Silgan Holdings Inc (SLGN) 2007 Q3 法說會逐字稿

Thank you for joining Silgan Holdings third quarter 2007 earnings conference call. Today's call is being recorded. From the Company today, we have Tony Allott, President and Chief Executive Officer; Bob Lewis, Executive Vice President and Chief Financial Officer, and Malcolm Miller, Vice President and Treasurer.

At this time I would like to turn the call over to Mr. Miller. Please go ahead, sir.

Thank you. Before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the Company and therefore involve a number of uncertainties and risks including but not limited to those described in the Company's annual report on form 10-K for 2006 and other filings with the Securities & Exchange Commission. Therefore, the actual results of operations or financial condition of the company would 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 afternoon, everyone, and welcome to our third quarter earnings conference call. As usual today, we'll start out with a few prepared remarks by myself and Bob, and at the end of that we would be happy to turn it over to any questions that you may have. As we indicated in the press release this morning, each of our businesses performed well against our expectations for the quarter. which which as you know. is our peak earnings period. We earned adjusted net income of $1.26 per diluted share for the third quarter versus $1.19 adjusted net income per diluted share in the third quarter of 2006.

We had positive unit volumes in each of our businesses driven in part by acquisitions. Our plastics container and closures businesses nicely exceeded profit from the third quarter of 2006 and our metal food container business was just short of prior year levels despite the negative impact of depleting the provisional inventory built in the fourth quarter of 2006 and the first quarter this year. We entered last quarter of the year with very strong results through the first nine months, and positive momentum across each of our businesses. As a result, we're raising our full year estimate of adjusted net income per diluted share to a range of $3.20 to $3.30, which would represent another year of double-digit earnings growth. Additionally, we anticipate strong cash flow generation and continue to look for potential acquisitions to continue strengthening our strategic positions. I will now turn it over to Bob to review the financial results in more detail and provide additional explanation around the earnings estimates for 2007.

Thank you, Tony. Good afternoon, everyone. While it is cumbersome to draw a direct comparison between the third quarter 2006 and the third quarter 2007, we're pleased with our results as adjusted earnings per diluted share of $1.26 is up 5.9% even after including an $0.08 negative impact of reducing our provisional inventory during the quarter. Highlights of the quarter include increased volumes in each business, accretion from the recently acquired businesses, and a depletion of the provisional inventory ahead of schedule.

On a consolidated basis, net sales for the quarter were $904.8 million, up $48.4 million or 5.7% as a pass through of inflation and raw materials and other manufacturing costs and improvements to products sold in the metal food container business contributed to higher average selling prices. Additionally, our net sales benefited from the inclusion of sales attributable to operations acquired subsequent to the third quarter of 2006, a beneficial foreign currency exchange on translation of international revenues, and increased unit volumes in each business. Net income for the quarter was $47.6 million or $1.25 per diluted share compared to net income of $49.7 million or $1.31 per diluted share in the prior year quarter. Adjusted net income per diluted share as scheduled in our press release was $1.26 in the third quarter of 2007 versus $1.19 in the prior year quarter which excludes the impact of rationalization charges incurred in both periods and cumulative prior year tax benefits recognized in 2006.

It should also be noted that the third quarter 2007 includes the effect of working off the provisional inventory which resulted in a negative impact of approximately $0.08 per diluted share. During the quarter, we recorded rationalization charges of $700,000 versus $1.7 million in the third quarter of 2006, each primarily related to the ongoing costs associated with the St. Paul rationalization plan initiated in 2006. Interest expense decreased slightly during the third quarter of '07 to $17.3 million versus $17.9 million in the same quarter a year ago. Our average outstanding borrowings were consistent year-over-year as acquisition borrowings, incremental capital spending, and the timing of working capital builds offset the benefits of the debt paydown from year end.

Lower overall interest rates benefited the third quarter of 2007 as lower leverage benefited interest rate spreads. The tax rate of 36.8% for the quarter was in line with our expectations. However, it compares unfavorably with the rate in the prior year quarter as 2006 was impacted by the cumulative benefit of tax initiatives related to the research and development credits completed during the third quarter of '06.

We closed the third quarter of '07 with outstanding debt on the balance sheet of $1.174 billion compared to $1.157 billion in September of '06. The increase versus the third quarter of 2006 is a result of acquisition borrowings and the impact attributable to foreign currency translation primarily on debt denominated in Euros and Canadian dollars, offset by cash flow use to pay down debt at the prior year end. Our fixed rate debt ratio at the end of the third quarter was 65% versus 55% in the same quarter last year. This increase is a result of incremental swaps put in place over the last twelve months. Our current fixed debt ratio is consistent with our historical percentages and in line with our practice. For those looking at cash liquidity metrics, depreciation and amortization for the third quarter of 2007 was $34.3 million versus $31.6 million for 2006. The primary drivers are the impact of the 2006 acquisitions and capital spending.

On a full year basis, we expect depreciation and amortization in 2007 to be slightly higher than the prior year as depreciation associated with capital spending and the 2006 acquisition activity is partially offset by the depreciation fall off from previous acquisitions. Third quarter capital expenditures totaled $37.2 million compared with $28.5 million in the same quarter last year. As we have discussed previously, we continue to see opportunities to invest in our business and estimate capital expenditures for 2007 to be around $150 million. Additionally, we paid a quarterly cash dividend of $0.16 per share in September, total cash costs of this dividend was $6.1 million.

Highlights of our individual business performance is as follows: third quarter net sales in the metal food container business were $585.1 million, an increase of $27.2 million versus the same period in 2006. The quarter benefited from an improved mix of products sold and the pass through of higher raw material and other manufacturing costs, each contributing to higher average selling prices. Additionally, unit volumes were up slightly for the quarter as a more normalized tomato pack was offset by lower unit volumes related to a reduced midwest pack and declines in soup primarily driven by the extended warm weather.

Income from operations in the metal food container business decreased $800,000 to $62.7 million for the quarter. This decrease was attributable to a sizable reduction in provisional inventory during the quarter hurting earnings by approximately $4.7 million. This was offset by an improved mix and slightly higher volumes as previously discussed as well as benefits derived from the ongoing cost reduction initiatives and lower restructuring charges versus the same period a year ago. We now have the work down of provisional inventory behind us and we'll return to managing inventories in line with our normal production planning process.

Net sales in the plastic container business increased $9.1 million to $153.1 million for the third quarter of 2007 as a result of modestly higher unit volumes primarily attributable to Cousins-Currie. Income from operations in the plastic container business increased in the third quarter of 2007 by $3.1 million to $10.3 million versus the same period a year ago. The primary contributors to this increase were the inclusion of the Cousins-Currie operations, productivity improvements, and the benefits derived from the cost reduction initiatives. Net sales in the closures business increased $12.1 million to $166.6 million in the third quarter of 2007. This increase was primarily attributable to the acquisitions of various smaller international operations subsequent to the third quarter of 2006, increased volumes across the business, the benefit of a favorable foreign exchange translation on international revenues, and the pass through of higher raw material costs.

The increase in income from operations in the closures business of $1.9 million to $21.8 million for the third quarter of 2007 was principally a result of the international acquisitions, increased unit volumes and the benefit from cost reduction initiatives and productivity improvement. For the nine months consolidated net sales were up 10.7 to $2.240 billion with each of our businesses showing improvement on the top line. The nine months ended September 2007 benefited from the inclusion of acquired businesses, higher average selling prices as we passed through inflationary costs, and improved unit volumes across all businesses. Income from operations also improved in each business for the nine months as consolidated income from operations increased 46.8 million to 213.2 million. A net income per diluted share of $2.70 is 22.7% ahead of the prior year nine-month results.

With three quarters of the year in our peak season behind us, we raised our full year earnings estimate of adjusted net income per diluted share by $0.05 to a range of $3.20 to $3.30. The midpoint of this range represents a 12.8% increase versus adjusted net income for diluted share of $2.88 in the prior year. We're also providing estimates of adjusted net income for diluted share for the fourth quarter of 2007 in the range of $0.43 to $0.53 per share versus $0.66 per share in the prior year. Keep in mind the fourth quarter of 2006 benefited from two items that will not recur in the fourth quarter of this year. First, we built provisional inventory during the fourth quarter of 2006, which benefited adjusted net income per diluted share in that quarter by about $0.07.

As of the end of the third quarter 2007 we have returned to inventory levels consistent with normal production planning, and the fourth quarter of 2006 also benefited from strong volumes in a favorable mix as a portion of the tomato pack shifted from the third quarter to the fourth quarter while 2007 experienced a more typical season with tomatoes being packed in the third quarter. We continue to forecast capital spending for '07 to be approximately $150 million as we continue to find investments, opportunities in our existing businesses.

Noting that while this level of capital spending is above our normal rate of spend, which we estimate to be in the range of 110 to $140 million, we continue to estimate we will generate approximately $150 million of cash that will be available for acquisitions, further debt reduction, or other permitted purposes including dividends, share repurchases or additional capital expenditures. Given our view of the current debt markets, we may elect not to repay term debt and instead hold cash at year end thereby lowering our average revolver borrowings for the year in '08.

That concludes our prepared comments, so I will now turn it over to Kim who can provide directions for the Q&A session.

Thank you.

(OPERATOR INSTRUCTIONS). Our first question comes from Alton Stump, Longbow Research.

Good afternoon.

Good afternoon, Alton.

Good job on the quarter. Just had a question on the [Sukien] side. Obviously there was a lot of talk last year in the West Coast region with the harvest being delayed there. Just wanted to get an idea of the comps in 3Q versus the fourth quarter. I think you talked a little bit already, but they do in fact get quite a bit more difficult heading into the fourth quarter?

Yes. Your memory is correct. Last year we had a fairly late tomato harvest. California had kind of a tough season all the way through, very wet at the beginning, so we had more of the tomato crop get harvested in Q4. That is not what happened this year. This year was a much more typical year. The West Coast saw pretty good growing season all the way through, so it was warm and on schedule, so much more of the pack happened in Q3 than Q4. You're right that that is part of the head wind on Q4.

While I am on I will keep going with the pack which is not really your question but continuing the story line of pack which affects this quarter in Q3 was also that the Midwest pack was off a bit from last year. Now, some of that was in our expectation. Again, you will recall that the Midwest pack was very strong in Q3 last year, so we all along this year had been foreshadowing we didn't think it would be quite as good. As it turned out it was probably bro below our expectations and our customers' expectations. It was very dry and hot in the Midwest as most of you are aware and right when it got around to harvest time, a lot of rain came in, particularly the Minnesota area. So some of the crops there was too much water at the very end. Depending on what product we're talking about, Midwest ran something in the upper 80% to mid-90% of what our customers were expecting. So in closing, the tomato pack shifted back to Q3 this year versus last year, and then the Midwest also was not as good on volumes in this Q3 some of which was expected and some of which was not.

Great. And then just as a follow-up to that, how is the Midwest pack looking so far in the fourth quarter? Should we see things get back to normal?

Most of the pack is essentially behind us now. That's kind of played itself through. The Q4 is as you pointed out, the comp issue comparison to Q4 last year is really around the tomato that came in late last year. That is a head wind for us on the quarter, and as Bob pointed out the other headwind on food cans, of course, is we were building inventory in the Q4 of last year. We will not be doing so this year. That gave us a nice lift on over head last year, in Q4.

Okay. Great. Thank you.

Our next question comes from Ghansham Panjabi from Wachovia Securities.

Hey, guys, how are you doing? Looking at 2008 for your metal food business in particular, there is some steel tin plate price increases outstanding. You guys have done a terrific job this year managing productivity. How should we think of margins next year? Is there any real visible opportunity for margin expansion in that business in '08?

First of all, on the steel side, as you raise that, you are correct that the steel in the U.S. now we're talking about for the food can business there are announcements of steel increases in the mid-teen levels, and every indication is the steel suppliers are pretty serious about that. I think you're correct there is going to be meaningful inflation to the market. As you know in our food can business we pass that through in our contracts and 90% of the business is you under contract. We do the same essentially on the noncontract piece. We have every expectation that that will get passed through, but yes it does have some margin negative impact, has no bearing on the profit that comes through the business.

Against that, we are always working on taking costs out of the business, focused on productivity, essentially how the business has been run from the beginning, so we will keep looking for way to say take costs out of the business. We will keep looking for ways to do more value-added products like quick tops, et cetera, so our expectation is that taking the steel aside that there there would be margin improvement opportunities in the business, and as to how much steel inflation impact, it really has no drop-through impact.

Looking at closures in plastics, did you see any sort of inventory destocking along the channel? The volumes looked a little bit light there. Thanks.

The plastics -- I guess I answer that in two parts. On the plastics side the volumes were actually -- volumes are hard to talk about. The problem of volumes statistics is we have bottles in there, and then we have closures, sifters all the way down to closures for Krazy Glue, so one unit of volume is not really the same as the next. If I looked at the bottle volume, which is really what a primary part of the business, actually it was pretty good in the quarter. What I think you're seeing there a little more is the mix was not quite as good as we would have liked. Some of that is typical of third quarter, but otherwise it could have been a better mix. I think you're seeing a bit of that in the quarter. None of that is lost business or anything else. It is just timing of when the sales come through.

On the closures side in the U.S. volumes were very strong, upper single-digit strong in the U.S. closures. In addition to that, you have the acquisitions of acquisitions of some of the international locations we made later in the year that gives you more top line growth. You're right in Europe that the volumes actually were down in our closure business in Europe, and the reason for that is essentially the weather in Europe was a very cool, wet, summer in Europe, and that had two impacts the closure business. One is a portion of that business to the juice industry, and essentially less juice and I think this is true of other soft drinks, et cetera, less consumption there. We certainly saw that as this quarter kind of wound down, and on the harvest and the pack side there were definitely impacts some of the agricultural markets as well, so you're right we're down on volume there all of which are attributed really to the weather conditions.

Okay. Great. Thanks so much.

Our next question comes from Christopher Butler, Sidoti and Company.

Hi. Good afternoon, guys.

Hey, Chris.

Forgive me if I missed it, did you but give us what the contribution was for the quarter from Cousins-Currie?

We did not. What I can tell you is it was accretive to the business during the quarter, and it has been accretive through the whole year.

And I think on that same note that you had mentioned that one of the reasons for margin expansion on the plastic container side was because of Cousins-Currie? You also mentioned productivity and cost reductions. Hoping you could give a little bit more color there.

On the plastics side I think we're talking year-over-year, really what we said and Cousins-Currie was a major driver, certainly on the top line it was really the major driver for all of the mix and volume reasons I just went through. It was the largest driver on the top line. It also, because it was accretive, was part of the driving bottom line, but not the majority of it. The other main part was really just the strong operating performance that we got in terms of productivity out of the business of was on a year-over-year was a sizable driver as well.

And could you give us an idea of what you're looking at on the acquisition market currently?

Sure. We won't talk about specific things that we might be looking at obviously, but where we sit today, we feel like we're pretty well-positioned with our balance sheet and pretty good shape, and having access to capital should we find an appropriate acquisition that kind of meets our hurdle rates. Where we are in sort of a pipeline is that we still see a pretty robust pipeline. I think there is a little bit of a stall for lack of a better term in the sense of letting sellers reconcile to price stabilization versus having buyers reconcile pretty quickly, particularly given what's happened in the credit markets, but there is still a lot of properties that are out there on the market for sale. There is a number of them that are being rumored to be coming to the market in the short-term, and we continue to Foster relationships on our own within the trade which is really where our success has been and what's brought us deals like Cousins-Currie and the White Cap acquisition anyway, so I would say we feel as good as we have in the past in terms of what our opportunities are, and we'll continue to fight that fight.

One caveat on that. I got the sense from our last call people thought we were going to try to signal something was imminent because we were talking favorably in the acquisition market. I want to be clear we would never signal that even if it was the case. What you're hearing is the honest opinion of what the acquisition market looks like, but you would be making a mistake to read anything into to either way beyond that.

Appreciate that. Thank you for your time.

Next to Robert Kirkpatrick, Cardinal Capital.

Good afternoon.

Hi, Rob.

Have you quantified what the effect of the shifted tomato crop and pack was in the last year's quarter?

We really haven't. Again, you're seeing -- it is a meaningful part of what you're seeing in the move between the quarters, but we've not quantified that.

Okay. And if Bob would mind commenting a little bit further on his statement that he may not repay the term debt but hold cash at the end of the year and what's leading him to do that for the first time in several years?

I didn't say we would. I said we may. We may consider it. I think there is a couple of things t play there. Most principally just the fact that obviously the debt markets have tightened up and debt has gotten more expensive than the debt that we're hanging onto, so you do know that we build inventory through working capital for the first nine months, so to repay debt that's reasonably priced only to go reborrow in a short-term basis probably doesn't make a lot of sense, so there could be some balance there of what we do with our cash balance at the year end.

Sounds quite logical. And then Tony, a different type of question. How much time do you really have in your manufacturing plants which could be utilized when you're not taking care of the seasonal pack and what can you do with that?

There is obviously time there, but again remember that our seasonal --we do a fair amount of our seasonal, actually to Bob's last point, part of the reason we build up so much working capital is we build inventory all year long for our season, so it is nowhere near the quantity that you would be thinking, Rob, but there is some that sits out there and I don't know that we would do anything with it. Our view is that we've got X customers to support and what's important is we do that and stay focused on their needs and not go kind of hunting around the market to fill capacity.

And then finally, I assume no impact from the fires out in California?

That's correct. Well, actually that's not quite correct. We have a lot of employees in that area who will obviously very worried about their homes, but it adds to the base of our business. That's all much further south.

Great. Thank you so much.

Our next question comes from George Staphos, Banc of America Securities.

Thanks. Hi, guys.

Hey, George.

I guess the first question I had is relative to the '08 outlook, and I realize it is a little early to be talking about whether the peas are going to be coming out well in July, but if we think about it, demand should be pretty flat. You had a terrific pack in California, the Midwest was weak, presumably those balance out. Anything else, again sitting here in October that strikes you as we look out to '08 in terms of volume? Here I am talking about again North American food cans obviously.

I think North American food cans what you described is about right, but I just want to point out that's been the story of North American food cans as long as we've been in the business. But yes, I agree with that point.

In terms of volume trends, I think maybe Ghansham was trying it get at this and certainly it has been a theme throughout the earnings calls. You're not seeing any sign of a slowdown perhaps right now in any businesses that would be a bit more economically tied, but would you see and where would it occur a slowdown if in fact the economy in North America, anyway, begins to pull back further? Would you see any effect in Europe as well given your mix of business? What are your thoughts there?

I think the place that we would most likely see it and where we have seen it in previous years is around our plastics business. The personal care side of that does have some reaction, it is obviously muted compared to most of the general economy, but you will see some there. I don't know that we've seen any in plastics. On the other hand, I wouldn't say that the volumes were over the top or robust either. There could be some there. I think if you see a real slowdown, we would see a little bit more pullback perhaps in the plastics business. As you know, though, on the other hand, in our food businesses, particularly on food cans, you probably see a little bit the other way on that.

I understand. I understand. That's what we talked about in the past. Let me ask one more question for this round and I will turn it over. Were you relatively pleased with your plastics margins in the quarter? Were they -- if you can share this -- above or below your expectations? You talked about mix. I thought you talked about mix being a little bit weak. You talked -- or less than what it would normally be and on the other hand you tact about productivity and Cousins-Currie, so at the end of the day were the numbers from a profit dollar standpoint where you had expected?

Yes. The simple answer is the business came in just about where we expect it to be, so that's the easy answer to it. There are a lot of moving pieces, and there always are around this, but I would say that we came in where we thought, and I think importantly the volume levels of the plastic bottles, which is kind of where we spend most of our time thinking and talking and investing capital also came in on a growth curve that we were pleased with, so we're not dissatisfied at all with plastics in the quarter, and we're certainly not for the year. It is up significantly on the full year, and as we talked before, this business has good returns and in fact, improving returns this year based on our outlook.

Okay. We'll come back to that in the next round. Thanks.

Okay.

Our next question comes from Chris Manuel, KeyBanc Capital Markets.

Good morning or good afternoon, gentlemen. Congratulations on a good quarter.

Thanks, Chris.

Thanks.

Kind of along these lines, traditionally you haven't done share repurchases or things of that nature. Given where the stock's at, I can't picture anybody in this world that wouldn't want to own Silgan stock. Would it be something you would look at? What would it take for you guys to do a share repurchase?

We talked about it before. I think if you look at the history of Silgan, there has been a lot of value that's been created through doing disciplined acquisitions, integrating, and building franchise value. If you look just over the last two years of this business, we've had essentially last year 14.7 adjusted EBITDA growth or earnings growth, and then this year we've got an outlook that somewhere between 11 and 15% growth again, and essentially that's been made possible by deploying that cash through acquisitions, and in this case through the closures business.

We do believe the business has a strong track record of finding good acquisitions, being disciplined about them and integrating them and strengthening our franchises through that effort, and so I believe that it is the best thing we can do with the cash that generated by the business. We've also said, though, if you're going to be disciplined about acquisitions, they're not always going to be there, and you can't necessarily count on that. We are not at all opposed to using that cash for any other purpose as the Board sees fit. Again, we have a significant shareholder ownership through our founders primarily and we are -- our motivation is to get the highest return we can over a long period of time for our shareholders.

By the way, I don't know of any analysts that would read into your thoughts about acquisitions incorrectly because I am just giving you a hard time. Second question actually I had was with respect to resin in the fourth quarter. With some significant increases that have been announced, how have you factored that into or have you factored that into the guidance that you gave and could there be let's say a one quarter impact as pass-through mechanisms and such work?

Yes. The resins are of course going up across the board fairly rapidly at this this point being driven by a couple things. Obviously oil and the sympathy of other chemical products to the oil move, demand overseas, and so we're -- as you know, we're seeing it in all products, and it is true that given the timing of us taking the increase and the ability to pass through in contract, there is a lag, and that is going to impact us in the fourth quarter in our plastics business. We have as best we can factored that into our outlook for the year. It is in the numbers, and our expectation around it. We'll see how severe it goes. The last couple years its abated by the end of the year. It is not necessarily showing any signs of that this year.

But your mechanism, nothing has changed with your mechanism, it is typically a quarter or so lag, and in your closures business, it is similar as well?

That's correct.

And then my final question has to do with when we look at the soup cans for a moment, one of your major soup can customers is out with nice pink cans, and/or pink labels your cans I should say.

Yes.

Historically when they've done these types of heavy promotional activities, does it usually -- have you found that it spurs demand for a short period of time and then things kind of pull ahead or revert back? What's been a normal path when you've had a customer do an activity or is it something that creates extra demand and then goes back to a normal life and doesn't actually pull ahead if that makes sense?

I think I got you. It probably varies by the different promotional items, but you certainly would see some kind of impact from during the promotion period at least. I guess I would say that typically you see some settling back of that, that it gets into the pantry and it gets consumed over some ordinary period of time, and therefore you might not go back to the store quite as quickly. I think it would be reasonable to assume there is some settleback on that.

Fair enough. Good luck in the quarter.

Thanks, Chris.

We'll go next to Richard Skidmore, Goldman Sachs. Your line is open. Check your mute function. Mr. Skidmore, your line is open. Check your mute function.

How about we go to the next caller and he can come back?

We'll go next to Tom Maher, Lord Abbett.

Hi, guys. Just a quick question, in terms of the metal food cans, I am trying it get the relative scale of the impact? I guess understanding that the change in the West Coast pack this year versus last, I thought it would be up Midwest pack I guess was softer, and the then the soup impact. Can you give us a sense of how big those two were?

Well, I think the -- probably the bigger two out that far -- I am trying to decide against prior year let's say. The bigger two probably around the tomato pack being the largest, and then really the Midwest pack and the soup would be relative compared to each other, about the same size.

Okay. And then I guess the relative size of those three businesses, though, I would think a rebound and when you look in the year to year comp on the West Coast would have been bigger than the other two, but obviously it was not because the volume was only up slightly.

That's right, on the volumes because you had the two against the one item.

And then the soup volume I guess is probably more lost than delayed?

I think it depends, you know. Again, our customers have done a pretty good job as Chris has pointed out promoting, paying attention to their product line, et cetera, so I don't necessarily know that, but I do know that the temperatures that we've seen on the East Coast at least for the last month if it keeps up may bode that is more permanently lost, so we would like to see some cold weather about now.

All right. We'll root for cold weather. Thanks.

(OPERATOR INSTRUCTIONS). We'll take a follow-up from George Staphos, Banc of America Securities.

Thanks, guys. I want to touch on the question again on pricing and margin. We know in obviously the United States you've shown the ability to pass along higher steel costs, a couple years ago or three years ago I think was a terrific example of that. In Europe, where perhaps the tin plate price hikes aren't quite as large but nonetheless they are out there, how will you cope with that within your business? Is it summarily a price pass through contractually or more of a negotiated price increase looking out to next year, and I had a couple follow-ons.

Europe is more of an an annual contract kind of marketplace, so there is no doubt that there is a negotiation process process if you will, because you need to get the new contract. We have -- when you're talking about that kind of inflation, we have no choice but to have to recover that in our business. There is not the kind of margin room in these businesses not to recover that level of inflation, so, yes, we have to go negotiate for it, but we have every confidence, expectation, and intention to do so.

Okay. Thus far in being in White Cap Europe now for a little over a year, I guess, is there anything in the business that has performed less well than you would have liked, or shown itself to be a bigger risk than you would have liked, and in turn, how would that dovetail with your ability if there is anything to be able to go out and recover higher steel costs next year?

You've been consistent on that question. Really, we've been very pleased with the business, so when I search my mind, not a lot comes to me that's been a negative disappointment. I think when we first picked up the business, there was quality issues, kind of lingering over. We had to get ourselves through that. I believe we've been very successful in that regard, and then beyond that, I would say that the two things that we always put out there as possibilities for the business, one being move more towards developing markets, I would say to that one we still are evaluating and unsure. Again, there is a lot more growth there, but the question is can you profitably pursue that. I don't have a clear answer to it.

I think that's one that we continue to look at and measure and we do sell into those markets. We have a way to kind of work ourselves towards an answer there. That's what we're doing. The second one is on the plastics side. I think that we knew that we -- the products we had in the U.S. plastic were not exactly the right products for Europe. We also knew that the returns looked different in Europe than they did here, and so we're still looking at that and trying to evaluate, A, do we have the right product line which I think the answer to that is yes if we want to, and the second part is, is it The kind of return market in plastic that is can justify investment, so those are the two that are kind of the big decision points for us. Again, neither of them -- the price we paid for the business and the returns we expect in the business weren't predicated on those. They said there's opportunities and they still do, but we have not decide odd either of them.

Okay. Do we have to switching gears a little bit but the same theme, do we need to consider within our model any effect from contract renewals in North America and food cans, either ones that are coming up that might again need to be considered in our models or any that have recently concluded that we would have to do the same for? Thanks, and I will be back.

As to contracts, the big three customers we talk about in contracts being Del Monte, Campbell, and Nestle, we have one contract, one of Nestle's that comes up at the end of 2008 I think the quick answer to you is no for the coming year, but we certainly are in negotiations already with Nestle. That's not for all their business. That's about half of their pet food business. It is only a portion of the total, and we are in discussions on that, but again that ends at the end of 2008, the other big three do not. I will go one step half that and just say that we have our contracts tend to run five-ish years around so there is always a certain amount that are coming off. Actually 2007 was a fairly active year on those smaller contracts and we came through those pretty well. 2008 looks to be a quieter year in that regard. On balance it turns out that '08 should be the Nestle one quieter around contract renewals.

Thanks, Tony. I will be back.

Sir, your line is still open if you have further questions.

Okay. Am the the last person who has a question, then?

Correct.

Right back at you.

The last one. I will try to make it a good one, Tony. Ultimately analysts who are supposed to evaluate and not advise companies are free to pursue their strategies. You had a -- I don't like to opine on these calls. You've had a pretty good year here. I think you're looking again for free cash flow of $150 million after dividends, correct me if I'm wrong there, Bob.

That's right.

And yet this stock again I don't like to talk about these on a conference call. That's for investors to do, but stock has been basically stuck in neutral and actually off a fair amount today as you know. One of the things that might be coming out of that is that investors are starting to look at you and consider perhaps maybe they need a higher rate of return in the stock, either the risks in the business have gone up or the risks that you might do something that they don't care for might have gone up. Do you subscribe to that view perhaps and how do you manage against it? Maybe it is time, like a few years ago, to really delever and bring in the CapEx to show the cash generation capabilities in the business? I don't know, but I am just throwing it out there and interested in your thoughts. Thanks, guys. Good luck in the quarter.

Thanks, George. It is a great question. It is the kind of thing we ask ourselves all the time, is we are a shareholder-driven company. It is a fair question in any forum, no problem there at all. I think first of all I would say we're not happy with the stock today, though we don't really try to live by daily movements in the stock. I think in fairness if you look over kind of a one, three, five, pick your period, our performance has been just fine on the stock, which doesn't mean we're happy with outperforming right now, but if shareholders see a higher risk, I am not sure why that is. It may be what I said before, which is we're maybe being more open about how we view the acquisition market. I certainly don't think it is because we have lost our discipline nor is there any evidence to support that. Think about the acquisitions we've done over the last couple of years, four years ago we didn't even have closures business.

Today we have a whole other leg. It is one of our better producing return businesses that we have, and I wonder where the stock would be if we hadn't deployed assets in that direction. I think anything else we could have done debt reduction or other use of the cash it would be hard for me to believe would have gotten a better return, so all I can say is that we would like the stock to be acting differently this month than the last couple months. We really do think that on a long-term basis there is great opportunities for consolidation of packaging market. We really believe the franchise businesses that we built have generated very strong returns over time, and so that's our first choice, but as I said earlier, if we can't find a way to do that, we're not going to go out and get desperate about acquisitions. We're going to deploy the cash in other areas, and that's part of why we sat here for awhile and haven't done a major acquisition in the last year because we're -- that's not the way we want to move.

Again, you don't want to manage your business based on one-day stock move, but would you be, given recent -- I will call recent the last quarter and a half, performance in the stock cause you to perhaps be using higher hurdle rates on a going-forward basis because again perhaps for whatever reason, the market is applying to your stock or to all stocks out there? Sure. We always look at where we trade against the targets and valuation. There is no question about that. The answer to that one is yes. Would that necessarily change the answer I gave you? It wouldn't right now. It would just change the threshold at which we decided to move in that direction or not.

Certainly. Thanks very much.

Thank you.

I think that's all the calls we have, is that right, Kim.

Correct, sir.

Thank you, everyone. We look forward to speaking with you at the end of the year.

This concludes today's conference. Thank you for your participation. You may disconnect at this time.