Silgan Holdings Inc (SLGN) 2006 Q1 法說會逐字稿

Thank you for joining Silgan Holdings first-quarter 2006 conference call. Today's call is being recorded. From the Company today, we have Tony Allott, President and Chief Executive Officer; Bob Lewis, Executive Vice President and Chief Financial Officer; and Malcolm Miller, Vice President and Treasurer. At this time, I would like to turn the call over to Mr. Miller. Please go ahead, sir.

Thank you. Before we begin the call today, we'd 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 2005 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.

Good morning, everyone, and welcome to our first earnings conference call for 2006. As usual, our agenda for this morning's call is to review the financial performance for the first quarter and then to make a few comments about our outlook for 2006. After the prepared remarks, we will be pleased to take any questions.

As you will have seen with this morning's press release, Silgan earned $0.45 per diluted share for the first quarter, a 32% increase over the $0.34 per share reported in the first quarter of 2005. Our metal food container business showed steady improvements over the first quarter of last year, again driven primarily by strong performance on the closure side.

Our plastics business had a very strong quarter and benefited from cost savings initiatives implemented over the past 12 months but was much more positively impacted by the volatility of resin costs and the related pass-throughs. As you know, the plastics industry experienced a severe run-up in resin cost during the fourth quarter of 2005, some of which was not recovered at that time due to lags and passing resins through to our customers. As we discussed at year-end, this compressed fourth-quarter 2005 results. Now, at the end of the first quarter, we've seen a rapid decline in these resin markets. Therefore, our business has benefited from a similar lag in passing these declines through.

With that said, we're pleased with the performance of both our metal food and plastic container businesses. However, we do have some concern about potential softness in demand in both businesses over the next quarter or two for very specific reasons mentioned in our release. As a result, we're not assuming the first-quarter gains will translate to an increase in the full-year results. Therefore, we're currently staying with our original 2006 earnings estimate.

More generally, we continue to be very positive about the prospects for each of our businesses, with continued customer interest in enhanced convenience of food cans, solid growth in closures for hot-filled products, and the prospect for longer-term strengthening plastic market. Additionally, we continue to anticipate strong cash flow generation and look forward to the potential completion of the strategic acquisition of Amcor's White Cap Closures business in the second quarter.

I will now turn it over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimate for 2006.

Thank you, Tony. Good morning, everyone. As you have seen, we delivered financial results above our original earnings estimate for the first quarter and well ahead of last year. The first quarter is seasonally one of the smallest quarters, further magnifying the impact of the recent volatility in resin costs and price pass-through. Consolidated net sales of 569.9 million for the quarter were up 39.9 million or 7.5% due to increased net sales in both the metal food container and the plastic container businesses, primarily as a result of the pass-through of higher raw material and other inflationary costs and improved volumes in closures. Net income for the quarter was 17.2 million or $0.45 per diluted share compared to net income of 12.9 million or $0.34 per diluted share in the prior-year quarter.

During the first quarter of 2006, we announced the closing of our Valencia, California plastics facility and therefore incurred a rationalization charge of $2.2 million. The decision was part of our ongoing focus to improve cash returns and strengthen our overall financial position. Comparatively, the first quarter of 2005 included rationalization charges of $300,000.

While we completed our debt reduction initiative in the fourth quarter of 2005, the first quarter benefited as interest expense for the quarter was down $1 million versus the first quarter of last year. This reduction in interest expense is directly attributable to lower average outstanding borrowings for the quarter versus the same period a year ago, partially offset by the effects of higher market interest rates.

Consistent with the seasonal nature of our business, our first-quarter debt balance increased versus year-end, as we used our revolving credit facility to fund working capital requirements. As a result, we closed the first quarter of 2006 with outstanding debt on the balance sheet of $857 million compared to 992.7 million in March of 2005.

Our fixed-rate debt ratio at the end of the first quarter was 47%, down from 66% in the same quarter last year. This decline is a result of the expiration of $150 million of swaps in March of 2006 and 100 million of swaps that expired in mid 2005. While our current fixed-debt ratio is slightly lower than our historical percentage, we expect to address it is as part of the acquisition financing for White Cap.

For those looking at cash liquidity metrics, depreciation and amortization for the quarter was $29.8 million for both the first quarter of 2006 and 2005. On a full-year basis, we expect depreciation and amortization in 2006 to be relatively consistent with the prior year. First-quarter capital expenditures totaled 26.7 million compared with 23 million in the same quarter last year. Our current 2006 capital forecast is approximately $100 million. Additionally, we paid a quarterly cash dividend of $0.12 per share in March. The total cash cost of this dividend was $4.5 million. I will now provide some specifics regarding the financial performance of each of our two franchises.

First-quarter net sales in the metal food container business were 406.7 million, an increase of $32.6 million versus the same period in 2005. The impact of the pass-through of higher raw materials and other inflationary costs and increased volumes, particularly in the closure product line, benefited net sales for the quarter. Food can volumes were up slightly for the quarter as well.

Strong unit volumes in the metal food container business, particularly in the closures product line, contributed to the $1.6 million increase in income from operations to $28.8 million. However, a portion of these gains were offset by inflationary pressures in raw materials and other manufacturing costs, resulting in a slight decrease in operating margin.

Net sales in the plastic container business increased 4.7% to 163.2 million in 2006 due to the pass-through of higher resin and other inflationary costs. These increases were partially offset by lower volumes.

Income from operations increased in the first quarter of 2006 by 4.6 million to $13.8 million versus the same period a year ago. Contributing to this increase were the benefits derived from the resin lag in a rapidly-declining cost market and a headcount reduction versus the prior-year period. Lower unit volumes, inflation and a variety of manufacturing costs, and the rationalization charge for the closing of the Valencia facility partially offset these benefits.

As you saw in this morning's press release, we reconfirmed our earnings estimate of $2.49 to $2.59 per diluted share after including the $0.06 charge for the Valencia rationalization. While we exceeded our earnings estimate for the first quarter, this is largely due to a quicker decline in resin costs, pulling some impact forward from the rest of the year. Additionally, we remain cautious about volumes, given the potential of inventory reductions in the supply chain and recent abnormally wet growing conditions in California. We are also providing a second-quarter 2006 earnings estimate in the range of $0.40 to $0.50 per diluted share, which includes the Valencia rationalization charge of $0.01 per diluted share. You should note that the majority of our volume concern would impact this quarter. We are evaluating several potential rationalization plans, which if implemented would be expected to yield compelling cash-on-cash returns. These plans are not factored into our estimates, as none of them have been finalized at this time.

Our second-quarter and full-year estimates also exclude the impact of the recently-announced White Cap acquisition. While the acquisition may close in the late second quarter, we estimate it will be neutral to earnings in 2006, given a midyear close and inventory write-up and potential rationalization and integration costs.

We continue to estimate we will generate approximately $150 million of cash, assuming capital expenditures of 100 million, that will be available for acquisitions; further debt reductions; or other permitted purposes, including dividends, share repurchases, or additional capital expenditures.

That concludes our prepared comments, so we can open it up for questions and answers. Lisa, would you kindly provide the directions for the Q&A session?

(OPERATOR INSTRUCTIONS). Chris Manuel, KeyBank Capital Markets.

A few questions for you. First of all, can we run through what some of the specific volume numbers were for, let's say, food cans versus plastic bottles versus closures in your first quarter here?

I mean generally, Chris, we don't give real specific information on the volumes. But I think what we've said in the release, you had kind of modest declines on the plastic side. You know, that's clearly a single digit, lower end of single digits I would say. On the can side, cans and closures had quite a nice quarter, so you'd look at that more as kind of mid single digits. That has clearly skewed more to closures than to food cans, but both were positive.

You know when we think about the plastic segment, you know, how have let's say tooling sales or restagings and things of that nature have been coming along? I think in the past, we've talked about the volumes there should begin to potentially pick up as the year goes on. Any thoughts?

Yes, I guess I could give you two thoughts on that, Chris. The first is what we've put in the release -- Bob just covered in the conversation -- which is around this whole question of the inventory correction. Today's Wall Street Journal gave clarity to that, so we don't -- we talk about supply chain. But clearly what you're seeing is Wal-Mart has come out pretty publicly now and talked about inventory reductions. We, you know, assume at this point that that will have implications back to the supply chain, particularly around the plastic side and then in probably personal care or maybe even a bit more specific to that. Although, it could be across more of the line. So there is that issue, which wouldn't reflect at all on the answer I'm about to give you your question of tooling, etc., right? Because that would've been reflected in people's tooling orders.

With that said, what we've seen -- I went back. I kind of guessed we would get the question. So I went back and looked kind of quarter on quarter. In fact, we've seen some increases in tooling activity that is a bit around both kind of restaging and new products, although interestingly a little more heavily towards the restaging side of it.

The last question I wanted to ask you was with respect to -- well, let me just follow up on the previous one first. Inventory destocking, was there any of that that you saw the impact this quarter from?

Well, it sounds like it's so easy to know what drives what's going on. We said that the volumes were down a bit in the first quarter. It gets harder to know why that is. So really, all I could do is speculate. I'm not sure I'm able to do that. It is conceivable -- it just gets broken in Wall Street Journal today. This has been known for some period of time. So it's conceivable some of our customers in advance were reacting to that. I really don't know the answer.

Okay, that's fine. I will jump back into the queue.

Ghansham Panjabi, Wachovia Securities.

Just as a related question, how should we look at the plastic container business for the rest of the year? I mean, you know, you absolutely have easier comps in the back half of the year. Just some sort of clarity on that would be helpful.

Well, I think a couple things. First of all, as Bob said, one of the things that happened here is we may have been pretty clear on, we had a very rapid decline in resin costs in the first quarter. That had impact clearly as we are catching up with that basically.

That, in essence, we had expected the resins were going to decline throughout the year. So, really, what that has done is pulled some of that improvement, if you will, forward into the first quarter. So as we look to the tail end of the year, you've already got -- you've got to come up over that, if you will.

Secondly -- and I won't go into all the details here because that would be a follow-up question -- but our expectation is that probably resin will have some increase from here going forward, so you get a modest version of kind of trying to keep up with that as we go forward. So those are some of the headwinds.

Then really, the big question is, what is the destocking going to do to volumes? What you're reading in our release is that we're cautious about that. We do envision that could have impact. So, that would be certainly I think Q2. But you don't really know; it could even drift into Q3. So that will be the major point is that we've got to climb up over that.

So, the volume declines in plastics during the second half of the last year, do you think that's part of the destocking process?

No, no, I don't. What really that had been about is you had such a -- we believe what that was around was, you had such a run-up in raw material costs and costs of packaging products, etc. One of the things we've talked about on previous calls is that may have slowed the idea of restaging and kind of just investment, promotion, etc. into some of the markets we sell into. So our view is that probably had more to do with it. It certainly did not have to do with this specific destocking issue, which wasn't really known until into Q1.

Just one final question, how much of the EBIT improvement in plastics year over year do you attribute to the pricing catching-up to the cost side?

I would say the lion's share of it.

The lion's share of it. Okay, great. Thank you so much.

Let me just finish on that. Lion's share of it because you've got to -- there are some other things going on there that we've talked about. We have had significant inflation across both of our businesses. So you know with what else is happening in the plastics business, which is not unimportant, is we've had significant inflation, which certainly we hope as we go forward and looking forward years at least, that ought to moderate some. But we also have been pretty effective in terms of working on productivity, taking costs out. We make the point in the release that we've taken out quite a few positions in the Company. So, there's a lot happening there. But the net of that is with the inflation, it doesn't amount to much. What basically translates through is the decline in resin.

Amanda Tepper, JPMorgan.

So, I want to understand more clearly what you have assumed in your guidance on the plastic side. First, on the resin pass-throughs, I know there is a lag. It's sort of continually periodically reset. So with resin prices coming down, when will your selling price, the past two portions, be coming down? Does that happen over the course of this year?

Oh, yes. Let's go back for everybody's benefit. Basically, we pass through both by in our contract and by precedent in the market, resin moves. Generally, that's off kind of indexes. We do that fairly quickly. So, it is pretty rare for us to be talking about lags. The reason it comes up is when you have a lot of volatility, which we had significant volatility in Q4 of last year that negatively impacted the business. We've had significant volatility on the other side of that in Q1, which has significantly helped the results. But it happens very quickly. So, you would not expect this to trail much beyond really the first quarter.

So what you're saying is, by Q2, your prices are down. Then, I also heard you say, you think that resin prices now are going to be moving up from here over the course of the year. Is that what is in your guidance?

Yes, there's a little bit of that in the guidance. I mean, if you look at -- using CDI as a benchmark, and I'm talking across a couple of different resin categories. But in general, they were looking in their last report for some increases from here going forward that the trough for PET was probably kind of not even at the end of the first quarter and that the trough for polyethylene at least was probably right about now and that there would be some increases. I think that was -- part of the decline is the demand has been soft. I think their assumption is demand would be coming back some.

So that's what CDI is saying. I think I would only add to that what we are seeing now of course is at $70 a barrel oil, that certainly has helped natural gas kind of stabilize on pricing. With gasoline high at the pump, there's been more demand for paraxylene, which pulls away from the PET stream. So we are already seeing increases on the paraxylene side.

So if anything, I think we would say that probably there would be a little bit more of the uplift on price through the end of the year. But still, we are assuming that is going to be fairly modest as we go forward. We are not assuming anything (multiple speakers) --

Well, but less dramatic in terms of timing, less volatile, so that you would think that in plastics, your margins would be more normalized for the rest of the year?

That's correct. You will have some headwind from it. But if it happens the way I just laid out, it wouldn't be that much because we do tend to pass through on a pretty quick basis.

Okay, great. Then, on the volume side in plastics, the weak volumes this quarter, do you think that was an early piece of -- you know, can you address sort of where did that come from? Was it just the plant closure? Do you think you are starting to see some of the destocking pressure or is there something else going on?

Yes, it wasn't really the plant closure because that is -- wasn't affecting the volumes on the quarter at all. That will affect us as we go forward from here. I would probably have to say, it probably was more what we've been seeing over the last 6 months, 9 months or so. You could envision, it could've had something to do with what was going on in the resin market and some anticipation of lower pricing as you go forward. I don't know any. Unfortunately, everyone speculates this; you never really have facts around it. As I said, I think some of the inventory destocking was known earlier. We certainly heard from a couple of customers about it during the quarter. So could that have influenced behavior a little bit? Yes, it could have.

Do you think you're seeing any conversions out of plastic into other forms of packaging in some of these end markets?

Not that I'm aware of. I don't know if your question is around food can or really around plastic.

I was asking about plastics actually.

Yes, nothing is coming to mind for me.

Okay. Then, on the acquisition pipeline side and White Cap, can you just walk us through -- assuming it does close, why it ends up not being accretive to earnings until next year?

Sure. The basic underlying premise is, obviously, you're going to get a half-year or thereabouts depending on when it closes. Then, you've got the nuances of the accounting treatment, where you've got to write up the existing inventory to salable value. So you're basically stripping out any value profit that resides in the inventory, which will take you through, call it a 60-day or so cycle. Then, you've got integration costs that will be there for us to get the acquisition up and running. So our expectation is that it's reasonably neutral for the year.

(multiple speakers) for the calendar year?

For '06, correct. Moving into '07, we do expect it to be accretive.

Then when the deal closes, presumably, you will be sharing color on the magnitude of the write up and the integration costs and what not?

That's correct. The real issue as to why we're not in that position now is we are in the midst of getting valuations done. Quite frankly, we just don't have a full view of those answers right now.

Then one last question on the acquisition pipeline. Is it fair to assume that your focus for now is first on closing and then integrating White Cap? Or could we potentially see some other deals out of you in the near-term?

Well, I think I would say yes to the first for sure. Our primary interest is on getting that deal closed, making sure we get through kind of the conditions to get it closed and integrate it. I mean, that obviously has been number one priority. But I wouldn't read that as meaning that we aren't still looking, etc. I think from a balance sheet perspective as an example, I think this acquisition would roughly increase leverage by about 0.5 turn, where the business essentially delevers itself by about 0.5 turn.

So, in terms of strategically how are we thinking, we would not view this one as getting the way of us being active and looking for other acquisitions.

The other thing I would add to that, Amanda, is the fact that integrating this acquisition doesn't necessarily impact our food can business or our plastics business. So we still got a fair amount of horsepower if we were to look at opportunities in those other parts of the business.

Robert Kirkpatrick, Cardinal Capital.

Tony, can you put some hard numbers on the price swings that you saw in some of the resins from the fourth quarter of last year through the first quarter of this year?

Well, what I can do for your hard number is, if you look last year, you know basically it was fairly -- the markets were reasonably stable in the first quarter of last year. So you didn't have a huge amount of volatility going on at that point in time.

If you look this year, you basically -- if you look on a peak to trough, which sometimes gets the timing of you -- you do get some of that. You had basically a 20% drop, peak to trough, meaning that some point in Q4 versus at some point in Q1, both PET and high density. So we're talking about significant swings; that's not an average I'm giving you but fairly significant swings in those markets.

The Q3 to Q4 last year, trough to peak, would have been of an equal magnitude?

No, no, not at all. No, no, no, much lower magnitude. And that's why you get this impact. Not to mention, you really have to get to the details of how rapidly did the increase hit you, even within that period. So what you have in this year was you really didn't have setting up. Last year, you had a very rapid decline basically that happened, affecting the first quarter.

Now, that happens to have come from a rapid run-up in the fourth quarter, but really when you talking Q1 to Q1, that doesn't matter. What really matters is, you had a rapid decline in the first quarter.

Could you secondly go into a little bit more as to your concerns on the weather? I didn't realize you were replacing Willard Scott as the nation's weatherman!

(LAUGHTER) I don't know how to take that comment. Yes, first of all, it's a little early for us usually to be having these comments. But what we've seen over the last 3 weeks or so has been the pretty unusual amounts of water on the West Coast. So what that could theoretically impact for us is fruit and tomato, you know, where the majority of those crops come from.

You know, on the fruit side, it's already on the trees. The question will be kind of, is it too moist? Are you worrying about mold, etc.? We really don't know the answer to that yet, but we [acting] concerns that we're hearing from customers and agricultural sources.

On the tomato side, what we understand is there have been in some cases now two rounds of plantings that have washed away. So in some cases, they are now thinking about going back at a third time of that. I think that's the extreme.

So it really is what we said is the case, which is just we are being cautious about it. Our customers to some degree are talking about it. It's a little hard for us to know what it means this earlier. You know, we've talked before that the canned tomato is relatively high on the food chain of what people want to do with a tomato after they grow it. So it is possible that even if the yields are down that our customers find tomatoes elsewhere and get them into can.

But right now, we really just don't know that. So as I say, we are being cautious about it. It really could affect fairly quickly if we have customers, who just pull down what their expectation is. That's sort of what we are working through right now.

Then finally, you've talked more of the inventory reduction on the personal care plastics side. Why would this not affect the metal food can side as well?

Well, I guess a couple things and then I don't know. I don't know what exactly Wal-Mart is working on. I think first of all, we're hearing it more from our customers on that side. So that's kind of part one for you. Then logic follows from that, that if this has more to do with the -- not the grocery stores they have but more of the kind of retail chain, then that would logically have more effect on the plastics side. There is some logic in that, in that you would expect there's a lot more inventory of those kind of goods than there are inventory of food goods to grocery outlets. So that's kind of why we're thinking it's going to have more impact on the plastics side. Frankly, that's kind of what we've been hearing.

Then Bob, are you going to do a whole scale refinancing for this acquisition? Or are you just -- did your remarks about addressing the low percent of fixed debt really refer to probably having a fixed debt piece on the acquisition?

Good question. Not necessarily having a fixed debt piece in the sense of going to the bond market. I think where we are leaning today is that we would finance the acquisition through incremental bank debt and obviously swap out some piece of that to kind of stay in the appropriate levels of where we feel comfortable in our fixed floating ratio. But the real answer to that as to why the bank market, it's really ease of transaction, repayment flexibility, low market risk at what we view as substantially similar cost.

I would say obviously, we have two markets that are very well available to us. But right now, we're thinking that the bank market is the way to go.

Then finally just a general question, even though you will be, after integration charges, probably breaking even on the acquisition in the second half of the year, will there be -- there should be positive cash flow generated from that?

Let us get through the process and understand more where capital wants to get spent, etc. I think it's a little early for us to be giving you quarterly projections for the business.

Okay, is there a seasonality to the business that you are acquiring, like there is in your food can or your plastic business?

Sure, there is some seasonality to the business. It's not to the degree that food can, but there is some seasonality to it.

Edings Thibault, Morgan Stanley.

Just a few questions on what you alluded to, Tony, in terms of looking at additional plans for rationalizations of the plants. I know this is kind of an ongoing process at Silgan. But can you talk about -- is there anything in particular that might be generating some additional thoughts along those lines? Can you quantify or would you care to try and quantify kind of the extent of what you are thinking about?

Well, probably no to the latter part of that. We're talking about specific things we are evaluating or else we wouldn't have it here. You are right that we are constantly looking. But we wouldn't necessarily be making this point if this was just a -- by the way, we constantly look. There is more to it than that. Obviously, if we had made a decision, we would be booking that and moving on with it.

So, we do have things under evaluation. They are real projects, etc. I think Bob made a point that the key to these most often is, we are really looking cash-on-cash returns. So I think from a shareholder perspective, particularly the ones I know that are on our thoughts -- plate right now, if we choose to move forward, it's really an opportunity about spending a certain amount of cash and getting a good, solid return. So it's more of positive, at least the way I think about it, if we move forward with that.

Sure, no, I'm just wondering -- I mean, in the context of what appears -- looks to be a little bit of a difficult year on the plastics side from a volume perspective. I'm just wondering, is that kind of where you're spending some of your efforts? Clearly, you don't need as many facilities on a lower volume base. Or is it again, is this something more focused on the metal side?

Well, I would say what we're talking about is more focused on the metal side. We look to both sides. But it could be -- it could be either side of it. I think most of what we are talking about on the plastic volumes, though, to the extent it's inventory reduction working through the system, that does not have a long tail on it. So you wouldn't necessarily want to rationalize your plants around that on a permanent basis.

Right, okay. Then just looking at the closures business in general, can you give us a sense of -- obviously, you had a strong first quarter. You referenced the strong volumes there, what the outlook is there. Then, would that be impacted to the same degree by some of the softness in the fruit/tomato market?

No to the latter question. It would not really be affected by those particular markets.

You know, the closures business, you know, as we can see, it's certainly part of the can business. So I can answer parts of that, and then there's parts that I can't really answer. But certainly if you look on the volume side, it had a very good year last year and it kind of built as it went. So the comp was a little easier in Q1; that will get a little bit harder.

Also, the growth has been such there that as we sit here today, where we are seeing that growth, we are pretty close to capacity constraint. So really the opportunity is to kind of climb up over and get harder until new capacity that we're building and we are bringing online gets online and up. So the opportunity here is that we have opportunities to grow, and we are investing in that growth. We will begin to get that benefit. But now, we've got to wait for it.

So it sounds like most of the volume growth has been on the easy open end?

Yes, we are switching -- that closure is being different, but most of the volume --

Oh, I'm sorry.

No, no, no. I'm giving you a real closures answer.

Then, when do you expect that capacity to come online?

Well, it's coming -- there's multiple lines and then one is already on. We have a couple more coming. So it's as we speak. But it will be coming out through kind of Q2 and Q3.

Good luck in the quarter.

Christopher Butler, Sidoti & Co.

I just wanted to ask some questions on the container side of the business, seeing as we haven't hit that yet. I noticed that the margins eroded here in the first quarter, and I'm hearing stories of possible higher steel and aluminum costs going forward. I just wanted to get your thoughts on that and the prospects for '06.

Sure. You know, as we said in the release, really what happened in this business in general but certainly on the margins is, we've had a lot of inflation in this business. You're asking about part of it, which is steel, which frankly has been less this year than it has been in the last couple. Aluminum certainly is -- we're seeing greater inflation there for sure. Now, that does get passed through to our customers, but you obviously suffer a rate impact of that.

I think even more importantly though has been inflation in other parts of our manufacturing. We've had significant inflation in energy, in packaging, in freight, etc. So that's really where we have seen a lot of inflation.

Under our contracts, we do pass that through. But there is a way we do it, it does end up with some lags on that. So what we're seeing is again a lot of inflation there, not all recovered on the top line at this point in time. Even if it were, you would expect to see some rate declines as you have higher revenue but the same drops through profitability.

So really, that's what's happening. I would say really no change to kind of our view about the business that we've had in the past. We feel very good about the food can business. We think the easy open ends are going to continue to penetrate the market. Our view is that which is kind of between 50 and 60% of our business today will get pretty close to the entire market as time goes forward, and that gives us an opportunity to make investments and get a fair return on our investment.

So really, no change to the market with the one exception that there could be some volume pick-up in the near-term if in fact there are weather conditions in California caused that to happen, which has no real long-term impact to the business.

Referring to the lag time on the container side, is there any difference in that from the plastics business as the higher proportion of contracts create any differences we should be aware of?

Yes. The differences are, on the food can side, we generally do pass through all of our other costs as well. These are much longer term contracts. They tend to be initially 10-year kind of contracts, renewing more at a 5-year kind of level.

The plastic contracts tend to be shorter in duration, so 1, 2, 3, the odd 5-year contract. So traditionally, they do not have a mechanism for pass-through of other inflation costs. Now, obviously as they renew, if you have high inflation, you are going to sooner or later have to go to the market and get that, but it doesn't happen contractually in that case.

Moving back to the plastics, just want to make sure I understood you correctly. You had referred to cost savings on that side as being part of the increased margin, but for the most part it was due to the pricing and resin costs?

Exactly -- not exactly. What I said is, the lion's share of the improvement was on the resins side. What I said is, there's a lot else happening at the time. So what you had is significant inflation going on and very good headway on the cost side. But in essence, you kind of get a washing out of a majority of all of that.

Okay. In referring to, and this might be a little bit premature, but you are talking about the usage of bank debt for the acquisition in part because of repayment flexibility minus any additional acquisition opportunities. Can we make the assumption you would go back to sort of the debt reduction-type plan that you had over the last couple years?

Well, no. If I understand the question, not exactly. What we had done is put out a debt-reduction target that was basically 200 to $300 million. We thought that would get us to an optimal capital structure, which is really what we are after -- is a balance between the right amount of debt we ought to carry that optimizes what the equity market is willing to accept. Our view is that we need to take about 200 to $300 million down on the debt.

We did that. That took us to leverage numbers around about 2 times. Our feeling was that really, that was the point we ought to get back to acquisitions, but that was a pretty low leverage number for this kind of a business. So as we said, assuming the White Cap business gets done, that will kind of bring us up somewhere around 0.5 turn. But within a year, we could bring that back down. So our view was, we kind of have done the delevering that we thought made sense and we really wanted to get to acquisitions at that point. Barring acquisitions, we would have to look at all the different possibilities for our cash, including dividends, repurchase, etc.

Alton Stump, Longbow Research.

Paul Bodnar sitting in for Alton here. I just wanted to see how much of the first-quarter earnings may have been either pulled forward from the second quarter or if that's some of the responsibility there for the kind of lower guidance, or if most of that is behind the inventory reductions at Wal-Mart as well as the California problem? I don't know if you could break that down into any kind of ratios as to where you feel that is coming from.

Well, by far, the main point has to do with volume concerns that we have. There's some simplifier -- I don't really have a number for you. I'm not sure I could even get that for you. But there clearly with some expectation we had of continuing decline in resin that would have theoretically spread out kind of the lag question a little bit further. That got pulled forward in the first quarter, but that is small versus kind of the concern, we are at least working through on the volume side.

George Staphos, Banc of America Securities.

I was trying to get through there. First of all, I just wanted to confirm, the cash flow available for a debt pay-down, etc., this year, what are you targeting that debt prior to acquisitions, I guess?

Yes, on an apples-to-apples basis, we said that 150 was kind of the number that we expected to be able to generate, and that compares relatively to the 140 that we used last year. So if you start with that as a proxy, there are obviously some little puts and takes to that number. But the key change there is the fact that in '05, we made a fairly sizable pension contribution. In '06, we do not have a minimum pension contribution required; although, given tax deductibility we may take advantage of some of that. Then, that's offset by some incremental CapEx year over year and some incremental cash tax year over year.

Right. Well, I guess one question I had as a follow-on, the 150 has been -- and correct me if I'm wrong -- a level that you've been at throughout this year. So it would be fair to say, I think, that with all of the concerns that you seem to be exhibiting around 2Q and responsibly, that the cash flow hasn't really moved. So I guess the question is, why not? Where did you find other areas to buttress the free cash flow generation? Or are we also saying that whatever hiccup you might have in the second quarter, it's not likely -- I realize there are no guarantees -- but not likely to be that significant on a cash basis? Could you help me understand that a little bit?

Yes, George, I think what I would say to that is that we have not changed our full-year outlook. So that really would not change our view on the cash generation of the business.

Right, so --

In essence what we're saying is it has kind of been captured in Q1. We're going to give up most of it that what we captured in Q1 in Q2, and we're cutting back on that.

Okay, fair enough. Now, in terms of the California issue, how big is California as a market overall or tomatoes? Could you give us some -- I realize this is somewhat proprietary. But give us a feel so that we can do our own modeling.

It's predominant for our tomato business.

I understand that, and I know you have a number of plants there. But is this 80% of your business? I doubt that or (multiple speakers) --

No, no, you mean, how big is it in total?

Yes.

You know, it's a material number. I mean, tomatoes, it is a meaningful business for us.

Okay, I will come back to that a little bit later on then. When we look at free cash flow normalized, what do you think is possible to be after you're done integrating White Cap and spending where you may need to spend? What kind of free cash flow generation might that business help you tack on? Similarly, with some of the consolidation you're looking at in food cans, piggybacking on Edings' question, what might that add to the $150 million? (multiple speakers) I know it's not an '06 number but theoretically.

Yes, I'm more concerned that we're getting ahead of ourselves on the White Cap acquisition. I would give you the answers that I think would be partial, and I think we need to know more to understand that. So I really don't want to do that yet. What we've said is, we think that business ought to be a good -- and you know us well enough to know we are looking on cash-on-cash returns. So we do expect it to be cash generative in the future, for sure, in a reasonably meaningful way in order to pay for the amount of the initial investment in it.

I'm not sure I follow your second question about consolidation on the can side. Yes, you're talking about (multiple speakers) --

Well, to the extent that you're going to shut can plants; I mean that's my read on your commentaries. You said you are looking at it on a cash-on-cash basis, so in theory, once you were done with the closings, I am assuming that would help your cash generation, not hurt it.

Once you paid for the cost to do it, yes.

Correct.

Yes. But again, now, you've got me trying to predict something that we haven't decided to do yet and have not put our earnings yet. But it's a fair -- in fact, we proved to move forward on it. It's a very legitimate question of what does this do to your free cash flow. I'm not sure we can really or should we answer that right now when we haven't even decided to do anything.

Okay, Tony. Last question, as far as easy open goes, what type of trial activity are you seeing this year? Has it picked up? What does that mean for '07 '08, if anything?

This has been true for the last couple of years. First of all as you know it, as the markets have tipped over, the data that we have is very compelling that the consumer preference for easy-open ends is quite strong. Interestingly, we've spent a lot more time looking at that. One of the things we found, which intuitively makes a lot more sense to me, is it's not so much the consumer going into the store and think, well, I really want an easy-open end. It's much more that when they take a certain amount of products home and it sits in the pantry, it's the consumption in the pantry. People reach for the easy-open end. That for me, it tells why that made a lot more sense.

Really the decision point is in the home, that somebody prefers to just grab the easy-open one and use it, and then that has to be replenished. That's what's driving kind of the growth. So I deviate here a bit. But the consumer -- it's just market after market that made this move, has seen very compelling changes in terms of the dynamics. So, as a result over the last couple of years, we've seen various markets testing, etc. That continues this year, that there are significant players in untapped markets or lightly-tapped markets for easy-open end, who are in the process of doing tests and understanding. So I guess I would have to say, it's somewhat consistent with last year or two. But I think that the data is more compelling, and I think people are increasing the importance of these tasks as we look at this year.

As you know, we do not have the capacity -- if a major market tipped right now, we do not have that capacity. We did do a minor expansion kind of speculatively, so we can begin to feed someone who wanted to tip over. But in fact, we do not have the capacity if there was a major shift, so that mean we would have to make capital investment.

No, that's understood.

Then, that would happen in forward years.

Tim Burns, Cranial Capital.

I have just a couple easy questions. Which days in May will it rain in California?

(LAUGHTER).

There's good news and bad news. The good news is, weather men are normally wrong. The bad news is, investors aren't much better. So, anyhow for whatever it's worth. Aren't we basically saying though, Tony, that it's kind of a -- the first quarter is always a very light quarter in terms of overall earnings, and we shouldn't look too far ahead. You've got an integration of a pretty significant acquisition for yourself outside the country. The supply chain is what it is, right? It could get tough. So, I don't know. It seems like people want to pull you up, but pleasant surprises would be nice?

Yes, I think I would say all-in-all I would. As I said in the opening comments, we feel very good about the quarter and the condition of the business. We obviously had a very nice first quarter. But we have legitimate things that in the short-term could be meaningful. But again, I don't think they have real long-term implications at all, nor do we even know. As you point out, we don't know what or when the California really means. But it's important enough that it's being talked about by our customers. Certainly the inventory reduction we are actually seeing, in some cases order impacts from that at this point. So, that one is real. I don't know how big it is, but it certainly is real.

You know, there's been apparently meetings out in Bentonville, discussing strategies to reduce working capital and enhance the profitability of the big monsters', you know, chain. You know, one of the things that has been talked about previously on other calls is the whole concept of concentration as a way to shrink the package size and the retail yield off the shelf space. You guys have historically been in the kind of the health and beauty side, where the packages can't get too big. God forbid they ever bring back a glass shampoo bottle but that's another story.

Right.

Might this open up -- I mean, because detergents and other household chem products are looking more and more at least in my eyes, like shampoo bottles. And I guess the question is, is their way to leverage this -- with Wal-Mart, it could be just dust in the wind -- but this concentration trend to smaller-sized containers?

Well, certainly, that does work for us in that that is kind of where we do play as a smaller, differentiated, decorated container.

You know, I think there's been more studies lately that continue to prove the point that I personally have held and that would be important to our business is that differentiation of the package on the shelf, particularly in personal care where the most recent study I saw, is really -- can be very meaningful to the share points of the brands. So I do believe -- and I will admit some of this is kind of hope but it's looking at research anyhow -- that we're coming back around to that realization. What is important is a differentiated package, and that speaks right to our plastics business.

Tony, doesn't it -- conversely, you could say that metal food cans are just convenient storage houses for either excess fresh production or whatever; it depends on your view. But some of the -- and again, these lines are a lot smaller than yours, but if you look at all the activity around shaped metal, aerosol and general lined cans and beverage cans, why can't we team up an easy-open end with something that's a little more dramatic in terms of chiseled cut or whatever? Because the other thing that Wal-Mart likes are products that have fatter margins than they did the week before.

You bet. You bet. Tim, I think we can. I think what's happened with easy-open end as being kind of the leading point here as -- I think that we're in the process of proving -- not we, personally, but the market is in the process of proving that a differentiated package that the consumer likes is worth spending money on. That took a long time for food cans because one of the big advantages of food cans is it's the lowest-cost package out there. So it's got that inherent advantage, but it's also treated that way. You know, why put money in that? That's the low-cost package.

What we found with easy-open end and I think our customers are coming around to this pretty strongly now is that the investment to make it a slightly higher cost package pays huge dividends in terms of the share gains on that. So I think that does translate exactly into other things you can do with that can and to make it more differentiated, etc.

What's happened over the last couple of years is marketers have been attracted to the shaping from plastic, etc., and not so much to what can be done in the can. In many ways, we allowed that to happen. So I think what's happening now is, all of us are refocused on, it's a better package, it's lower-cost, consumers like it, and they like it a lot more with the easy-open end. If the marketer wants something different, why can't that be with the food can?

Yes, there seems to be a lot of work if you talk to the film companies in multi-packing, shrink multi-packing. Now that might rob a little bit of your value in terms of graphics, but if it moves more cans, what the heck? But it just seems like there is a movement afoot around some of the more traditional containers --

Yes.

-- that is quite positive. I would love to see you guys capitalize on it.

I agree with all of that. That is something we are very focused on, not just easy-open end but kind of more broadly where else is there differentiation on the package? I think our competitors are as well on all that positive. Again, it's by far a superior package. So all we need to do is remind people of that and keep it fresh.

By the way, to your point of kind of bundled packing, etc., we don't really decorate food cans, so we are all for that. It's all positive.

God, you'd think I would have known that after 30 years or whatever it is.

Well, if you went back 30 years ago, that wasn't true!

Hey, the last two questions in there quick. The hot points in terms of capacity shortage in closures, what areas are those? Are those kind of the isotonics or the teas or kind of the high-end drinks or what?

Yes, predominantly around plastic side to those markets, yes.

So the shortage is in plastics and not metal closures?

That is generally correct, yes. But don't take that to mean plastics have -- I'm sorry, that metal has not done well as well. I mean, we've seen nice growth on many of our metal closures as well.

But it's largely specialty drinks that is the real hot item, though, right?

Generally that is true, yes.

Okay. Then maybe a question for Bob, but [in you], I guess you ripped through that 200 to $300 million debt reduction program. It had a very, very positive impact I think from investors and your valuation. Why not keep going? Will you keep going? Then, if something comes along, no big deal? Do you follow me?

Yes, I follow you. I think you know I tried to answer you before. I think the trick is kind of optimal capital structure. I think if you start getting the business levered less than 2 times, I think there's a pretty compelling argument that says that's not a very optimal use of your available resources and cash capabilities. So, therein lies the problem. Now, I think the question is, the value that's been created by this business has been primarily done through finding good acquisitions, integrate them well, and staying very tightly focused on our franchises and delivering value to our customers and our franchises. So, a lot of value has been created through acquisitions and integration. It's kind of a core competency we believe we have. So again, our view is that we're going to create more value for our shareholder by finding those and growing that way than we would by levering below 2 times.

Just one comment -- when I'm looking for a can, it better have an easy-open end on it.

There you go. Thanks, Tim.

[Todd Maranowski], Silverpoint Investments.

A quick question -- Crown reported earlier this week and during the earnings call, their management team forecast pretty strong volume growth in the America's food can segments, something like mid single digits for 2006. I'm wondering if you are seeing a more maybe competitive response on their part on pricing, if they are gaining share in the market, and kind of what implications that might have for Silgan.

I'm not going to get into kind of the specifics of what our competitors are doing. I think what we've talked about here in the California issue would affect us more directly than it would Crown or Ball in that matter. So I think that would be part of the difference between the two. So I'm not sure I can speak anymore specifically to kind of what Crown is looking at and thinking about.

You know basically, you've got a market that has got a lot of contemplation in it. Generally, competitors are pretty focused on making sure that they get that covered. So in terms of share moves, I'm not aware of major kind of moves of share.

Okay, that's helpful. Maybe a quick follow-up, what's your view on sort of industry-wide unit volume growth for '06 in food cans?

We've talked about things being kind of flattish. That's sort of our view of food can -- would be generally flattish over time.

Chris Manuel, KeyBank Capital Markets.

I'm all set; thanks, fellows.

[Roger Harris], Porter Orlin.

A quick question on -- unfortunately, I jumped on the call late, but I'm trying to understand the closing of the White Cap transaction. What you're saying is, through '06, it will be neutral. So, you are not breaking out any integration charges or anything of that nature going forward for '07? Folks have looked at historical returns and what you were spending on the acquisition. I think I came out with a number of $0.15 to $0.20 a share for accretion on kind of an annualized basis. Is that accurate? Can you speak to that at all and perhaps the level of free cash flow, let's say in '07 you think White Cap might generate?

Yes, I really can't speak to it yet. You know, we have not closed on the business yet. We don't have complete, unfettered reign over all the numbers, etc., at this point in time.

So what we have said is that we do expect it will be accretive as we go forward after kind of this year's impact, and that's because -- primarily because of the inventory write-up. So again, Bob (indiscernible) made out on the call. But essentially, you've got to take all the profit out of the inventory, so when you sell that, you basically make no money on it. Yet, you have all the other fixed costs of the business, etc.

So that is primarily kind of why we're saying we're not expecting much out of it at first. But then we do expect it to be accretive going forward. But we have not said anything specifically about what those numbers are.

Can you speak, Tony, as well to the acquisition pipeline and the potential there? Again, you are levering up 0.5 turn; you're paying that down really pretty rapidly inside of the year. So are you seeing opportunities out there? Are you are seeing them at better prices?

Yes, we have had this comment in the past, so it's kind of a continuation of it. I think we would say that there are properties that are out there. The prices still are bought -- based on historical levels pretty high. Some of that is because debt cost is still reasonably low. But more so, it's because the sponsor markets are so strong and continue to be pretty strong. So you know, I think we would say directionally, pricing has probably moderated some. It has got a little more reasonable, but it's still pretty high.

Again, our view is on trying to find acquisitions and keeping a good eye to the market. We do that. The history of our business has been, most of these acquisitions have not come out of option process. So we generally are not in kind of in the stampede of the sponsors when acquisitions come around. It's usually something more that we find ourselves through our own work or through our reputation, etc. So more likely, that's where transactions would come from, but we definitely are looking. Again, the market is getting more reasonable, I would say.

At this time, we have no more questions in queue. Mr. Allott, I'd like to turn the conference back to you for concluding remarks.

Great! I just want to thank everybody for the time. Recap again that we think obviously, the first quarter was a good quarter for us. We're still expecting a solid year. What we've talked about a couple items, it could affect Q2 or Q3. Basically, our view is those are kind of one off-type items. We will keep closely attuned to them. We look forward to our call after Q2. Thank you.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation, and you may disconnect your phone lines at this time.