Silgan Holdings Inc (SLGN) 2005 Q1 法說會逐字稿

Thank you for joining Silgan Holdings' first-quarter earnings conference call. From the Company today we have Mr. Phil Silver and Greg Horrigan, co-Chairmen and CEOs; Mr. Tony Allott, President; Mr. Bob Lewis, CFO; and Mr. Malcolm Miller, Treasurer. At this time, I would like to turn the conference over to Mr. Miller. Please go ahead.

Thank you, Sarah. 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 2004 and other filings with the Securities and Exchange Commission. 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, let me turn it over to Tony Allott.

Good morning, everyone, and welcome to Silgan's first quarter 2005 earnings conference call. Our agenda for this morning is to provide a brief overview of the results, review the financial performance for the first quarter, make a few comments about our outlook for 2005. And after those remarks, Bill, Greg, Bob, and I would be pleased to take any questions you may have.

I would like to open our remarks by reminding everyone that the first quarter is seasonally one of our smallest quarters, leaving plenty of the earnings year still ahead of us. That said, we are pleased with the solid first-quarter performance and believe that at this point we have set the stage for the full year. As you have seen in this morning's press release, we earned $0.69 per diluted share for the first quarter, a 15% increase over the $0.60 per share reported in the first quarter of 2004.

Our metal food container business performed well, exceeding the prior year, as we continued to benefit from the investments made over the past several years and realized continued benefits of a major rationalization program in our metal closures facilities which were completed late last year.

The plastics business experienced soft demand in the quarter, and as a result, we are remaining cautious on our outlook for the year for this business.

With that said, I would like to turn it over to Bob to review the financial results in more detail and provide earnings estimates for 2005.

Thank you, Tony. Good morning, everyone. As you have seen, we delivered financial results at the top-end of our original earnings estimates for the first quarter and 15% ahead of last year. As a result, we are pleased with our solid first-quarter start and are encouraged by our outlook for the full year.

Consolidated net sales of 530 million for the quarter were up 11.7 million, or 2.3%, due to increased net sales in both the metal food container and the plastic container business. Net income for the quarter was 12.9 million, or $0.69 per diluted share, compared to net income of 11.1 million, or $0.60 per diluted share in the prior-year quarter.

The first quarter of 2005 included a small rationalization charge of $300,000 resulting from our decision to consolidate facilities in Mississauga, Ontario. Comparatively, the first quarter of 2004 included rationalization charges of $1 million.

Our debt reduction initiative also provided significant benefits, as interest expense for the quarter was down 2.9 million versus the first quarter last year. The reduction in interest expense is directly attributable to lower average outstanding borrowings for the quarter versus the same period a year ago.

Due to the seasonal nature of our business, we use our revolving credit facilities to fund working capital requirements for the first three quarters of the year. As a result, we closed the first quarter of 2005 with outstanding debt on the balance sheet of 992.7 million compared to 1,142,100,000 in 2004. Based on the structure of this debt, as well as applicable swaps that are in place, we have approximately 66% of our debt in fixed rates.

For those looking at cash liquidity metrics, depreciation and amortization for the quarter was 29.8 million versus 28.6 million in the first quarter of 2004. On a full-year basis, we expect depreciation and amortization in '05 to be roughly in line with the prior year.

First-quarter CapEx totaled 23 million compared with 24.7 million in the same quarter last year. Here again, we expect our full-year capital expenditures to be relatively consistent with the prior year. Additionally, we paid a quarterly cash dividend of $0.20 per share in March. The total cash cost of this dividend was $3.7 million. Also of note, the Board of Directors declared the next quarterly cash dividend of $0.20 per share payable in June.

I will now provide some specifics regarding the financial performance of each of our two franchises.

Net sales in the metal food container business were relatively flat year-over-year at 374.1 million versus 372.9 million in the first quarter of 2004, while units were down. The impact of the pass-through of higher material costs and a favorable product mix in the food can business benefited net sales for the quarter. Offsetting these benefits were volume declines which were attributable to the impact of stronger demand in the fourth quarter of 2004 and certain low-margin business that was not retained upon a contract renewal in late 2004, each of which was discussed during our year-end conference call.

The metal food container business converted very well, as operating margin in the first quarter of 2005 increased to 7.3% from 5.7% in the same period a year ago. Income from operations in the metal food container business increased $6.1 million to 27.2 million for the quarter. The key contributors behind the increase were improved product mix and continued rationalization and integration benefits at our manufacturing facilities, partially offset by lower volume.

Net sales in the plastic container business increased 7.2% to 155.9 million in 2005, due to the pass-through of higher resin costs. These increases were partially offset by lower volumes, particularly a sales decline resulting from an inventory correction related to a customer's recent product launch. The impact of these volume declines and higher resin costs adversely affected the quarter, as income from operations decreased 4.7 million to $9.2 million in 2005.

Our earnings estimate for 2005 remains unchanged in the range of $4.50 to $4.80 per diluted share. This estimate does not include the impact of potential rationalization charges. We expect continued strength in the metal food container business and lower interest expense for the full year to more than offset our cautious outlook in our plastic business. We are also providing second quarter 2005 earnings estimates in the range of $0.85 to $1.05 dollar per diluted share. This estimate also does not include the impact of potential rationalization charges.

As we stated in our press release, we have several potential rationalization plans that are under review. If we choose to move forward on these plans, it would be because they are expected to yield compelling cash-on-cash returns.

As we indicated previously, we remain committed to optimizing our capital structure, and thereby completing our debt reduction initiative. Based on our expected cash generation, we anticipate that in the absence of compelling acquisitions we will be able to pay down approximately $100 million during 2005.

As in the past few quarters, in an effort to preempt any questions, I would like to make a few comments about our metal costs and can pricing.

Once again, we were successful in procuring adequate supply on our customers' behalf, and we expect that to be the case for the remainder of 2005. We continued to pass through the cost of metal under our existing customer contracts, which, as you know, accounts for more than 90% of our food can business. In addition, we've had good success in passing along material increases -- metal increases to our non-contract customers as well. As in prior quarters, we do not intend to make further comments regarding this issue.

That concludes our prepared comments, so we can open it up for questions and answers.

Sarah, would you kindly provide the directions for the Q&A session?

(OPERATOR INSTRUCTIONS). George Staphos, Bank of America Securities.

I guess my first question is can you comment at all on any business that you might have picked up over the balance of the year, or anything of significance? You mentioned you lost a little bit of business basically programmed out of your mix. Anything that you picked that we should be thinking about over the course of the year?

George, this is Tony. I assume you're asking about the food can business?

Yes, right.

I think generally what we would say about the food can market is that we, and we assume other can manufacturers have experienced increased cost of steel and are out passing that on to customers. So, that is kind of the headline, if you will, about what is going on in the marketplace. I think you're alluding there were a few shifts of business that did occur for very specific reasons, and that may be kind of what is driving your question.

The first of those is something that we had disclosed, frankly, in our year-end release and again in this quarter, which is there was some lower-margin business that we did not renew at the end of a contract that impacted the volume starting in this quarter. So, that one was already out there. The second one is there is a customer who is an exclusive U.S. contract customer of ours who also bought some cans in Canada. And that customer always had the right under the contract to buy from us instead. And with the change -- I assume with the change in the foreign exchange rate that became more attractive. So, that customer has in fact moved some of that business over to us.

Have you gotten all of that, or some?

For that particular customer, that would be all of that business. I think if you kind of drop back, what we would say on the whole thing is that we're not really aware of any big changes on volume or share when all of that shakes out across the market. There is always typical at the beginning of the year some movement of non-contracted business. This year has been no different in that regard. So, on that we have said our business probably will be down a little bit on volume, but nothing meaningful in that regard. And our focus remains on strategically we think our share is very important, and so we take kind of a long-term posture on the marketplace.

Tony, then, you would agree with my perception -- this year there seemed to be, I would phrase it, a little bit more bickering or skirmishing. I don't think it's 1999 or 2000 either, but you would disagree with that? That was our sense anyway from our trade intelligence.

Yes, it's hard to answer that question. There are a couple of specific items, and then beyond that I would say it was probably not that unusual.

Can you give us any kind of color in terms of what your volume looked like in both segments year-on-year? Realizing that there was some business you programmed out, etcetera. But, just for the sake of having numbers?

George, this is Phil talking. I will take the plastics piece of that question. The revenue, as you can see, in plastics was up 7% for the quarter. 10% of that was driven by resin inflation and then the volume was 3% negative against that. I want to parse this a bit and say that without a particular new product introduction impact, which I will talk about in a second, our volume was down 2%. We also had one less shipping day in the quarter versus last year. So, on a per-day basis, our volume was down very slightly first quarter. We think that is in line pretty much with what is going on at the industry. It was, we believe for us and for others, a, as we say, tepid kind of demand quarter.

I would agree with that across a lot of sectors.

For whatever reasons, I'm not sure; maybe some pre-priced buying (indiscernible). I don't know. But, it was not a very robust quarter.

You have a lot of companies from boxes to pressure-sensitive materials.

That's kind of the best information we can give you on the plastics side.

Yes, Tony. On the food side, George, the (indiscernible) kind of covered in the release -- the volume was down. The big drivers on that were partly what we had talked about at the end of last year, in terms of we saw pretty strong -- stronger than we had anticipated sales in the fourth quarter. We had anticipated that was going to have some impact in the first quarter. And then there's the business I referred to, the lower-margin contract business that we did not renew under. So, basically if you look at it -- I'm going to shift (indiscernible) for a minute. If you look at what the CMI data says, and we have seen it through February, basically you're seeing declines across the food can market in the low single-digits. We would say if you exclude that one contract business that we referred to, we're right in line with that.

So kind of mid single-digits if you include it?

(OPERATOR INSTRUCTIONS). Amanda Tepper, JP Morgan.

On the plastics side, I know you were just saying kind of tepid across the board. But, specifically in plastics, we're seeing this in a lot of areas where it's sounding like soft demand. Do you think customers are starting to move down scale a little bit and dumb down the packaging to save money on these resin pass-throughs? What would you speculate? And what are you seeing on demand for the rest of the year?

Amanda, I think that the effect of the resin on demand is just an economic fact of life, that higher prices do affect demand. And the resin inflation has been very significant, particularly this quarter versus last quarter is the most dramatic as we look forward and expect for the year. So, we have found that our customers are at as high a level of concern and activity about their cost of packaging as we have seen in a long time. I think that leads to a lot of things that affect demand, and to some lesser extent margins. So, I would say this is a cyclical tough time now as it relates to plastic packaging because of the resin run-up.

I mean, for instance, using shampoo bottles as an example -- which I know is something you make -- they're not selling less shampoo. So, if their unit demand is down, what are they doing? Are they buying from lower-cost competitors?

I just want to make the point that our demand is basically flat on a per-day shipment basis. So, it's not like there's a big run-off of demand; it's just that you expect 3 or 4% growth in this business year after year. And in this quarter we're simply not seeing that. It's basically flat-lining. You can point -- we can point to some specific things. As I said, we had one particular new product introduction that last year was a good boost to us in terms of demand, because we were filling the pipeline and we were making sure that we had plenty of supply for the customer so that we wouldn't disappoint them, depending on how successful their launch was. And in this quarter, we now are emptying that pipeline because the launch, while successful, was not as successful perhaps as we may have hoped. So, that has affected -- that's one-third of our sales' year-to-year decline and half of our profit decline as it relates to that particular item.

I don't think there's a lot to read into this in terms of structural shift. I think it is a phenomenon that reflects resin pricing. Resin pricing is at this point not going up anymore. And there's some hope now that there may be some weaknesses, so I think that will be helpful. We expect some improvement the rest of the year, at least we've put that into our forecast. But, we remain cautious because we're best to come as opposed to what we have seen. So, I think that I would not take the first quarter and say that that's the start of the trend to the negative, that we can see at least.

And then on the product innovation front, can you give us an update as to where you are on the easy-open sell-through, where you think the market is? Is that still picking up steam in conversions?

This is Greg Horrigan. We have crossed over the 50% mark in terms of easy-open ends, or what we call Quick Top ends for can out of what we supply. The pace of change has slowed somewhat. We had very large conversions over the last couple of years from Campbell and then Progresso in the soup category. We are getting some improvement in this year and that's reflected as a piece of what we call the mix improvement that's going on in the can business. And we have a lot of interest out there that is generated, and I think it will come in fits and starts moving ahead. And we think that the longer-term goal here is that ultimately there will be some kind of easy-opening end on every container that we sell in the metal food container business.

And then on the rationalization plans, is this part of you're just continuing effort to make sure you are maximizing your physical plant? Is that likely what it is going to focus on?

Yes. It is related to getting the lowest-cost production out of the demand that we have available to us. It's not driven by reduced demand.

Edings Thibault, Morgan Stanley.

I would like to try and focus again on the metal containers business and maybe see if we can try and understand. I mean, this is almost a 30% jump in profitability on a year-over-year basis, despite kind of fewer shipping days and given a challenging cost environment. Because it sounds as if on your comments on the metal pass-through, you said you got it on the contract business and you were making "good progress" on the non-contract business. So, I will start off by asking is it fair to say that on some portion of that 10% non-contract business you have not gotten 100% recovery?

What I would say is that's probably always going to be the case. But on average, we have gotten our metal cost covered through that 10% as well.

So, you're doing mid single-digits on a volume side thanks to some new contracts. Could you sort of quantify maybe the impact of the volumes on the food can side versus the mix shift on the food can side? And what realistically -- and what I'm trying to get at is should we be looking for this sort of pickup on a year-over-year basis, or were there other challenges perhaps in the first quarter of last year that you should remind us of?

Okay. Let me pick up by clarifying that we did not pick up volume. What we were referring to is volume that we lost at the renewal of a contract. So, what we're saying is our volumes will probably down slightly on the course of the year, to make that point. I think your broader question is sort of what's driving the numbers. And the answer -- first of all, you've got to remember that a significant part of this is included in the closures business here. We acquired that closures business -- you know we went through a fairly lengthy and extensive rationalization process that we got completed during last year. And so, we're getting the benefit of the manufacturing and integration from that business, is one part.

Secondly, we have had very strong manufacturing performance in our food can side as well. We've, as you know, made -- Phil was just saying -- three particular plants where we've also done integration rationalization work on that side as well. But, even more broadly spoken, we are making investment, as you know, over time into productivity in the plants. And what you're seeing is some of the return coming from both that integration and rationalization and the productivity spend in the business.

And finally we're seeing improved mix. So, those are basically the drivers. And as we said in our outlook, those we expect to continue going forward. You won't get the same kind of comparison against closures as you run over the rationalization, but the basic drivers we expect to continue.

When would you expect that barring a new announcement on the rationalization side, that you would begin to lap the biggest benefits of that -- by the third quarter?

Second into third. That's a specific question on closures. And that's the answer to that, which was the largest of that group.

Right. And that was the Chicago facility, if I recall, that you finally closed. Just focusing again on the plastics side -- obviously, a difficult quarter with volumes being soft. How long -- and there are a lot of reasons for that. But, clearly, one would imagine that the profitability in this business is not where you want it to be. How long are you willing to sort of be patient and wait for a potential turn in the market, and when would we expect to hear perhaps more aggressive moves?

I think it's a well-posed question. You may recall at the end of our last conference call when we talked about this, exactly what we said is it is our intention to be patient and disciplined around this business. So, patient is exactly the right word. We continue to think the relative performance of this business and our team is quite positive against kind of what else has happened out in the market place. And you can take that over the 17-year history of the business or even over the last couple of years as we have gone through kind of a heightened competitive market.

But just as importantly, the absolute performance -- I'm not talking about this quarter, but I'm talking about kind of more generally spoken -- the absolute performance has been very good. The cash flows are quite strong in the business. Returns are well in excess of our cost of capital. So, all of that informs our judgment about how patient we're going to be about the business.

We actually look at it and are optimistic about kind of the opportunities that we have there, primarily around the team that we have in place in that market. So, we do stay very aware and close to what is going on. We certainly are disciplined about the current quarter, but you would not expect, I don't think, that we would make a major change in our philosophy around the business from a short time period.

But it would be fair to say you guys have always been very much a cash flow-focused company. And I think in large part when you talk about the returns on the plastics business, historically it's been a lower-margin business. But, perhaps I'm reversing that. It's been a higher-margin business, but the cash flow -- the cash requirements have been higher as well.

But, just to finish that point, the net of that has been that it has been very consistent on a return on capital over a period of time with our can business.

Absolutely. So, are you now starting to ratchet down the capital spending? Is that effectively the sort of hidden response that you don't necessarily see on the income statement?

That's the natural consequence of us being careful and patient and disciplined, if you will, during the last two or three years, is that our top-line growth has not been at the rate that it had been before that because we're being careful about what new business we seek or what business we seek to defend; therefore, we have had less need to put in investment for new capacity. So, the capital spending, for instance, this year we expect to be significantly below the previous year. So yes, you are right; there will be less capital in this environment than, say, when we had more top-line growth that we were attracted.

One final question. Given the total CapEx is flat, can you sort of talk about where the incremental capital spend is going on the metal side?

The closures business is attracting a good part of that, and that is in the plastic closure part of that. The growth there is strong. A lot of it is conversion of metal closure to plastic closure, so we simply have to put in new capacity to be able to meet that demand. And we will continue to spend on productivity-type expenditures on the can side.

You're clearly getting the payback from that. Thanks very much and good luck in the quarter.

Robert Kosowsky, Sidoti & Co.

I was wondering if you could maybe quantify the basis point headwind of increased resin cost on the plastic container side?

Well, like I said, the 10% -- 7% increase, 10% positive from resin. So, it was significant. That's about like a 15, $16 million resin impact.

(indiscernible) -- how about your level of success in raising prices on the non-contract business that you have?

I think we are suffering a lag like, I think, everyone is in the industry in terms of pass-through. The pass-throughs run 30, 60, 90 days in resin. So, when resin prices are going up, the first quarter would have reflected that. And you suffer some effect, but then you pick it up on a lag basis. I would say that the issue isn't the amount of passing through the resin; that happens. You have to do that. It's more that because of the resin inflation, you have more customers who will seek alternatives rather than just stay pat. So, there's a little bit more competitive activity generated by the customers because of the resin inflation.

Have you noticed an increase in customers coming back to you wanting you to take away maybe a bell or a whistle on a particular packaging?

I don't know. It seems like that's not -- that would not be new if customers were coming back and trying to get all they could from us. We expect that. I'd just say that the customers are maybe casting the net wider as they bring out a new product or are looking for new supply, because they just aren't happy with the level of their costs now with resin inflation.

Are we to assume that most of the rationalization charges going forward and kind of what you guys are looking at is mainly targeted at the plastic container business?

No, not at all. I think what we're looking at now is in the metal side.

Scott Whalen (ph), TCW.

Congratulations on the quarter. I just have a real quick question for you. On your revolver, you said you did a little bit of a draw-down. What was your draw-down on that?

In terms of -- our total debt is $150 million better than it was in the previous year, which is about a $10 million fall-off from where we were at year-end. We were at $160 million. And if you recall from the fourth quarter call, we talked about how we had positive working capital management coming through the fourth quarter and that we were cautious about our ability to hold that. I think that, combined with just the seasonal ramp up of the business and the increase in inflation of raw materials is what is driving the raw material or the working capital change, which is reflected in how much we borrowed.

George Staphos.

Could you give us some of the free cash flow items, if you have them? Particularly, guys, you said you had converted well in the quarter in metal. I was wondering if that also led to any kind of inventory build relative to what seasonally you would normally have anyway this time of the year. And also, if you have any guidance for us on tax rate or interest expense.

Due to just the free cash flow items, we did speak to the depreciation item -- it's relatively consistent with the prior year. Inventories and AR, we did see a little bit of an increase there; just our seasonal build from year-end.

But nothing more than seasonal?

Correct. And then in terms of the tax rate, we are at 39.4 which is reasonably consistent with where we were in the prior year. And that is down from where we ended up at the year-end because of some of the adjustments. I think what we are thinking is the 39.5 is probably a good range in where we are as we take vantage of the manufacturing credit afforded under the Jobs Creation Act.

Interest expense. I mean, we can do the math ourselves. But, just carried forward for the time being, maybe up a bit given your discussion on short-term rates.

I think what we're saying is we will see a front-half benefit. Probably over the full year we'll be down, year-over-year, but rates will catch up with us in the back half. And then, I think, as we stay committed to our debt reduction program we will also have an additional charge related to the debt issuance costs.

Two last questions and I will turn it over. Phil, I think you had mentioned most specifically to plastics, that it's been a while -- I forget exactly how you said it -- it's been a while since you have seen customers this focused on their packaging costs. Was that really more aimed at plastics or are you seeing it both in metal and plastic?

I was referring to plastics when I said that because of the resin inflation. I think in the metal side, it's not quite the same market, as you know, and there's not as much moving around there. Because in the plastic side, there's new product introductions coming out all the time. And that is a point of change for customers. And you get to see a lot of, if you will, empirical evidence on what the customers are thinking at a point of change. And in the food can and the closure side, there's not nearly as much change going on.

You're hearing the same sort of saber rattling on conversions into other substrates, but that you would say -- from your comments here I would infer it's just another day in the park, since we have heard that for really basically the last 20 years.

Are you talking about cans specifically, George?

That's correct.

I would say. It's just we have seen this virtually the whole time we've been in the business. And substitution is just a fact of life. When we started it was a 27 million unit market in the United States, and last year it was around 30.5 billion, and it hasn't been -- and it has been up and down a little bit over time. And we see no change. It's very much the same. That which would be the basis of substitution for the food can has had as much or more inflation than the food can, because it's coming on the resin side.

Generally that is right, but there are some substrates that haven't moved. But, still.

But those have had -- well, specifically, the big move into the chili market with paper-based package --

With the give-away machine.

(multiple speakers) as you pointed out before. They've got the market. The success has not been that significant so far. We've been very happy with the performance of the can against that package.

Leaking cartons aren't a great selling point. I guess the last question, and that's the labor of plastics, since it's relatively small for you. This is more of a macro question. Are you seeing any evidence of customers doing less in the way of new product introductions and launches, maybe a little bit more cautiousness on that outlook over the next few months or quarters, or really no change?

No question. In the past 12 months there has been a dampening down of that from the customer side, which is, again, not too unusual when you have resins moving the way they've been moving. And we have a very close coupling with what is going on there by the development work we do with customers. I would say it has not gotten worse in the past few months, or weaker; it may even be turning up a bit. But, when you have the kind of thing going on with resin, folks are focused more on cost than they are new product introductions.

Timothy Burns, Cranial Capital.

I have got some bad news; I'm not buying as much shampoo as I used to.

Is that because of your hair, Tim?

Not really. I just decided not to use it. But I am buying a lot of bottles to look at and get dusty. Guys, haven't we been through this cycle before? People are having kittens over what has been, obviously, a major move in resin, but it's just a move and it moves back. And you guys are smart enough to manage your way through this as well as anybody else can. Unless we are missing something, there's some real competitive fire amongst the other players in the business or what have you -- as I go through the Wal-Marts and Walgreens, I still see -- obviously, it's layover from last year. But, there's a lot of new product on the shelf in many of the health and beauty categories. And I don't think these guys can just say we're going to cut our costs some more and hope to gain share at these monster retailers. Do you?

They can't because their competitors won't let them. If that were to be anything that a company did for a very long period of time, the competition would eat them alive because they're so dynamic. So, yes, this is cyclical. It has happened before. It has some effect but it's not a dramatic effect. Our new tooling orders are just marginally down last year from the year before. And in the first quarter this year they are up, but only marginally. It's not a big deal going on here, other than we're kind of talking on the margin. Our sales were basically flat on a per-day basis in the first quarter. That is not anything dramatic. We would love for them to have been be up 2 or 3 or 4%; it would have helped in every regard. But, I don't think this means anything about the preference for plastic or the importance of innovation by our customers with that package.

At some point over the next quarter or two, the floodgates will be opened again. Then you guys will be complaining about not being able to make enough bottles efficiently. But, the bottom line is you hear these chemical analysts speak and they talk about they don't foresee any change in high-cost petroleum feedstocks. And they are always wrong, right? They're going up or they are going down.

The problem is, as the guys in the industry would say, they believe their own forecasting so they build more capacity. And that takes care of itself. There's a lot of capacity being built in the Mideast now. And the demand spark here is coming out of China in what we see happening. And some analysts see the same thing, that the supply coming out of the Mideast will come into the face of demand ramping down in China. And we will be back with the declining resin price and we'll start the cycle again.

Isn't this higher resin cost, with this product and your plastic container business, isn't it an opportunity to redesign the container to sexier looks yet lower costs? That is the Holy Grail. There are some companies in flexibles, and I think you know a few of them, where they bring new features, new benefits, new barrier, new graphics and all this other stuff, but at a lower price, because they've reformulated the product. It would be neat to see that happen in the rigid container business.

I think it happens a lot on the beverage side. We're not really a participant there because the volumes are very large and the opportunity to reduce the cost of the package, coupled with reformulation, makes sense. Where we compete, what is in the container is still relevantly more expensive versus the container, that I don't think you have the same kind of payback really to do that. So, we're not seeing people dumbing down or cheapening the containers; it's more that they're just -- the ebb and flow of new product introductions, which is always -- we thrive on new products being introduced because it's the point of opportunity for us to sell what we think we are very good at, which is development of a new package with a customer when they go to market.

And everybody's costs throughout the chain go up. Right? And we are always late to respond. So, the hammer comes down and it's usually late. So, it's kind of an interesting cycle. But, I would bet over the next couple of quarters you guys will see a surge in orders. New product development is not going to be shut down. It just can't be, because the market demands it now. And while we're talking about that -- are you guys impressed with what is going on with -- although I know it is a small market -- this aluminum bottle technology? I just got back from Japan and saw some major competitors' plants producing these things. Aluminum bottles are -- it's like a product that was -- it reinvented itself. Are there opportunities like that for your metal packaging?

You probably should talk with Ball and Crown and Rexam about that, because I think it's right in the middle of what they do. It's not -- other than the fact that we're selling some closures for those packaging -- those packages, we wouldn't be the best people to talk to about that.

I was just thinking generally. I've never seen a product that kind of was able to recast itself so effectively in metal packaging. It's kind of neat. Shaping graphics and a neck out of a product that really didn't have all of that in the past.

I think the question (indiscernible) is there room for some innovation on the food can, in terms of shaping, etcetera? I think we would say yes. There is.

Last question. The conversion from metal to plastic. First of all, it sounds like you are doing well with the White Cap lug business.

Yes.

But there's still some movement to plastic, and it complements, I guess, some of your non-rigid plastic products. Is that an area where there's going to be capital spending?

I think what's happening is metal closures are losing share to plastic closures and glass is losing share to plastic. So, we just follow. When it goes from glass to plastic, we go from metal to plastic. And that means we invest for capacity in plastic and idle capacity in metal.

Good quarter and I have got a feeling it's going to get better. And if the hair product I am using stimulates enough growth, I will be back in the shampoo market.

We have time for one or two more.

Edings Thibault.

I was hoping we could just talk about your relative interest rate exposures as we do enter this rising cost environment. I think you said earlier that of that core $920 million of debt, you were 66% fixed. Could you sort of walk through the horizons on that fixed debt? In other words, 66% fixed for the balance of 2005 -- if we were to look forward two years, how would your swaps work as they stand today?

It's actually 992 of total debt, but we've got about $450 million of swaps that are outstanding that will roll off a piece of it in '05 and then throughout. I think if you look at it on a year-end basis, we would expect that we would probably be above 60% fixed now through '07.

Let me just (indiscernible) that piece that rolls off at the end of '05 is very small, or do you plan on attacking it the other way? In other words, you're not going to pay down the fixed portion. So, as you pay down debt, you're fixed portion increases or stays relatively flat.

I think we will continue to take a long view of what the market is doing. There's about 100 million or so that will roll off in '05. And we will continue to look at and take advantage of the swap market.

You've got to think about it in context again. So, that production that we've said -- without acquisition there would be 100 million of pay down on the year approximately as well. So, that's why that works.

But that's how it works, right, is the pay down? Just as a curiosity -- rates are rising, but by any historical measure, still quite low. $100 million of free cash more or less being generated this year. How does the acquisition market look? And particularly, sort of following-up on the earlier question -- plastic is a little bit on its back across the industry right now. Is that market potentially attractive to you guys given your cash flow and your willingness or ability, perhaps, to take a little bit of a longer view on this?

I will try to answer the order you asked it. The general question is what the acquisition market looks like. There are certainly plenty of properties out there, so there's plenty to look at. As you know I am sure, prices seem to be pretty high right now with the private sponsor money out there. Generally speaking, there are things to look at. The plastic question specifically -- as you know, Silgan has kind of grown and prospered by doing acquisitions and integrating them in. So, we continue to look for opportunities to do that. And you are right that we would look at the plastic market and say that in fact some of the challenges it is going through right now could create opportunities. So, we would view it that way, but we're going to stick to a pretty disciplined approach to acquisitions. You can destroy more shareholder value by overpaying on an acquisition than probably any other way. So, that is something that we stay pretty close at.

I would echo that. But, it just seems to me like you guys have really done a great job on the closures rationalization, amongst other things, creating value that a potential private equity holder might not. I guess we will stay tuned. Thanks. Good luck.

Ashwin Krishnan (ph), Morgan Stanley.

Just a housekeeping question. What is the estimate of cash taxes that you will be paying this year?

I think what we said at year-end and what's still consistent with where we are looking, we are looking at a number that is cash tax of about 35 to 40 million in '05. And that compares against the cash tax number of about 7 million in '04.

Robert Kosowsky.

Just kind of following on the acquisitions versus debt reduction -- is there an opportunity for even further debt reduction once you guys finish your 250, $300 million goal?

What we've said, and wouldn't want to move off that right now, is that we set a target, as you know, for debt reduction of 200 to $300 million over that three-year time period. The thinking there was try to get to something like an optimal debt equity capitalization, if you will. So, there's no change in that. So, we wouldn't necessarily want to drive down our leverage any further. But, what will just happen by matter of course is if we're disciplined around acquisitions, we will have to look at a lot before we buy anything. So, we may not have acquisitions in that time period. And then, of course, we'd pay down more debt.

Alright. Thank you, everyone, for the time. And we will look forward to speaking with you at the end of next quarter.

That does conclude today's conference call.