Silgan Holdings Inc (SLGN) 2006 Q3 法說會逐字稿

Thank you for joining Silgan Holdings' third-quarter 2006 earnings conference call. Today's call is being recorded. From the Company today, we have Tony Allott, Chief Executive Officer; Bob Lewis, Executive Vice President and Chief Financial Officer; and Malcolm Miller, Vice President and Treasurer. At this time, I'd like to turn the conference server 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. Welcome, everyone, to Silgan Holdings' third-quarter conference call.

As usual, we're going to make a few prepared comments at first, and then Bob and I would be happy to take any questions once we've concluded that portion.

As indicated in our press release this morning, we are pleased with the business performance during our peak third quarter, particularly given the challenging growing conditions experienced in the West Coast. We earned $1.31 per diluted share for the third quarter, well in excess of our original earnings estimate and the prior year. These results did include $0.15 of cumulative benefit of an R&D tax credit, offset by $0.03 of rationalization costs. Excluding these items, we were still ahead of our expectations due primarily to strong performance in the closures business.

The recently acquired International Closures business was accreted to earnings during the quarter, and the integration has gone well thus far. Our metal food container business performed about as expected, given the volume issues on the West Coast. On the plus side, we are anticipating some recovery of these volumes in the fourth quarter, as certain food [pack] seasons were extended.

Volumes in our plastic container business began to pick up from the second quarter but were still a bit behind last year's levels. As a result of this performance in the quarter and our expectations of some recovery in the metal food container business in the fourth quarter, we have increased outlook for the year to a range of $2.56 to $2.61 per diluted share.

With that, I'd like to turn it over to Bob to review the financial results in more detail and provide earnings estimates for 2006.

Thank you, Tony. Good morning, everyone.

As you know, the third quarter is our strongest seasonally largest quarter, and as Tony indicated, we faced the challenges of poor growing conditions in California, the uncertainty of plastic volumes which we believe resulted from the inventory destocking at the retailers, and our first full quarter of the International Closures integration. After completing the peak season, we are pleased with our financial performance for the quarter and nine months, particularly regarding the International Closures business, as the acquisition was accretive for the quarter.

Plastic volumes improved versus the second quarter and food can volumes were in line with our expectations. As a result, we delivered strong financial results for the third quarter of 2006, which were above the top end of our earnings estimate.

Consolidated net sales of 856.4 million for the quarter were up 58.9 million, or 7.4%, as sales increases in the closure business or offset by volume declines in containers and plastics.

Net income for the quarter was 49.7 million, or $1.31 per diluted share, compared to net income of 45.2 million or $1.20 per diluted share in the prior-year quarter. Interest expense for the quarter increased $5.3 million versus the third quarter of last year as a result of incremental acquisition borrowing and higher interest rates.

During the third quarter, we completed research and development tax credit project that we engaged outside advisors to undertake. The result was that we were able to identify various projects over the past several years that met the IRS definition of research and development and yielded a cumulative net tax benefit of approximately $6.5 million, thereby reducing our third-quarter tax rate to 28%. After offsetting these credits by the project fees paid to the advisor, which are recorded in corporate SG&A, the quarter benefited by $0.15 per share.

Given that the third quarter is our seasonal peak, we continue to use our revolving credit facility to fund working capital requirements during the quarter. As a result of this and the acquisition of the International Closures business, we closed the third quarter of 2006 with outstanding debt on the balance sheet of 1.1574 billion compared to 970.7 million in September of 2005.

Based on the structure of our debt as well as applicable swaps that are in place, we have approximately 55% of our debt in fixed rates at the end of September. However, we expect our fixed ratio to be approximately 70% at year end, as we anticipate paying down our revolver borrowings during the fourth quarter.

For those looking at cash liquidity metrics, depreciation and amortization for the quarter was 31.6 million versus 31 million in the third quarter of 2005. On a full-year basis, we expect depreciation and amortization in 2006 to be roughly in line with the prior year.

Third-quarter capital expenditures totaled 28.5 million, compared to 19.5 million in the same quarter last year. As we indicated last quarter, we expect our full-year capital expenditures to be approximately 130 million as we fund normal capital requirements for the International Closures business, continue to invest in easy open-end capacity, complete plant rationalization programs, make additional plastic closures investments, and invest in automation and cost-reduction opportunities across each of our businesses. Additionally, we paid a quarterly cash dividend of $0.12 per share in September, the total cash cost of which was $4.5 million.

I will now provide some specifics details regarding the financial performance of each of our three franchises. Net sales in the metal food container business were 557.9 million versus 573.8 million in the third quarter of 2005. As expected, food can volumes were down moderately versus the prior-year quarter as poor growing conditions in California reduced yields of peaches and tomatoes during the quarter. Some of this volume shortfall is expected to move into the fourth quarter, particularly as a result of the delay in packing tomatoes. The revenue impact of passing through higher raw material and other inflationary costs partially offset the decrease in net sales due to the volume shortfall.

Income from operations in the metal food container business decreased 7.2 million to 63.5 million for the quarter. Lower unit volumes and rationalization charges were the primary contributors to the decrease in operating income.

Net sales in the plastic container business decreased 1.6% to 140 million in 2006, primarily as a result of lower volume. However, plastic volumes were up versus the second quarter of 2006.

Our continued focus on cost reduction and productivity improvements offset the impact of volume declines and additional rationalization charges, as income from operations of 7.2 million is essentially flat with the prior year.

Net sales at the Closure segment increased 77.2 million to 154.5 million versus the prior period. The primary driver behind this revenue increase was the incremental revenue provided by the first full quarter of the newly acquired International Closures business, which closed in June of 2006. Income from operations in the Closures business increased 9.4 million to 19.9 million for the quarter, driven by solid results from both the international and domestic businesses. Earnings from the International Closures business more than offset the negative impact of the write-up of the acquisition inventory as required by purchase accounting.

On the domestic side, our recent investments and continued focus on cost reductions contributed positively to operating earnings.

The first nine months were impacted by unit volume declines in plastics, which we believe were the result of the inventory destocking initiatives, and poor growing conditions in California, which reduced year-to-date can volumes and caused a shift in some volumes into the fourth quarter. While these challenges, combined with inflationary pressures, created a headwind, the combined business was successful in delivering positive year-over-year results for the nine months.

Based on our year-to-date performance and our fourth-quarter outlook, we are raising our earnings estimate for 2006 from a range of $2.33 to $2.43 to a new range of $2.56 to $2.61 per diluted share. Keep in mind that these increased estimates include estimated rationalization charges of $0.22 per diluted share and a benefit of research and development credits of $0.15 per diluted share. As a result of our increased full-year earnings estimate, the fourth-quarter 2006 earnings estimate is a range of $0.37 to $0.42 per diluted share, which includes estimated rationalization charges of $0.05 per share relating to activities previously announced. This estimate compares favorably to $0.37 per diluted share in the fourth quarter of 2005, which was not impacted by rationalization charges.

As part of the normal course of operations, we continue to evaluate potential cost savings initiatives and are currently reviewing a plan to close an additional metal food container facility. We expect that a decision could be announced in the fourth quarter of 2006, resulting in an additional rationalization charge which is not currently included in our earnings estimate. If we choose to move forward on this plan, it is expected to yield compelling cash-on-cash return.

As you know, the fourth quarter is the period in which we generate significant cash from our working capital. Consistent with our prior guidance, we anticipate our 2006 year-end debt balance to be approximately $900 million, representing a $257.4 million reduction from our current debt level.

That concludes our prepared comments, so we can open it up for Q&A. Millicent, would you please provide directions for the Q&A session?

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Chris Manuel, Keybanc Capital Markets.

Congratulations on a great quarter! A couple of questions. First, can you give us a little more color on what volumes look like maybe on a unit basis across your three segments?

Should I wait for the other questions or start answering that one?

Go ahead! (LAUGHTER)

Sure. In the food container business, basically the volumes for the quarter were down a little over 5%. On the plastic side, we were down about 3%. Closures, there is really no way to answer that, up a lot considering we had the new acquired business in it.

Okay. If I give you all of my questions at once, it gives you too much time to think of an answer!

(LAUGHTER). That's why I asked the question.

So when you think about, could you give us, how much did the acquisition contribute to revenue in the quarter, in the international business?

To revenues, it's pretty close to 50-50 between the businesses.

Okay. Let me go a little deeper into the plastics business, if I can. So volumes back to, well, sort of more normalized where they were the last few years, so essentially the destocking issue now fully behind you, I would assume. And as we look forward, is there a good likelihood, in your mind, that we would get back to more normalized plastics growth, i.e. up 1, 2, 3, 4% beginning next year? Can you talk about the overall climate?

Sure. First of all, your characterization I think is right. You know, the problem with inventory corrections is you never really know whether they exist at all or when they begin or when they will end. So what we talked about in Q2 was that we had seen, pretty much across the board, volume softness, and so it made a lot of sense to us that that was an inventory correction.

During the third quarter, I would say, generally speaking, we saw the same thing recover, which is essentially, across the board, you saw demand start to fill back in. So that it all fits a hypothesis that we had there was an inventory correction going on. So I would say it fits to that.

You know, I think it's probably fair to say, given the concerns over hurricane season that may have been going on in the quarter, you may have also had some lift just generally on that. I don't know; that's all speculation as well. So, are we all the way through an inventory correction if in fact that exists? I don't know, but the signs are pretty good in the quarter that there was some strengthening going on at least.

I think, Chris, the answer to your question is on a longer-term basis, not dealing with individual quarters looking out more, is yes, that I think we've said we do see a plastics business that we were holding back to a certain point over the last couple of years really trying to assess what was happening in the market. I think we've been saying that our feeling is that it has been competitively a lot quieter of late, and so we are looking for opportunities to find growth in a disciplined manner. So not across the board but longer-term, that is kind of how we're looking at it. We would expect to see growth in the coming years.

Okay. Thank you very much, gentlemen.

George Staphos, Banc of America Securities.

Good morning. I guess the first question I had was with White Cap Europe and to the extent that you can comment on a forum like this. What have been your observations with the business now owning it a little over a quarter? What surprises, again, that you could relay have you found, either positive or negative? It would sound like, overall, it's been trending as you would have expected overall, given the performance. Then I had some follow-ons.

Okay. I think, George, I will start with observations and then I will see if I can come up with a surprise for you. You know, the general observation with one quarter in, which I have to characterize as being very much early days on this, but what we saw in the quarter was somewhat promising. The volumes looked pretty good. They were up something like 3% over the same quarter a year ago. I recognize that wasn't, we didn't own the business at that time, but that's what the data shows. That was in spite of the fact that you had some shortfall in the Middle East because of the conflict in Lebanon. You did have not a great growing season interestingly in southern Europe, particularly Italy as well, so some of the tomato business was off a bit there.

Right.

Nonetheless, you saw some volume growth, and importantly, a pretty good mix of volume during that period of time. So I would put all of that in a positive category.

Also, there had been, you may recall that we had talked about cost reduction efforts that the business had been going through prior to our acquiring it. What we saw in the quarter is that those were basically holding and taking some root, so I think that's positive as we look to the business and the success of the management team. Essentially, our team implemented that. So I would also say that's a good sign for us as we look forward.

Then operationally, I think, again, as a business performed pretty well. So we would look at it and say it's hopeful as we go forward but again, that there's no victory being declared yet. We've got a lot of integration still to go here, and I think that sort of takes (indiscernible) the surprise for me on it is probably how seamlessly these two businesses have come back together again in that very deep in the two organizations, people know each other, so deep down already there's a communication that goes across the ocean. I think that is both a challenge and an opportunity. The challenge is we've got to control that and make sure that we are working on the things we want to be. But the opportunity is you are getting the best out of both businesses. I think we will have a better shot at doing that more quickly.

Is there more of an opportunity do you think for synergy as the Street would typically think of it? Then separately, what were the negatives with White Cap Europe? You know, there must have been some things.

Well, I will go in the order you asked it. I don't think, there may be a bit on synergy, as the Street would think about it, real cost-saving synergy. But I think what we've said so far still holds, which is, in essence, it's more of a complementary acquisition than it is a synergistic acquisition. So you know, I don't think that you get those kind of opportunities.

You know, on the negative side, I'm not sure it's a negative but like everything we do, it is a grind-out business. You've got to get in, understand in detail what's going on. I think the focus for us, which I just sort of speaks to a negative, our focus here primarily is really driving this business at a real market focus. You know us well enough. You've heard a lot from us. We have pretty strong opinions about how franchises are formed and built, and it all revolves around this idea of providing best value uniquely to individual customers. That cost us a lot in price, quality and service. So what we are focusing a lot on is getting this business concentrated on, what are the needs of the market individually by customers, etc.? I really think that's something that Silgan can bring to the business uniquely, is that kind of focus on market and customer needs.

On the other hand, this business has done a lot in terms of automation, productivity, etc., and in many ways there's more opportunity perhaps for them helping the U.S. business over time. Again, that would take investments. I wouldn't call that a typical synergy, but it actually kind of presents those opportunities as we go forward. Then from there, all of the growth opportunities that we hope to take a look at in terms of developing markets, plastics in Europe, etc. all kind of follow that process, George.

Okay. One quick question and then I will turn it over on a separate topic. On debt, we shouldn't expect anything unusual out of the business in terms of how you drive that 250 million some-odd free cash flow so as to pay down the debt in the fourth quarter. Are we still looking at, maybe this is a two-part question. Are we still looking at a leverage factor by next year in the 2 times vicinity? (multiple speakers) debt pay down?

Yes, George, this is Bob. The real driver of that cash coming out of the business is really just the ordinary course, how it comes out of our working capital. So yes, to your point, nothing out of the ordinary from that perspective.

Then yes, we are still kind of in the same range from a leverage perspective. We ended last year at about 2.1 times. The acquisition ticked it up to what will look like about 2.6 times, and then the business deleverages at about a half a turn a year, so nothing, no major change to that [view] either.

All right, guys. Thank you.

Ghansham Panjabi, Wachovia Securities.

Good morning. Congrats on the quarter. You know, in your new plastics business, you mentioned that volumes, volume trends were up sequentially versus the second quarter. Yet on a year-over-year basis, your margins don't show that necessarily. Is that because of resin? Is there a mix issue there? How should we think of that?

Good question. I did see that in your write-up this morning. Essentially, if you look back over the recent history of this business four years or so, you always get that kind of movement in the margin in Q3. There are a couple of drivers of that. One is essentially the mix of product we sell. Certain markets that we sell into have different seasons, so you just have a mix change that happens naturally through the typically kind of more front-loaded, certainly through Q3.

The other thing is that July tends to be a month for many of our customers where there will be shutdowns around the Fourth of July period, so you also tend to get customer shutdowns and they associate either volume or cost challenges associated with it. So those are the kind of two factors that drive that. So I do think the right comparison here is year-over-year. The reason that we may comment on the sequential is it seemed like there was a lot of focus, understandably, about the 11% decline year-on-year in the second quarter. So all we are trying to do is start to address that we were seeing some sequential improvement on that point.

Okay. You know, you just seemed a little bit more positive on the prospects for this business going forward. Are you ready, at this point, to start looking at consolidation as a mechanism to create more value in that business?

Well, first of all, I didn't mean to be more or less positive on the future of the business. I think our view is we thought we had an inventory correction going on; we believe that to be the case. We think we are seeing some change in that although as I said, whether Q3 and hurricane concerns drive any of that, I don't know. My comments were definitely meant more on a long-term basis about the business. I think we've been consistent that our feeling here has been that this business has performed quite well over a long period of time, that it has got a very meaningful franchise position in markets that it sells into, and that essentially there has been a competitive dynamic going on over the last four or five years that made us pull back and watch. I think we've been saying, for at least a good year now, that our view is that there will be opportunities to continue to expand and invest in the business.

So the long way of saying yes to you, that the right opportunities, we look at plastics as a broad market and say it's gone through hard times, the entire industry, and that that creates opportunity on the consolidation side for a disciplined buyer.

Okay. Just one final question as it relates to food cans. You know, how much do you think the poor crop harvest relative to, say, a normalized year, all said and done, would have cost you on an EPS basis for this year? Is it $0.10? Is it $0.15? You know, can you just us some color there?

Well, I think we've got to get through the fourth quarter to answer that question. I mean, one of the things we've said is that we are expecting some recovery but there's no question that there is also some permanent impact on the year from essentially what was a very poor peach harvest, peach crop and a down tomato for sure. So I don't know.

EPS for the full year, again, that depends on kind of what recovery we see in Q4.

What are you estimating for that recovery in Q4?

Well, we are estimating that tomatoes will, that we will see packing continue through to kind of this week, basically. So far, that seems to have occurred. Then there's some other pack that goes on in the Pacific Northwest still, and that will go a little bit longer, so it's harder to determine now.

Okay great. Thanks so much. Good luck in the quarter.

Claudia Shank, JPMorgan.

If you could just provide maybe a little bit of guidance on the tax rate for the fourth quarter and maybe next year as well.

Sure, I will give you some clarity there. As you know, the R&D tax credit study yielded a fairly significant benefit in the third quarter, which bought the rate down to about 28%. There is a piece of that that is ongoing that is by comparison pretty small. So that combined with the fact that we now have some international low tax jurisdictions, our overall rate on a go-forward basis should be below what I will say is the historical last couple of year normalized rate that was somewhere in the neighborhood of 41%. So you can think of it as 1.5 points or so reduction off of that.

Okay, that's great. Then just if you could put maybe a little bit of color on the rationalization and restructuring program. You know, how are the savings progressing or what inning are we in, in terms of savings and what can we expect going forward there?

I will start and Bob can clean up for me. I think the ones, there are essentially three to be discussed I think. One is a rationalization we did on the plastics business, which is essentially behind us now, and so you are seeing essentially the, well, some costs remain but many of those costs are now out of the business. So, too, is the volume by the way. Something like 1.3% I think of the volume in this quarter down is essentially the result of shutting that plant down. So amongst the other volume conversations, there's that as well. That's the smaller of the three items discussed.

The second one is the consolidation that we announced last quarter, the shutting of our St. Paul facility. We are kind of right in the game now. Game is bad word there. We're right in the process of doing that. That plant won't be fully shut down until the middle of next year, so you get some of the benefit in the back half of next year.

The third one, there's not much to say, which is, as Bob said in his prepared comments, we are looking at another facility on the food can side. We put it there because we anticipate the possibility of an announcement in the fourth quarter about that. I think it would be fair for you to assume that that's going to take awhile to get completed as well. So, typically these are kind of like a year out before you are beginning to see benefits of those kind of actions.

Yes, Claudia, the only thing I would add to that is that, in fact, reflected in our guidance is some cost associated with those, particularly the first two that Tony talked about, primarily just relating to sort of building shutdown costs as we exit out of those facilities.

Great. Thank you very much.

Dan Khoshaba, KSA Capital.

Good morning, guys! Let me ask you this question. You had mentioned in the press release that the White Cap Europe international acquisition had been more accretive, or at least it was accretive; it wasn't expected to be (indiscernible), if I remember correctly, actually next year. What happened that it was accretive? Was it better volume? Better price cost? Better execution? All of the above? What's going on with that? Does that make you think about the overall level of accretion? I know you don't want any of the analysts on the sell side to get ahead of themselves, but in terms of how profitable this business might be, like going into next year?

Well, first of all, a clarification. We always assumed that this business would be accretive in Q3 and dilutive to Q4, and the net of that plus the bit of dilution in June, the net of all that was going to be flat for the year was our original estimate. So again to be clear, because this is seasonally the peak quarter for that business, we always assumed it would be accretive this quarter. What's changed now is it was more accretive, as you point, and I'll get to your real question in a minute. So it was more accretive in Q3 than we had expected. It will still be, our expectation right now is somewhat dilutive in Q4 because that's its weakest quarter. But now we are seeing accretive in total for the year.

The answer to your real question is that partly when it's a new business, you hedge yourself a little bit against kind of what you don't know. The good news in the quarter, not much of that really happened. Then I would add to that that it was a pretty good mix of products sold, which was helpful, and then the execution was pretty good. So again, maybe that's more of the, we were hedging a bit of that and didn't need to. (multiple speakers).

Fair enough. Another just follow-up if I could? To get to where you are at or where you believe you're going to be at the end of the year in terms of debt, at 900 million, you have to generate a lot of cash, which I have no doubt that you will. But when do you now think your free cash flow for '06 will come in? What should we think about free cash flow for '07?

I would do the debt reduction for the year.

Yes. I guess I will come at it maybe slightly differently for you, Dan. If you remember, we came into the year talking about a free cash flow number that now just comparatively gets upside-down because of the deal.

Right.

So I would say, look at the major components and you'll kind of come to the conclusion that not much has changed in the fundamental underlying business. We borrowed 251 of additional borrowings for the White Cap Europe deal. There's still some acquisition to go in that deal, which will cost us about 40 million or so. We upped our CapEx of about 40 and some incremental cash interest. That kind of gets you to, offsetting by the free cash flow, that's kind of the $200 million net change, if you will, getting from 700 year-end to the 900 that we are forecasting now.

Okay, right. I've got that, not a problem. What do you think CapEx will be for '07?

CapEx?

Yes.

I guess we would say that, right now, our view is that a normalized number is probably something that looks like 110 to 120. Historically, we would have said that was about 100, but now, if you add the full year of the normal White Cap international business, you know, we are moving it up a bit.

And a bit of that depends upon how much we finally spend this year and how much carries into next year. So if it looks more like 130 this year than 140, then maybe you shift 10 the next year or something like that.

Okay.

But importantly, the depreciation in this quarter was about 30, 31 million. So if you compare that, we are still talking about something in line the depreciation or underneath it.

Right. Your interest expense should run at about, it's about running at about 18 million a quarter right?

That's about where it was for this quarter.

Yes, but you're paying down debt. Okay.

The third quarter runs a little but higher because of the seasonal borrowings.

All right, thanks a lot.

Alton Stump, Longbow Research.

I just had two quick questions. First off, I just wanted to get sort of an update on your easy open ends. Obviously, you guys have done a great job over the last couple of years in moving that into the soup category. I just want to get an idea now that has largely been completed, how the other end markets are accepting these new ends.

Good question. I think it is something we've talked about, as you know, quite a bit. Again, it's kind of a review somewhere around 60%, 50 to 60% of what we do are on easy open ends today. As you point out, that the most recent kind of major market to move over was the soup market, which has essentially happened. Again, we've talked on previous calls. I won't go through the whole litany but the consumer reaction continues to be very strong in markets that have gone to easy open ends, so there's a lot of information to support that. I would be happy to talk about it with anybody who wants to spend time with me on it.

So we're quite optimistic. We talked about last call that we are putting in more capacity. We are essentially capacity constrained right now, so if anybody wanted to make a major move in easy-open ends today, we really couldn't support them. We could help them initially get into it, but we really couldn't support a major conversion without more capacity.

So, what's happened lately? I think we started to talk about it but there are cases now of certain vegetable products have been packed with easy-open ends, so I would think it is fair to say that the vegetable market is looking and considering and trying to get a sense of consumer reaction on easy-open ends. Again, you can tell our experience leads us to conclude that that will be quite successful once they've had a chance to see that perform.

Okay, great. That's all I have. Thanks.

Christopher Butler, Sidoti & Company.

Good morning, gentlemen. I just wanted to get a little bit more color on the harvest in California and just how much business here in the third quarter was lost and then what you might expect that can be transferred into the fourth quarter.

Well, as I said, the volumes were down about 5.4%. You know, the bulk of that is the California harvest. So, that gives you kind of, and by the way, we shouldn't forget Q2 also suffered, because essentially we had the improved (indiscernible) to affect Q2 as well. And so, essentially that's what happened thus far.

Our feeling is that we will see some of that shift to the fourth quarter, but a relatively small portion. I mean, you were talking about three weeks or so that will shift over. So on balance, it's pretty clear to us that volumes will be negative for the year. We would ultimately characterize pack in aggregate as not being a very good year, and you've heard, peaches by far the worst. In fact peaches, the tonnage looks to be down 35% this year, so we're talking about a major change in terms of total tonnage to be canned in the market. Tomatoes are certainly down. Then the Midwest basically had a very good season. The problem is the good never offsets the bad because people don't want to can a whole lot more than 100%. They may go a few points over but it was very, it was a good growing season in the Midwest, but again, you don't offsetting [point] on that.

I'm sorry if I missed it, but could you give a little bit of detail on the tax benefit that you received here in the third quarter?

Sure. It was a research and development tax credit, which basically entailed a project of going back and looking over the past several years at projects that we've invested in that meet the IRS criteria. It is a direct deduction through the tax return and that was about a $6.5 million benefit offset by the fees that we were incurring to facilitate the project. That netted us to the $0.15.

Thank you very much.

Edings Thibault, Morgan Stanley.

I just wanted to drill down a little bit more on the food can side. You know, based on my numbers, it seems to me your volumes year-to-date are running down about 4.5%; your profits are down more like 12% year-to-date. So putting aside whether or not you recover some of this in the fourth quarter, can we talk about how much of the profit decline is due to weak volumes and how much is due to some price cost slippage?

Well, sure. I'm checking what you just said against, the year-to-date food can volumes are down about 1.5%.

For Silgan?

For Silgan.

Okay.

Yes, so just to clarify that point. So, and I think, I guess that answers that question.

I think other things affecting the business, because your point is right. If you look year-to-date, the profit performance, that is not all attributable to what has happened on the tax side. It is also fair to say that the product mix in food cans has not been as strong as it was the year prior. Now, some of that is because of the pack and the size can that often go into the pack. So you've had that as well. Thirdly, we've had a fair amount of inflation that, because of the way we pass that through, you get that on a lag, in essence. So for instance, we've had significant freight inflation, energy inflation, etc. that the business has essentially suffered and is only beginning to pass through in many cases.

Well, can you talk about maybe in aggregate some of those pass-throughs? Do you anticipate them getting full recovery of those pass-throughs or is that a little bit more of a shared pain model where at least contractually you have to absorb some of those costs and perhaps some of your customers on a lag absorb those costs?

Well, it depends. Essentially the way our contracts work, and they do vary here a little bit, but essentially they work on index pass through. So the shared pain, if you will, is if we are less efficient in terms of handling our costs than the broader market, then that's our share of the pain. But against the index, typically that gets passed onto the customer. Remember, 90% of our canned business in under contract. The last 10%, we've got to go fight it out in the market to get that piece.

How would you characterize your costs versus the index, given the strong, and by index, you're talking about a broad market index like PPI or CPI, right, not --.

That's correct.

A transport (multiple speakers) freight index, right?

Right.

So your costs have been rising higher than that in the index?

That's very hard answer because the contracts work at different periods of time. Some are point-to-point versus, so I guess the simple answer I would give you is we are probably pretty typical in that regard. You're talking about energy costs, freight, etc.. I don't know why we would be any different than typical.

Okay, so your costs are rising much greater than the CPI/PPIs.

No, I think I said they would be rising in line.

In line with that, okay. Okay, so you do anticipate getting at least some recovery but it's going to be more of a n'07 story, or it will start to lag in --?

It lags. It's when the customer contracts come round, so some is now beginning to get in the numbers; some will come in as we look into '07.

Okay. I think your earlier answer to, Mr. Khoshaba's question answered this. But you are anticipating, in terms of understanding your seasonality of the new acquisition and the closures business, I think we said, last quarter, it is not dramatically different from the current closures business, the international component?

Yes, that's correct. I mean, so the weakest quarter is the fourth quarter. Then comes the first quarter, and then the second and third tend to be closer to each other. So you get something like, maybe in the international business, something like a 15% lower sales level in Q4 than you would in Q3 dealing with averages, if you will.

Okay, got it. Then finally, just on your planned restructuring charges for the fourth quarter, that would be about 2 million, right? About $0.06 remaining?

You're talking about the rationalization costs on the already announced project, which is I think $0.05.

Okay, so you've done 17, okay, I'll check my math. But it's still the $0.22, so it's just $0.22 less what you've done year-to-date, right?

Correct.

Got it.

Yes, you're going to get into some, it's probably a bad thing to even bring up on the call, but there's some nuance of how you account for quarters versus 9-month or 12-month periods, so you can't actually go and add each individual quarter to get to the full year.

Meaning rounding?

Yes.

Okay, (LAUGHTER) I don't know if that clarifies anything! (LAUGHTER). No, I'm just kidding. Thanks for that answer. I think that's it for me. Good luck in the quarter.

Chris Willis, Impala.

Good morning. I had a couple of questions. On the peach situation, it was the hardest, actually worse than you had thought? Because I was under the impression that the government has really incented growers to plant less. I'm trying to get a sense whether there's, anythings are worse than you have anticipated. Then should we expect this to be a permanent change or is there any thought that this might rebound in 2007? Then I had a couple of financial questions behind that.

Okay, yes to both parts of that. You were right that there are two things that affected that peaches this year. The first one was that trees were ripped out of the ground. That we knew about as we came into the year, but that you could only characterize being a permanent reduction on that for food cans in the future, for those speeches. But larger than that, what happened this year was a very poor growing season. So essentially, you had the combination of the two, and a larger by far was the growing conditions. So yes, that was worse than we had anticipated and frankly, even as we looked at Q2, it was a little bit worse in that regard. It continued to get worse. So, we will get some recovery is the answer to your question; we'll get some recovery but the trees that are pulled out are gone for good.

Okay. Then I recognize that you chewed up a lot of working capital going through the first eight or nine months of the year, but just curious how your working capital performance was in the quarter. Then kind of an add-on to that, how is the free cash development? I mean, obviously, it's very early on in the European acquisition of recent, but how is that developing and how optimistic are you about that for 2007?

Well, I will answer it in reverse order. In terms of the international business, I think, again, one quarter in, it looked pretty good. The cash generation was pretty good; not a lot of capital was being spent at that point in time, so early days, but that one looked pretty good.

Help me with the first part of your question again?

I was just wondering how your working capital, I mean, obviously, you have a working capital build as you go through the year and then a tremendous cash inflow in the fourth quarter. I'm just wondering. As you look at your internal metrics of how you thought it would progress through the first three quarters and then into the fourth quarter, how it has looked kind of year-to-date.

Yes, it's pretty typical of what we would have expected, particularly given some of the rising input costs. But we are pretty disciplined and pretty happy with the way the businesses working capital, so it's pretty much right in line with where we would have expected it to be.

Okay. Then one just last clarification. I guess you sort of pointed out that your free cash or excess cash is going to be about where you saw it early in the year. I think you described it as sort of the conditions are as you saw them eight or nine months ago. But is the operating cash flow actually better than you thought in a sense? Is your free cash flow going to be a similar number even with a higher CapEx number? Just walk me through how you get to the same? Are you talking about a similar number that you were looking at, you know a dollar amount back in January, as you would be, say, today, in terms of excess cash flow?

No, you're going to have to offset that original target by the incremental CapEx that we moved it up, because that original target was based on 100 million of CapEx. Now, we're talking about 130 or so. So that would actually pull that number down, as well as the incremental cash interest associated with the borrowings for the international acquisition.

But obviously the changes would, you've got some growth opportunities I guess both organically and on the acquisition front that are bringing the number down.

(multiple speakers) absolutely.

(multiple speakers) exactly right, is that we see opportunity to divest really across the primarily food cans and the closures side, and that's what we're doing. So we are deploying some of that free cash flow is how we think about it.

Great, thank you.

Robert Kirkpatrick, Cardinal Capital.

Good morning. This is getting to be quite a busy call, guys! (LAUGHTER). Can you quantify what the write-up of the inventory was during the quarter from the acquisition, and also quantify what the amount of the acquisition amortization was during the quarter?

Yes, the inventory write-up was somewhere in the neighborhood of about $1 million in the quarter. I guess question, the depreciation of that business is about 3.3 million.

Okay. Then, can you provide us with, you've broken out your business now between the metal food can business and the closures business. Can you provide us with that breakout back on an annual basis into '03 and '04?

We can. I thought we did that.

(inaudible)

Yes, we will do that.

Okay, that's great. Then finally, what's your acquisition spend in year-to-date so far? You've done, you said you borrowed 251. You've still got 40 million left ago on the acquisition. Is that how I should think of it?

Yes, that's basically where we are. We've acquired the businesses in Europe, including Turkey and, then we've got basically the Latin American and Asian businesses still to close.

Now, whether that actually all happens this year or not is a different question. Right now, it would look to us as though one of the two Philippine locations will close shortly. One of those locations probably will not be acquired. The china location I would also expect to close in Q4, and then I think it's hard to tell right now on Latin America. Could that shift out beyond the end of the year? It could go either way.

So you really didn't close on very much in Q3, then?

Only Turkey.

Which would have been just a couple of million dollars?

A little more than that.

A moderate amount of millions of dollars? (LAUGHTER). All right, thanks, guys.

[Todd Mirinowski], Silver Point Capital.

Congratulations on the quarter. Most of my questions have been answered, one last one though. In earnings release, you said that income for operations in the third quarter was a little bit lower because of professional fees associated with the tax initiative. How much did you guys spend on professional fees?

In the aggregate or on that one issue?

I guess what I'm trying to call out is sort of the unusual or kind of one-time fees associated with the quarter.

Well, we don't even need to do that for you, because we already did it for you in the press release. We told you what the whole tax item was net of those costs. So I think we've already done that for you in the $0.15 number that we've already given.

Correct.

Okay. If you go up to the operating income, because up in operating, I'm not going to see the tax benefit, but I just want the (multiple speakers).

Yes, you'll see the variance fall out in the corporate SG&A number. Almost that whole variance year-over-year is that fee.

I got it. Okay, thank you very much.

I've got time for one more if there's one out there.

Chris Manuel, Keybanc Capital markets.

Hello again, folks. (technical difficulty) if I take a step back and let's take a big picture question.

All right, I like those steps!

Oh, yes! So when you think about the plastics business and you think about the mix of your business today that are small-sized models or closures that go to small-sized models, and you think about the potential now for all of us that travel way too frequently to have to take something smaller than 3 ounces on an airplane, is that something you think you can participate in or is it something that you do much of today? Can you help us with, A, how much of the mix it is and, B, maybe just some sort of thought on what you think the potential would be for that business, both on your closures side and on making the bottles themselves?

Well, the closure side, not at all; we don't do those kind of closures. So, there would be no impact there.

You know, when all of this hit, originally I was kind of curious what would happen although at first, we didn't have the small size that you could travel with. So I have to confess that I did have visions of a lot of stuff being thrown out every day at the airport1. I don't think I could say we've seen much from that point.

Would we participate somewhat in the small size? The answer to that is sure, we would. My gut is that we're not really talking about big items here. But it would seem logical that, on balance, you're going to see a little more 3-ounce and less containers sold. That should mean more containers in total. So I think there something to it but I wouldn't, it's not a business model by any means.

Well, what portion of your business today are more not even necessarily 3-ounce or less but travel-sized products?

I'm not going to be able to give you a really good answer. I'm going to tell you it's not a huge part of the business.

Okay, thank you very much.

Thanks, Chris. I think that concludes us. Do you have one more comment? Yes, I think that concludes us at this point. If anybody else does have a call, please feel free to give Bob or me a call. Thank you all very much and we look forward to talking at the end of the year. Thank you.

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