Silgan Holdings Inc (SLGN) 2006 Q2 法說會逐字稿

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

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.

Thank you, Malcolm. Good morning, everyone. We know today is a busy earnings release day so thank you for joining us for our second quarter conference call. Our agenda for this morning is to make a few prepared comments about the financial performance for the second quarter and our outlook for 2006. Afterward, we'll be pleased to take any questions that you have.

As you will see in this morning's press release, there's a lot to report in this quarter. We're pleased with having completed the acquisition of the majority of the European White Cap business in June 2006. This acquisition, combined with our existing closures operation makes up our new closures reporting segment being reported for the first time this quarter. In addition, as part of our ongoing efforts to increase our asset utilization and improve our return, we announced a plan to close our St. Paul, Minnesota, production facility by early next year. As a result of this plan, and our previously announced Valencia, California rationalization, we recorded rationalization charges of $6.2 million in the quarter.

With that said, our year year-to-date performance is in line with our expectations. As a result of this performance and balanced by some concern regarding food can volumes related to the fruit and vegetable tack we are reconfirming our original 2006 earnings estimate after adjustment for the rationalization charges. We remain very positive about the prospects for each of our businesses. Our closures business continues to perform very well and we look forward to the contribution from the newly acquired White Cap business. Our plastics business has done a good job of controlling costs and has positioned themselves well as retailers move through this period of inventory reduction. And we are expecting the food can business to show year-over-year operating improvement for the last half of 2006.

Finally, we see increased opportunities to invest in each of these businesses either for growth or for compelling cost savings opportunities. I'll now turn it over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimates for '06.

Thank you, Tony. Good afternoon, everyone. As you've seen, this is a complex quarter to compare to the prior year results and to our earnings estimates. Results for this quarter include additional rationalization charges for St. Paul and Valencia, one month of earnings for the newly acquired portion of the White Cap business including the impact of a purchased accounting adjustment to write up inventory values and we broke out a new reporting segment for closures.

In addition, last year included a loss on early extinguishment of debt. Our earnings estimate for the second quarter of 2006 did not contemplate these charges. That said, we are pleased with our financial performance for the quarter and remain on track for the full year. Consolidated net sales of 597.2 million for the quarter were up 16 million or 2.8% due to increased net sales in the domestic closure business, the inclusion of the recently acquired White Cap business, and the effect of the pass-through of higher raw material and other inflationary costs offset in part by declining volumes in our plastic business. Net income for the quarter was 16.4 million or $0.43 per diluted share compared to net income of 15.4 million or $0.41 per diluted share in the prior year quarter.

The second quarter included rationalization charges of 6.2 million or $0.10 per diluted share. Largely attributable to the closing of our St. Paul metal facility announced during the quarter and a small incremental rationalization charge for the shut down of the Valencia plastics facility that was announced during the first quarter of this year. These decisions are part of our ongoing focus to improve cash returns and strengthen our overall financial performance. Additionally, we consolidated one month of earnings of the recent White Cap acquisition which, as expected, was slightly dilutive to earnings for the quarter. Comparatively, the second quarter of 2006 included a loss on early extinguishment of debt of $11 million or $0.18 per diluted share net of tax. Interest expense for the second quarter was down $10.5 million versus the second quarter of last year. This reduction in interest expense is attributable to the impact of the loss on early extinguishment of debt recorded in the second quarter of last year, partially offset by the impact of incremental borrowings used to fund the White Cap acquisition and the effects of higher market interest rates year-over-year.

As we used our credit facility to continue to build working capital toward our seasonal peak and took on additional borrowings to fund the White Cap acquisition, our second quarter debt balance increased versus year end. As a result, we closed the second quarter of 2006 with outstanding debt on the balance sheet of 1 billion 170.9 million dollars. Our fixed rate debt ratio at the end of the second quarter was 54%. Up from 47% in the first quarter of this year. This improvement is a result of five new swaps totaling 227 million as we fixed out the majority of the incremental Euro-based loans used to finance the White Cap acquisition. These swaps have various maturity dates through 2014. Our current fixed-debt ratio is in line with our internal policy and compares favorably with the ratio of 50% in the second quarter of 2005. We expect our fixed rate ratio to be approximately 70% at year-end.

For those looking at cash liquidity metrics, depreciation and amortization was 31.8 million for the second quarter of 2006, versus 30.1 million for the same period in 2005. On a full-year basis, we expect depreciation and amortization in 2006 to be approximately 5 to $10 million higher than the prior year as we take on additional depreciation for the White Cap Europe acquisition. Second quarter capital expenditures totaled $32 million compared with 21.2 million in the same quarter last year. Based on growth in cost savings and opportunities currently in front of us, we are increasing our 2006 capital forecast to approximately 130 to $140 million. This represents an increase approximately 30 to $40 million versus our prior estimate.

In addition, we anticipate cash expenditures relating to the announced rationalization charges to be approximately $3 million. As a result of these factors and the impact of the remaining White Cap acquisitions, which we expect to close during the year, we anticipate reducing our year-end debt balance to approximately 900 million versus current levels. Additionally, we paid a quarterly cash dividend of $0.12 per share in June with a total cash cost of the dividend of $4.5 million.

I'll now provide details for each of our three franchises which Tony noted now breaks out closures separately. Net sales in the metal food container business were $350 million for the second quarter. Essentially unchanged versus the same period a year ago, due to the impact of the pass-through of higher raw material and other inflationary costs, which was offset by a less favorable mix of products sold, which resulted from a shift in the timing of sales of certain products between quarters during the year.

The effective rationalization charges associated with St. Paul, the less favorable mix of products sold and inflationary pressure in raw materials and other manufacturing costs negatively impacted income from operations for the second quarter of 2006. These same factors also contributed to the decline in operating margin. As expected, net sales in the plastic container business decreased 8.6% to $145 million in the second quarter of 2006 as retailers such as Wal-Mart implemented inventory reductions during the quarter leading to soft unit volumes throughout the the quarter. This decline was partially offset by the pass-through of higher resin costs.

Income from operations in the plastic container business for the second quarter was 11.8 million versus 12.9 million in the same period a year ago. Contributing to this decline were lower unit volumes and incremental rationalization charges for Valencia, partially offset by productivity improvements and cost reductions implemented throughout 2005. These productivity improvements and cost reductions enabled us to maintain second quarter operating margins of 8.1% year-over-year.

The closure segment of our business continued to grow as net sales in the second quarter of 2006 increased 29.1 million to 102.2 million versus the prior year period. The drivers behind this revenue growth were incremental revenues from the newly acquired White Cap business which closed in June, a high single-digit increase in domestic unit volumes and higher average selling prices due to the pass-through of higher raw material costs. These positive drivers were partially offset by the negative impact of the write-up of the acquisition inventory to sales value as required by purchase accounting and income from operations increased 1.8 million to 10.7 million for the quarter.

While our 6-month financial performance is slightly above the high end of our estimate, we remain cautious about food can volumes given the forecasted weakness in the West Coast harvest of peaches and tomatoes. In addition, volume levels in the plastic container business have not yet rebounded from the inventory reductions by retailers. Therefore, as you saw in the morning's press release we reconfirmed our earnings estimate of $2.33 to $2.43 per diluted share after including full-year estimated rationalization charges of $0. 22 per diluted share. For the shutdown of Valencia and St. Paul.

We're also providing a third quarter 2006 earnings estimate in the range of $1 to $1.10 per diluted share which does include rationalization charges of $0.05 per diluted share. We're estimating a decline in net income per diluted share versus the third quarter of last year primarily resulting from the rationalization charges and the anticipated shift of tomato can volumes from the third quarter into the fourth quarter as compared to last year.

Our third quarter and full-year estimates now include the impact of the recently announced acquisition which we believe will not be impactful to earnings in 2006. As outlined in my earlier comments, we expect to be able to reduce our outstanding debt balance through back half of of 2006. Our current estimate is to reduce our outstanding debt to approximately $900 million by year end. That concludes our prepared remarks, we can open it up for Q&A. Would you kindly provide the directions for the Q&A session?

Thank you. [OPERATOR INSTRUCTIONS] We take our first question from Chris Manuel with Keybanc Capital Markets, please go ahead.

Good afternoon, gentlemen.

Good afternoon, Chris.

A couple questions for you. First of all, can we dig a little deeper into the plastics side of the business? Volumes have been declining now for several quarters and it would appear as though unit volumes this quarter might have been off close to double-digit levels. Do you think that as the back half of the year rolls around, what's the outlook there?

Chris, this is Tony. You're right by the way, the volume is just into double-digit numbers in declining Q2. We did have decline in the first quarter although a much smaller number. And I guess everybody's interest and Bob already went through it, but we did talk about after our first quarter that we had concerns about specifically at that time what Wal-Mart was talking about on inventory reductions. I think more broadly now we would say that kind of the retail sector in total saw the opportunity or competitive threat of not working down inventory. So you kind of, we believe you saw it sort of across the retail spectrum and then had to work through or is working through the supply chain. And as you know, the further you are down that chain, the longer you feel the effects of it.

So we've looked around to resin suppliers, we've looked around to other public information, closures, bottles, and every indication that we can get to is that this is pretty standard across the personal care market space anyhow. So obviously we don't think it's anything unique about our business. We think it's just happening around the industry. With that said, I don't think we know yet for Q3 and Q4, to the extent that it is an inventory correction, which we think it is, it has to turn at some point in time. And we've seen this before and it does turn. But I'm not here today, we're not able to tell you exactly when we think that's going to happen.

Well, let me ask you maybe this way. You think about what you have baked into your guidance. Do you have more levels down, double digit through the back half of the year, are you anticipating more flat or are you anticipating more down like you have been, low single digits over the last quarter or two?

We are not anticipating that kind of a decline continuing on. We are assuming a level of recovery, we're not looking for growth in units on a year-over-year basis necessarily but certainly a recovery off what we saw in Q2.

Okay and then my next question has to do with Bob, could you run us through a little bit more detail on the restructuring, how much you're spending, when you would anticipate starting to get contribution, I should say, or pick up in earnings from the restructuring activity, timing of that?

Sure. Basically, there's two components here. There's the Valencia piece, which is about $4 million. The charges will sort of run through, call it the early part of '07. And then we're looking to cease operations there in kind of the third quarter of this year and then we've got some building cleanup that will kind of go. So we'll start to feel less of the effects of the charge as we move into next year. On the St. Paul side, that total charge is about 14 million. With the majority of that being in this year from a charge perspective. It's about 10 million of that will be in '06 with the balance kind of rolling over into '07. And I think we'll start to see benefits as we come into sort of the mid to later part of '07 from both of those charges.

And that was if I remember right, was about $8 million you guys said in your press release?

Well, the total charge is 14. It's about--.

I mean on the savings side. On an annual basis. It was an amount that you had. Right?

Yes, the number you just quoted sounds high to me. I don't have the original press release with me.

That's all right. Either way, the idea being that the savings will start to come in the back half of next year?

Yes, I think that's right. I want to say the number that you quoted, we probably were looking at half of that.

Okay.

I don't have an exact number but that's about right.

And then the last question was, the additional CapEx, can you give us color on what you're spending on?

Sure. As I kind of presaged it a little bit in my comments, but essentially we're, the increase in CapEx is across all of our businesses and it's a combination of growth opportunities that we see and compelling cost savings investment. If you look at the food can, metal food container business, in that case we're saying fair amount of opportunity as we have in the past on compelling cost savings initiative. But also, we are continuing to spend on our Quick Top family of easy open ends. We remain convinced that the market will continue to tip over more and more on Quick Top ends. Again we've talked about this in previous calls, but the data continues to come in that where we see our customers divert to Quick Top Ends they're getting sizable pickups in terms of volumes in the market.

Interestingly, I'm sure we'll get another question on this. When you look at kind of the industry unit volume growth, basically it's the sectors who converted to Quick Top Ends that you're seeing sizable growth across the industry. So I deviate here a little bit. So Quick Top is something we are continuing to expect that we will spend on, on the food can side.

On the closures business, we are continuing to invest in growth that we're seeing, primarily around isotonic beverages and that market, putting in new capacity. And then in plastics, it's a combination. We continue to see cost savings initiatives that we can invest in, but also we are investing more in growth opportunities that we're seeing primarily with existing customers, but we've been again, kind of saying for a while we thought that opportunities may show themselves in the plastic market once it stabilized a bit, which we think it has. So we see good growth opportunity there as well.

Okay. Thank you much.

Chris, two comments that I would add to what Tony just said. And that is that that incremental CapEx also factors in the White Cap acquisition. And some smaller piece of the incremental capital is related to moving some work around with these rationalization charges as well.

Oh, okay. All right. That makes sense. Thank you.

Sure.

Next we'll go to the site of George Staphos with Banc of America Securities. Please go ahead.

Thanks, guys. Good afternoon.

Thank you.

Let's start with the CapEx. Can you ballpark a rough range of returns that you'd expect to be getting and/or what kind of timing payback we should start to see in your results from these initiatives? And I had a couple of follow-ons.

Sure. I would first of all say that some of that increase, of course, is the maintenance, if you will of the new business acquired, the White Cap Europe business. Not everything was increased, although the lion's share of it is return-based capital, if you will. We're usually looking for something three years or less when we're making those kind of investments. There could be a few strategic exceptions to that. But essentially we're looking for something that's got that kind of a payback. High teen-type returns at least.

Okay. So where the growth and/or cost save initiative you've got embedded in that increment, and by the way, if you look at the 130 to 140 up over the 100, how would you parse that increment across White Cap and the other two buckets of growth in cost savings?

I'd say something like -- and that's always at the end of the year. It's probably something like 5 million of the increase would be around the maintenance of the White Cap if you will. Something close to another 5 million of that would be opportunities, return-based opportunities in that business. So call it 10 in total to that acquired business.

Yes. Okay. What kind of -- when should we start seeing these in the numbers, back half of 2008 or could it show up a little sooner than that?

I think you'll see it show up sooner than that. Some could be that late, but the majority -- if you look at the spending CapEx for the year, it was not -- certainly pretty low in the first quarter, it came up a bit in Q2 so a lot of what we're talking about are projects that we're getting going on spending on the last half of this year. So some of those will be projects that will continue on a capital stage into 2007. But the lion's share of those would be kind of online sometime in 2007.

Okay. And in turn, is it possible to say how much of that is related to the Quick Top?

Yes. I mean, it's not a huge part of it, let's put it that way. It's probably -- probably in the less than 10 million size.

Okay. Tony, when you say you remain convinced that you're going to see the market tip over, have you -- obviously you're spending some amount of money on Quick Top conversions. But does the second leg of conversion seem to be going a little bit slower than you would have anticipated, at the pace you would have expected, or quicker?

Well, I -- I have a little bit of an out on this one in that I think we always said the one hard part of this was figuring out what the basic conversion was going to be. So I would say we're probably on line. I think we always said that this was going to happen in a lumpy fashion because essentially you're going to have markets tip over. And it takes a while for someone in a market to decide that's what they want to do. You'll recall in the last half of last year, we started talking about putting in some capacity, which was speculative in essence because we believed growth was coming. Here we are coming around again saying that we're thinking about it a little bit more capacity along that line. That implies that that capacity we started putting in is already being consumed as people think about opportunities on Quick Top. So I would say it's certainly being watched I think by most all of those that have not yet converted. And again I say this all the time, but the data that we're all looking at is pretty compelling.

Fair enough. Two last quick ones. I'll turn it over. Can you tell us what the effect of the inventory write-up was on the closures business -- I missed it. And the mix factors that were reflected in your food can development quarter can you give us a little bit more detail on that? Thanks.

Just two quick little easy questions. Essentially the impact of the inventory on the quarter was a couple of cents to the negative, of course. And giving you an EPS kind of an answer on that.

Right.

The -- on mix, the easy way to talk about this I guess is to say that we give you a volume of cans, but as I'm sure you're used to with all of your companies you follow, one unit of volume is not the same as the next unit of volume. So an example for you is we may sell a large can and a small can, the margins might be comparable on those, but the contribution drop-through from one is very different than the other.

Sure.

When you look at the impact down to the operating income line, it can be pretty impactful. So in essence, that's all we're talking about is that when we look at the year, we don't see significant shifts. There might be some because cause of the tax but nothing too major. But when you go quarter by quarter, every once in a while it does happen that you get kind of an odd mix of products that are sold in that period. And essentially Q2 of last year was a pretty good mix against that kind of background in Q2 of 2006, was the back side of that if you will, not as good.

All right. I'll come back. Thanks.

Yes.

The next question comes from the side of Ghansham Panjabi with Wachovia, please go ahead.

The inventory step-up, just as a follow-up to George's question s. Is there any sort of flow-through into the third quarter?

Yes, there will be another component that will hit in Q3.

Okay. But it comps out in 4q then?

Well, hat I will say to that, in general, that's true. What will be impactful to that is the timing of the other deferred entities.

Okay.

So as we close the additional pieces of business, you'll see, albeit much smaller, but an impact that could lag as well. And to further that, because I'm not sure what you're going to do with that information, it's important to understand that that business is also a seasonal business. So your Q4 number is not a number you'd want to annualize as an example and assume that's the comp base for that business.

Okay. And the inventory reduction in the channels that you referred to, is it your sense, apart from Wal-Mart and spilling over to the other retailers out there, is it also being done more categorically? In other words, you sell to a few different markets. Did it start off in food and is it now in household or is it just broad-based?

It's pretty broad-based -- perhaps the exception, our food can business does not seem to be going through that. Certainly the can business in total does not seem to be going through that. So I think it's not, at least from our experience, I don't see this as a grocery store chain phenomenon too much. Although I do happen to know a grocery store chain that is going through some of this. But I would say we've seen it more on the personal care side, which the channel tends to be a little bit different in that regard. But not if -- if you happen to break it between household and personal care, I'm not sure we're seeing much difference there.

Okay. And just finally, your appetite for share buybacks here, can you just update us on that?

Well, we've talked about kind of the excess cash, the broad question, what are you going to do with excess cash? I think is really a question. A couple things on that. First of all, because of the acquisition which we've just gone through, we've just added leverage to the business, to the tune of about, what we're saying the end of the year about $200 million or so. Debt we've added onto the business. So I'm not sure that the excess cash conversation is even on the table right this moment. At least how we're thinking about it. Because our view is that we really want to keep -- work the leverage to a point of optimum capital structure for the equity side, and so our view is we want to keep that somewhere in that 2 to 3 times range on leverage. With the deal done by end of the year, we're looking at something 2.5 times the business turns reduces basically about half a turn a year. So that would put us kind of over the course of a end of next year, let's say, back to a point where we'd be talking about kind of the cash generation business again. And our priority has been, will continue to be around acquisitions to that. That's kind of where the value has been created in the business in the past. So our priority is much more around A, getting some of that debt paid down again, two, getting on to acquisitions. And then we'll have to look at what the other potential uses are of cash.

Okay, fair enough. Thanks so much.

The next question comes from the site of Edings Thibault with Morgan Stanley. Please go ahead.

Thanks, good afternoon, guys.

Good afternoon.

I want to kind of move down to two separate avenues here. Number one, I guess I'll start with the easy question. It just seems like every quarter we get on this conference call and we have to talk about plastics. And I know the profitability from an absolute dollar perspective, returns have been okay. But it just seems like it's one issue or another in the plastics business. It's a competitive presence, it's inventory destocking. I mean, and yet you're talking about investing capital, more capital in this business because you see growth opportunities. Can you shed some more light on what you're seeing changing in the plastics business and what your tolerance or patience is for actually seeing that turnaround occur? In other words, if it doesn't happen and you're disappointed, do you revisit whether or not this is a franchise you want to continue to participate in?

It's interesting. In some ways, your question goes right to the problem of conference calls, because you're right, we spend a lot of time talking about the plastic business. The reality is our plastic business is up year on year. We've made more money with that business this year than we did last year. So -- on a year-to-date basis. So we end up talking about the granularity of things rather than the broad view. Broad view is we think this plastic business is a pretty good-performing business. And yes it's going through some volume issue now, but again, we think that's across the industry. So I'm not sure what you do about that point.

So really all I can say to you is we like the performance of the business. We like our position in the market space. We are making no apologies for that business. If people ask questions, we're going to answer those questions, but we think we're well positioned and as I've said earlier in the call, we see investment opportunities, again, because we think we're well positioned. We see growth on the horizon here, where it makes sense for us.

I mean, not, I mean, you can look year-over-year, but if you look multiyear, your profit there has been fairly stagnant as opposed to some very dramatic progress you've mad in your metals containers business. So I mean, do you see it as a business that you do expect in you the start to grow again in that business, or you simply, and again, you do see these opportunities, if we're sitting here talking about, I don't know what the issue is of the next day, and I think you guys have done a great job holding the line on profitability -- don't get me wrong. You want this to be a growth engine? Are you happy with it being maybe a return engine, if you will?

No, well, first of all, either one of those are fine. You know us well enough to know that. We're not going to go for growth for growth sake. If it proved to be a great cash generation business that would be a fine answer here. As you asked me right now, I do think that there are growth opportunities here and that we do anticipate growth going forward.

Again, to kind of put the last couple of years in context, we came from a business that had very high returns. It did go through competitive intrusion so those returns came down but still to quite accessible levels and we think better than most comps that you find in the marketplace. Now you've got a year where with the volume off for what we believe is a totally unrelated reason, yet it's holding its operating profit basically. So it's done a good job taking costs out. We look at all that and say that's a formula for a pretty good opportunity, if you can find good profitable growth investment. That's what we're looking at. But over those past couple years, remember we basically held back capital for a while in the business. We were not trying to go for broke because we wanted to wait and see what the market played out. So, I think basically the business did a very good job, given what we have to do during that time which was stabilize itself and we are hopeful that we'll find opportunities now to move it into a new segment, which is some good profit return based growth.

Great. Thanks for those thoughts. And the second avenue I want to talk about is the CapEx program. And the investment program. Can you give us a sense of where you think 2007 capital spending is going to be? In other words, how long do you anticipate that your capital program will remain at these elevated levels?

Yes. We can give you some color there. I guess what I would say is that given the opportunities that we see out in front of us and some of what Tony talked about, this is probably a bit abnormally high from where we would see kind of a run rate for next year. I think we've talked historically that this business is about 100 to 105 million CapEx on a sort of a normal year. I think what we would say to that is if you just normalize that up for a full year of the White Cap business, so maybe that's another, 10 or 15 million, so now you're looking at kind of 115 to 120 as being an ongoing baseline for the business to be sustainable.

Okay. So you anticipate -- your view is your net by next year, you'll be closer to a run rate, at least based on what you know today, in other words, these capital -- these are clearly identified programs that are going to occur this year?

Yes. What I would also say to that is there's no guarantee that we don't -- that one of those easy open end categories doesn't tip in a big way and we have incremental CapEx to support that as well. So we've used sort of the 12 to 120 as being the baseline and then we'll view incremental opportunities on a return-based priority. So could we be plus or minus that in any given year? Absolutely.

Right. And looking at that easy open end is kind of a classic example of CapEx resulting in growth -- in profit growth for Silgan, my rough numbers back of the envelope is you invested 30, $35 million in that business. Is that a decent ballpark?

You're talking the last time through. Yes.

And that got you essentially close to 50% conversion?

No. No, no. No. We've spent closer to $100 million over the course of time. Some of it much earlier because some of it was aluminum ends early on. So a bigger number got spent but you got to look over a longer period of time if you're going to try to find -- trace the results of that.

Right.

So if we tip the -- maybe that's your question. If the rest of the market tips, we think the capital would be around about $100 million. If we were to go 100% easy open end.

Okay. So that will give us some idea of what portion of that is driven at the easy open ends and incremental 25 million or so -- 20 to 30 million.

The other thing I would just like to say is I think the -- if you look at the history of capital spending in this company in returns, and you know as we do the way our organizations think about getting return on capital our view is if that number drifts in '07 from 120 to 140, that's good news. That's just more return. Free cash flow for its own purpose isn't meaningful. If you can reinvest it and get good returns, that's where value gets created.

And many of your prior capital spending programs, particularly in your food can business you have negotiated returns ahead of time.

Certainly. Yes, we've had some kind of a contract or something in place. Most of our capital has some kind of contract commitment behind it.

Would it be fair to say -- how much of your incremental capital spending that you're doing is 25 to 30 million in incremental capital spending for 2006 has some form of contract associated with it? How much of it is I mean, I don't use this disparagingly, speculative?

Most of it would. Most of it would have some kind of a -- obviously if it's cost reduction, that's irrelevant. On the growth side, most of it would have some kind of a specific customer commitment for at least some period of time behind it. The one exception to that might be if we choose to continue to press forward on easy open end, again I say we sort of already filled the capacity the last time we did that. So that's the one exception where we're -- that we're trying to stay ahead of the curve a little bit on the Quick Top capacity.

And then final attempt to put you on the spot. How much of the incremental capital is cost reductions versus growth?

We don't have that exact. And some of our combinations, often you're going after a new piece of business and combining it with other business and getting a lower cost structure. So we don't really have that broken for you

Okay. Got it. Thanks, good luck in the second half.

Thanks.

[OPERATOR INSTRUCTIONS] Next to Christopher Butler with Sidoti & Company, please go ahead.

Good afternoon, gentlemen. Just wanted to take a step back to the plastics question here for a second. With your customers reducing their inventory, can we expect that your inventory levels are going to go up as you are asked to be more responsive to their needs?

No. Not generally. That's not been the discourse, if you will, it's been much more kind of how retailers handle inventory and handle stocking shelves, et cetera. And not so much kind of inventory through the stream and trying to push that backward. This is more about logistics than it is about you're going to carry inventory instead of me situation.

Okay. And with the delay on the -- in the can segment due to the weather in California, as I understand it, this is for the most part a push of business from the third quarter to the fourth quarter; is that correct?

That's correct. For the most part. I mean, and this happens. I mean, we almost always this time of year get in a conversation about why that for Q3 versus Q4. We tend to think more of the back half because what happens and tomatoes being the most dramatic part of this, is can you get almost all of that back in in Q3 or if it starts drifting late, you get up to potentially this year what could be 2 or 3 weeks drifted out of the quarter later into Q4, which is a meaningful difference.

So you're right, effectively what we're talking about right now is a shift from Q3 to Q4 and predominantly around the tomato business. With that said, we in general have already indicated we think tomatoes will probably for us at least be down a bit for the year as well. But that's already factored in.

Now, is there any residual harvest that takes place in Q4 that now gets pushed into the first quarter '07?

No.

And moving towards the acquisition front, could you give us some details on the part of the acquisition that has been closed, especially the European assets? If I remember correctly, there was a question as to whether they would close.

Yes, sure. Included in the numbers here was all of Europe in June with the exception of Turkey. We had already -- we'd indicated in the release that we have now closed on the plant in Turkey. So essentially all of Europe is now closed although not entirely included in that Q2 set of numbers. So essentially, you've got four international locations that need to be closed now. One in the Philippines, one in China, one Venezuela, and one in Brazil. Basically what's going on here is we had certain conditions to close and those had not been met yet. And when they're met, we'll go ahead and move forward on closing those businesses. So if you ask me now I think the remainder of this year, we could see somewhere between 1 and 3 of the 4 locations closing. With Brazil probably being the wild card we're not so sure about the timing on that one. So and that will, of course be a use of cash through the remainder of the year as we do close on those and that will include the numbers in as we go forward.

Can you give us an idea of the size of those businesses?

In combination there, the Europe alone was about 87% of the top line -- just use that as a proxy here. So in combination of the net balance there.

Okay. Thank you.

We go next to the site of Timothy Thein with Citigroup. Please go ahead.

Hi, guys, good afternoon. Just a follow-up on the -- well, first of all, on the plastics side I'd also add pricing to be a pretty difficult resin environment that you've had to navigate through the last couple of years so certainly that hasn't made things any easier for you.

Tim, thanks, I can't believe I forgot to say that

Just quickly on the St. Paul closure. Is that just you right-sizing the business there or I think you do have a couple of facilities there in more -- north-central Minnesota, I'm just curious if this -- is this it or do you think this is kind of a closure every couple years kind of thing to balance supply and demand?

Well, this is not so much balance of supply/demand. This really is us, what we're constantly doing is trying to look around our organization and see if there are ways that we can consolidate and become more efficient, which the market demands of us. So that's really what's happening here. The St. Paul facility is our largest facility in the entire system in terms of the building itself. So unfortunately that comes with all the costs associated with that kind of size, location, et cetera. So it just made sense for us in order to kind of protect the franchise to take that opportunity to take some of those costs out and go forward with that. We are constantly looking at ways to do that. We think that's kind of how you grow and survive in our industry. And so we, from time to time, they come up. I would not want to leave you the impression there are a lot of these. But you've got an organization that's been active in this regard for a long time.

Yes.

But we're always looking at ways to move around the parts of the puzzle if we can.

Okay. All right. Great. All my other questions were hit. Thanks, good luck on the quarter.

Thank you.

Our final question comes from the site of George Staphos with Banc of America Security. Please go ahead.

Maybe you could talk a little bit about your early-on findings with White Cap Europe. What has been progressing pretty much as expected, perhaps where have you been somewhat surprised? And could you give us a little bit more color on what kind of synergies you might be able to get across businesses, realizing that you know, this is a new flagship basically in Europe there were going to be a lot of synergies, but I guess there's probably still a little bit.

Yes. Well, first of all, it is a little bit early to have a lot of that beyond what we thought as we went through diligence. But right now that business is in kind of its busy season. So in essence they're just staying focused on meeting the demands of the market right now. But we're -- so far we're pleased with the kind of the organization in place. And the prospects of the business again we're going to look awful hard at the growth opportunities that we've talked about in the past. So that's, we're kind of in that mode now of A, letting the business get refocused. Remember, this business also just went through a fairly lengthy process of sale. So we want to let it kind of refocus itself on its market. And then we will look at a few of these growth opportunities although we'll, in our typical Silgan way try not to inundate with too much too quickly in that regard.

But really no other findings at this point except that the -- it's interesting to watch the two businesses kind of reach out to one another. We talked about putting these two parts back together. What's interesting is deep down in our organization, individuals know each other and can reach out. Which sort of goes to your second question. This is not as you'll recall a synergistic acquisition. We had no presence in Europe or the other locations so we don't see a lot of costs to be taken out, necessarily. On the other hand, there's a lot of complement to it. We both were working on technology around metal closures. So there's -- we have knowledge that's moved in different directions over time that we can share a bit. We can probably get more efficient in that development process as well. So maybe that's a bit of a synergy.

And then on the U.S. side, we've advanced so far on plastic closures and opportunities there, that I think that that, we can already see that there could be some learnings and opportunities that go towards Europe in that regard. But it's going to be those kind of subtle things, George, that are going to take time to play out, rather than a quick synergistic hit. But again, we bought this at what we think was a very reasonable price for the opportunity that's before us and the potential for growth opportunities.

Is the staffing per line equivalent across both businesses, is the manufacturing process the same? I'd imagine it's pretty comparable or are there differences where you might be able to do best practices?

Well, there will be best practices for sure and we're already beginning that process. But I would say that it's not that far ago that these businesses -- already were doing that.

I understand.

But you can imagine in some locations in Europe there's been more capital spending to automate and take some labor out. And is there a value of that given our labor cost? We're looking at all that. So there are some of those, George.

Okay. Quickly, maybe to wrap up the north side. You had talked about mix before when I asked you a question. And I understand that larger cans tend to be more profitable in terms of dollars per unit than smaller cans. But I was asking the question really more from a standpoint of end markets, what caused the shift in the quarter? Was it simply tomatoes moving into the third quarter or even the fourth quarter. You said that you typically give volumes, but I don't see that you've give us volumes for the food cans in the quarter, so I was wondering if you could help us out there?

Well, essentially the volumes are flat food and can for the quarter. So we tried to do that just by saying flat. It's not, with the exception of the pack, pack certainly is driving part of this. Beyond that, there's nothing more to it. It's really the timing of what's going on -- and yes, pack is a piece of that.

Okay. How frequently have you had a situation where the tomato pack is delayed and then you lose it because of frost? I know -- what's that?

It can happen. That certainly is the concern. I have -- interestingly--.

It's got to be less prevalent than with say corn or some of the other crops.

No. No. What happens with tomato is that if it gets wet, you can get a mold situation and that's a problem. And it cuts right off. So there is risk if it goes late. I haven't really given the full dissertation on our pack business whick I'll spare everybody, but on tomatoes, you'll recall we talked about the wet conditions, made plantings go late. We were hearing about potential delays as much as three weeks. That really would have brought your question in play. You got to get pretty late in October for that to work. It's been hot and tomato plants like heat. It's been very hot on the West Coast. So it would appear that perhaps we picked up maybe a week of that at this point in time which would sound like pure good news except that I'm told that in those areas where they did get the plantings in in time and they actually have fruit on the vine, the fruit doesn't like it at that heat. So I'm not sure what all that means except that it does feel like we picked up a little bit of time against the three weeks.

It means a lot of tomato paste, I guess as opposed to other products.

Yes

All right, guys. Thanks, good luck in the quarter.

Thanks, George.

Thank you, everyone for your time, and we will look forward to speaking on our third quarter conference call.

Ladies and gentlemen, this does conclude today's conference call. At this time I'd like to thank you for your participation. You may disconnect at this time and have a great day.