than a lot of industry for next year. Beyond that on the container side, I would just say that you probably continue to see a little bit more of what we've seen which is some amount of competitive activities, with the excess volume capacity in the US.. And frankly with a volatile steel cost market that makes the market a little more confusing. And then in Europe, we talked about there had been some aggressive move, some of the larger players in Europe, and so if you assume those continue, you're going to get some mitigant against the volume improvements that I just talked about with Ghansham on the margin side.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Okay, thanks. And then Adam, I sense some optimism in the pet food business. I guess a couple of you guys have commented to that effect. Might that warrant additional investment for some capacity? Or, were the adjustments that you've made, or investments, I should say, recently enough to compensate for that?

Adam Greenlee -- President and Chief Operating Officer

Sure. Yes, I think you read the optimism correctly. It's been a nice growth market for us and we expect it to continue to grow going forward. We've been investing all throughout this growth cycle with our customers for additional pet food can capacity on our side. There is a variety of projects under way right now to increase our capacity. We've also got some more capital going in to overall increase our capacity as well. So it's a little bit of both. I'd say nothing significant as far as no new plants, anything like that, but enhancements to increase our capacity are what we're looking at in the near term.

Anthony J. Allott -- Chairman and Chief Executive Officer

And Gabe, let me just go back and finish the previous comment. So I got caught up in the food can side, I didn't really finish that I think closures, as I said, with that volume up we ought to be able to continue to improve the profitability of that business. Same on plastics, which we've done in the past. And then I think the third thing, and kind of the whole reason we had our analyst meeting and one I think we've been really trying to talk a lot about is, we sort of have two levers to pull in our business. Lever 1 is we run these franchise businesses well, and we run them for free cash. Then, our second lever is we deploy free cash.

If you think about Silgan next year and you think about the comments I made about the container business, the metal container business, for example, I would just remind you that we are back now into the mid-point range, roughly, by the end of the year of our leverage level. And so our own view is that next year, between the two levers, there might be a little bit more lever on the cash deployment side.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Thank you. If I could sneak one last one in for Bob. The tax rate came in a little bit lower. Are you still guiding to 23% to 24%, or --?

Bob Lewis -- Executive Vice President and Chief Financial Officer

Yeah, I think we did see a benefit in the quarter that will obviously have a bit of an impact on the full year rate as well, although a bit more muted against the full year. I think if we're looking forward, kind of in that 23% kind of range is probably as good as I could get it. We probably do maybe a hair better than that for the full year this year, just given the benefit that we saw in the seasonally larger Q3 that will carry over a little bit to the full year, but I wouldn't think it would be meaningfully different.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Thank you.

Operator

We will take our next question from Arun Viswanathan from RBC. Please go ahead.

David Pajhan -- RBC Capital Markets -- Analyst

Hi, this is David Pajhan [Phonetic] for Arun.

Anthony J. Allott -- Chairman and Chief Executive Officer

Hi, David.

David Pajhan -- RBC Capital Markets -- Analyst

Hi. I wanted to, you know, in your metal container segment you discussed, you mentioned soup volumes increasing. I just wanted to know if you think the soup category in general is stabilizing, and where do you see future growth in the soup category?

Anthony J. Allott -- Chairman and Chief Executive Officer

Sure, good question. For starters, I think when we're looking at the soup category in the quarter, it was a difficult year last year in the third quarter. So where we are today, we saw some nice growth year over year, but we feel pretty good about what's happening right now in the soup business, and we're at the early part of the season, filling for soup. But, you know, we think the activity in the market, the promotional activity, the focus on soup products I think has been good, and canned soup has been good for us, so we feel good about where it's going.

David Pajhan -- RBC Capital Markets -- Analyst

Okay, thank you. That's helpful.

Operator

We will take our next question from Brian Maguire from Goldman Sachs.

Brian Maguire -- Goldman Sachs -- Analyst

Hi, good morning. Thanks for taking my question. I hopped on a little bit late, so I apologize if this was already asked, but I was just wondering if you can comment on what you're seeing in the pricing environment over in Europe on the metal can side?

Anthony J. Allott -- Chairman and Chief Executive Officer

Sure. I alluded to it a little bit. We certainly saw, this is going to be a 2019 comment, not really about 2020 at this stage, but we saw a little more competitive activity in Europe than we've seen in the past. We saw some big players who were really looking hard for volume, and it didn't seem to us like it was getting full cost recovery of what was happening on the steel side. So we're hopeful that that will change. Certainly the cost dynamics had continued to change, but we won't know that about 2020 until we get into it a bit. In Europe, you have some that happens at the beginning of the year, you have some that goes into negotiations first quarter, so it takes a while to get there.

Brian Maguire -- Goldman Sachs -- Analyst

And the mix of contracts there, is it roughly like half that resets annually, and half that is on longer-term contracts? Any way to think about how much of it is impacted by recent weakness?

Anthony J. Allott -- Chairman and Chief Executive Officer

Yeah, no, it's less on our contract. I'd guess for you a little bit here, but something like 20% is probably under multi-year contract, and more like 80% is annual negotiation.

Brian Maguire -- Goldman Sachs -- Analyst

Got it, okay. That helps. And then last for me, just Tony, following on your comments around the leverage kind of being back in the range you want it to be in, I just wonder if you could comment on your thoughts of it being the trade-off between M&A and buybacks. You've been pretty active in both arenas in the past. Maybe you can just kind of comment on the general M&A environment and where multiples sit versus where you think fair value is, and any specific parts of the portfolio? I know you've talked about dispensing in the past as being a fragmented market that you think that there is some room to pursue M&A in. Is that still the case, or are there any other parts of the portfolio you're looking at?

Bob Lewis -- Executive Vice President and Chief Financial Officer

Yeah, Brian, this is Bob speaking. Look, as Tony said, we're kind of right square back into a range that gives us a lot of flexibility around how we deploy capital. No difference in strategy from where we've been for quite some time. Our interest and desire is to first allocate that capital deployment toward M&A activity. I think as we look through the segments that we operate in, obviously we would love to continue to find opportunities to build out the closure segment, and particularly build out around the dispensing systems side of that. If there are ways to tuck things in and around the can business, that would be interesting to us, but perhaps a little more challenging, given the market share, if you will.

Then, look, the plastics business has turned the corner nicely, right in line with what we would have expected to have happen over time, so the idea that we could see some capital allocated there is not off the table. I'm not trying to signal that there is something that we're going hard after, but it certainly, the team has earned at least the opportunity for us to be thinking about capital deployment there. All of that in the backdrop of the same kind of discipline that Silgan has historically put forward on the M&A side, and that is, if the cash-on-cash returns are not there, then we'll drop back and look at all of those options against what happens from a return of capital to the shareholders.

So I would not at all rule that as off the table, and quite frankly as we look forward into 2020, as Tony said, the idea of allocating capital to one or the other of those remains pretty high, and will benefit the year.

Brian Maguire -- Goldman Sachs -- Analyst

Okay, thanks very much.

Operator

And we'll take our next question is from Chip Dillon from Vertical Research. Please go ahead.

Chip Dillon -- Vertical Research -- Analyst

Yes. Thank you very much for taking my follow-up. My main question is two. One is, is there any update, and I don't think you all are involved at all, but I know that there is some kind of an investigation about the food can business in Europe. Anything you can tell us about that? And then secondly, and this is a very broad question, but we continue to hear more and more about the ban of plastics and single-use plastics in various places. Certainly nothing on a wide scale involving containers, but I do know that is an important market for both closures and plastic containers. Just any -- any kind of update you have on that and maybe moves that you and others are taking to try to to counteract some of the PR that's out there, going the other way.

Anthony J. Allott -- Chairman and Chief Executive Officer

First of all, we are in Europe in the can business and basically everybody who is in that jurisdiction, the can business got pulled in. So we are a part of that, which we have disclosed and really, there are no updates to that to offer. On the plastics side, there is a lot there. I think you're asking the right question. So there is a perception of plastics, which is one whole issue, and I think we all know that there is a heightened awareness around it, as we speak. I do still think that is primarily around single-use applications, that as Adam pointed out, particularly things like single-use water, a lot of people are starting to ask themselves, why does this make sense? And so I think that continues to percolate, and so we watch it very carefully. Again, I think your question was very pointed in that bans are particularly important to us, because that sentiment moves a little more slowly; bans can come in fairly quickly, and so we do watch that.

I think where that's most likely, you've seen it on straws, you may see it around the fact, I'm not sure it's a ban, but that the closure needs to be tethered or somehow tied to the bottle. As you are certainly in Europe, you're seeing that and I think you'll probably see it in other jurisdictions. We've said on this call before that that is not necessarily a bad thing for us, being that the scale we are, the development capabilities, etc., we feel that we're in a really good spot to work on that with our customers to come to a good solution on it. And that will add some complexity and engineering content to the closure, if you will.

So those are the kind of moves that we're focused on, is how do we address the real challenges that are out there, and help it where you don't end up with a ban of the entire product. Now, I'll remind you that back to this whole, so single-serve beverage is less than 2% of what we are, so it's not a big point, in any case. Our plastic bottle business, as you know, is primarily around household use, healthcare, personal care, etc.. So those are multi-use applications. They are in home, they are kitchens, they're bathrooms, so the idea of moving to glass or other, it's just a little hard to imagine any major change there. So our belief is that that is an area that will be fine through this. It needs to be a responsible part of solution. We need to keep working on post-consumer resins in our products, which we are, whether it's in biodegradable, and so there's a whole variety of bio resins that we are all looking at working on.

So we're doing all of that around it, but I really think the heart of this problem is going to be more around single-serve, particularly, probably, the single-serve water areas.

Brian Maguire -- Goldman Sachs -- Analyst

Okay, which again, is less than 2%. That's very helpful. Thank you.

Anthony J. Allott -- Chairman and Chief Executive Officer

That's correct. Thanks.

Operator

We will take another question from Mark Wilde from Bank of Montreal.

Mark Wilde -- Bank of Montreal -- Analyst

Yeah, I just wanted to actually, Tony, to follow on, on the plastics. First of all, can you give us your EBITDA margin in plastics in the third quarter?

Anthony J. Allott -- Chairman and Chief Executive Officer

Yeah, somebody is going to look it up, but it's just sub 15 -- 14.8, I think, from memory. How did I do, guys? Jim is giving me a thumbs up, by the way. But I think 14.8. Your obvious question is, how are you doing? I think how we're doing against the 15, if you just put the pension back on, you're at or above the 15. To that topic, if I am getting you correctly, we view that we more or less achieved the first hurdle here, which is that we got the business back to what we think is a sustainable level. Hurdle 2 is kind of, what are the growth prospects at that level, and where do we go?

Brian Maguire -- Goldman Sachs -- Analyst

And what do you think about that?

Anthony J. Allott -- Chairman and Chief Executive Officer

Well we're working, you're seeing growth in the business now, so I think we're feeling a little bit better about it. We feel really good about the team and how they've gotten us to where we are. So we're going to watch the pipeline a little bit more, we're going to see where the business can develop before we kind of declare an all clear and that we're necessarily going to try to keep pushing in, in the market space.

The other thing we have said is we think consolidation needs to happen in the plastic bottle supplier community. There are a lot of players, and so I think it's going to be an important aspect to it. And so either we feel like we need to be part of that process, or at least we want to watch that to happen around us before we can finish the thought process on, what's the long term?

Brian Maguire -- Goldman Sachs -- Analyst

Okay, and is it possible, Tony, just to get some sense of how much volume runway you have in your existing footprint? Also, you know, what the upside might be to kind of a 15% margin, since you're basically there right now?

Anthony J. Allott -- Chairman and Chief Executive Officer

Yeah, there's always a little bit of room. Obviously, within 15%, you have things that are higher, business that is higher, and business that is lower, so you can always look at it and say, I could do better. But that will always be true. And so we really aren't thinking about it. If you take the markets that we serve today and the way we serve those markets, we think 15% is roughly – round about the right spot, and you can get a good return on capital at that level. So I think that's kind of where it stands.

Therefore, you can read that also and say, we don't have a huge amount of capacity we can fill if we drive that number up. There is some capacity that has got to be exactly the right kind of model, etc.. We are working at doing that, and that's part of how we've improved to this level, but it is not enough to move 15% by a big number.

Brian Maguire -- Goldman Sachs -- Analyst

Okay. All right, that's really helpful. Good luck in the fourth quarter and through the year.

Anthony Pettinari -- Citi -- Analyst

Thanks, Brian.

Operator

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

Adam Josephson -- KeyBanc -- Analyst

Yeah, thanks, everyone. Tony, just one follow-up for you, back on sustainability. So some of your competitors in paper and packaging have obviously been talking about that subject quite a bit, and to the extent they can show volume growth and tied to sustainability, their multiples have been getting a nice bump because obviously investors are starved for growth stories. Bearing in mind that volume growth isn't, in and of itself, the be all and end all, how do you think about the relationship between volume growth and multiples that we're seeing in the sector these days? I ask because you had your analyst day a few months ago, and you talked about your multiple discount to the group. And I think a large part of the reason for that is volume growth.

Anthony J. Allott -- Chairman and Chief Executive Officer

Yeah. We fully understand that as a public company, growth is somewhat linked to multiple, without a doubt. The point we keep trying to raise is that if you're a disciplined deployer of free cash flow and you've got a lot of free cash flow that it seems like the market ultimately ought to reward that. I think over the history at Silgan, we would say it has rewarded that, right? Not always at every moment in time, and we do seem to be at a point now where the organic growth being incredibly high in the focus level, but we're a little hopeful that that'll fade over time and people will start to say that the cash deployment is really important. So that's a big answer to your question. But of course, if you have more organic growth, there is a value benefit from that.

Yes, sustainability can play a part of that. And yes, you're probably right that we do not beat that drum as loudly, perhaps, as some. Which is ironic, because nobody has a better story than a steel can, right. Again, it's a fully recyclable, more recyclable than anything else. It's magnetically pulled out of the waste stream, so it is far preferred by all of the weight processors, and low energy to recycle, just like aluminum can. And so it's got a great story. The only reason we've been a little quieter is when we have actual sales that are from that, we promise we'll tell you that. Just, it's a long lead time on it, where there's a lot of customers who are talking to us about a whole bunch of different ideas of steel packaging. But really, it's not like us to talk it up until it's actually in the numbers, and so we'll wait for that.

Adam Josephson -- KeyBanc -- Analyst

Tony, just one follow-up on that, you know obviously steel and aluminum have a good recycling story. Plastic has a much better carbon footprint story, because obviously, mining bauxite, converting into aluminum is incredibly energy intensive relative to PET. How do you think about the actual environmental impact of say PET or single-serve plastic bottles versus steel or aluminum cans?

Anthony J. Allott -- Chairman and Chief Executive Officer

I think it's a great question. I think the steel can is a different animal entirely. It does not have that same bauxite energy, so it's more energy than plastic, but not a lot more. Because it is so recycled, you have to address that recycling content. And so, essentially the steel can keep going round and round, and so it's way lower energy when you consider that fact. And therefore, I believe even just on that straight point, once you consider the recycling of it, it's better.

The thing with plastic that everybody forgets is in order to -- you use it, but in order to recycle it, you have got to ship all this plastic all over the place, to wherever it is getting recycled etc., and so there's a lot of costs and energy that gets consumed in that process as well. By the way, I think there is an argument for plastics on this side. The problem with plastics is the waste issue more than anything, and I'm not sure that that is going to be quickly solvable.

Adam Josephson -- KeyBanc -- Analyst

Yeah, thanks so much, Tony.

Operator

It appears there are no further questions, and that ends our question-and-answer session for today. At this time, I would like to turn the conference back over to Tony Allott, President and Chief Executive Officer, for any closing remarks.

Anthony J. Allott -- Chairman and Chief Executive Officer

Thank you, Chloe. Thank you, everyone. We look forward to talking to you about our year-end results late in January.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Kimberly I. Ulmer -- Vice President of Finance & Treasurer

Anthony J. Allott -- Chairman and Chief Executive Officer

Bob Lewis -- Executive Vice President and Chief Financial Officer

Adam Greenlee -- President and Chief Operating Officer

Anthony Pettinari -- Citi -- Analyst

Chip Dillon -- Vertical Research -- Analyst

Mark Wilde -- Bank of Montreal -- Analyst

Debbie Jones -- Deutsche Bank -- Analyst

Adam Josephson -- KeyBanc -- Analyst

Ghansham Panjabi -- Baird -- Analyst

Molly Baum -- Bank of America Merrill Lynch -- Analyst

Gabe Hajde -- Wells Fargo Securities -- Analyst

David Pajhan -- RBC Capital Markets -- Analyst

Brian Maguire -- Goldman Sachs -- Analyst

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