Silgan Holdings Inc (SLGN) 2009 Q1 法說會逐字稿

Thank you for joining Silgan Holdings First Quarter 2009 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; Malcolm Miller, Vice President and Treasurer; and Adam Greenlee, Executive Vice President of Operations.

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

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 2008 and other filings with the Securities and Exchange Commission. Therefore, the actual results of operations or financial condition of the Company could differ materially from those expressed or implied in the forward-looking statements.

With that, let me turn it over to Tony.

Thank you, Malcolm. Welcome, everyone, to our first quarter 2009 earnings conference call. Our agenda for this morning is to review the financial performance for the first quarter and to make a few comments about our outlook for 2009. After these prepared remarks, Bob, Adam, and I will be pleased to take any questions.

As you saw in the press release, we had a solid first quarter delivering adjusted earnings per diluted share of $0.75, which was the high end of our estimate of $0.65 to $0.75, and 19% over the prior year as we successfully navigated a pretty challenging economic environment.

As expected, the most notable impact was on the demand for our plastic containers, largely in personal care, where we experienced moderate volume declines for the quarter. Our closures business also continued to experience volume declines in single-serve beverage products. Offsetting these declines were very good cost controls as each of our businesses flexed their cost structure consistent with the demand they experienced for the quarter.

Our food can business came in right in line with our expectations as volumes, excluding any buy-forward effect, are holding up well.

As a result of the strength of our first quarter performance, our volume outlook for the full year, and the momentum we have in our businesses around cost control and manufacturing performance improvements, we remain confident in our full-year forecast and, as a result, have confirmed our guidance in the range of $3.75 to $3.95 adjusted earnings per diluted share, which, at the high end, represents a 7% increase over a very strong 2008.

For the second quarter, we are forecasting $0.75 to $0.85 per share, which is down slightly from our Q2 2008 results, but we would note that that quarter was a very strong one, up 24% from its prior-year comparison.

With that, I'll now turn it over to Bob to review the financial results in more detail and provide additional explanation around the earning investments for 2009.

Thank you, Tony. Good morning, everyone. As Tony highlighted, with the first quarter behind us, we are off to a pretty good start to the year. As expected, the first quarter of 2009 was impacted by continued raw material volatility as tin plate steel costs increased significantly year-over-year, aluminum costs were nearly cut in half, and resin saw continued declines early in the quarter.

As anticipated, certain of our products continued to experience moderate volume declines as a result of the economic environment, and the food can and closure businesses dealt with the impact of the fourth quarter buy-ahead in advance of the 2009 tin plate price increase.

We incurred incremental pension expense of approximately $4 million, which was offset by year-over-year interest savings of nearly $6 million. In light of these challenges, our businesses did an outstanding job of staying focused on cost controls and operating performance allowing us to drive sold bottom-line earnings. As a result, we delivered first quarter of 2009 adjusted earnings per share of $0.75, up 19% from the prior-year quarter of $0.63.

In addition, as part of our ongoing efforts to pursue the most efficient low-cost platform, we approved the rationalization plan in our closures business during the quarter, which provides for a reduction in workforce in our German operations.

As a result, during the quarter we incurred pretax rationalization charges of $1.4 million, or $0.03 per diluted share. At this point, we have not included any further estimates for this rationalization plan in our guidance.

On a consolidated basis, net sales for the first quarter of 2009 were $655.4 million, a decrease of $24.4 million, or 3.6% primarily as a result of the pass through of lower resin costs, the impact of unfavorable foreign currency translation, and volume declines across each of our businesses partly offset by the pass through of higher tin plate steel costs.

For the first quarter of 2009, we converted these sales to net income of $27.7 million or $0.72 per diluted share compared to first quarter of 2008 net income of $21.2 million, or $0.55 per diluted share.

Foreign currency had very little impact on net income as we remain effectively hedged, having financed the international businesses in their local currencies, and we maintain a business practice of balancing out across quarter activity to help mitigate the effects of currency on our earnings.

Interest expense decreased $5.9 million to $10.4 million for the quarter as a result of lower market interest rates and lower average borrowings including revolver borrowing as we used part of our cash position to fund working capital.

As you will note on the balance sheet, we built our cash position to $201 million by the end of the quarter, as we have adjusted our capital structure to reduce our reliance on bank borrowings during the year.

Our effective tax rate of 35.9% in the first quarter of 2009 is in line with expectations but 80 basis points lower than the previous year quarter as we benefited from a research and development credit, which was not recorded in 2008 until the third quarter when Congress approved the credit in October.

Capital expenditures for the first quarter of 2009 totaled $23.9 million compared with $23.8 million in the prior-year quarter. As we discussed in our year-end call, we continue to focus on generating solid free cash flow and, therefore, we anticipate tightening our capital spending and expect to be closer to the low end of our normal range of $110 million to $140 million.

Additionally, we paid a quarterly dividend of $0.19 per share in March with a total cash cost of $7.3 million. This dividend represents an 11.8% increase versus the previous quarter's dividend.

I will now speak about the individual businesses. The metal food container business recorded net sales of $371.6 million for the first quarter of 2009, an increase of $20.4 million versus the prior-year quarter. This increase is primarily due to the effect of the pass through of higher tin plate and other inflationary costs partly offset by the pass through of lower aluminum costs.

Unit volume declines of approximately 3% partially offset the net increase related to the raw material pass through. The volume declines are attributable to the customer buy-ahead in the fourth quarter of 2008.

Income from operations in the metal food container business increased to $26.6 million for the first quarter 2009 versus $25.1 million in the same period a year ago. The increase in operating income was a result of improved manufacturing efficiencies including benefits resulting from replenishing inventory that was reduced in the fourth quarter of 2008 and lower rationalization charges versus the prior-year period.

These benefits were partially offset by lower unit volumes, higher pension expense, and increased depreciation expense.

Net sales in the closures business decreased $14.1 million, to $142.3 million for the quarter primarily due to unfavorable foreign currency translations of $8.9 million and moderately lower unit volumes largely due to the decline in global demand for single-serve beverages and as a result of the customer buy-ahead in the fourth quarter of 2008 ahead of the tin plate price increase.

These decreases were partially offset by the impact of slightly higher average selling prices as a pass through of higher steel costs for metal closures were partly offset by the pass through of lower resin costs for plastic closures.

Income from operations in the closure business was essentially flat to the prior year at $14.3 million. However, the first quarter of 2008 included $2.2 million benefit from the management fee income associated with operating the Brazilian business prior to closing, and the first quarter of 2009 had lower rationalization charges of $1.2 million versus the prior-year quarter. After adjusting for these differences, the change in operating income was driven by the benefits of ongoing cost reductions and improved manufacturing efficiencies offset by lower unit lines.

Net sales in the plastic container business decreased 17.8%, or $30.7 million, to $141.5 million in the first quarter of 2009 primarily as a result of a moderate decline in unit volumes as general demand weaknesses continued through the quarter.

Lower average selling prices as a result of the pass through of lower raw material costs and unfavorable foreign currency translation in our Canadian operations of $6.8 million also negatively impacted net sales for the quarter.

Operating income in the first quarter of 2009 increased $3.5 million to $16.1 million. As expected, the year-over-year resin impact was the primary driver as 2009 benefited from the lag pass through of fourth quarter 2008 and early first quarter 2009 declines in resin costs.

The first quarter of 2009 also benefited from the ongoing focus on cost reductions, improved manufacturing efficiencies, and lower rationalization charges for the quarter. These benefits were slightly offset by lower volumes and higher pension expense.

Turning now to our outlook for 2009 -- we are off to a good start for the year with a solid quarter behind us. While we remain cautious regarding the macroeconomic environment, we operate in relatively stable markets, and our businesses have done outstanding work flexing their cost structure to react to the modest volume impact they experienced and to focus on improving manufacturing efficiencies.

As a result, we are confident in our current estimate of adjusted earnings per diluted share for 2009, and we are confirming our estimate in the range of $3.75 to $3.95, which excludes the impact of rationalization charges.

We are also providing the second quarter 2009 estimate of adjusted earnings in the range of $0.75 to $0.85 per diluted share, also excluding rationalization charges.

We continue to forecast that 2009 free cash flow will be in line with 2008 as lower cash interests and reduced capital spending will offset incremental pension funds for the year. We did make a $23 million voluntary contribution to the pension plan during the first quarter.

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

Thank you. (Operator Instructions) Claudia Hueston, JP Morgan.

I was hoping you could just provide a little bit more color on the volume trends within your businesses. Maybe how they progressed over the quarter and if you've got any read-in to early April here and what you're seeing would be helpful. Thanks.

Sure, I think Bob hit it a little bit -- this is Tony speaking. On volume, essentially on the food can business, and I'm sure we'll have more questions on this, so I'll just say that we were down around about 3% in that business in the first quarter. You need to remember that we had a [Disciple] pre-buy. We were up 6% in the fourth quarter. So you've really got to look over that period, and we'll come back to that, because I'm sure it will come up.

As your question -- trends -- I think -- let me finish with all the businesses. On the plastics business, we essentially saw high single-digit volume declines. Remember, we're cycling, again, kind of the stronger part of last year, so no real surprise there. And pretty much comparable-type levels on the closures side of the business and, again, that's primarily driven by two things. One, the single-serve beverage side, which, again, we had seen the beginning of last half of 2008. And then also, on the metals side of that, you had pre-buy going on as well. So you had the negative side of the pre-buy of a strong December.

I think your question is a little more to the trend in the quarter, and I think probably we would just say that it's pretty tough month-by-month. What we would say is you kind of see choppy performance across the board. You get some good weeks, and then you get some off weeks. So it's hard to read that.

I think we could tell you that March, for instance, was a little bit stronger than it was in the first part of the quarter but, really, when you look at shipping days, in our case, that could just as easily be explained by shipping days.

So I don't think we would necessarily say there is a lot to read into the monthly trends at this point in time, nor were we surprised by what happened in volumes -- I don't think we were looking for that.

Okay, so looking at your guidance for the full year, your expectations for volumes really haven't changed much today versus where they were in January?

That's correct.

Mark Wilde, Deutsche Bank.

I wondered if you can just talk about the market for acquisitions right now. Certainly, you're in very good condition to look at acquisitions.

Yes, Mark, this is Bob. I think you're exactly on the point. I think our balance sheet is in very good stead. We continue to make sure and focus on liquidity for the company for that very reason. We said from the very beginning that we still have a focus on acquisitions and keeping our balance sheet position for that was important to us.

All that said, I think the markets have still run against us a little bit, although I would say that the credit markets seemed to opening a little bit. There is money flowing now, which I think is -- that, coupled with the fact that the sellers have been out of the market for so long, it's starting to feel like there is a little more activity, at least in properties that are being bantered about as coming to market.

I still think, though, that the sellers will continue to be patient here and wait for the right opening. But, on balance, it feels to me like there is a little bit of traction that's starting to loosen up.

Okay. Maybe, if you could, Bob, just give us some sense of how you could prioritize opportunities?

Prioritize -- amongst the segments, you're talking about?

Yes, exactly.

Well, look, they're going to be opportunistic as they come to market, so I'm not sure that we have necessarily have that luxury of picking what the priority is. But I think what we've said often is that anything in the US -- food can business would be very synergistic and probably fit well.

Plastics, most of the opportunities that we would likely see would sit in the US, and we'll see there, because that seems to be one area where the competitive landscape, anyway, is a bit more distressed on a relative basis.

And then the closures segment, either in the US or in the international segments would be just fine. So I think the priority is really going to be what comes to market that fits up well with our franchises that's at the right price to give us the kind of return that we are accustomed to, and we would need to pull the trigger on a deal.

Alton Stump, Longbow Research.

I think you guys had said on your last conference call that your '09 estimates factored in flat to maybe up slight in terms of food can volumes for the year. Just per the last question that was asked, it sure looks like we're seeing some evidence of a trade-down on the positive side for consumers going to -- not with cheaper meal items but also to the overall packaged food versus takeout space. I just want to get an idea -- is that simple conservatism on your end only assume a flat to slight uptick or is there something there that we're missing?

Alton, it's Adam. No, I think you're right. If you look at our trends in the food can business and now just combined essentially the fourth quarter buy-ahead and our actual results here for Q1. If you put those two quarters together, the underlying volume is slightly up. We're up probably 1.5% to 2%. So we are seeing a general uptick in the food can market.

If you take a dive into the details of our business a little bit further, some of our markets where we experienced softness, which is a core part of our business -- pet food, adult nutritionals, those types of markets, are seeing softness. So I think if you peel those away from our core food can business, you would see an uptick in the overall volume for the food can.

So I think what Adam is giving you is a little bit of a peelback of why we thought flat to modest growth makes sense, because there are some parts where food cans go that we knew were going to be price sensitive in this kind of market -- that's proving out that way, like pet food is a good example, where it's a relatively higher-priced choice than dry pet food -- same with diet supplement, nutritional beverages. So there are some markets we kind of thought would perhaps show some elasticity in that demand, and that seems to be the case.

But, again, if you peel that out, you've got -- the remainder is up in the mid single digits. So to your question about substitution or anything else going on -- not at all. We feel like the food can continues to prove itself out as a very strong product in a recessionary environment. It's just there's a lot of moving pieces in that that we're giving you a little more flavor on.

Christopher Butler, Sidoti & Company.

I wanted to circle back to the acquisition question a little bit. Is this simply a situation where, because of the credit market, potential targets haven't even been out looking for acquirers, so there are no conversations even taking place? Or are we in a situation where they are still looking for valuations that are too high or possibly financing costs are just too expensive with credit markets as they are?

Well, I wouldn't categorize it as there is no conversation. I would say that they are limited and probably now the thing that's limiting most is that as the credit markets have tightened up and the overall economic environment is such that it is, multiples have kind of compressed, and in many cases they have compressed so far that when companies think about the idea of selling at those multiples, there's not much of an equity position that's left.

So it sort of positions them with a free option to sit tight, so to speak. So I think it's a combination of just the multiple compression and whether or not potential suitors would be able to finance transactions from this play as well. But there are certain properties that are out there that dialog is occurring. To what degree of seriousness is really the question.

And changing gears, if we look at the softer-than-usual demand in the first quarter, was there any part of that that was inventory destocking from customers or even the end-market, the pantry destocking that we've heard a little bit about or even on the personal care side, and is that a part of the first quarter story at all?

Chris, it's Adam. We certainly saw examples of specific destocking at retail chains both in the fourth quarter and also through a bit of the first quarter here as well. But essentially every retailer and then each of their customers is going to deal with this current economic situation in their own way in a different way. So it's really not clear to us -- is the current activity in destocking really any different than prior quarters or what's going to happen down the road? So it's a pretty foggy picture as we sit here today.

I appreciate your time.

Let me add just one thing, Chris, on that, because you started with a theory of softer-than-normal demand -- I guess I just want to go back and say that if you take the pre-buy out, and you look over the six months, food cans are up almost 2%. So I might start with a question of the first hypothesis. I think we would actually characterize demand as (inaudible).

Al [Cabelli], McQuarrie.

On the food can business -- in the outlook second quarter, are you thinking volumes are up there -- flat, down, in the second quarter outlook that you gave us?

Right now the thought on that is kind of flattish, kind of consistent with the comments we've made, so far -- not looking for much different on that at this point in time.

Okay, and so the thought being, then, that the closures and the plastic containers business, then, that's driving the year-over-year decline in earnings on volume weakness -- is that fair to say?

Well, one part we made in our prepared remarks, which is you've got to remember that Q2 last year was a very strong quarter. We were up 24%, much stronger than the whole year was up over the prior year. So I think part of it is just you had a lot of things all clicking on all cylinders in Q2 last year.

You've got to remember, we've got higher pension costs this year than we did last year, which we've talked about in the past, and so, really, I think we're expect all of the businesses to perform reasonably well. I think probably yes at one part. I think plastics will have, I would guess, the toughest comparison because, again, we are expecting volumes to be out there a little bit. It did have the benefit of a resin lag pass through this quarter they wouldn't have next quarter. In fact, maybe a little bit to the negative, it actually had some increase in resin going on a bit in second quarter.

So -- but aside from that, I think we're expecting business to perform well, and you've just got a tough comp there. It's still -- you know, what we're talking was a very strong second quarter.

Okay, and then, and speaking of the resin benefit in the first quarter -- any way you could quantify what that was and then also in the food can business, did you see any inventory holding gains with respect to metal in your non-contract business?

On the resin side, Al, if you take out the favorable effect of the pass through that Tony was talking about, essentially we would have seen a decline in income in the plastics business of essentially the same kind of value that we had the increase for the prior year -- so about a $3.5 million decline.

And then on the food can side, we did replenish some of the inventory that was depleted with the buy-ahead in the fourth quarter -- in the first quarter for food can, so there was a slight benefit there as well.

Just a point of clarification -- what Adam is talking about there is that we had had -- we had consumed inventory -- our own inventory in Q4 last year, and so we essentially suffered the consequences of that in the operations side, and what he's saying is that we essentially started to replenish some of that in Q1 and got the benefit.

To your point about the purchase of steel, et cetera, not really because you got a -- essentially not everybody goes to the new price January 1, so by the time you work out the timing of the pass through, et cetera, and the fact that our contract pass through, what we actually experienced, there is none of that holding gain, as I hear you -- if I understand your question completely.

Right, okay, thanks for the clarification. And then a final one, if I may -- any read into April food can volume thus far -- how they're tracking year-over-year?

No, and based on what we said before, reading in that tightly will just likely get you to the wrong conclusions, anyhow. So there's nothing worth sharing out of that. Again, we're perfectly content with where food can volumes are right now -- really not surprised at all, and so we're not expecting any big shift in what we've seen.

Chris Manuel, Keybanc Capital Markets.

A couple of questions for you -- first, when we think about the pre-buy that you had, you gave us some color there to help us. Do you think that the pre-buy is essentially done at this point in food cans -- you're kind of beyond that? Or is there still some carryforward here into the second quarter?

Chris, it's Adam. If you look at the pre-buy, not all of our contracts come up January 1 as far as the new pricing for 2009. So they're kind of staged-in through the first quarter. So I think you're seeing some of that pre-buy also occurring throughout that period prior to their contracts coming up. So there certainly were some that we talked about in Q4, but it was also staged into Q1 a bit as well.

Okay, but as we move into second quarter, whatever excess inventories that your customers may have had, or depleted inventory that you may have had, would essentially be -- this is a one-quarter event, one Q'09 event? Would that be fair?

No, what Adam is saying, though, is therefore you would expect some downside of that into Q2. For those that did a pre-buy later in Q1, now have them having that inventory and working a bit of that off.

Okay, that helps. Because where I was having trouble was you indicated that second quarter volumes would be flattish, but yet your earlier comments that, absent pre-buy, would be up 1 to 2 -- you know, you felt underlying volume was up a couple of percent. Does that -- is this continuing in the second quarter -- does that essentially explain that difference?

That's certainly part of it. Part of it is that, you know, it's we're one quarter into this year. I think you know us well enough that we're going to want to keep seeing before we kind of declare any more than that.

I've heard that before.

[laughter]

I'm just kidding. The next question I had was the plastics had a resin benefit you talked about in the first quarter. Is that done as well or will there be some carryforward in the second quarter there as well?

That was a Q1 event. In fact, as Tony mentioned, I think, earlier in some comments, it potentially can start going against us now as we've seen some increases already announced for Q2 that will be a negative lag effect to some degree, but it will be very small.

Okay, well, let's talk a little bit about volumes in this business as well. When we think about -- we look back over the last two, three, four years, we've had customer -- volumes have -- normally, we think of volumes in that business as being up low single-digit sort of a trajectory longer term. But we have been, for the last few years, at a flattish or even modestly downward trajectory.

What do you think it takes to -- do you think we can get back to a low single-digit growth or is that sort of an antiquated concept? Or what do you think it takes to get back there?

I think we are expecting to get back there. I think you actually summed it up pretty well. Even this year, our expectation -- remember that we're against the toughest comps now. As the year went on, you saw more of the decline last year. So our expectation is the high single digits. It's not where we expect to end up in the plastic business this year. We expect that to be more low single-digit still. And, again, that is impacted by the general consumption demand of primarily personal care.

But we very much believe that business should get back to a low single-digit kind of growth business. We've been making, as we've talked about the last couple of years, we've been making investments for that, and some of that is actually in these numbers. So I think, actually, we'd be seeing more decline, quite frankly, if it weren't for that.

So, yes, we still believe that's a low single-digit growth business and very much like our position in it.

Okay, and the last question I had -- as you look across your three business segments, and you think about returns on capital today, and as you're making some of these investments -- how do -- it's difficult for us to look and see how returns are across the different businesses, and I know if we went back two, three, four years ago, you used to tell us that things were comparable. Well, certainly, trajectories and things in each have changed. How would you rank those three businesses today in terms of the returns versus cost of capital and the returns versus, say, a corporate average?

Well, look, you'd have to clearly say that our plastic container business is a little bit behind that, but it's not significant. And, still, when we make investments in there, it gets no pass. Every new investment in that business has to meet the same threshold as a new investment in our other businesses.

So -- a lot of what that is is just kind of what's happening to the rest of the business and the dynamic around it. So we hold everyone to the same expectation on that. And, over a long term, that would be our -- that is what we would expect, is you will see the same kind of returns out of those businesses, or else we ought to be deploying that capital elsewhere, and that's how we think about it.

So, right now, behind, but we wouldn't expect that in permanence.

Chris, the only thing I would add to that is to make sure that everybody understands that each of those businesses is outperforming its cost of capital.

Okay, so if I were to look at it with respect to, say, your corporate average return on capital, metal food can above, plastics a bit below, where would closures fall?

Closures would be above.

Richard Skidmore, Goldman Sachs.

Just a couple of quick questions, guys. First, can you just remind us when your PPI adjusters kick in? I think it was in April. Is that correct?

No. Well, it's all over -- it depends on what contract you're talking about. So there's no one point of time on that.

You don't have, like, a big part of the business that's getting price adjustments in the second quarter?

That's correct, that's correct.

Okay, a second question -- can you just remind us, a, what your pension expense year-over-year increased in '09 versus '08, and where does that show up? Is that in the corporate expense line or does that get allocated to the businesses?

It gets allocated to the businesses. It will be up for the full year about $16 million. And it gets allocated out to the businesses and it also gets allocated between cost of goods sold and SG&A. So geographically it's spread through the P&L.

It was about $4 million, right?

That's right.

Okay, okay. And then just last question -- a couple of weeks ago you filed a shelf. Can you just comment -- is that just normal course for Silgan to have that outstanding or any additional color you can provide on that?

There's really not much to say about it. We've talked for a long time now that we want to keep all avenues open around liquidity, and this was just another kind of belt and suspenders against that to put it out there. We thought it was prudent, so we went forward and did it.

Okay, so, historically, you haven't had a shelf out there, and this was just putting one out there just to make sure that you have it out there in case --?

Yes, well, historically, we haven't operated in this kind of credit environment, either.

(Operator Instructions) Kurt Meyerhoff, Consumer Edge Research.

I had a question just on the back of the acquisition talk -- you spoke of US food and US closures as well as US plastics as being an interest. How would you feel with regards to US beverages?

What we've said always is that our acquisition strategy is around two things. It's around bolstering the franchises that we have in place, and it's around -- if there are other franchises in consumer goods products, and as we define franchise, you're talking about sustainable competitive positions.

So you could pick any market you wanted that's a consumer goods packaging market, and all we could say to that is if there was a franchise business in that market, then that could be interesting to us. But, aside from that, it would just be adding to the franchises we currently have.

(Operator Instructions) Mark Wilde, Deutsche Bank.

Tony, just a fairly simple one -- is it possible in your food -- or your fruit and vegetable packing business to get any kind of a read on what the packers might be committing to in terms of planting this year to give you some indication of whether they are planning to put more in cans this fall?

Yes, sure, Mark, it's Adam. We've got fairly good visibility into it, although it is still early in the year, but if you look at our core vegetables -- corn, green beans, peas, that type of product -- we are seeing a slight increase in the acreage that has been contracted for plantings. If you look at tomatoes, they have also had a slight increase there as well -- actually, probably more than slight increase in tomatoes.

One thing to keep in mind with tomatoes, though, it's the Central Valley of California where they are suffering from a severe drought as we sit here today. So tomatoes have been allocated zero water for the current period. So you're talking about well water restrictions now for those plantings, and when they're using well water versus state-supplied water, you've got different minerals in the well water versus state-supply. So your yields typically will go down a bit on the tomato products.

So, getting back to some of the previous commentary, we feel good about the volumes that we are looking at, and certainly fruit and vegetable would fall in that category as well.

Can you give us just some sense of what that acreage increase, excluding the tomatoes, might be?

Core vegetables, I'd say they're up slightly. So I don't have a percent for you offhand here. Fruit, actually, the mature trees are doing well, but they did pull some of the acreage on fruit -- for peaches, apricots, et cetera, out in California.

Over the last couple of years. That's not new news.

George Staphos, Banc of America.

Just maybe piggybacking on that, the water restrictions in California -- now, that's not new news, as I recall, or have the conditions worsened for you here in the last several months?

No, it's not new news. It's been a threat, if you will, for some time. If you look at what our growers have done in California, they've invested fairly heavily in the infrastructure to support well water supply of irrigation here. So this is not a new subject. It's just they are more prepared to deal with it today than they have been in the past.

And, probably, George, as I think you and I have talked about before, probably most of what we're talking about here isn't even very relevant because the fact is that canned tomatoes is only a small part of what happens to tomatoes -- tomatoes on the West Coast. There is a huge paste market. So even if yields are down, there still is a separate decision to be made about how much of the total tomatoes grown are going to end up in canned tomato products.

So I think it's a lot of interesting information. It does give you a feel for how the growers are thinking about what they want to can, but, in the end, it may not tell you much. They may have lower yield and still can more, if they wanted to.

Right. Well, it's helpful, though, because sometimes the concerns crop up, and so the review of this helps address those concerns before they do.

I agree with that.

Now, in terms of SG&A, you might have mentioned this -- what was behind the pickup -- there is that largely -- when I look at the P&L -- is that largely the pension that I'm looking at?

Well, there are a couple of things in there, George. In 2008, we had a benefit on the SG&A line of roughly $2.2 million, which was the management fee for the Brazilian operation.

Yes.

Pension is just under $1 million year-over-year on the SG&A line. You've got some year-over-year acquisition comp in there for about $0.5 million. And then there are just some professional services in there for about $0.5 million. The rest is just kind of timing. So on the overall balance, we still feel like SG&A will be right in line with historical levels.

Okay, and therefore what would your guidance be for the year? What are you defining as historical levels either as a percent of sales or dollar terms?

Yes, I think if you look at percentage of sales, that's the right indication there.

Okay. Now, the tax credit -- can you go back -- how much was that in the quarter for you? It was related to R&D, as I heard.

Yes, essentially, you might recall that last year in the third quarter, which was after the Congress approved the research and development credit, we booked that credit all in the third quarter, which incorporated the first and second quarter component of it. And now we're just booking it on a real-time quarterly basis. So it's not very significant. I think it's about $700,000 for the full year.

Okay, fair enough. Now, when we look at some of the sub-categories within food cans, whether it's pet food or adult nutrition, and I guess I'm thinking more about pet food, why do you think those markets are proving to be more price-elastic? I mean, you would think that canned food might be a little bit less expensive than some of the other pet products that are out there, or some alternatives like table scraps. Why are you saying the volumes in that business is down so much given the economy?

Yes, I would say that, in fact, that's not so -- that the wet pet food is a more expensive option than dry pet food. So if you're on a tight budget, and you're worried about feeding your family and kids, then there is something you could do to cut back your budget by moving to dry pet food.

Okay, so we should be looking at down 10 or so, really, over the course of the year within that business? Would that be fair? I know it's hard to forecast but --.

My guess is that that's a little too dramatic. There won't be that kind of magnitude, but that it will be down more than the rest of the food cans, for sure.

Okay. Is there any residual effect in that market from -- who was the packer that had some bad product that wound up requiring product being taken off the shelf? Is there any residual from that in these numbers now one or two years down the road, or is that now certainly through the market?

We would think that's through the market. There is no sign of that. Remember, that kind of became a broader problem than just the pet food problem where it was over with. So -- I think that's worked through.

Okay. Last question -- having had experience with you folks for a while, I know that you like to put the point on the board when you finally score the touchdown as opposed to when you're on the 30-yard line. But if you could give us some flavor for how much cushion you think you're building in or conservatism relative to the broader macro comment and uncertainty that you list on your press release, that would be helpful. Otherwise, good job in the quarter, guys.

Thanks, George. I would only say that what we are doing is the same as what we have always done, and we might characterize it slightly differently. I think what we've always said is that good news takes a long time to actually turn into P&L. When you win new business or something, you take a long time to get that. Bad news comes up really quickly.

So I think the one thing we always do when we put our forecast (inaudible), we leave some room for the bad news that's going to creep in quickly. And essentially that's all we do. So I wouldn't characterize what we're saying for the year is fairly typical for what we'd be saying this time in any year. Maybe with one caveat -- there are a few more uncertainties out there in the general market, but, again, I think we've been clear. We think we're fairly well positioned against those general market issues, and so we think that's kind of factored in here as well.

All right, maybe a last related question -- I apologize for taking one more -- if you think about where your expectations were, say, two or three months ago, across the businesses and across the metrics within those businesses, whether it's volume, customer development, contract rebids, if there are any out there, et cetera. Are there any line items realizing that you are -- as you said before -- perfectly happy with where trends are right now. Are there any things that are off negatively relative to your expectations as the year begins. Thanks, again, guys, good luck in the quarter.

Thanks, George. This is Tony. I would answer that no. I mean, look, there's bound to be puts and takes across it, but, on balance, I think we feel that, really, this quarter was right in line with what we expected, and we're feeling the year is kind of unfolding, so far, as we had expected -- and so no real change in event.

Thank you, and that does conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Allott for any additional or closing remarks.

Great. I just want to thank everybody for your time on what I know is a busy day, and we look forward to talking about our second quarter in not that far distant. Thanks.

And that concludes today's conference. Thank you for your participation.