Silgan Holdings Inc (SLGN) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, thank you for joining Silgan Holdings' second quarter 2008 earnings conference call. Please note, today's conference will be recorded.

From the Company today, we have Tony Allott, President and Chief Executive Officer; Bob Lewis, Executive Vice President and Chief Financial Officer; Adam Greenlee, Executive Vice President, Operations; 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 2007 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.

Thanks, Malcolm. Good morning, everyone, and welcome to our second quarter 2008 earnings conference call.

Our agenda for this morning is to review the financial performance for the second quarter and to make a few comments about our outlook for the remainder of 2008. After these prepared remarks, we'll be pleased to take questions.

As you'll see in this morning's press release, we had solid performance across each of our businesses in the second quarter, culminating in adjusted earnings per diluted share of $0.92, a better-than-20% year-over-year improvement in earnings. These results were above the high end of our guidance.

There's no question that we're in a tough economic environment, compounded by significant inflation in raw materials and other manufacturing costs. One of the things we can control in this type of environment is our manufacturing performance and cost controls. Each of our businesses were very focused in these areas which therefore represented a large driver of our second quarter performance.

Our closures business continues to perform very well and in fact saw a reasonable volume growth. Our plastics business has done a good job of controlling costs to offset a nearly across-the-board decline in unit volumes resulting from consumer pull-backs. The metal business had very good manufacturing performance during the quarter and appears well-positioned for the peak season.

While we remain a bit cautious about the commodity inflation and macroeconomic environment for the remainder of 2008, we have increased our full-year outlook by $0.05 to a range of $3.50 to $3.70 per diluted share.

With that, I'll turn it over to Bob to review the financial results in more detail and to provide additional explanation around our earnings estimates for 2008.

Thank you, Tony. Good morning, everyone.

As you've seen, the second quarter was a strong quarter with each of the businesses outpacing the prior year. The takeaway is our cost control and manufacturing improvements offset inflationary pressures and softer demand.

Consolidated net sales of $735.3 million for the quarter were up $51.7 million or 7.6% due to the pass-through of higher raw materials and other manufacturing costs, a favorable foreign currency impact on revenue of $15.6 million, and increased unit volumes in the closures business. These gains were partially offset by lower unit volumes in both the metal and plastic businesses.

Net income for the quarter was $33.3 million or $0.87 per diluted share, compared to net income of $26.8 million or $0.70 per diluted share in the prior-year quarter. Foreign currency was neutral to the bottom line for the quarter as a result of our natural hedge positions. After excluding rationalization charges, adjusted net income per diluted share was $0.92 versus $0.74 in the prior year.

The second quarter included rationalization charges of $2.7 million or $0.05 per diluted share in 2008 versus $2.3 million or $0.04 per diluted share in 2007. In addition, the second quarter tax rate benefited from a $1.7 million tax credit relating to certain non-recurring state tax incentives associated with capital investments. This credit was reported in the quarter and is largely a timing difference relative to the projected tax rate for the year which we still expect to be between 36% and 37%.

Interest expense for the second quarter was down $2.1 million versus the second quarter of last year. This reduction in interest expense is attributable to lower market interest rates and higher interest income associated with the cash on hand as we continue to be cautious about the credit markets and utilize higher cash levels to reduce our dependency on our revolving credit facility.

On a year-over-year basis, our cash position improved $60.8 million to $86.1 million for the second quarter. We closed the second quarter of 2008 with outstanding debt on the balance sheet of $1,214.6 million, up $222 million from year-end but in line with the prior-year quarter. The increase versus year-end is largely seasonal borrowings as we built working capital for the tax season and the impact of foreign currency on international borrowings.

Our fixed rate debt ratio at the end of the second quarter was 45%, in line with the first quarter of this year.

Capital expenditures for the six months totaled $55.4 million compared with $75.4 million in the same period last year. We continue to forecast full-year capital spending to be in the range of 110 to 140, in line with normal levels for the business.

Additionally, we paid a quarterly cash dividend of $0.17 in June. The total cash cost for that dividend was $6.5 million.

I'll now provide details for each of our three franchise businesses.

Net sales in the metal food container business were $377.5 million for the second quarter, up $12.5 million versus the same period a year ago due to the impact of the pass-through of higher raw material and other manufacturing costs, which were partly offset by a decline in unit volumes for the quarter. Good cost control and improved manufacturing efficiencies, including the benefits of ongoing rationalization plans, were partially offset by these volume declines as income from operations for the second quarter of 2008 improved to $33.1 million, up from $27.7 million in the prior-year quarter.

Our plastic business felt the effects of the soft macroeconomic environment as unit volumes declined, particularly in the smaller-sized products, contributing to an overall improved mix of products sold. Additionally, the pass-through of higher raw material cost and favorable foreign currency translation of approximately $3 million contributed to a $9.7 million revenue increase versus the prior-year quarter. Total revenue for the quarter was $166.9 million.

Income from operations in the plastic container business for the second quarter of 2008 was $13.6 million versus $12.4 million in the same period a year ago. Contributing to this increase were a favorable mix of products sold, improved manufacturing efficiencies, and lower SG&A cost. These benefits were partly offset by cost inflation and a decline in unit volumes.

The closures segment of our business continued to grow as net sales in the second quarter of 2008 increased $29.5 million versus the prior-year period, to $190.9 million. The drivers behind this revenue growth were $12.5 million of favorable foreign currency translation, the pass-through of higher raw material cost, and improved unit volumes including the recently-acquired businesses. Unit volumes in the closures business were up solidly for the quarter. Benefits from higher unit volumes were partially offset by the inflation in manufacturing and other costs as the income from operations increased $1 million to $21.8 million for the quarter.

As we come into our peak season having delivered solid first half earnings, each of the businesses continues to show good discipline around cost controls and making manufacturing performance improvements. This performance as well as our current tax view offers some increased confidence in the full-year earnings outlook despite the current economic uncertainty. As a result, as you saw on the press release, we raised our full-year earnings estimate to a range of $3.50 to $3.70 per diluted share which excludes rationalization charges for previously announced plans which are currently estimated to be $0.16 per diluted share. We're also providing a third quarter 2008 earnings estimate in the range of $1.40 to $1.50 per diluted share which also excludes rationalization charges. As the third quarter is seasonally the largest quarter and largely dependent on the pack yield and timing of the harvest, it is possible to experience volume shifts between the third and fourth quarters.

As outlined in my earlier comments, we remain very cautious about liquidity in the credit markets, and as a result, anticipate continuing to build our cash position through year-end. We continue to forecast year-over-year improvements in free cash flow.

That concludes our prepared comments. We can now open it for questions and answers. Peter would you kindly provide the directions for the Q&A session?

(Operator Instructions). We'll go first to George Staphos of Banc of America Securities.

Hi, thanks. Good morning, everybody.

Good morning.

Maybe the first question, could -- and I know you gave some of this detail, but it would be helpful to get it once again -- could you give us, for each of the segments, the FX effect at the top line? And could you give us a little bit more clarity on the volume trend as opposed to just up or down? Could you give us some ranges? And then I have a follow-on. Thanks.

Sure. The -- George, this is Tony. The foreign exchange is predominantly of course going to be in the closures business, and that's a tune of about $12 million in the quarter. There's another $3 million on the plastic side. So that's your foreign exchange question.

The -- on the volume side, I'll -- what I would say is containers kind of -- the metal food container business is kind of similar to what we saw first quarter, within a couple of percentage declines levels, so call it roundabout 2%.

On the closures side, you basically saw an increase there of a little over 5%. Pretty nice improvement of volumes there. That does -- that includes the impact of acquisitions as well in that number.

And then finally, on plastics, this is, probably, of all the businesses, the one we least like to talk about volume on because there's such a spread of the kind of dollar value of the different products sold. So that the specific answer to your question is a little over 3% decline. The fact is, what Bob went through in the prepared remarks, is that we got a mixed benefit of that, which is another way of saying that a lot of that decline was on smaller units and that you actually saw pretty healthy volume numbers on larger sizes, again, a pretty sizable change in the mix of what we were selling.

Fair enough. And piggybacking off of that and some of the comments that we've heard from some of the other companies over the last week or two, I guess, not that I expect great growth from food cans at any given time, but it would seem like the consumer is obviously battening the hatches. And one of the ways you might batten hatches is by staying home and eating more of products from a canned package as opposed to going to Whole Foods or whatever. Are you surprised that you haven't seen a little bit more of a pickup in food cans at this present time?

Yes, I believe that is correct. If you look at what's happened, the market itself is down a little bit kind of in line with what Tony gave as far as our numbers as well. So it's logical that you would think the consumer would be consuming more products at home. But we just haven't seen it in our numbers yet.

I think we'd say, George, that we -- the concept makes sense to us. I think if you kind of look at where the declines are, there are some specifics in there as well. So it's a little hard for us to say that it's not the case, that people would consume more. For instance, nutritional products, dietary-type products are a little more a high price point, and that's a case, where you see a little more decline as opposed to some of the other markets.

So I'm not sure we have clear answer to your question yet of would see a pop in food cans. We definitely don't have evidence that proves you do see a pop, let's say that.

Okay. Last question, I'll turn it over. We can reverse engineer this, but would you expect that when the year comes to a close, your operations -- netting your investment spending should give you $150 million of free cash flow or cash to be used for acquisitions, dividends, et cetera? How you would have us think about that?

Yes, George, I think you're in the ballpark there. I think what we said coming off of last year and reiterated again in Q1 and now again in this quarter, is that we generated roughly $125 million, $124 and change last year, and that we left a fair amount of cash on the balance sheet and working capital and we thought that we could pull that back. We are still forecasting that we'll have improved cash flow versus last year.

The one caveat that I would put out there is that inflation has certainly been a lot more significant than we were expecting coming into the year. So that will have some impact on how much we can take off the balance sheet in working capital this year. But I think your numbers are kind of in the right ballpark.

All right. Thanks. I'll turn it over.

Thanks, George.

We'll take the next question from Ghansham Panjabi with Wachovia Securities.

Hey, guys, good morning.

Hi, Ghansham.

Just as a follow-up to George's question, could you remind us what your end-market exposure private label versus branded is in metal containers, and also in plastics? I'm just trying to get a sense as to whether this recent move from some of the grocers in terms of the customers pushing towards private label on any given category is having a negative impact in any of your business, and being skewed either way branded versus private label would explain some of that. Thanks.

Ghansham, it's Tony. As far as we're aware, our spread to private label versus branded is probably not much different than the market's. So the -- what Adam took you through is essentially where the food can market is. So it's not a question of Silgan's position versus others. Essentially food cans are still a bit negative on the year-to-date numbers as far as we've seen them.

So the specific answer to your question, I think our mix to private label is not that dissimilar from the market. And the current market is down a bit.

Well, have you seen any uptick in private label, then?

Yes, I think -- there's no question that private label -- and actually this is much more evident in our plastics business -- but there's no question, at the broad point, that private label is seeing more growth than branded products across our businesses.

Okay. And the mix in plastics, private label versus branded? Is it 2/3, 1/3?

No, it's -- I'm not sure I can give you that exact -- again, I don't know that we're -- dissimilar from the basic market. But again -- and that -- it was even more clear, as we have foreshadowed the idea that we've seen the consumer pull away from the personal care, on that side, we thought there was more flexibility, if you would, for the consumers to pull away, and no question about that. And so you saw a more dramatic shift towards private label. You saw more dramatic shift towards larger, more discounted size containers, et cetera. So, no doubt, the consumer behavior patterns have changed.

And so, how would you qualify the customer sentiment at this point, you know, in terms of their expectation? Do they expect some uptick in packaged food volumes as the at-home consumption becomes more obvious? How should we think of it in the back half in terms of volumes in the metal food?

I think what we're looking for the food business, to be kind of flat to down a bit, which is not dissimilar from normal. So that's our view on it. I think our customers right now are pretty focused on the fact they got a lot of inflation that they got to pass through the market. So I think that is their primary concern right now.

So I suspect, and they're all different, but I suspect they're concerned about the fact they've got to take price increase into the markets. We could all sit back as -- armchair economists and say, "Yes, but people still consume food." But the individual customers have the concern they've got to get price on their product into the marketplace.

Okay, it makes sense. Thanks, Tony.

Thanks, Ghansham.

We'll go next to Richard Skidmore with Goldman Sachs.

Good morning. Thank you.

Tony, can you just update us on where you're thinking on the M&A front and how things may have changed or not changed over the last quarter since your last call?

Sure. I'll start and maybe Bob will clean up anything I get wrong.

But we would just say probably the exact same things we said, and I'm not sure much has changed in our view from the last call -- first of all, that we do believe that acquisitions are a very good way for us to strengthen our sustainable market position and therefore drive value to shareholders. So we continue to look hard. I would describe that there's plenty of things out there to look at, but the problem persists that sellers are still thinking in multiples from 18 months ago, and the fact is the credit markets just aren't financing that way and therefore it doesn't make any sense for buyers to be buying at that level. So I think you still have a price disconnect between sellers and buyers, and that will persist, I think, for a while, until everyone learns how long term the current credit situation is.

Yes, Rick, I would add to that that I think this is the exact environment where patience and discipline around the whole M&A strategy is important, and will be the real benefit that plays out in the end here. So that's kind of the position that we're in. We're still actively looking at a lot of things in the pipeline, but we'll continue to view them with a patient eye.

And as you look across the three businesses, are there any holes in these three businesses that you would think you would -- you're particularly focused on? Or are you considering branching out into a fourth business?

No. I think Tony touched on, what we look to do is play to the whole of idea of creating sustainable franchises, and anything that fits into that, whether it's in the existing businesses or whether it happens to be something else that creates that, much like the White Cap acquisition did for us, those are all things that would be attractive to us and kind of sit up as priorities. But I wouldn't say it fits in any one of our particular businesses, because we have the ability to broaden out each of those franchises.

And Bob, as you look at the end of the year, if you don't find anything in the next six months, you end up with meaningful amount of cash on the balance sheet, is your plan just essentially to stay very liquid at the end of the year or would you expect that you'd use some of that cash to do some things, i.e. raise the dividend, buy back stock, pay down more debt?

Yes. I think we've said from the very beginning that we're very focused on creating value for the shareholder, whether that's through reinvesting through acquisitions or some alternative method to get value to the shareholder. But I do think that, over the long term, we are still very much in that position. In the near term, you kind of touched on it, that liquidity is king here, particularly given at least our view anyway of what the credit markets look like, that we may hold some cash right now and see how we get through that credit crunch. But that will be a moment by moment decision as we see how the credit markets develop.

Thank you.

We go to next Alton Stump with Longbow Research.

Thank you. Good morning.

Good morning, Alton.

Just a quick question, your guidance for the full year, obviously you beat the high end of your second quarter number by $0.07 and only raised the full year by $0.05. Of course the overall macro environment being weak I'm sure is part of that. I just want to get an idea, is that just -- simple be conservative or is there something in that number that would take those couple of pennies off in the back half that was not in your prior guidance?

Well, part of the [meat] was on tax rate that's going to kind of norm itself out over the course of the year. So that's part of the answer to your question. You can't take the entire meat and add that to it.

Beyond that, I think the answer to your question is, yes, that we're -- there's definitely still headwinds out there that we need to deal with. The one we haven't really talked much in this call yet but I know you're all hearing is there's a lot of inflation in plastic market that is coming into our plastics business and the plastic part of our closures business that is -- because of the lag to the pass-through, it has a pretty real impact on Q3.

So, all of that is sort of going against what we think is pretty strong operating performance and so we increased -- but yes, we're remaining a little conservative on what we don't know is going to happen at the end of the year.

Okay. And then actually, a follow-up, I think you already answered for the most part, but within the plastics business, obviously there are costs escalating. Is there a couple of million dollars there that you have taken off of your guidance for the back half of the year because of that or is that not reflected yet?

Yes. I we can answer that as absolutely yes. That has been taken off -- predominantly right now, it looks to be in Q3, that's assuming -- that's looking at what the markets are saying about resins capping off. And in fact, a little bit of decline at the tail end of the year which we -- we are now considering a bit of that into the numbers.

But yes, it's that magnitude, and right now we're thinking predominantly in Q3.

Okay, great. That's all. Thank you.

And next we'll go to Roger Harris with Porter Orlin.

Good morning. You asked and answered on the acquisition front, it sounds like that patience is paying off. Has the pipeline grown at all? Has the mix between international and domestic changed any? Has currency impacted that? If you could give us some insight there, that would be great. But a nice quarter operationally.

Yes, thanks. Yes, I would say that the pipeline is pretty consistent with what it has been. We've often said we look at a lot of deals for every one that ultimately gets done. So we've got a lot of irons in the fire, so to speak.

But I would say, naturally, over the last several years, that the mix of international versus domestic has increased and for no other reason that we've now got an international presence and an eye towards those things. So I think we've got a pretty good balance in the pipeline right now of opportunities to look at.

And as to the currency question, obviously the dollar has weakened. But our view is if it's financed right, you can overcome that as well and that ultimately it's about the total net dollars in, net dollars out on the deal that really count and make up the true cash returns.

Great. And just timing-wise, I'm sure you continue to point out potential changes in capital gains and things of that nature to prospective sellers. Are most of these opportunities private companies or a blend of public companies with divisions and private companies?

Yes, I think it's probably a blend of all of that. And who knows? That's in large part speculation on our front as well in terms of what's driving the seller.

I think Tony touched on it in his comments about the M&A environment, is that people are still trying to reconcile what their own valuation metric should be in terms of the selling environment. And then marrying that up against how robust the pool of acquirers really is. So I think that's part of what's got a lid on it a little bit right now as well.

Great. Thank you.

Thanks, Roger.

Claudia Hueston with JP Morgan, we'll take our next question.

Thanks very much. Good morning.

Good morning, Claudia.

I was just hoping you could maybe provide an update on the restructuring efforts in the closures business, sort of where things stand there and how things look in terms of those coming through for the next couple of quarters. And then also, just more broadly on the closures business, if you could just comment on any particular areas of strength -- the volume there was up nicely -- kind of like just any sort of areas where there might be particular strength. Thanks.

Thanks, Claudia. The -- on the closures side, the rationalization work that we've been doing thus far has been really around SG&A, administrative type, headcount. So that has largely been completed. Again, we look across the businesses all the time for opportunities. So you shouldn't read that as saying that we're not looking for more things. I think given the challenging cost environment we're in, we're probably going to have to find more opportunities across our businesses. So we will keep looking, and I don't think anybody should be surprised if that comes up over time.

As to your volume question, the areas of strength were primarily around two main areas - to be repetitive - one is the acquisitions. Again, we did acquire the Vem business and we completed the Brazil operation acquisition from Amcor. So you had the inclusion of that volume in the quarter. So that was nearly half of the volume growth, take a rough number. The rest of it is predominantly US growth around vitamin products, water products, and kind of hot fill beverages has been the largest growth area now.

Okay. That's really helpful. Thanks a lot, guys.

Thanks, Claudia.

We go next to Chris Manuel with KeyBanc Capital Markets.

Good morning, gentlemen.

Good morning, Chris.

Good morning.

A couple of questions for you. First was, was there any impact in the second quarter due to any lags or things of that nature, resin pass-throughs? I know materials obviously started moving in the second quarter and there's a lot more left on the table, but did you have any impact that hurt you at all in the second quarter?

Chris, yes, we did. But you got to kind of flash back to last year, you also had that last year. So it depends if you're asking a year-over-year question or an absolute question. The answer on the absolute basis, yes, we did have issues around inflation and what's happening on the raw material side of the pass-through. We did also a year ago. So it wasn't a meaningful point in comparing the two quarters.

Okay. But what you're anticipating is some substantial hike into the third quarter?

That's correct. Anticipating -- I mean we -- there's no question. I mean there are big increases coming through on the cost side right now. There's just no question about that.

Sure. But, you know -- okay. It's looking awful favorable with what's happened here in the last week or two with crude net gas, that some of those may get -- may not all come to fruition.

That could be the case -- let's hope.

The second question I had was -- if you're looking at your plastics business, can you give us a sense of what you're seeing in terms of product restagings and tooling and that kind of stuff? Is that a leading indicator to suspect are folks trying to start to change up the packages in relation to private label picking up some shares, things of that nature? Can you give a little more granularity into what may be some of the underlying trends there?

Sure. I think the trend has changed a little bit versus last year. If you recall, last year, our capital spend in plastic did provide for some of the restage of products. So we went through that process last year and we have seen a slowdown of the same event happening this year which obviously is affecting our tooling purchases and orders as those new products have been launched into the year. But I would say, in general, there has been a slowdown in that activity in 2008 versus '07.

Okay. And as you look through the balance of the year, embedded into your guidance, are you continuing to believe that the plastics business will be flat to down low single-digits?

Yes, that's correct.

Okay. Last question I have is more of a housekeeping question for -- or a couple of housekeeping questions for Bob. CapEx assumption for the remainder of the year, D&A?

CapEx for the remainder of the year will bring the total to somewhere between 110 and 140. And I'd probably say think about more to kind of the midpoint there. And then, D&A, probably just a touch higher than the prior year.

Okay. And then, the last kind of modeling question I had for you is -- interest expense is quite a bit lower. You talked about having extra cash on the balance sheet, but in a way that's almost counterintuitive to me, unless you've figured out a way to earn more on your cash than you have on your borrowing rate. Can you help us kind of put those two pieces together?

Yes. Essentially, look at the cash on the balance sheet as a lower rate debt reduction, if you will. We're earning the interest income on the cash, but the real driver in the year-over-year comparison is the fact that the rates are down.

Okay. That's helpful. Thank you.

We have a question next from Robert Kirkpatrick with Cardinal Capital.

Thank you. Did I hear you say that you were not going to pay down the revolver by the end of the year, that you would keep almost all your cash on your balance sheet?

No. You did hear us say that we would keep cash on the balance sheet, but we'll pay the revolver down to zero. We may not just -- we may not go beyond that.

Great. Thank you so much.

Moving on to Tim Burns with Cranial Capital.

Good morning, Tony and Bob.

Good morning, Tim.

I had a question for you, and it kind of falls in line with what my neighbor, Chris Manuel, was talking about, but in a broader sense, metals cans, closures, and plastics. I mean, has the R&D and innovation at your customers come to a screeching halt or is it being targeted? Or how would you describe it?

It's an interesting question, Tim. I think if you looked over the last couple of years, it would appear that our customers are more and more focused on innovation. And I mean that more than just as a slogan. I think they really are looking for innovations. So, on the broader -- long-term answer, I would say, I think there's more interest that way.

The fact is, right now, many of our customers are just in hand-to-hand combat to deal with inflation and getting it through their market. So I think it's a little hard for them right now to, as the general population, to be thinking about changing packaging, et cetera, given what they're up against.

I think that answers part of what Adam was saying around the tooling side, is you would kind of like to believe that tooling would be going up. Right now we're not really seeing that. I would say it's kind of a normal level if you take out the spike of capital last year. But it does not show a new effort at innovation and changing of the packages. I think that's true across all of our businesses. But there are exceptions. There are definitely some customers out there who are thinking about adding cost and doing very different, unique thing in their areas. So hopefully that will continue to take shape.

Okay. And then there's also, I guess if you're trying to grow, there's the bolt-ons or the technology additions and your easy-open end, I guess. I mean, where does that stand? Is it just about done as far as you can see in this country?

No, we don't think so. We think there's still opportunity for further penetration of easy-open ends. As we've said before, it's about 60% of our can volume has an easy-open end that goes along with it. So we think not only internal penetration in our markets but out in the broader market as well.

Got you. And the White Cap business came with some plastic components. And obviously you've got experience in plastic bottles. So I mean, are customers -- you mentioned growth in H2O and hot fill -- are customers seeking strictly metal, the metal lug closures, and glass, or are they seeking composite closures like you've made to a certain extent?

Well, there are -- I mean you're seeing growth -- the major growth of course is on the plastic side. I think that's sort of what you said. The finished question wasn't clear to me on that. So you're seeing -- you're definitely seeing growth on that side. And again, we're not talking about the products we're seeing that, our hot fill products. So not -- we're not talking about just basic water -- we're talking about water with supplements, et cetera, teas, juices, et cetera.

So -- but the growth is primarily in plastics and it's been so far primarily in the US.

Yes.

Because that's where we've, of course, seen the plastic package show more popularity.

But we do think Europe is an opportunity for that as we go forward. And that's something we said when we acquired the business, that we would look to assess that opportunity. We continue to do that and are trying to improve our technology for the needs of that market. But we do see opportunities for plastic growth in Europe as well.

Okay. And last question, we all -- whenever we're on this conference call -- and I think I've been on them since 1987 or something like that, even when the high yield debt was out there -- there was a thesis of restocking the pantry. And I'd like to challenge that, maybe, by saying, "Okay, we're not big city dwellers out here in the Midwest, so we're not going to Club 21, we're not shopping at Whole Foods. We're going to Piggly Wiggly or whatever it is." But for some reason, I wonder if the change in the family structure, both spouses working, and the time famine means maybe it's cheaper to go to McDonald's or maybe it's cheaper to go to Pizza Hut or whatever.

I don't know if there's any data that supports that. But you would think with what we're going through right now, in this country and worldwide, that there might be more stock in the pantry?

It's hard to answer that question. I mean I think we can kind of all theorize. I think the -- what I understand is that restaurant comps are showing weak results. So that as a broad group people are eating out a little less. That continues to me to mean that they have to eat home more and that should benefit cans.

I think we've been pretty clear here that we don't necessarily see that, although there are some extraordinary items in there. So I would -- I just -- I have to say, as I said before, which is it's inconclusive so far.

Yes.

But I think there's no question, what we're seeing across our business and others, is the consumer's pulling back. And they're going to find the cheapest solution to use as little cash as possible. And they're going to find out, I think, that maybe McDonald's is a comparative, but most of the rest of the restaurant choices are not. And so they're going to be doing -- consuming something at home.

Listen, my new wife, who can't cook, and I dream about cooking upstairs everyday but we end up at Arby's or Boston Market. And let me tell you, those new salads at McDonald's aren't too bad.

Well, population of one.

But thank you. All right.

Okay. Thanks, Tim.

(Operator Instructions) We have a follow-up question from George Staphos.

Hi, guys.

Hey, George.

Just following along with old dialogue. I guess maybe on the question of conversions, this comes up periodically, some of the other producers of rigid packaging, not in metal, have stated that they've never seen a more buoyant opportunity to take customers out of metal and to other substrates in rigid because of the advertised steel price hikes that are coming. And I think this question's come up in the past as well.

One, what are you hearing and has your tenor changed at all in your ability to pass through some of these steel price increases that are being bantered about for next year? And two, what's your view overall on the conversion question? And how big of a threat is it now relative to, say, six months ago, a year ago, et cetera, 20 years ago?

Sure. The first part of the question regarding steel pricing for next year, I mean we do have our built-in price pass-through mechanisms that will pass through those increases for steel and all of our other costs into the market in 2009. So we are anticipating right now fairly significant sizable increases from the tin plate producers for our metal packaging business.

If you look at the -- what that does as far as potential conversion away from the metal food can, I think the first comment has to be that the water level is rising across all of packaging. So there is an inflationary environment out there that we have to recognize.

Well, sure. But I mean bleach board isn't going up as much as steel. So I hear you, but clearly it still seems like it's going up quicker than some of the other paperboards. So I'm sure it could continue.

Sure. But in terms of the advantages that our package provides, you have to acknowledge the simple fact that from a food safety, strength in shipping -- [improvement] efficiency standpoint, et cetera, we still feel very comfortable with the advantages that food can provides. And there's a total value of our products that is recognized in the market.

Sure --

George --

-- and you left out [re-toward] and leakability or lack thereof. I'm sorry, Tony, go ahead.

Well, I was just going to say that I think you got to start with as the economy gets tougher and all of what you were describing happens, there's a certain natural draw to the cheapest package; that happens to be the food cans.

So it might be that the opportunities are better than they've ever been on substitution because our inflation is higher, although that's not true against plastic. But the fact is all that is doing is reducing the negative issues that those alternatives already have. And then you go to the infrastructure costs around it. So I just --

Yes.

And then you asked a specific question, what are we hearing? And the answer is we're not hearing much about this, because our, again, our view is that it's -- there's just no reason to leave the lowest cost package behind.

Okay. To the capital deployment question, it seems like you have a bit of a conundrum at this juncture. On the one hand you clearly have a pipeline that you're looking through, as always. And from your vantage point, you're trying to get sellers to recognize the current credit market is a bit of challenge.

On the other hand, if ultimately credit markets improve, you miss the opportunity to perhaps make an acquisition, or B, buy your stock at what would be likely a lower price than it would be when credit markets improve. So, how do you balance that? Why wouldn't it make more sense if at the end of the year if you don't find the right acquisition, credit market concerns remain present, to buy back a bit more stock, in a way betting on an improvement down the road and improvement for your ability to get an acquisition across the goal line?

I don't -- George, I don't know that we really consider them. If you think about the balance sheet today, I don't know that we consider those mutually exclusive points. So I think mostly I agree with what you said. I think that the -- you could miss the opportunity to do something else with that cash that will generate the higher return. So we agree with you. I think we hope there will be acquisitions out there. There are -- the business generates a lot of cash. So I think we have alternatives that are not all binary.

I think there's one component of that that you didn't mention which is it's just a tough credit market out there. And so there's just in the daily operations of the business -- I mean we use a huge amount of revolver each year to fund our business. And in this kind of credit environment, we -- the third thing we have to think about is we got to remain pretty darn liquid.

That's a fair point, Tony, I appreciate that.

I guess the last question, and I'll turn it over -- at this juncture, how far back, if at all, are the crops for the third quarter behind where they'd normally be at this time of the year? You're still a couple of weeks behind or have you closed that gap a bit?

Yes, I think we're still running about a week and a half to two weeks late. If you look at our Midwest pack, we're still anticipating a very normal pack season for the Midwest. Peas are over halfway through the harvest at this point, green beans have already started, and corn is literally right around the corner. So, Midwest, we're one and a half to two weeks late.

If you go out to the West Coast and look at fruit, I'd say that, due to the earlier favorable growing conditions, fruit still looks good. And we're anticipating a normal pack season with fruit. There was a heat wave in early July that didn't really have any impact on fruits. If you jump over to tomatoes, it did have a little bit of an impact on tomatoes.

Right.

You have a slight weakening of the plants or softening of the fruit in tomatoes. But as far as what's going to go in a food can, we don't think that that is going to have any impact at this point on the products that go into the food cans. So, West Coast pack should be essentially at normal levels as well.

Okay. Thanks very much guys.

One last question -- forgive me. What did you say your expected resin increase will be per pound or could you give us some color around that for the third quarter? Thank you.

We didn't say. It's significant -- we've never said before -- and we have a blend of resins we buy. But it's -- we're seeing increases right now that are as big as I think that any of us have ever experienced. So in some cases you are talking about double digit cents per pound of increase.

Thanks, Tony.

Yes.

We'll take a question from Craig Hoagland with Anderson Hoagland & Company.

Hi, Tony. I wanted to get your comments on your post-mortem or how things are going on the big acquisitions in '06 from a return on capital point of view, if those acquisitions have met your criteria. And then more broadly, as you think about your business, your business is being fairly low growth organic and the growth coming through acquisitions, how you see your ability to move the needle on the firm's returns metrics through acquisitions going forward.

Okay. Thanks, Craig. Well, I think the easiest way to answer that is if you look at the returns of the total company, they were up in '07. They're -- they should be around that level, I would say, in '08. So without kind of calling out each of the acquisitions, we've been pleased with them.

Again, the big one there is the closures -- the international closures acquisition. It -- the strength that it created by combining that with our US business is meaningful. And so the opportunities definitely fit there for us and are already beginning to bear some fruit. Now we're working at improving the returns, and taking costs out and reacting to kind of the market conditions there as we are here.

But we're pleased with the acquisition or acquisitions from '06. And again, the returns to us look pretty good.

I think the -- to your question, that if you look at the history of Silgan, the returns that we've had have always been a bit of a combination. It's been a bit of what we do in our organic business and it's been a bit of acquisition. So I might take a little bit of exception to the point, that would say that would say that -- if you point was it's heavily dependent on acquisition, I think it's partly dependent on it.

The other part is that we keep trying to strengthen the sustainable position of our businesses and therefore take costs out and improve the bottom line. We don't believe that top line growth is the secret here at all. In fact, we could probably argue the other way around. The top line growth creates more competition and it often drives returns down. Really the opportunity here is consolidate the markets, strengthen your position, and you ought to continue to be able to drive returns on this.

So we look at both of those kind of equally, frankly, for the future.

Yes. Well, the way -- I mean we like your stock because your returns have been above your cost of capital and you've been able to grow the business primarily through acquisition in a manner that maintains that positive spread.

Yes.

I guess the other comment I would hope to get from you is, in the current environment, do you think that strategy sustains going forward or has the environment changed at all?

Great. Great question, and actually I appreciate that Bob kind of came up behind my first answer on this. Because the key point here is that the net of this condition in our strategy is this is a great time for us, that you do have an opportunity now where acquisitions should be more rightly priced, that strong balance sheets should have greater opportunity, and that strong franchises should be more successful in the market and get rewarded. So I would tell you that I think we are better positioned today for execution of that strategy than we've been in a long time in the past.

Now the problem is when we get into conference calls, everyone wants to know exactly what market, when will that be, and it's all opportunistic. It's really the only way you could do that and get the kind of returns that we aspire to.

Yes, okay. So you're -- the company that's good at integrating acquisitions is the same and the pricing environment is a little better than what you've seen in recent years.

That's correct.

Okay. The other question I had, I was listening to George's question about moving to other forms of rigid packaging. Have you heard anything in the food markets about concerns about packaging in plastics due to the instability of the plastics chemically following some of the recent studies on infant formula packaging? Has there been any follow-through in that regard that you're aware of?

Well, there's competent, discussion and evolution, if you will, on that side. The -- you may or may not be aware of this, but that does not -- it doesn't just affect substitution, it also affects the food cans. I mean they -- I think what you're referring to are -- is BPA, bisphenol A which has also been used in food cans for 50-plus years and beverage cans.

Yes.

And so, there had been some questions, actually in all of that time there's been question of research done around that product. I should start by saying, this is true, there's a lot of chemical exposure to food all across our business and food in general. This is just one of those, by the way.

But to keep going with it -- because this one got a little more press lately -- the simple answer there is this is regulated by the FDA in the US, in Europe, European Commission, Japan has got Ministry of Economy, Trade and Industry. And these organizations have all basically concluded that BPA does not pose a risk to human health at the extremely low exposure levels that are out there in the marketplace.

So we just keep watching and paying attention to that like we do lots of regulatory issues, et cetera. And in the meantime, we work to find alternatives, again, as we do with other chemicals that are out there. So, have we seen any kind of meaningful change in buying patterns, et cetera? No, we have not at this point in time.

Okay. And last question, are you comfortable with your leverage, where it is today, or do you have any -- I mean, when I first met you, you were talking about -- and you have indeed went on to reduce leverage at the company. Do you think you're at the right level now?

Well -- this is Bob. I think that depends upon what your view is. I would say that on a long-term basis, we said that something between 2.5 and 3.5 times levered is probably the right level from an optimal standpoint given the appetite for the credit markets.

I think we still probably are in that camp from a long-term perspective. As we sit here today, with the condition of the credit markets and feeling like liquidity is important, we'd probably say that that's probably moved down a notch, at least in the near term. And that's kind of the way we're thinking right now.

Yes. Okay. But long term, back into that range?

Yes.

Okay. Thanks a lot.

We'll take a follow-up from Richard Skidmore.

Tony, just wanted to follow up -- just really on the cost inflation front. You mentioned a couple of times in your press release about just better manufacturing efficiency and cost controls. Can you put a number on that that you saw in the second quarter in terms of what level you brought your cost down? Or maybe another way to ask it would be relative to the inflation that's not passed through in price? Were you ahead of that? Were you in line with the inflation you saw? And how do you see that shaping up for the third quarter? Is there a lot more you can do from an operational cost control standpoint?

Yes, the -- probably the biggest driver of this would be in our food can business where we really -- there's been more of a concerted program around taking these costs out.

And the focus there, we're not really into [fad] management. So what -- I would just say, essentially it's all about taking waste out of the business. And I mean waste in the broadest definition, meaning how we spend our time, how time is wasted, et cetera, and really cutting that out of everything we do.

So it's a fairly sizable cultural change that we've been working on for over a year now. And it's really starting to bear fruit. And that's -- it wasn't just to sound theoretical. In fact, what it boils down to is how do we reduce the time of changeovers, the time of maintenance, et cetera. And the answer is that it's multi-million dollars in the quarter of impact year-over-year. The -- was it enough to offset the inflation? No, it was not. But it was enough to do better than we had been anticipating in the numbers.

And we --

Tony, is that -- is this the first quarter that we're really -- that you're really seeing the benefit and so it's going to continue to flow through? Or do you cycle through -- or you -- are you cycling over what you did, say, in the third quarter of '07?

You'll start cycling over. I mean it's been kind of a ramp-up, if you will, the fact that we've been kind of rolling out over more plants, et cetera on that particular program. So you will start cycle over that. This is probably one of the larger quarters for the difference.

Okay, great. Thank you.

(Operator Instructions)

We'll go to Christopher Butler with Sidoti & Company.

Hi, guys. Thank you for taking my question.

Hey, Chris.

Looking at the -- your closures business, of the three segments, there was the one that the operating margin was down year-over-year, yet we're looking at basically the same raw materials as we've seen in the metals and the plastics segment. Can you give us an idea of what's going on there? The lion's share of the integration should be behind you, outside of Spain and Brazil, costs -- you should be able to trim some of the cost from that integration period, yet we're looking at lower margins there.

Yes. The -- essentially, the margin rate is driven by a couple of things. The first one is that you had the inclusion in the quarter of acquired businesses, both the sales from Vem and the Brazilian operation, and recall that just purchase accounting alone is going to drive that down because you can't make any -- any meaningful profit off the sales of the inventory you acquire. So you have that issue going on.

You've also, as you mentioned, you've got raw material inflation pass-through. That's true of all our business, but it's true here too, if you look year-over-year. And then you've got -- when we bought the international operation, we made it pretty clear that the margin rate of that business is lower than the margin rate of the US business because of all the infrastructure costs. And it was priced accordingly when we bought it.

With the run-up of the euro against dollar, the relative weighting of that is greater into the business. So, it's greater part of percentage of sales, and therefore it drops down and has impact on the combined margins.

So those are kind of the main drivers of that. And then as we look to Q3, which I think part of your question is kind of where do we go from here, we will add to that that as plastic piece of that business, it's going to suffer the same thing that our plastic business is, a meaningful lag in the pass-through of that particular raw material.

So it doesn't really have to do with the integration of the international business. It has more to due with those particular items.

All right. The rest of my questions have been answered. Thank you.

Okay. Thanks, Chris.

And ladies and gentlemen, this brings us to the end of our question-and-answer session. At this time, I'll turn the call back to Tony Allott for closing remarks.

Well, thank you, everyone, for the time. And we look forward to talking about our Q3 results in October. Thanks.

And that closes today's teleconference. Thank you for joining us today.