Silgan Holdings Inc (SLGN) 2009 Q2 法說會逐字稿

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

At this time, I would like to turn the conference 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 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 second-quarter 2009 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 2009. After the prepared remarks, Bob, Adam, and I will be pleased to answer any questions.

As you saw in the press release, we outperformed our expectations for the second quarter delivering adjusted earnings per diluted share of $0.89 or $0.07 above the high end of our estimate of $0.72 to $0.82 as we maintained an unwavering focus on cost controls and manufacturing efficiencies during this challenging economic environment.

On the revenue side, our classic container business had the greatest challenge with weak consumer demand and a continued apparent trade down by some customers to products using less value-added packaging. Our vacuum closure business also continued to experience volume declines due to demand shortfalls for relatively higher priced single-serve beverages. Food can volumes were up slightly and continue to be weathering the economic conditions well.

More important to the quarter was the excellent job our businesses continued to do reacting to the topline challenges and driving focused cost control. These actions we believe will continue to benefit the businesses in the future.

As a result of our strong first-half operating performance and our expectations for continued performance in the second half of 2009, we are raising our full-year estimate of adjusted earnings per share by $0.15 to a range of $3.75 to $3.95, which at the high end represents a 7% increase over our very strong 2008 results and after absorbing the impact of the 7.25% senior note issuance which was $0.15 dilutive to earnings per share.

With that, I will turn it over to Bob to review the financial results in more detail and provide additional explanation around their earnings estimate for 2009.

Thanks, Tony. Good morning, everyone. As Tony highlighted, the economic environment continued to be challenging during the second quarter. While more difficult for some of our businesses, they each responded accordingly and on a consolidated basis delivered better-than-expected results for the quarter.

As expected, the second quarter of 2009 was impacted by continued raw material volatility as tinplate steel costs increased significantly year-over-year, aluminum costs were down considerably and resin reversed course and saw some cost increases during the quarter.

Our food can business returned to a more normal volume pattern as we saw sequential quarter volume increase resulting in slight volume gains versus the second quarter of last year. However as anticipated, certain products in our other businesses continued to experience moderate volume declines as a result of the economic environment.

In addition, we incurred incremental pension expense of approximately $4 million, which was partially offset by year-over-year interest savings of $2.6 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 solid bottom-line earnings.

As a result, we delivered adjusted earnings per share of $0.89 for the second quarter, slightly behind the prior year of $0.92 but $0.07 above the high end of our earnings estimate for the second quarter. On a year-to-date basis, we have earned adjusted earnings per share of $1.63 versus $1.55 in the prior year period representing a 5.2% increase.

In addition, as a result of using the proceeds from the $250 million 7.25% senior note issuance to prepay our 2009 and 2010 debt amortization, we recorded a charge for the early extinguishment of debt in the amount of $700,000 or $0.01 per diluted share. As a consequence, in the absence of a levering event, we expect to be able to utilize our free cash flow to make future amortization payments and to fund our seasonal demand without being required to access the volatile and increasingly expensive credit markets.

On a consolidated basis, net sales for the second quarter of 2009 were $689.5 million, a decrease of $45.8 million or 6.2% primarily as a result of the passthrough of lower resin costs, the impact of unfavorable foreign currency translation, and lower volumes in our plastics and closure businesses, partially offset by the passthrough of higher tinplate steel costs and slightly higher unit volumes in our food can business.

For the second quarter of 2009, we converted these sales to net income of $33.7 million or $0.88 per diluted share compared to second quarter of 2008 net income of $33.3 million or $0.87 per diluted share. We continue to be effectively hedged through our financing activities and our cross-border business relationships and as a result, foreign currency had very little impact on net income. However, foreign currency negatively impacted the topline by approximately $14 million.

As I indicated earlier, interest expense decreased $2.6 million to $12.2 million for the quarter as a result of lower average borrowings including a revolver borrowing as we used much of our cash position to fund working capital.

As you will note on the balance sheet, we continue to hold cash of approximately $80 million at quarter end relatively in-line with the cash balance of $86 million in the prior year quarter as we have adjusted our capital structure to reduce our reliance on bank borrowings.

Our effective tax rate of 35.4% in the second quarter of 2009 is in line with the prior quarter and our expectations, but 180 basis points higher than the previous year quarter, which benefited from a $1.7 million tax credit relating to nonrecurring state tax initiatives.

Capital expenditures for the second quarter of 2009 totaled $24.9 million compared with $31.6 million in the prior year quarter. As previously discussed, we continue to focus on generating solid free cash flow and therefore we anticipate lower capital spending versus the full year 2008 as we target being 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 June with a total cash cost of $7.3 million.

I will now provide some specifics regarding the financial performance of each of our businesses. The metal food container business recorded net sales of $405.3 million for the second quarter of 2009, an increase of $27.8 million versus the prior year quarter. This increase is primarily due to the effect of the passthrough of higher tinplate and other inflationary costs, partially offset by the passthrough of lower aluminum costs. The second quarter also benefited from slight volume gains.

Income from operations in the metal food container business increased to $41.8 million for the second quarter of 2009 versus $33.1 million in the same period a year ago. The increase in operating income was a result of ongoing cost controls, improved manufacturing efficiencies including benefits resulting from rebuilding inventory that was reduced late in the fourth quarter of 2008, and lower rationalization charges versus the prior year period. These benefits were partially offset by higher pension and depreciation expenses.

Net sales in the closure business decreased $36.3 million to $154.6 million for the quarter primarily due to unfavorable foreign currency translation of approximately $10 million and moderately lower unit volumes largely due to the continued pullback in global consumer demand for single serve beverages as a result of the current economic environment.

Income from operations in the closure business increased approximately 2% to $22.2 million as compared to the second quarter of 2008. The change in operating income was driven by the benefits of ongoing cost reductions, improved manufacturing efficiencies, and lower rationalization charges, largely offset by lower unit volumes.

Net sales in the plastic container business decreased 22.3% or $37.3 million to $129.6 million in the second quarter of 2009 primarily as a result of lower average selling prices as a result of the passthrough of lower raw material costs, a modest decline in unit volumes, and unfavorable foreign currency translation in our Canadian operations of approximately $4 million.

Ongoing weakness in consumer demand attributed to a 9% decline in terms of resin pounds sold as consumer demand was weakest for higher-end personal care and food products.

Operating income for the second quarter of 2009 decreased $9.3 million to $4.3 million as volume declines, the negative impact of inventory reduction, the unfavorable effect from the lag passthrough of resin cost increases during the quarter, and higher pension costs negatively impacted earnings. On the positive side, the business did an excellent job of controlling costs and improving manufacturing efficiencies, which offset some of the earnings headwind in the quarter.

Turning now to our outlook for 2009, as we bring the first half to a close we successfully delivered a 5.2% increase in adjusted earnings per share versus the prior year. Given the relative stability and predictability of our markets as well as our outlook for continued operating performance in the back half of 2009, we are raising our full-year 2009 adjusted earnings per share estimate by $0.15 to a range of $3.75 to $3.95, which excludes the impact of rationalization charges and the loss on early extinguishment of debt.

While we remain cautious regarding the macroeconomic environment, we expect our businesses will continue to focus on managing their costs to respond to volume changes and to continue making improvements in manufacturing efficiencies.

We are also providing a third-quarter 2009 estimate of adjusted earnings in the range of $1.45 to $1.65 per diluted share excluding rationalization charges. This compares favorably to adjusted net income per diluted share of $1.45 for the prior year third quarter. The primary drivers behind the estimate are better year-over-year volumes in the metal food container business and continued cost performance across each of our businesses.

As we have discussed in prior years, given the magnitude of the third quarter and the potential impact of movements in the harvest dates, the results of the back half of the year can shift between quarters.

In addition, we continue to gain confidence in our free cash flow guidance. While we've provided previous guidance in the range of $150 million to $200 million, we currently expect that range to be $175 million to $200 million as improved earnings, prudent working capital management, lower year-over-year cash interest, and reduced capital spending will more than offset incremental pension funding for the year.

That concludes our prepared comments, so we can open it up for a Q&A. I'll turn it back to Patrick, who can provide directions for the Q&A session.

(Operator Instructions) Claudia Hueston, JPMorgan.

Thanks very much. Good morning. I was hoping you could talk just a little bit about what you are seeing in terms of tinplate costs and how you are positioning for the second half there. And then maybe just if you have any comments just on inventories within the food can business both at your level and the customer level, that would be helpful. Thanks.

Sure, good morning, Claudia. It's Adam. The situation on steel remains very dynamic at this point. The steel industry continues to be very disciplined in their approach to the market for 2009 and their simple desire to recover the cost increase they incurred last year. So as we had discussed before, there was a significant price increase in January of 2009. Now it does seem like tinplate prices are starting to show signs of decline so we just don't have full clarity at this point as to the timing of those declines.

If you recall, we also said on the last call the North American mills were much more disciplined about idling capacity in response to lower market demand levels than the European mills were. So if there were declines in tinplate pricing, it was much more likely that they would occur in Europe than North America at this point.

And for us, the simple reality is that we've already purchased the tinplate required for the pack season, so if there were to be declines, we wouldn't see any decreases in our products until the raw materials we've already purchased have been consumed. And if there is a decline again, what I would say is there's still going to be a sizable increase year-on-year in tinplate pricing 2009 versus 2008.

As far as inventories, our inventories again, we are heading into the pack season, so seasonally this is our most intense working capital area that we face. From the customer's standpoint, we think inventories are right in line where they should be and where they have historically been heading into the pack as well.

Thanks, that's really helpful. Then I was just curious if there was any change in the metal food business over the course of the quarter in terms of demand trends that maybe struck you as unusual?

Claudia, Tony. I think if you look at volume, volume was up in the second quarter -- and slightly. So if you look kind of quarterly, you saw improvement. A lot of that had to do with the buy forward that happened in Q4, which hurt the first quarter of course. So I think on balance we would say it looked a little bit stronger in Q2. We are somewhat hopeful we will continue to see some strength in cans. So we are pretty confident that we have a pretty solid year of can volume coming. I don't -- again, we're not expecting it to be up big percentage points, but nor are we expecting it to be down.

Okay, thanks very much.

Ghansham Panjabi, Robert W. Baird.

Hey, guys, good morning. You know, related to the volume weakness in plastic containers and closures, I'm just trying to get a sense as to whether there has been any sort of volume shifts from a competitive perspective? And also whether maybe you are exposed to customers that are losing share to their competitors. Can you just sort of walk us through that?

Sure, it's Adam. Number one, no, we don't think there's been a market or a shift away from us from a volume standpoint. Certainly if you look at our plastics business, as you know very well, our primary franchise is in the personal care market. That's been under severe pressure in this economy that we are now living under.

On the closure side of the business, the products that we sell into kind of your premium or higher-priced single-serve beverages in the US for sure those products are mostly consumed out of convenience stores. That segment of the closures business has been hit pretty hard from consumers pulling back.

In Europe, we also see the same kind of phenomenon. We also had an inventory reduction that happened in the first half in Europe from a retail standpoint. So we don't think we've lost share. In fact, we think we have held share in both of our core businesses, in plastics and enclosures.

So back to your comment on the personal care demand in the US specifically, these are consumer staples at the end of the day, right? So is it -- do you feel like your customers that you are exposed to are disproportionately losing some market share maybe to private label or something else?

Yes, I think you hit it right on the head. If you look at specific to personal care, number one, we are aligned with the big branded customers. Two, we primarily sell differentiated packages to those brands simply due to the content that is in the container. And three, we are a bit underweighted in private label for personal care. So when you talk about products like shampoo, body lotions, hand lotions, etc., they have seen share loss to private label.

So on the back of that, are your customers sort of managing your expectations as to increased promotional activity at those market levels?

Sure. And the other thing to I think talk about is the fact that the branded companies are not going to take this market share lightly. In fact, many of them have already announced a multi-tiered product strategy to go after some of that private label market loss.

Okay, great. Thank you.

George Staphos, Bank of America-Merrill Lynch.

Thanks, everyone. Good morning. A couple of questions first around food cans. Could you give us a bit more clarity in terms of what types of volume year-on-year percentage changes we might be expecting for the third quarter? Obviously it's not going to vary significantly. It will probably be up modestly, but I just want to get your thoughts there.

And from our checking of channels and reading the trade press, it looks like some of your larger customers are promoting more aggressively for the fall in some of their key products. I wanted to see what your thoughts are relative to what that might mean for 2010. And I had some follow-ons.

Sure, George. It's Adam. The first comment I would make is that for the third quarter if you recall last year with the seasonal pack due to Midwest flooding, the pack did really run about two to three weeks late, so we did have slippage into the fourth quarter of the pack last year.

If you look at the planting this year, essentially we were only a couple of days late to the plan. So fundamentally you're going to have more pack volume in Q3. So that's part of the reason for the expectation for an increase in Q3.

If you also look at promotional activity, yes, we are aware of more promotional activity from our customers. I don't want to say that's necessarily translated into higher forecasts at this point, but we do expect some growth from that promotional activity as well.

I think the last thing, George, is just that -- we talked last call about kind of which segments of can are showing strength, which one's are not. As you look into our third quarter, more of the canned segments like vegetable, etc. that are showing strength in this economy, they skew more to the third quarter anyhow. So you ought to expect a little bit more growth out of those particular can areas in Q3 anyhow.

Okay, and on the subject of promo, should we expect that a bit more promotional activity in soups and that sort of product line or do you think we will see more in 2010 in fruits and vegetables, if you can comment at all?

Actually I would say both. I think we will see more promotional activities specifically regarding soups here as we get enter the fall season. We're also aware of more promotional activity not only in 2010 but towards the tail end of 2009 for some of our fruit and vegetable customers as well.

Okay, around back to school and that sort of thing?

Exactly.

Maybe moving to plastics and then I will turn it over, obviously this has been a tough environment for your business. Both in terms of pantry de-loading, some of the private label issues that you were touching on on Ghansham's question. But if we take a step or two back and look at the longer term, plastics has been in this declining trend for awhile. And does there come a point where you reconsider whether this is really an appropriate portion of the Silgan portfolio? And what key metrics are you looking to to make that evaluation, if not the timing of which to judge whether this is still a keeper within the portfolio?

George, Tony. A good question and an important question. I think it's interesting. This business, I guess the penalty for not being consistent quarter to quarter is you tend to get this question more? So when they have a weak quarter like the current one, which by the way had the impact of some resin headwind again, the fact that we actually worked down inventory, so it had some kind of unusual items in the quarter. But nonetheless, this question seems to come up when it has a down quarter. We don't have the opposite question when it has a very strong quarter like it did in Q4 last year or Q1 this year.

Well we kind of hope for the best, Tony, and hope you can keep it going.

Well, let me keep going with the answer. Because if you look on a trailing 12 including this quarter, the business is basically -- and this is to your question of metric -- if you look on cash generation against segment assets as a percentage, it is right in line with our Company. If you look at 2008, it was right in line with the rest of the Company. When I say in line, I'm talking about near top double-digit teen numbers. So very high, way ahead of our cost of capital, 18%, 19% kind of range.

In 2007, it was about 1 point below the rest of the business but still in the upper teens. So way ahead of cost of capital. If you -- our assumption of course as you are getting from this call is that we are going to probably continue to see some period here of volume weakness the remainder of this year.

So even if you kind of include what we are thinking is going to be a more lackluster full year this year, you are still only going to be a couple of points below the Company, upper double-digit teen numbers, so 16-ish kind of a number, maybe 17.

So we would still say as that being the important metric to us, this business continues to perform very well and we can put our fingers on the areas, as Adam did on volume, where we are seeing weakness. And it is in largely in kind of branded areas and our view is that those companies are not going to take it standing down.

Take P&G as an example. We just don't think that betting against P&G is a real smart idea here. We think they will win at this. So our feeling is that we like where the franchise sits in that case and frankly you look at the costs that have come out of the business, it actually makes us feel a little bit more optimistic in that it's -- the opportunity when some of that volume comes back is even greater.

So we still stand feeling very good about the plastic business. We think it's a very important franchise and part of our overall business.

Tony, I just want to be clear. The ratio that you were giving out, upper percentage, double-digit percentage, etc., that's an EBITDA margin and that is an EBITDA minus CapEx to assets? How are you defining that?

That is essentially an EBITDA ratio to segment assets.

Okay, I will turn it over. Thanks, guys.

Mark Wilde, Deutsche Bank.

Good morning. I just wanted to start off in the can business. I would just kind of puzzling a little bit between the numbers that you are reporting in the can volumes and then these CMI numbers that have come out for the second quarter, which would have kind of food cans down 4%. You seem like such a big part of the category and I'm kind of curious about the disparity.

Mark, Tony. We are too. But let me answer the obvious question first, which is we are unaware of any kind of a share shift going on here. So this just has to do with what markets were up, what markets were down. If you look at the CMI data, the other category is one of the larger unit decline categories. Because of the fact that we play a small part of seafood at least in that, it could be that it sits in that category. I really don't know the full answer to that question, but again, this is not a share shift question. This is only a question of what markets did better in the quarter and which ones didn't.

Okay, and Tony, one of the other categories that seems pretty weak is pet food. Is this kind of a trade down effect that you have been speculating about for the last several months, where kind of pet food owners kind of switched to dry food instead of canned food?

There is definitely an element of that in there and as you point out, it is something that we kind of talked about pretty early on. So, yes, there's no question about that. Is there a chance still for some promotional activity against that to recover some of it? I think the answer to that is probably yes. But there's no question that dry food is doing a little bit better in this economy and wet food is doing a little bit worse.

Okay, and then as you guys look around the country right now, is it -- do you have a read on sort of the prospective size of the pack this year and can you give us some sense of how much of a difference historically that can make from year to year?

Sure, Mark, it's Adam. If you look at -- I will give you some specifics by crop. So our green bean pack, which essentially is about one-third complete right now, the planned acreage for green beans, there was no change to the 2008 acreage. If you look at peas, corn, and peaches, there were mid single-digit increases to acreage, but at the same time, yields are forecasted to be down a little bit. So you're going to have some offsetting effect of the lower yield.

The one that is probably on the forefront of your mind is tomatoes. There is a sizable increase to the tomato crop for 2009, but most of that increase is going to go towards bulk product and not towards canned tomatoes. So there are varying reports on that but that's essentially where we stand. We think that we will be at comparable rates to 2008 as we sit here today.

Okay, and then over in the plastics business, is it possible to give us just some order of magnitude in terms of the segment EBIT there about how much of that delta might have been resin headwind, how much of it might've been mix, and how much of it might have been volume?

I can give you some parts of that. If you look -- I assume we're talking EBIT right now versus revenue.

Yes.

Yes, if you look at EBIT for the quarter, where you were down $9.3 million, a little more than half of that is what I would call specific items, a little over $5 million. Yes, the inventory reduction of about $2 million, so that's kind of overhead cost absorbed as you reduce the inventories. You had -- the fact that resin was going up and you weren't -- you were lagging the passthrough of that. That was about $2 million. These are year-over-year comparisons.

And then you've got a little over $1 million of pension costs, higher pension costs in there. So you can kind of -- from that, you can get a net item which is essentially the volume decline offset largely by the cost reductions that we've done in the business.

Okay, that's helpful. And the last thing, Tony. Can you just talk a little bit about what you are seeing out there in the acquisitions market? And also just perhaps where your biases lie right now in terms of where you may take the Company in terms of growth?

Sure, I think we have talked about this for a couple of quarters. I think the properties that are available, it seems to be building a little bit. It's certainly not as good as when prices and multiples were higher, but there seems to be plenty out there to be looked at right now. And so we are not lacking things to spend time on.

There's really no change to what we're interested in. The bolt-ons to our existing franchises are always kind of our most interesting opportunities. Beyond that, what we would be looking at are -- would be other franchises in consumer goods packaging. And a reminder that to us what that means is it is a sustainable competitively advantaged business.

And so again, it would be in cans. It makes great sense if we could find one in food cans. Certainly closures business, which we've done a few of late, continues to be interesting progress particularly if they are vacuum closures. But again, as you can guess from my answer to George, plastics sits there as well as opportunities in the plastics side. And again, we wouldn't rule out the idea of another sustainable competitive business to combine in, but that's not necessarily our driving force and strategy.

Okay. can you comment just about sort of what you are seeing in terms of valuation expectations and whether that's -- how much that might've moved over the last 12 months?

Yes, Bob, why don't you.

Yes, Mark, this is Bob. I think it is still a bit more of the same that we've talked about at least over probably the last quarter where given the credit markets and the economy multiples have moved down to a range that from a buyer's standpoint you probably start to feel like there's a range that makes some sense where you could earn a return.

I think it's still at a point where given the debt loads that a lot of these businesses are carrying, it doesn't leave a lot of equity value left for the seller. So there's some consternation on their part in terms of moving to the market. You know, I think as the credit markets improve and as balance sheets strengthen, there will be some movement.

I'm also hopeful that given some of the recent packaging M&A deals that have come to the market that it will sort of drive some of that reconciliation between expectations of buyers and sellers and get the market greased a little bit here for some activity.

So I still sit here saying given the strength of our balance sheet and our cash flow generation, patience and discipline is important for us to find value-creating opportunities.

Bob touched on a really good, which is I think there were a couple of recent announcements of strategic buyers consolidating in the market. It's a pretty healthy sign, we would say. That is the right direction to see things going from our perspective.

Okay, that's very helpful, guys. Thanks. I will turn it over.

Chris Manuel, KeyBanc Capital Markets.

Good morning, gentlemen. Congratulations on another good quarter. A couple quick questions for you. One is kind of a follow-on to Mark and George's levering opportunity question, to use your term, Bob. As you think about the plastics business and over the last few quarters its struggles, in order to get it back to, say, corporate type level returns or -- do you think it's necessary to do an acquisition or two that would add more private-label exposure to balance the portfolio? Or do you think more along the lines of we will just kind of let that cycle roll as it does and maybe more internal-oriented restructuring type changes to improve returns there? How do you think about making improvements in that business?

Well again, I'm going to go back and say I think if you look on a trailing basis, the business is doing fine. I think we could overplay this point. We feel pretty good still about the position of that business. Secondly, I would probably always be a little worried about a strategy to do an acquisition to cure a problem. I think that often is a pretty tough strategy to try to play out. It might drive you to do an acquisition at a price you don't want to do it at. So that's not -- it doesn't sound like something we would necessarily do in that case.

I think the third point you are asking me, which is a good one, is would you want to get yourself more pointed to private label? The answer to that is that in some cases we do private label. In some cases, private label is willing to pay more for a package because they don't have to spend the money branded guys do to market, etc., and so having a better package on the shelf makes a lot of sense for them in that case.

So I think the honest answer is the franchise that we have around kind of a more value-added custom-designed decorated container and the service by the way that it has to provide and be behind that does not necessarily only fit to the branded players. And so it has been traditionally more spent by the branded players, but I don't know that that's going to be a permanent trend on that.

And as we said, we don't think the branded guys are out of this game at all. So really the long answer to your question is saying no, in no way do we feel the need to do something materially different than we have done in the past because of recent performance of the plastic business.

Okay, that's actually helpful. The other component with your volume trajectory in food cans that is seemingly a bit better than industry as well, you guys had indicated in the past that you were hurt a little bit by -- in the first quarter by some hangover from pre-buy. With the prospect of tinplate costs potentially coming down at some point later in the year, whether that's the end of this month, beginning of next month, whenever, could some of your customers -- your passthroughs are pretty close, so it would be hard to say that their orders aren't --.

I guess where I'm going with my question is is there concern about supply at this point getting enough cans? With your tight passthroughs, that there wasn't necessarily people holding back orders, whereas they may have been for other folks. How do you think about customer order levels that you gauge to say that they are where they should be with this in mind?

Okay, well it's a good question. You kind of got yourself around to it. Better than 90% of our business is under contract. Those customers essentially are going to -- whatever we end up paying for steel over the course of the year is what they are going to pay. So they would have no incentive to do anything different through their buy patterns in any case.

There is no particular supply issue out there. That was much more something we were potentially facing a year ago, which is part of how the price increase got implemented by the steel side. But there is really no supply issue there.

Finally and importantly, because of the seasonality of our business, really so much of the steel we're going to consume this year has already been purchased, contracted, and in many cases formed into cans already. So it is really what will happen is this will kind of settle out at the end of this year and it will have more bearing I think on next year.

Okay, so it doesn't sound like you have had any folks gaming the system on your end and maybe that's why you're doing a little better here. As you look at the full year given there was a little pre-buy at the end of last year, with what you are seeing for projected packs, yields, things of that nature, would you still anticipate that food cans this year could be flat to slightly up on a volume basis?

Yes, on a volume basis, we are still expecting a flattish to just a very slight increase.

Okay and could you give us a sense to --? Last question is -- could you give us a sense as to what volumes were like in the closures side of the division?

Sure, on the closure side, volumes were essentially down low double digits, so -- and again, that's primarily driven by the single-serve beverage side. You also had in the quarter -- you also would have seen a little bit of the developing markets in Europe were a little bit weaker as well. So those would be kind of the two main drivers of that.

But that's not that inconsistent with what we saw in the first quarter either. So I would say on volume in general, both on closures and back to plastic, there was nothing new in this quarter that we haven't been seeing for some lengthy period of time here, a quarter or two.

But was it any different when you look at those closures between the metal ones and the plastic ones?

No, it was more to the market they sell to. So plastic tends to be even more to the single-sever beverage side. So it gets a little bit more of an impact from that. But the commonality is really the market that it's being sold into.

Okay. Thank you.

Alton Stump, Longbow Research.

: Thank you, good morning. I might have missed it, but could you give us what the volume number was on the plastic container side as well? Or just a range of what volumes were down?

Sure, the trick with volumes that we have talked about many times before is you get in -- you got a range of plastic containers, fairly sizable ones all the way down to caps and closures that go on small spice sifters, etc. So unit volume is always a little tricky for us. That's particularly true right now.

So I am now going to give you a different -- which we think at least at this point in time is a more relevant answer, which is how much pounds resin were consumed. If you look at it that way, essentially we were down high single digits in the quarter and year-to-date. And so I think that's a better volume statistic for you right now.

Great, thanks. And then just a real quick follow-up on the tinplate pricing front obviously has talked already on the decreases coming in the back half of the year. Any word yet on what might happen in 2010? I assume we'll probably see further declines.

No, no word yet. We're still working very closely with both our steel suppliers and our customers to try to determine really what and when it is going to happen here at the back half of 2009.

And again, Adam said this before. I want to be clear. We are still -- 2009 is going to be an increase year. All that is happening here is the increase may not be quite as much as we had thought at the beginning of the year.

Okay, great. Thanks, guys.

Al Kabiri, Macquarie Group.

Thanks, guys, and good morning. Just a quick question I guess on volumes, on plastics and closures and just interested in hearing your commentary. Both segments down similar volumes yet the closures business you are able to hold the EBIT up much better year-over-year than on the container side. And I know there's a little bit of resin impact going on there, but I just wanted to get your thoughts on that difference.

Well, I think you put your finger on the big part of it, which was the $5 million of one-time items I discussed. So you had -- you went through an inventory reduction. Again, to the plastic container business's credit, not only do they deal with declined volumes, but because of shutdowns they took to take costs out, they actually brought their inventories down. So that took costs out but also had an impact on the overhead on that side.

And you had resin headwind which is a little bit greater in the plastic container business than in the closures side. So those are the main differences. I think both businesses did a very good job reacting to the volume shortfalls.

Okay, and then related to the inventory drawdowns in the plastic containers business and the associated negative fixed cost absorption, do you think you are pretty much through that or is there more of a headwind that we could see on that front in the coming quarters?

Well, I think we are pretty much through it. I would say that we are not at a sustainable level of unit inventory at this point. We manage the inventory and the working capital on a turns basis, so we've gotten our turns down to where we are comfortable with the turns in the business. But as volume comes back, you will see a rebuild of that inventory to some degree.

Okay, okay, I guess the question is even if we sustain the current kind of end market volume trends, is there an argument to be made that you could just see a little bit of an improvement just as you don't have anymore destocking through the channel?

I would reiterate what Tony said. I think our plastics team has done a great job of taking costs out of this business and focusing on what's important to the business. So I don't think that's going to change as we go forward. So I don't anticipate rebuilding inventory there unless the markets come back from where they are today.

And if you are talking about destocking by our customers or down the chain, it's plausible, but we find you are always waiting to see that happen. You're talking about inventory corrections in the system. It's pretty hard to ever figure that out. So we are not sitting here counting on the fact that there is going to be some kind of a restocking of the inventory chain down the line.

Okay, that's helpful. And then I guess the last question on acquisitions is your leverage ratio now is well below kind of the 2 to 3 times that you normally target. I know you are going to be patient and not jump on anything here, but at what point as your leverage ratio continues to decline -- at what point do you start evaluating other uses of cash such as further dividend increases or share buybacks or whatnot?

Al, this is Bob again. You know, I think you touched on a key that we have talked about for a while. You know, we at one point said that we thought anything under 2 times levered was beginning to be inefficient in terms of the capital structure. And that was kind of leading up to the meltdown of the credit markets. I think you could probably argue that the credit markets are marginally better than maybe they have been over the last several quarters. But given kind of the economic outlook right now, you know, I don't necessarily think that we are out of this whole mess just yet and I think given that fact, it's prudent for us to kind of hold capital on the balance sheet and perhaps continue to be underlevered for some period of time.

So I think it's really as the economy starts to come back and the credit markets start to flow more steadily, then we'll have to take a hard look at that. I agree with the point that this is not a business that should over a sustained period be at that kind of leverage and that's not our objective here. It's just protecting the base business and making sure that we've got the right capital structure to react to the economic climate.

So over some period as that recovers and if there is no transaction, then we will have to look at alternatives to manage that capital structure, to which we are not opposed. We are very shareholder value focused and that's something that we would consider doing at the right time.

Okay, great. Thank you very much.

Robert Kirkpatrick, Cardinal Capital.

Following onto that, Bob, I assume that that means you will build cash rather than incrementally pay down much in the way of debt in the back half of the year as the business seasonally cash flows positive.

Yes, essentially that is very consistent with what we said when we did the bond steel. If you look at that position, we ended last year with roughly $160 million in cash on the balance sheet. We will generate pretty significant cash flow this year and on an after dividend basis, we could be sitting on $300 million plus worth of cash. And as we said as he came through the bond deal, that we were putting ourselves in a position such that we could fund all future amortization payments including our working capital needs through our free cash flow generation.

So by definition, that means in order to be able to do that next year we've got to be sitting on cash at year-end. Keep in mind that our average peak borrowings on the revolver look something like $275 million to $300 million anyway, so this would put us right about where we would need to be at year-end.

So that's a long way of saying yes, we will be holding a pretty good cash position at year-end barring any acquisition activity.

And does that mean that you would -- as things stand currently -- not draw down on the revolver in 2010?

Yes, that's correct, or at least certainly we would draw down a lot less than historical.

Okay. And then a question on the tomato crop. I've read some articles about some sort of fungus putting the crop at risk this year. Can you comment on that?

That would be news to me. I have not read anything about a fungus at this point. What we do know is that the pack has already started late last month, so what we have heard is so far so good. Quality and yields looked very good for the early part of the pack. So I haven't heard about the fungus.

Great, thanks so much.

Richard Skidmore, Goldman Sachs.

Good morning, just a question, Tony and Bob. As you looked at your second-quarter guidance and where the results came out for the second quarter, can you put into kind of key buckets where the upside came from, specifically focusing on how much really was driven by productivity and cost control?

Sure, it was almost entirely out of the cost control of the businesses. I don't -- separating productivity. Mostly what we do now is really good cost containment, so I would say it's largely cost containment and really from all the businesses kind of across the board, add to that that the food can business was a bit stronger than we were expecting, so it's kind of a combination of those two points.

Okay, and as you look forward, how much more is there on the cost control side? I know you guys are always pretty active at improving productivity and efficiency and whatnot. How much more do you see that there could be in terms of potential costs coming out of the business?

Well, you almost have to look at the individual businesses. If I look at what the plastic container business has done, I think it would be very hard for them to do much more. In fact, I think really what will happen is as business comes back whenever it does, they will have to bring some costs in. I think we will be leaner against those sales so the dropthrough margin I think has opportunity to improve, but in fact they will have to bring costs back in a little bit more.

On the closures side, I think they probably -- I think we have seen most of what we will be able to see out of that business. The interesting one is on the container side. Some of what we are seeing are kind of more fundamental changes to the way we run our operations in terms of lean exercises, etc. So some of that is more fundamental and could have more ongoing gradual improvement to the business.

Tony, is this more of people coming out of the business or is this somehow you are thinning the can or something, taking metal out of the can or something like that?

No, it has much more to do with the operations and how we are running the operations and ultimately people or cans out, etc., but it is not about changing specs of cans.

Okay, great. Thank you.

Christopher Butler, Sidoti & Co.

Good morning, guys. I was interested in when you started to see the increase in resin costs during the quarter?

Resin costs actually started to go up towards the tail end of the first quarter, so it's been a pretty consistent theme here for Q2. It's been increasing the entire quarter.

Part of what happens you had a just significant drop coming into the year, as you know, and it just got so low that it doesn't bounce back. So if you trough to peak in the six months so far, in some resin categories, there is as much as a 25% increase trough to peak. So -- and that happened kind of throughout the first six months of the year.

And coming from some of the resin producers that I've been hearing more from June that there had been some increases, July. Did you see acceleration as the quarter progressed?

Not acceleration, I don't think, but just more consistency. So yes, we saw June increases, July increases, and an August increase has also been announced as well.

And understanding that things are a little bit different due to the recession and weak demand environment, but normally with resin costs sort of bottoming and starting to climb again, do you generally see customers go through that sort of pre-buying that you had talked about on the food can side at the end of last year?

Not really in our plastics business. It's not a phenomenon that we have really experienced before, nor is it one that we think we're in right now.

Shifting gears a little bit to the balance sheet, what payments are due for 2010 at this point?

In terms of the debt --?

I'm sorry, on debt payments, the amortization there?

Near none. With the proceeds from the bond deal we paid -- we prepaid our 2009 amortization as well as our 2010 amortization, so there is a few million dollars or so that's due in 2010.

And looking at working capital, accounts receivable came down considerably looking year-over-year, though some of that is reflected in the revenue that's down, but it seemed to be well in excess. Are you doing something different to improve collections?

Well, certainly we are very focused on collections. If you look at our DSOs, we are down year-over-year by roughly four days or so. I think the other thing if you're looking at the cash generated from receivables on a year-over-year basis coming out of the cash flow statement, some of that is also the effect of the buy-ahead that you are getting -- you're collecting the cash now because you had the sales early. So that's part of that phenomenon that's happening there.

But generally, the businesses are doing a very good job of managing their working capital as well, and we've seen pretty good improvement on a year-to-date basis comparative to the prior year as well. And that's not just receivables, but that's all of working capital.

I'm sorry if I missed it, but how much did you take out for -- how much do you have outstanding on the revolver?

I think it's a little under $100 million right now drawn on the revolver.

$99 million.

I appreciate your time.

George Staphos, Bank of America-Merrill Lynch.

A couple questions maybe to conclude, at least from our side. First of all, I would seem that the free cash flow guidance range that you have given didn't change all that much in terms of what you were targeting for the year. Bob, would you say that the risks are to the upside from what you could see so that when we're all said and done maybe free cash flow even has an chance of being in excess of $200 million? How would you handicap that scenario?

Well, you said that, not me, but no, I think your point -- (multiple speakers) essentially what we have done is I think we've tightened the reins to mitigate the downside and I think that's -- there's two drivers there. I think the performance of the business has been very good. The management of working capital has been very good. So as we came into the year, we were thinking that we would see a drag from working capital and now we are thinking it's at least being minimized. So I think we are tightening the reins is really what we've done.

Look, we're going to try and squeeze everything we can out of this business, so while not committing to upside there, I think we are at least mitigating the downside risk against the cash flow generation.

Okay, a quick housekeeping question. How much were metal closures down in the quarter year-on-year? Round numbers?

They were round about the same kind of percentage, so it would be double digit percentages as well. But remember again, metal closures often go into those single-serve areas as well, particularly in Europe. So the European business, which is essentially all metal, has a fair size that goes to single-serve beverage as well.

Okay, the last question, you know, periodically over the last few years we've heard about conversion threats. I mean a few years ago you had chilis in aseptic boxes. That didn't really work all that well. There's been some discussion about composites taking some share because of where tine plate has gone and periodically have the pouch folks talking about taking share in [restorable] pouches. And at best it seems like that's been a very, very modest migration.

With tinplate having moved up, realizing we don't know yet what tinplate might do next year, do you sense that there is more willingness by your customers to try some of these packages once again and shift out of cans, or do you think there will still more of the glacial shift if at all and why? Thanks, guys. Good luck in the quarter.

Thanks, George. No, we do not expect any more of that. I think the point that you raise, two things about it. First of all, the food can as you know is the lowest cost package out there. So the idea of anybody moving because of a cost consideration about tin or anything else just doesn't fit. It is by far a more economical package. And remember that the increase that tin was getting this year essentially went through every other package content last year.

So it's sort of just a year trailing in that increase and we have already said now we are starting to see some mitigation of that increase. So I don't see any change to any of those things. At the end of the day, that kind of a shift is going to be a market-led shift. If companies from a marketing perspective think the consumer has a preference, that's what would do it. And so I would -- to use your words, that's going to be more of those kind of glacial moves and there's no change to that at all.

One last, last follow-on. Has there been any more saner discussion regarding BPA and coatings regarding the can? Thanks.

Thanks, again PPA, we do a lot of food contact. We do a lot of food packaging, and so there are always ongoing efforts around food contact. BPA being probably the most public one of that right now. The changes that have happened of late have been pretty constructive, frankly. The European Food Safety Commission went again and looked after the US was getting kind so focused on this, they came out again and said they think the levels are safe.

And then Health Canada, who was the ones who really started this round again when they looked at it, has recently come out again and said that it's safe in cans for -- at the levels way below what they thought was necessary. So all of that has been more positive. You know, there are states that are trying to get ahead of the Federal Government, FDA on this.

But BPA continues to be FDA-approved. You've seen progress on all those fronts. From our perspective, really the issue is a lot more about consumers because there is a lot of press on this. Our concern is much more that the consumer may well choose at one point in time that they just would rather be away from this. And so we are expending a lot of energy getting alternatives into place. We will have alternatives for our product at some point in time.

And so our feeling is that that has to happen but right now that's because of the consumer interest, because again, today every regulatory authority out there has basically said that this stuff is safe.

Thanks, guys.

Tim Burns, Cranial Capital.

Hey, Tony, Bob, Malcolm, Adam. It sounds like a rock group.

It does look like one.

Or the modern-day investment bank as we combine and combine. You know, it's a joke but I think I've been following this industry for 20 plus years and you guys ought to get into the weather business. Silgan Weather Network, you could make a fortune, probably more than you're making in cans.

The other thing I was going to ask you is why hasn't anybody ever convinced a consumer to drink or to consume gazpacho out of a can or a cold soup, a nice offset to your winter season?

I don't know. We would be willing to ask our customers that. I don't know that we have an answer for you, but.

You ought to buy some time on one of these fancy food networks and have the guy pour a nice easy open can into a pan. It goes a long way and it may not cost that much.

But listen, my real questions are this. This is a goofy question, but the vacuum lug closure, the single service beverage weakness that you've talked about, I assume this is for soft drinks, isotonics, sparkling water, stuff like that. Is that the case?

Yes, and juices, teas, etc.

And juices. Okay. And virtually all of that is packaged in glass, right?

That is correct. (multiple speakers) Sorry, wrong answer. As to the metal closure, yes. But as to the plastic closure, no. Again, you think about isotonics, the vitamin-enhanced waters, etc., those are all sitting in PET.

In PET, got you. But is there a large chunk of the global beverage market still dominated by glass in your view? Wouldn't that be something to not rest your laurels on but make the vacuum lug closure, the twist off, a much more secure product?

More secure because what -- because glass is more secure?

Yes, I guess it's more ingrained in the cultures over there, when you go over there, there's a lot of glass. And even like beverage cans seem to have difficulty penetrating some of the BRIC or emerging market countries. And I think that's good for vacuum lug, right?

Sure, and that's why our closure business is our most international business. It is metal closures around the world into all of those markets. And so the answer to that is yes. Now the question is how big will that get and where is the growth? And you know, our thinking is that it's going to be kind of modest growth in those products and that probably plastics will see more of that growth as time goes forward, which is fine.

We have plastic offerings too so it is not as if we don't have an offering even if that's the case. But that's more of what we are seeing.

Got you, and that plastics business was kind of subscale, but it sounds like it's growing, that plastic component, either as part of a composite metal plastic closure or on its own. Is that fair to say?

Oh it has grown a lot. If you look at our US business, in units, it is half our business now.

Is it really?

Yes. So plastic vacuum closure is a big part of what we do.

Okay. Congrats on that. Last question I've got for you. Everybody has talked about plastics and kicked it to death. That's not my job. The thing I'm wondering is you are not the only guys suffering in that sector. You're not -- all your customers are. All your peers are.

But the one thing I'm wondering is all this time spent between brand/house brand, that's kind of a trade-off maybe. There seems to be in my eyes anyhow a lot of repackaging and new promotions of products especially coming out of people like Gillette. But -- I mean a lot -- and you wouldn't expect it at this time in the economic cycle or maybe you would.

But are you guys missing the merging categories? Forget brand or not brand, what about the tweeners and things of that nature where you have got categories that have never had their own personal care products made for them?

It's a great question, Tim. I don't -- are we missing them? Probably somewhere, but the business is definitely focused on finding customers not by market necessarily but customers who desire a custom differentiated package and the service component that comes behind that. And they are not stopping at the territory of personal care or anything else. We are looking all over for that.

That is sort of what we've always called the wet edges of our plastic business. And in fact if you look over time, personal care has become a smaller and smaller part of what we do for that very reason. So what you said is exactly right. We are out all the time looking for those customers and in some cases they will be private label customers who want to buy what we sell in terms of a more differentiated solution.

Got you, not you. Okay, listen, I appreciate it and good quarter. Everybody, have a good one.

Gentlemen, we have no additional questions at this time. So this does conclude the question-and-answer session and also concludes the conference. We thank everyone for their participation.

Great. Thank you, everyone, and we look forward to talking at the end of our third quarter.