Silgan Holdings Inc (SLGN) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Silgan Holdings Inc. second quarter 2004 earnings conference call. My name is Carol and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded.

From the company today we have Phil Silver, Chairman and Co-CEO; Greg Horrigan, President and Co-CEO; Tony Allott, Chief Financial Officer; and Malcolm Miller, Treasurer. Now it is my pleasure to turn the presentation over to Mr. Miller. Sir, please go ahead.

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, involves a number of uncertainties and risks including, but not limited to, those described in the Company's annual report on Form 10-K for 2003 and other filings with the Securities and Exchange Commission. Therefore, the actual results of operations or financial conditions of the Company could differ materially from those expressed or implied in the forward-looking statements. With that, let me turn it over to Tony.

Thanks, Malcolm, and thank you, everyone, for joining us for our 2004 second-quarter earnings conference call for Silgan Holdings. Our agenda for the call is to briefly review the financial performance of the Company for the quarter and six months, make a few comments about our outlook for the next quarter and the rest of the year, and then Phil, Greg and I would be pleased to take any questions.

The second quarter continued what was already a strong beginning of the 2004 year. Our net income in the quarter increased to $18.2 million, or 98 cents per diluted share, as compared with $13.5 million, or 74 cents per diluted share, in the second quarter of 2003. The key drivers of this increase were continued strong performance in the Metal Food Container business, both in the food cans and enclosures, and lower interest costs.

Sales increased $6.1 million, or 1.1 percent, to $551.3 million for the quarter, primarily due to the higher average selling prices in metal food cans and partially offset by lower unit volume of food cans. Operating income increased $3.1 million to $45.2 million, as long-term capital investment programs and rationalization efforts in the metal container business continued to strengthen results, but were partially offset by declines in average selling prices and margins in plastics.

Now I would like to take a minute to discuss the quarter's performance for our two business franchises and provide a bit more detail before covering other corporate matters. In the Metal Food Container business, sales increased 2.3 percent over the second quarter of 2003 to a $407.1 million. This increase resulted from higher average selling prices, which were due both to an improved mix of value-added products and from price increases, as higher metal costs were passed through to customers. The higher average selling price was partially offset by a 1.5 percent decline in combined unit volumes. For the six months of the year, Metal Can volume, exclusive of closures, is up approximately 1 percent.

Operating income in the Metal Food Containers increased by $7.1 million over the 2003 level to $33.2 million, and operating margin increased from 6.6 percent of sales to 8.2 percent. This improvement resulted from the benefits being realized on capital expenditure programs over the past several years, particularly on Quick Top convenience end capacity, as well as from improvements realized in rationalization and integration efforts. The most significant of these, which was the rationalization of Silgan Closures, is now largely completed and the business is performing at targeted levels.

In the Plastic Container business, sales were $144.2 million, as compared with $147.3 million in 2003. This decrease is the result of lower average selling prices versus the quarter a year ago, due both to the comparative mix of products sold and certain price adjustments made last year. While the competitive activity in the Plastic Container market has remained relatively quiet this year, the business is cycling over the impact of adjustments that were made in 2003. We anticipate this lag price differential abating in the last half of the year.

On the volume side, unit sales of Plastic Containers were flat with the second quarter of 2003, and have grown modestly on a year-to-date basis. Operating income of $14.1 million in the second quarter of 2004 declined from $17.3 million for the same period in 2003, but increased from the first quarter of 2004. The decline over the second quarter a year ago resulted from the lower average selling price, which I have already discussed.

Selling, general and administrative expenses companywide decreased $1.8 million in the second quarter of 2004 as compared with 2003, and decreased as a percentage of sales from 5.2 percent to 4.8 percent. This decrease was primarily the result of the integration of Silgan Closures into the Metal Food Container business.

For those who are interested in calculating EBITDA or other cash flow metrics, our depreciation amortization for the quarter was $29.3 million as compared with $28.5 million in the second quarter of 2003. Year-to-date depreciation and amortization was $57.9 million as compared with $54.2 million in the first six months of 2003.

Interest expense decreased significantly in the quarter, down $5 million, as a result of the refinancing, which was completed late in 2003, in which we redeemed $500 million of our 9 percent senior subordinated debentures with a combination of $200 million of new 6 3/4 percent Senior Notes, additional bank borrowings and free cash flow. This refinancing resulted in a significantly lower borrowing rate and more prepayable debt on the balance sheet. Additionally, the average outstanding balance was lower as a result of debt reductions which were made late in 2003.

We also just completed a repricing of our B term facility to reduce the spread over LIBOR to 175 basis points from what had been 200 basis points. We believe this change continues to evidence the financial market support of Silgan and confidence in our franchise market positions and consistent financial performance.

As indicated in the press release, our target of 200 to $300 million of debt reduction by the end of 2006 remains intact, as does our goal for this year of at least $75 million. Due to the seasonality of our working capital requirements, you should expect to see this paydown not until late in the fourth quarter.

We did initiate and pay a 15-cent-per-share dividend during the second quarter, which aggregated to $2.8 million. The principal reason for initiating this dividend was to increase the population of potential buyers of Silgan stock and thereby theoretically reducing volatility. This action did not change our debt reduction target.

Now briefly turning our attention to our outlook for the year, as indicated in the press release, we have increased our earnings estimates to a range of $4 to $4.30 per diluted share. This compares with $2.28 per diluted share in 2003, although that year did include rationalization charges and losses associated with the early retirement of debt.

The first six months has certainly been a strong start to the year, but it is important to note that more than 60 percent of our anticipated income is still ahead of us, with the third quarter representing by far the seasonally most important quarter. Also, the second half 2003 had already begun to benefit from some of the capital investment programs made over the past several years, so comparisons in the second half year will be more challenging than they were in the first half.

For the third quarter, we provide an estimated range of $1.80 to $2.10 per share, as compared to $1.45 per diluted share in the third quarter of 2003. This was a relatively strong quarter in 2003 and has the full impact of manufacturing and selling of our new Quick Top capacity. Once again, interest expense is expected to continue to be well below prior-year levels.

Finally, before we turn the call over to questions, I would like to comment on the current situation with steel costs and metal food can pricing. We are experiencing surcharges and higher steel pricing. We have announced and implemented price increases to the market to cover these higher costs, and these were already in effect by the end of the second quarter.

As a reminder, approximately 90 percent of our metal food can business is under multiyear contracts, which do allow for the pass-through of our metal costs. Therefore, we do have the right to pass through to our customers any surcharge or price increases that we experience, and are already doing so with the price increase I just mentioned.

For the remaining 10 percent of the business which is not under contract, we have the right to increase our prices and have done so. At this point, we do not believe that we have lost any of this business -- being the 10 percent noncontract business -- as a result of our announced price increases, which we assume means the other can manufacturers have also increased prices to recover higher metal costs. While there may be other questions you would like to ask related to this steel situation and pricing, this is all we intend to say at this time.

That concludes our prepared remarks. We will now turn it over to Carol, if you would please give the appropriate instructions.

(OPERATOR INSTRUCTIONS) Edings Thibault of Morgan Stanley.

Good morning and thank you, operator. Tony, since you're going to throw down the gauntlet, I guess I'll pick it up and ask a question on steel costs. I am just curious. You got the surcharges in the second quarter; you passed them through. Was there any lag looking back on your ability to pass those through?

This is Greg Horrigan. Our ability to move increases to market is real-time.

Great. That is the answer I wanted. A question on the Food Can business, where volumes were down. I remember they were up quite nicely in the first quarter. Was some of that due to some anticipation of some of these higher steel costs, or can you give us a little more color on the mix shift that may have driven a first-quarter strength, second quarter, a little bit sloppy, but still a pretty good start for the six months in total?

On balance in the first half, taken all together, we're up a little bit on Food Can volumes, so that the second half did come in a little light versus prior year. And taking your question looking ahead, looking at the pack, I guess what is really relevant here is what the estimates we have on book and how it will affect our volume for the year. And all in, we're looking to be down marginally this year from prior year. Having said that, it is always in play and we never know until we get into the fourth quarter and then look back.

Just to give you the segment information, the feedback came in a little short of what was expected and short of prior year. The green beans actually have been quite good. The wet weather in the Midwest caused a late planting on corn and the pack won't start until August 2, and it will run as long as -- there have been good plantings, so it will run as long as the weather holds up. For what it's worth, the Farmer's Almanac is saying that we will have a sharp freeze on October 1. So that would say that we pack on. In tomatoes, look to be pretty good on the West Coast, and the peaches were good, but they were small, so the yield probably is down a little bit.

Taken all together, we look to be down marginally on the year. We have trouble identifying any demand pattern activity in what volume we've experienced through the first half. We just can't discern that. But taken all together, I would say that we are being relatively cautious in terms of our volume outlook in the can business for the year.

So it sounds as if, to paraphrase, you can't detect anything secular, but given some of the weather situation and the impact on various crops, that that is driving your expectations for a moderate decrease?

I would say that the biggest risk probably is in the corn pack, which is a pretty substantial part of what we do, and we will see. We're starting in a few weeks and we will see how it runs out in August and September.

Great. When we look at the profit growth in that business year-over-year, would it be possible to break out perhaps the impact of some of the restructuring, the cost savings initiatives, with the impact of the easy-open ends? And can you give us a sense of how much of your ends business is now using the easy-open ends and where was that a year ago?

The earnings improvement year-on-year and the rate of profit growth has been first and foremost our closure business year-on-year. And it is gratifying to us here to be able to acknowledge the terrific performance that has been done by that business. Last year we were troubled. We had gotten the acquisition. The plastic part of that business has been fine-tuned and running very well for some time.

The metal part of it was going through a dramatic restructuring. We had hoped that the management that came across would be able to manage it effectively. We concluded they could not. We put in a key executive from Silgan Containers, and moreover we took the Silgan Containers manufacturing group and lent to support to the metal part of the closures business through this restructuring, and they came through it wonderfully and quickly. And we have gotten pretty dramatic improvement, therefore, year-on-year.

The second largest part of the improvement in the second quarter in the can business comes from the investment that we have been making in Quick Top ends and that maturing out through the quarter. The balance of the business was relatively flattish.

Okay. But do you have a sense of how much of your ends business is taking the Quick Top -- is now utilizing the Quick Top? Is that all of it or select customers?

When we started this, we were at about 30 percent. We are driving to 40 percent. We have an ambition that over a longer period of time, we can expect to convert virtually -- every single can that we supply could have any easy-open end of some type on it. And we have developed quite an arsenal here to take to market. It is not just steel easy-open, but it's steel easy-open, aluminum easy-open and an aluminum (indiscernible) end. We have the dotok (ph) end and so on. So we have a variety of ends to take to market and we think we have one virtually for every container.

Thanks very much. I'll get back in line. Thanks.

Amanda Tepper of JP Morgan.

First, on the plastics business, why are volumes trending flat? It sounds like other plastics companies -- and I understand no two plastic businesses are exactly comparable -- but others are showing up volumes, though everyone's showing negative price. So are you expecting volumes to be flat for the rest of the year? And how negative is price, because of course what is also running through the top line is resin pass-throughs, which would be positive.

Amanda, this is Phil Silver. Our volumes are flattish in the plastics business, and that, by the way, has persisted for the last couple of years, as we have taken a posture as the industry it is being somewhat restructured, much of our competition, to focus on margins and returns on the capital employed as opposed to growth. So our posture in the market is lending somewhat to what you are saying about the flattish top-line growth.

Additionally, in this year we of course are aligned with certain customers out there that compete in the consumer goods marketplace and they cycle in terms of their success. As it turns out this year, the customers that we are serving are having some difficulty in the market and are losing some share, and we are simply sharing that with them.

Looking forward, I think we expect some recovery in our growth rate as these competitive impacts dampen, if they do dampen like we're forecasting. But I don't think it's going to be dramatic. There is still time to go here as things get sorted out. And as I say, we are very much focused on our returns of the investment employed. We relocated, redeployed people and assets to better markets, better opportunities than perhaps they were in.

Pricing has had an impact on our margins, continued to this year, as Tony said, as we get the lagged impact of actions taken last year. So it has been a tough period the last two or three years, but I would say that I think we have done a pretty good job of responding to it. And as we look at our position now, we think that the combination of our market position and the quality of our people and our management puts us in the position of having a stronger franchise now even than we had two or three years ago. And we think we're in a great position to take advantage of this marketplace as it continues to unwind.

On the pricing side in plastics, is it fair to say that it has stabilized going forward so the price hits that you're experiencing are events that occurred last year?

I would say that the amount of competitive activity in the past six months or so is what we would say is sort of normal, not like the heightened period of the two to three years before that. And so far, that is where it has been sitting. And our visibility, obviously, can't be very good on this, but we have had some period now of returning to normalcy.

Normalcy being stable prices or prices declining less rapidly?

I would say normalcy would be stable prices in the sense as it reflects our costs rather than, of course you know, prices move with resin costs.

Ex resin. Okay, right. I should have clarified that. Right. And then I have a question on your guidance, just doing the math, whether I take the low end or the high end, it looks like you're implying about 59 cents of EPS for the fourth quarter, which is well below current consensus, I believe, for the fourth quarter. And I'm wondering if this is just conservatism or if there is something we are missing.

I would not necessarily call it conservatism as we move that estimate. What I would say to you is -- and Greg can pile on here -- but it is important understand, and I think we have talked about this, but there is a fair amount of movement between Q3 and Q4 in terms of the pack, primarily, and the timing of it. So we are giving you our best shot of what we think the Q3 is, which, based on what you're saying, maybe it's pulling a little bit from Q4. In truth, we will have to see how that plays out.

So personally, I would focus more on the six-month period. We are giving you our best shot on the quarter. If it happens that way, then yes, we think the fourth would be a little bit softer than perhaps you're thinking. But you're getting more of it in the third quarter in that case.

Okay. And can you give us an update on the our status of your search for a new CFO?

Yes, what I would say -- obviously, we have put nothing out, so nothing is complete yet on it. What I would say is that we are obviously out doing a search. We are pretty pleased with the caliber of people out in the market that we have been able to talk to and pursue on the effort. So I would characterize us as pretty optimistic that will have somebody in the position in the next several months.

What is your ideal candidate? Other than a clone.

You took that from me. That would actually be the answer, Amanda, somebody that would be very, very similar in background and experience to what Tony has done -- what Tony has brought to us.

Okay, thank you.

The last piece on that, I just want to say, is at this point, we would not envision putting anything out in advance of the candidate actually starting.

Okay, thank you.

George Staphos of Banc of America Securities.

Good morning. Congratulations on the results. They are terrific. I just want to piggyback, actually, on Amanda's question from before. Just in terms of understanding the second half and the fourth quarter, we should not read in anything about the fourth quarter relative to last year's fourth quarter, right? There is no other structural or semi-secular issue that we need to contend with? Obviously, there is a lot of play in your earnings per share relative to just a small move in the volume, right?

That is correct, George. There is nothing you should read into that Q4 other than we're just trying our best shot at what is always a tricky Q3/Q4 estimate.

Yes. That's understood. I jumped on late. Volumes in the food can business for the second quarter, what did you say they were? I know they were down; I read that in the press release. But what did you say they were down for the quarter, if you did?

What we gave -- actually, I have to find --. We're down 1.5 percent combined volume. So combined means -- in that case, it's food can and closures. And for the quarter, it's a comparable period of time.

I remember 6 percent being a number from the first quarter. Was that combined volume or was that just food can?

6 percent was food cans only.

So was food can down more than 1.5 percent?

It was. You can kind of get to it actually, George. Because the other thing I said is that the food cans ex the closures for six months are up about 1 percent.

You did say that? Okay, fine. Sorry about that. In terms of the price increases and surcharges, congratulations to you for getting this implemented. Obviously, your customers never like price increases. They are probably particularly annoyed with some of your suppliers for the midyear move. Do you think they are thinking at all differently about how they use cans on a going forward basis, or you don't think so, as long as there aren't any other surprise surcharges in 2005, that can maintains its 30 billion unit, more or less, demand into next year?

It's a fair question, George, that ultimately will be a function of what the steel industry wants to do in terms of keeping this product competitive with competing products. In that regard, we have been the noncyclical, very stable segment -- as stable as any segment the steel industry has had over the last 30 or 40 years. And we understand on the one hand that this is their day in the sun and things have tightened up rather surprisingly. You know, we didn't see this a year ago and it came on the whole industry pretty quickly, and presumably driven by events in China and so on in terms of demand increased there.

On the other hand, against the idea of the steel industry day in the sun is that we are -- in the sense that during the thin times, we are paying relatively more and a steady consumer of steel product; in these thick times, we ought to have it come the other way a bit for us.

And so I think that this is going to play out, obviously, over the next couple of years. It is unprecedented in terms of the experience we have all had in the industry, with the exception of one year back in the early '70s when OPEC-induced increases were put through to the market. So we will just have to see. I can't say that we are getting any feedback from customers right now that would say that because of the inflation in steel, they are looking to do something else. But if we backed up this year with another year and another year, then clearly we would have some concern, and we will just have to wait and see.

I think part of it -- and I don't want to get on a soapbox here, because that is not the appropriate forum, but do you think the steel industry is more likely to give you, if in fact they are still concerned about supply and availability, one big increase but let's get over with so that you can go to your customers with one price. Or have they not really given you any kind of read on '05 yet and what their plans might be?

I don't think they know what the market situation is, and they haven't certainly given any preview of that. I think, as Greg pointed out, we do believe the steel company appreciates the importance of this product in their mix, which is noncyclical and good margins year-in and year-out, while most of what they do, they have to suffer with cyclicality and very high volatility of pricing. It has always been part of the mix that has been valued and treated as such. And I personally don't think that that will change over the long-term.

There is some unusual dislocations going on now, I think because of China. I think we are all just waiting to see how our steel industry here integrates that into their commercial plan.

One last question. I think I heard you say that Quick Top is currently 30 percent of your volume, more or less, in food can, and you're looking to drive it to 40 percent. If I heard that correctly, over what time frame are you looking for that to occur and what would be the increment, say, in '05?

Essentially, when I said we had started this last quarter at around 30 percent, we are at 40 and moving higher. And it is just -- I would say the big push that we have experienced over the last 12 months or so will abet somewhat, but will be pretty steady and consistent. AND we're just continuing to get interest in a lot of different customers and a lot of different segments, and pursuing these opportunities. So I think it will be steady going forward, George.

Okay, thanks again.

Bala Ramakrishnan of Morgan Stanley.

Good morning. Just a couple of questions. First is, if you could remind me of your ability to pass through price increases on the plastics side. Have you managed to recover pretty much all your cost increases through price increases, or if not, at least what percentage have you recovered so far?

The way we do business, and I think the industry by and large, is that any contract we have, we have the right to pass through the resin change and the obligation, by the way, to pass through changes real-time. So that is contractual, and a very high percentage of our business in the plastics business is under contract.

For that which is not under contract, we have the right to pass through changes in resin. For a practical matter, we have the right to change prices any time for any reason. That has to stand the test of the market.

In general, the issue has not been -- there has been no issue about passing through resin price changes. I think, in general, the market continues to treat those as a cost that needs to be passed through one way or the other real-time. That is not to say that there has not been price -- as I said, there has been price pressure, but not around that issue. It's just competitive supply/demand and, if you will, strategic initiatives by some of our competitors. There has been no change, though, in the basic premise of passing through resin as and when it occurred.

So you haven't felt any competitive pressures that would limit your ability to pass through resin cost increases?

No, not in that (multiple speakers).

The other question was, in terms of the recent contracts, if you look at the recent contract you signed with Del Monte -- I know I had a chat with Tony on this one -- it's a bit confusing. I'm sure some of the investors are also confused in terms of it looks like the language in the Del Monte 10-K (ph) says that you agreed to price reductions. Can you give us the context and also whether this will be adopted in some of your other contracts with other customers?

This is Greg Horrigan. Del Monte is one of our largest customers, as you know, and a highly valued customer. For some years now, since 1993, we've been the sole supplier of all their volume, and until their recent merger with the Heinz assets, did bring in some volume, part of which we were already supplying to Heinz. So taken all together, we looked at the volume supply in that circumstance and determined an ability to make sensible investment and bring cost reductions in and so on, and valued that into a five-year extension.

And we have accomplished that. It absolutely suits the circumstance of our historical supply relationship with Del Monte. What we do on other contracts and so on is specific to the unique circumstances that we have with other customers and the market conditions and so on.

Okay. And you mentioned that you are pretty committed to the $200 million to $300 million debt reduction target in the next few years, and you also mentioned that the plastics industry in general is going through a bit of reorganization here. Does that means that you might make an exception at some stage in the next one or two years to make selective acquisitions, or is your priority still to get the debt reduction ahead of any potential acquisitions?

First of all, the $200 to $300 million that we put out there gives us flexibility to do acquisitions which we think are compelling, that would be, as I would describe, kind of the bolt-on nature. And our view is that that is the most likely thing that could happen in this two- to three-year period. We will never rule out that something would come along that is beyond a bolt-on that is so important to us and we think compelling from an economic point of view that we would stay slavishly committed to the debt repayments. But I think the odds are very low that we would come off that. It would be hard to do and we don't foresee that, but you never say never.

Just one last question. Your CapEx guidance for '04 again, please?

We're still looking for '04 to be somewhere in the 100 to 110 million range.

Thanks very much.

Christopher Miller of JP Morgan.

Good morning. Just a couple housekeeping issues. Balance on the revolver at the end of the quarter?

It was about $227 million.

And following up on the prior question in terms of the debt reduction, have you had conversations with the rating agencies and their views at this point, and I guess to your view on getting yourselves back to an investment-grade level?

Yes. Well, first of all, we stay pretty regularly in touch with the rating agencies, as you would expect us to. They are very aware of our focus and our target on debt reduction and obviously pleased with that. But do I know of anything that's going to happen in the short-term around rating? I certainly don't, but I think that again they are watching it and they see the movements and leverage, etc., and pretty positive specifically on that. So we will have to all wait and see on that.

I think to your question of investment grade, and I think we've been asked this before, is investment grade necessarily a goal unto itself? And the answer to that is that it is not. What we're focused on is kind of what is the right cost to capital to grow the business in the future and getting the right balance of total cost to capital. And so if investment grade translated to a more right cost to capital business, then we would look at it; otherwise, we wouldn't, and that's the driver here. It is not a goal just to get to investment grade.

Okay, and also any color in terms of particularly in the PET business, what you're seeing there in terms of capacity and where you see that going and the impact on price over the next 12 months or so?

I think the important thing to understand is we are not really in the PET business, I think in the context you're talking about it. We do some PET bottles, but it is for the personal care market. They're highly customized and we don't compete in the food and beverage business to speak of. So we are not a good source on that. We read the same things you do.

Okay, great. Thank you.

Robert Kirpatrick of Cardinal Capital.

Good morning. First of all, thank you for the dividend. I agree with your decision to do that. Second of all, Tony, what was CapEx during the quarter?

21.8 million.

21.8, so it will be a little heavier than the second half of the year.

That's correct.

Third, what is the status of the Nestle contract? Is that scheduled to expire this year, or has that been changed?

This was already in the first quarter, but that contract has been extended, basically. It was set to expire the end of '04, and it was extended for a 5-year period. Just for everyone who's listening, that is a portion of the overall business with Nestle. It rounded about one-half of the overall business. That was extended by 5 years.

And the other half?

The other half comes up in 4 years time, I believe.

Have you looked at the option of doing something like a convert to take out more of the debt, given some of the pricing that has gone on in the convert market the last few months?

We look at all kinds of potential opportunities, and so that is one. It is not one that we found to make a lot of sense for us at this point in time. Again, as you know, we think there is a good opportunity for the stock going forward and the valuation of the stock, and frankly, the cost of debt is pretty low as it is. So at this point it's not too much a good idea for us, and you've got the liquidity of the stock and the impact of a convert on liquidity of stock and short interest, etc. So it's not one at this point that we've taken a lot of interest in.

Okay, and then on your working capital for the year, are you -- last year you managed to generate a little bit of cash from working capital. Are you expecting to be able to repeat that performance this year, or is that going to be much harder to do and you'll end up using some?

Well, given what we've talked about on steel and to a lesser extent on plastics, I think there is a fair chance that will be a little bit harder to hold. We may have more costs of raw material hung up in our balance sheet at the end of the year.

Okay, great. Thank you so much.

Timothy Burns of Cranial Capital.

Let me tell you if you could hire Lance Armstrong as a CFO, you'd do pretty good. I was doing a little multitasking here. He just destroyed -- he just virtually won the tour today, so check it out when you get home tonight. By the way, I am curious. Do you guys think the plastic bottle business, especially where you focus, settles down once the OI assets have been sold, or does it get worse for a while?

Tim, I don't know. You could see it either way. I think that we would handicap as it settles down, but you can't be sure because you don't know who the buyer is, and the buyer will have some sort of strategy which will probably become understandable pretty quickly after it happens. So you're just speculating, and it can be -- I think we have said it can be good for us; it could be bad for us; it could have no effect on us. We just don't know.

So you've just got to wait, hold your cards and wait. By the way, do you guys subscribe to the New York Post?

No, I don't.

Okay, just curious. In terms of this whole steel issue, a lot of the products that you package don't really have that many alternatives. I know you do some work with the OmniCAN plastics in particular. There's pouch, foil pouch-based stuff, but what are the alternatives? It's not as if these guys can just jump over tomorrow. Maybe over multiple years they could convert, but that would be foolish for the steel industry, would it not?

I think you've made an excellent point. First of all, you do not convert quickly out of metal cans to anything else, steel cans to anything else. There are no alternatives in many cases, and it takes a long time by and large. The steel can cost is superior by some significant measure to the alternative package types. And lastly, I think our point, we don't think the steel companies would take that course of action at all as a practical matter. They are looking at the fact that in 3 or 4 years or whatever the period is, the world is going to be long steel again as China comes through this. So longer-term, we feel pretty sanguine about all this. In the nearer term, we can't predict, and you always hate to be able not to predict, but longer-term we are pretty sanguine about it.

To Greg's point earlier, though, shouldn't you guys use this disruptive, painful period, not necessarily to your P&L but to the industry and the users of cans as a way of bringing the ultimate costs down on a longer-term basis? Saying, you know, shares will be converted unless we take action and the action needs to be lower tin plate or steel cost to us.

Well, I don't think, Tim, that the question right now is that the steel can is uncompetitive on a cost basis. That is not the issue. So it would not be an easy case to make to the people who are selling steel. Now if they believe that the price ought to be 50 percent higher, it would be a hell of a case to make, but we're not seeing any evidence of that. As I said, we have to see how this unfolds. I think it is pretty hard for them to even know how to position themselves in the world right now in terms of what they should do longer-term.

Got you. It sounds like you guys are extremely happy with Silgan Closures and the integration. What are the lessons learned from that? That is not necessarily a racy, high-end business, but obviously a lot of things have gone right. What are they?

Tim, I think it's what we have basically always known or believed that don't get involved in something that you aren't pretty familiar with, and we obviously were very familiar because we owned part of the business. Don't pay a fancy price, and have a plan of how you're going to integrate it and increase the value, and we have that. We're familiar with the business. We don't think we paid a fancy price, and we had a backup plan of what we would do with the integration management of the business should the management in-place falter. We concluded early on that we needed to do something different with management, and we went to the backup plan. And as Greg said, it worked wonderfully and it is just the value of having something that is close to what you do and have an understanding of it, so that if you need to, you can get right hold of it and make it produce what it's capable of.

One of the skill sets that I think we have that is competitively excellent in Silgan, Tim, is the ability to successfully integrate acquisitions, and knitting together what we have. And the closure business with the food can business, the plastic business, through these 20 acquisitions it's one thing administratively and economically to price them out, get the deals done successfully, which for the most part we do out of our holdings Company. But it is something else to successfully integrate manufacturing technology, commercial standpoint these businesses, and we have a skill that fits deeply down through our businesses that gives us a lot of comfort and confidence in terms of our ability to continue to acquire when we get back on the acquisition trail.

Okay, and the easy-open end chip that you all have, I guess one area that seems to still be a consumer flap as far as I am concerned, unless you like carbonated soft drinks all over your hands, is the basic 12-ounce beverage can. Is there a solution you could provide there? That would be a huge market, but I think it's insulting as a consumer to have to continue to pop that thing open and have Pepsi or Coke fall all over my hands.

I think you're better do direct that question at our competitors who primarily focus on that, and more secondarily on the food can business, but Ball and/or Rexa (ph) would better answer that. I don't think that we are looking to do something over on the carbonated soft drink and beer side of things.

Okay. I didn't know if the end -- you've always kept it ring-fenced, and believe me, I don't mind if beer is spilled on my hand, but to me it is really still not that friendly a consumer package. It is like an explosion that goes off. Anyhow, listen, you guys had a great quarter. If Lance Armstrong is not available, Tony, I would vote for Sheryl Crow.

Joe Kinnison of Kennedy Capital.

Just looking for a little bit more detail on current assets from this quarter; current assets up a little more than 4 percent on 01 (ph) percent increase in sales, and so were DSOs up, were inventory turns down, or what more detail could you provide us there?

Obviously, there will be more balance sheet to come, but a brief answer to that is that it is more in the receivable side partly, and that is just kind of the timing when the sales came in and some of the higher prices in those as we pass through some raw material costs. And then some of it is in interest accruals and it's kind of around the board. It is not predominantly in inventory at this point in time, but again as I said in a previous question, you could imagine as we get to the end of the year and there's more and more of the steel increases that we would see more on inventory side.

All right, thank you.

Andrew Feinman of Iridian.

When you say $75 million of debt reduction this year, you're talking about from the end of '03, right, where your net debt was 991?

That's correct. We're going to the end of the year, yes.

So I think that is pretty impressive, because if I'm doing the numbers right, for the second half of this year you would generate $265 million of free cash, which is about $14 a share to get to 910, 920 by the end of the year.

Andy, this is Phil Silver. I think that is right, but I would want to make the point that the seasonality of our business is such that we have a significant negative per-share use in the first 6 months. So I think what is useful is the end of the year-to-year comparison.

Okay, thanks a lot.

A follow-up from Edings Thibault of Morgan Stanley.

I just want to follow up on the dividend question a little bit and echo the applause of the dividend policy. But as you look on to this, debt reduction is clearly a priority for the company. Would you expect to maintain the dividend at current levels, or if you were to see an increase in free cash, would you look to make marginal improvements? What is your thought process of the dividend policy over the next couple years as you drive towards this $200 to $300 million debt reduction target?

Edings, we came out and announced the dividend and the intent that it would be recurring on a quarterly basis. The target level of that dividend was related to our earnings as we think about it. Of course, the Board makes the decision on this and they do it quarterly, but we would think that the right way to look at this is the dividend that is tied to the earnings power and cash flow power of the business, and that would be very respectful of the commitment we have on paying down the debt, though.

Got it. Thanks very much and good luck with the second half.

Ladies and gentlemen, this concludes the question-and-answer portion of today's call. I will now turn your presentation back to Tony Allott for his closing remarks.

I just want to thank everyone for their time, and we look forward to talking at the end of our third quarter. Thank you.

Ladies and gentlemen, thank you very much for your participation in today's presentation. This concludes your conference, and you may now disconnect. Have a great day.