Silgan Holdings Inc (SLGN) 2009 Q3 法說會逐字稿

(Operator Instructions) Thank you for joining Silgan Holdings third quarter 2009 earnings conference call. Today's conference is being recorded. From the company today we have Tony Allot, 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 and Chief Operating Officer. At this time, I would like to turn the call over to Mr. Miller. Please go ahead, sir.

Thank you, Cynthia. Before we begin the call today, we'd like to make it clear that certain statements made today on this conference call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and, therefore, involve a number of uncertainties and risks, including, but not limited to those described in the company's annual report on form 10-K for 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.

Thanks, Malcolm. Welcome, everyone, to our third quarter 2009 earnings conference call. As usual, our agenda for this morning will be a quick review of the financial performance for the quarter. We'll make a few comments about our outlook for the remainder of 2009. Afterwards, Bob, Adam and I will be pleased to take any questions.

As you will have seen in the press release this morning the third quarter was a new earnings record for the company at $1.91 per diluted share, $0.26 above the high end of our range and $0.46 ahead of last year on an adjusted basis. This performance was driven by strong performance in both our food, can and closures businesses which mitigated weaker performance in our more economically sensitive plastics business. Our metal food can business benefited from solid growth due primarily from one of the strongest fruit and vegetable packs in recent memory. For most crops, customers increased acreage, had better yields and chose to pack most of this product. Additionally both our food can and closures businesses benefited from continued success in operational cost control and manufacturing efficiencies.

Our plastic container business continued to face the challenge of overall volume declines which were compounded this quarter by unplanned spikes in demand for certain products such as cold and flu and the inefficiency in responding quickly with reduced plant staffing. As a result of our strong year to date financial performance and our expectations for continued performance in the fourth quarter 2009, we're raising our full year earnings estimate to a range of $4 to $4.10, which at the high end represents an 11.1% increase over a very strong 2008. This would be the fourth year in a row of double digit earnings growth. This increase also absorbs the impact of the 7.25% senior notes issuance which was estimated to be $0.16 per share diluted earnings. With that, I'll now turn it over to Bob to review the financial results in more detail and provide additional explanation about our earnings estimates for 2009. Thank you, Tony.

Good morning, everyone. Our food can business benefited from a strong seasonal pack in terms of acreage planted, yields achieved and timing which resulted in significant volume gains versus the third quarter of last year. However, as anticipated, certain products in our other businesses continued to experience volume declines as a result of the economic environment. In addition, we incurred incremental pension expense of approximately $4.7 million which was partially offset by year-over-year interest savings of $1.4 million.

In light of these challenges on a consolidated basis, 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 $1.91 for the third quarter, out performing the prior year quarter by $0.46 or 32%. On a year to date basis, we have delivered adjusted earnings per diluted share of $3.54 versus $3 in the prior year period representing an 18% increase. On a consolidated basis, net sales for the third quarter of 2009 were $1.165 billion, an increase of $52.2 million or 5.4%, primarily as a result of the pass through of higher tin plate costs and significantly higher food can volumes, offset by lower resin prices, lower volumes in our plastic and closure businesses and the impact of unfavorable foreign currency translation.

For the third quarter of 2009, we converted these sales to net income of $73.5 million or $1.91 per diluted share, compared to third quarter of 2008 net income of $52.8 million or $1.38 per diluted share. We continue to be effectively hedged through our financing activities in our cross border business relationships and as a result foreign currency had very little impact on net income. However, foreign currency negatively impacted the top line by approximately $5.8 million.

As I indicated earlier, interest expense decreased $1.4 million to $13.7 million for the quarter as a result of lower average borrowings partially offset by higher average rates, largely due to the issuance of $250 million of 7.25% senior notes in May of 2009.

As you'll note on the balance sheet, we continue to hold cash of approximately $67 million at quarter end. This is down significantly from the cash balance of $290 million in the prior year quarter. Keep in mind that 2008 includes the excess $200 million we drew down on the revolver in the midst of the credit crunch.

Our effective tax rate of 35.6% in the third quarter of 2009 is in line with prior year quarter and our expectations, but 190 basis points lower than the previous year quarter which included a $1.2 million evaluation allowance against tax positions in Turkey. Capital expenditures for the third quarter of 2009 totaled $23 million compared with $32 million in the prior year quarter. We continue to focus on generating solid free cash flow and, therefore, we anticipate lower capital spending versus the full year 2008 as we anticipate capital spending to be approximately $110 million for the year. Additionally, we paid a quarterly dividend of $0.19 per share in September with a total cash cost of $7.4 million.

I'll now provide some specifics regarding the financial performance of the three business franchises. The metal food container business recorded net sales of $716.5 million for the quarter, an increase of $99.1 million versus the prior year quarter. This increase was primarily due to the effect of the pass through of higher tin plate costs and significantly higher unit volumes, principally due to the favorable size and timing of the seasonal pack. Income from operations in the metal food container business increased to $104.2 million for the third quarter 2009 versus $76.6 million in the same period a year ago. The increase in operating income was primarily a result of significantly higher unit volumes, improved manufacturing efficiencies and the delayed pass through of inflation and other manufacturing costs, partially offset by higher pension expenses.

Net sales in the closure business decreased $18 million to $166.3 million for the quarter, primarily as a result of lower unit volumes largely due to the continued pull back in global demand for single serve beverages as a result of the current economic environment as well as unfavorable foreign currency translation of approximately $4.5 million. Income from operations in the closure business increased approximately 42% to $24.3 million as compared to the third quarter of 2008. The increase in operating income was driven by the benefits of ongoing cost reductions, improved manufacturing efficiencies and lower rationalization charges partially offset by lower unit volumes.

Net sales in the plastic container business decreased 17.8% or $28.9 million to $133.7 million in the third quarter of 2009, primarily due to lower average selling prices as a result of the pass through of lower raw material costs, a modest decline in unit volumes and unfavorable foreign currency translation in our Canadian operations of approximately $1.3 million. Unit volume demand showed some signs of improvement in certain product categories such as cold and flu, however, total volumes for the third quarter were down 2.5% versus the prior year period, both on a unit volume basis and on resins pounds sold.

Operating income for the third quarter of 2009 decreased $6.5 million to $2.6 million as a result of volume declines, the unfavorable effect from the lagged pass through of resin cost increases during the quarter and a negative impact of demand volatility which created inefficiencies in the plants due to shorter run lengths and the impact of running with reduced plant personnel as well as higher pension costs. On the positive side, the business did a good job of controlling costs which offset some of the earnings head wind in the quarter.

Turning now to our outlook for the remainder of 2009. Given the strong performance year to date and the relative stability and predictability of our markets as well as our outlook for continued operating performance in the fourth quarter 2009, we're raising our full year 2009 adjusted earnings per share estimate to a range of $4 to $4.10, which excludes the impact of rationalization charges and a loss on early extinguishment of debt. The high end of this range represents an 11.1% increase in adjusted earnings per share versus 2008 after absorbing the dilution from the $250 million 7.25% senior notes issued in May of this year.

We're also providing a fourth quarter 2009 estimate of adjusted earnings in the range of $0.46 to $0.56 per diluted share, also excluding rationalization charges. This is behind last year's performance of adjusted net income per diluted share of $0.69. However, keep in mind that the fourth quarter of 2008 included a significant resin benefit of approximately $0.13 per diluted share, a lower than normal tax rate which contributed approximately $0.03 per diluted share, as well as a slightly delayed pack season. In addition, the third quarter of this year benefited from higher yields and earlier pack timing which as has some negative impact on fourth quarter volumes.

In addition, we continue to gain confidence in our free cash flow guidance. We expect to generate free cash flow toward the high end of our previous guidance of $175 million to $200 million as improved earnings, prudent working capital management, lower year-over-year cash interest and reduced capital spending more than offset incremental pension funding for the year. This guidance assumes that we do not make incremental pension payments beyond our 2009 expense level.

While we are in the midst of our 2010 budget season, it seems prudent to provide some early directional guidance for the first quarter of 2010. You should note that in the first quarter of 2009, the metal containers business benefited from rebuilding inventory in response to the fourth quarter 2008 buy ahead and the plastic business benefited from the delayed pass through of resin declines. However, given the work our operating businesses have done in responding to the economic climate by reducing costs and improving manufacturing efficiencies, as well as lower year-over-year interest costs, we currently expect a high end of our earnings range for the first quarter of 2010 to be at or near 2009 levels on a consolidated basis. That concludes our prepared comments. We can open it up for Q&A. Cynthia, I'll turn it back to you to provide directions for the question and answer session.

Thank you. The question and answer session will be conducted electronically. (Operator Instructions) Our first question will come from Claudia Hueston with JPMorgan.

Thanks very much. Good morning.

Good morning, Claudia.

Just a couple of questions on volume. One, I was just hoping you could elaborate a little bit on the plastic segment and the volatile demand that you talked about with the cold and flu side and then just maybe comment on how demand in plastics is trending now.

Sure. Good morning, Claudia, it's Adam. Overall, I think we would say we're disappointed in results for the quarter for the plastics business. When you specifically look to volume, we had three primary drivers of that volume short far, again continued weakness in the personal care market. Our microwavable bowl volume was down significantly versus prior year. And we've got continued SKU rationalization programs with our customers. So to answer your direct question, cold and flu only, that's really where we did see the fits and starts in the quarter. So that was really the shining star, if you will, from a volume standpoint in Q3. And sequentially versus Q2, we did see volume increase Q3 versus Q2. So, from a trend standpoint, we're feeling a little bit better about the business on a go forward basis.

What are your customers saying now about demand trends? I mean how do their attitudes maybe compare now versus even a couple of months ago?

I think it depends on the market. Certainly with cold and flu related items, there is bullish nature to the comments that we're receiving from our customers. Again, I'll go back to say microwavable bowls and microwavable cups, that market is a market where you're paying for ultimate convenience and the consumers have certainly pulled back from that market and essentially no recovery in sight at this point. So, we're in the middle of a recession and our personal care items are subject to, are very sensitive to the recession. So nothing in the immediate future for personal care.

Okay. Thank you. And then just on the food can volume side, those volumes obviously sound like they're very strong in the quarter, better than we had expected. Can you just talk a little bit about how much you think you maybe drew from fourth quarter into the third quarter on the volume side. And then, also, just if you have any comments on, some of the efficiency gains in the quarter in the metal food can business and how sustainable they may be if you're running at slightly higher volume levels. Thanks.

Sure. Good question. If you look at our Q3 volume, obviously we were up pretty significantly in our metal food can business. Part of that is related to the 2008 Q3 pack. So as you recall last year, plantings were delayed about two weeks in the Midwest due to flooding. So we did have pack volumes that slipped into Q4 of last year. Compare that to this year, plantings were essentially a day or two late and most of the pack and the harvest was completed in Q3. So there is a significant benefit from that. If you look at how we've run our plants, we've continued to improve the operating performance in the metal food can business. And we're built to handle volume and the volume drop through that we had here was pretty significant. So we've taken significant costs out of the business and that will benefit us going forward as well.

Okay. Thank you very much.

Moving on to Ghansham Panjabi with Robert W. Baird.

Good morning, Ghansham.

I must have missed this, but what were the volumes up in metal food and also in closures? What were they down?

Metal food containers was up high, mid to high single digit range. Closures were down low double digits.

Closures down low double digits. Okay. And so, looking at plastics more specifically, clearly the volume declines are starting to moderate a little bit. Can you isolate for us the impact of the unfavorable spread on resin and also these manufacturing inefficiencies, if you will?

Yes, sure. If you look at resin in the quarter, we saw about $2 million of unfavorable resin in the quarter. If you talk about the inefficiencies that we experienced for the uptick in cold and flu related items. All told our total operating costs related to those items are between $1 million and $2 million. So significant impact to the business.

Okay. And then, Tony, the drop in operating cash flow year over year through nine months?

I'm going to let Bob answer that one.

Yes. Essentially, I think you're looking at the cash flow statement, correct?

Yes.

I think what you need to do on that cash flow statement is down in the cash flow provided from financing --

Yes.

-- is a change in outstanding checks and that's just the way we present it in the statement of cash flows, but --

Oh, I see.

-- those back up. Essentially what you've got on an adjusted basis is cash from operations would have been a use in '09 of about $33 million versus a use in the prior year of almost $14 million. And the lion's share of that is the build in working capital. If you look at the base -- or at the face of the balance sheet, you'll see about a $16 million increase year-over-year in working capital. And that's largely the incremental receivables because of the sell through in containers as well as part of that impact comes from the inflation in raw material.

Okay. Very helpful. Thank you very much.

Just to close that out, Bob said in his comments that we're expected to be at the high end of our range on cash flow. So the net of all of this, we're expecting a good solid cash generation year.

Sounds good. Thanks.

And moving on to Mark Wilde with Deutsche Bank.

Good morning.

Hi, Mark.

Good morning. I wanted to turn to the closures business where you really had a great quarter from an operating income standpoint. I'm curious as to whether you think you can maintain margins anywhere close to where they're at right now on a go-forward basis? They look much higher than you've historically had in that business.

Yes, that's a good question. First of all, I appreciate your initial comment. I would agree. Sometimes it gets lost in the shuffle, but the closures business is performing quite well.

The answer is, yes, most of it is sustainable. The, in this case what we got at were on the European side we got at infrastructure savings costs that we did last year. As you may recall we shut down our Turkish operation, we went pretty hard at some SG&A costs which, as in Europe, is trickier. So I think we've made some fundamental enhancements on the European side. And then in the US the business has been very good at reacting to the volume, primarily on the plastics side by taking out plant head count to reactive volume, shutting down lines as needed, etcetera. So it's been a little bit different depending on where you're looking in terms of what the business did on reaction. Most of it looks sustainable. I think as volume comes back, what will probably happen and this is similar to our plastics business, it could be that it's not as efficient at first as we're ramping up new people back into the plants, etcetera. Long term if you put more volume on it, then our expectation would be that the margin rate and the costs should really hold for us.

Okay. Just over in plastics, I'm just curious, you've got, I think, about three plants up in Canada. Are you being hurt at all by this rally in the Canadian dollar in terms of whether you ship any containers kind of cross border and you're less competitive on Canadian manufacturing now? Maybe an effect on your customers from the Canadian dollar being higher?

Yes, well, I'll talk to our P&L first. I mean essentially we're profit neutral to currency, including the Canadian dollar.

Okay.

Although it is having some impact on the top line. This quarter was about $1.3 million in the Canadian side of the business. I suppose there might be something to the volatility of our customer base. Although that's a pretty difficult one for us to track and pinpoint. So, I would say not much effect coming through our results as a result of the swinging currency.

Okay. Finally, Tony, I wondered if you can talk about two sort of interrelated issues.

One is what you're seeing out there in terms of the acquisition market right now, both domestic and offshore. And then kind of tied with that, if you can just kind of address your capital structure right now because you're significantly under what you've described in the past as sort of your target debt levels on a debt to EBITDA basis. Okay. Good questions. Bob will fill in wherever he needs to along here, but on the acquisition side, I think we've said before and we'll continue to say we think that the environment is improving. That the sellers are becoming more serious about selling. I think they're seeing now that multiples were better than they were a year ago, let's say, or nine months ago, but certainly not where they were a few years ago. So, therefore there's more chance, I think, of sellers and buyers finding some common ground. So I would say that there seems to be some activity in properties out there. Obviously I'm not trying to say anything is going to happen next week, etcetera, but just generally it seems more active, more properties out there with serious consideration. As capital structure, I mean you've said it right. We said all along that where we're ending now is, the leverage is too low. It's an inefficient balance sheet in that regard. Now, we don't think we're out of the woods here on the economy. And so right this moment, we're comfortable being a little bit on the low end of the leverage curve and, as I just said, we see pretty good opportunity environment out there. So we think the prudent thing out there right now to do is leave ourselves in a good solid balance sheet position. Essentially, that's an opportunity that we have that some others may not have. That's a prudent thing to do, but on the long term basis the capital structure would need to shift here some is our perspective on it.

Okay. Fair enough. Good answer. Thanks, Tony.

Thanks.

Next is Chip Dillon with Credit Suisse.

Hi, good morning.

Hi.

First of all, just one volume number I didn't get was the plastic segment. What was the volume change there in the quarter?

It was down 2.5%.

Okay. And do you happen to have the year to date volume changes for both metal food containers and closures?

Yes. We'll give a -- we're not going to give it to you exact, we generally don't, but the year to date for -- I'll give you all the businesses. Food cans is up, but low single digit up. Closures have been down low double digits for the course of the year, This quarter was no different, so that's been kind of the same and plastics is more in the mid-single digits down. But again, one of the reasons we don't give exact numbers here is volume can be very deceiving. I mean in closures, it can be a small cap on crazy glue or it could be a big decorative bottle. So you can kind of get lost in volume, but that's the answer to your question.

Got you. Okay. And then when you look at -- you were just talking about the balance sheet and, of course, you acknowledge the under leverage, I'll put it that way. On the other hand, as you think about, the longer term, I mean there's obviously a trade off between buying your own stock and acquisitions and yet, n a strange way if you bought your stock aggressively and then two months later there was an acquisition that had a better return, then you might miss it. And so I guess how do you see the timing? I mean, in other words, are you willing to sort of bide your time just to make sure you don't miss any acquisition opportunities that may come up if not next year, in 2011?

Yes. This is Bob. I think you're -- you're raising a good question. I think as we see it, keeping cash to put back to work to the business to grow it is really part of the core competency of the management team. And I think we would say that we've got a pretty good history of being able to do that and out perform returns by making those investments as opposed to buying back the stock. In terms of timing, what the timing looks like keep in mind that the capital structure that we deploy causes us to relever through the early part of the year as we build back toward the peak of the season. So we'll hit the low point of our leverage at year end and then it will start to creep up again for the early part of the year. So I would see this as really kind of being a, as we look to the back half of 2010 and look at the cash generation that comes there before we really start to get into a squeeze spot of where we're forced to make a decision.

Chip, let me add one thing on that. Also, these are not necessarily binary decisions, it's not either one or the other. There is room for ground in between the two. So I think it's -- our focus is totally about return to shareholders and there are lots of ways to accomplish that and what we're trying to do is kind of maneuver our way through to find the best answer from that. We and our board would continue to be focused on that.

Got you. Totally understand. And when you look at the -- I mean you mention the cost cutting you had done in especially metal food container, the Turkish plant. That's a different division, but the returns in the metal food container business have never been higher. Is there any reason as you look out over the next couple of years why those returns couldn't be maintained at current levels or do you see this as a bit of everything coming together in 2009 sort of in an unusually positive way?

Well, I think if you're talking about the year of 2009, I think that there's nothing that's all that unusual about that year. So I think that's a relatively sustainable kind of level for the business. If you're talking about Q3, you got to be careful when you dump a lot of volume on a fixed infrastructure, it looks really good. So I wouldn't want you taking the Q3 margins, for example, or even returns and think that's replicable. But if you look at the full year, there's nothing about that that's all that unusual.

Got you. Thank you very much.

Thank you.

Moving on to Tim Thein with Citigroup.

Thanks. Good quarter, guys. Two questions here. The first is just following up on that -- on that thought, Tony, what about -- what do you see in terms of next year with regards to you highlighted one of the drivers in terms of margin improvement in metal food was the kind of the delayed pass through in inflation and given we're looking at PPI at actually down year over year. What is that -- what kind of -- can you get some of these efficiencies and cost savings from some of the plant rationalizations you've done in the last couple of years to help offset that into next year if, in fact, you start to see inflation at least moderate or go back up?

Sure, Tim, it's Adam. I think we've got a pretty strong track record of continually taking costs out of our businesses and certainly the metal food container business. So we think there are still opportunities to reduce the cost in that business. If you look specifically at passing through recent PPI information, etcetera, yes, we do do that. We have direct pass through of the other costs associated with the business and that includes inflation or deflation for the most part. And we do expect that we'll be able to offset those with our own internal efficiency gains.

Okay. And switching back to acquisitions, is your experience with White Cap thus far, has it impacted your thought process going forward in terms of acquisitions outside North America. Specifically would you look at has this experience maybe said we can look outside of North America and even in other segments of the -- or other franchises within Silgan?

I would say modestly changed our posture. The main posture has been and continues to be that we're perfectly happy in North American packaging. We think there are plenty of opportunities here. As I think , we never got to points that we have to go to Europe or other parts of the world. It was more just a great business was sitting there that fit with what we had. So that didn't change at all. The only thing that changed a little bit is we now have infrastructure and footprint in much of the world, so it's a little bit easier to think about. The corporate structure you'd need to have and some people issues, etcetera. And so in that regard, it's a little bit easier to think about the rest of the world. I think as you change franchise, it gets harder. If, take the extreme of that. I mean we don't do anything plastics around the world. So we don't have any real infrastructure around that side. So that would be a little bit harder. But if you talk metals as a broad category, I mean we do have metal people in other parts of the world and so that one is a little bit easier to

Okay. And lastly, Bob, any initial cut in terms of CapEx for next year?

Well, we're in the throws of the budget process right now. I would say that early view would be that we'll still be in our normalized range of -- as we've said, that's $110 million to $140 million. I don't see anything on the horizon that would take us above or below that range. And then it will just be predicated on what kind of returns we see as to where in that range we are.

Okay. All right. Got you. Thanks a lot.

Moving on to Chris Manuel with KeyBanc Capital Markets.

Good morning, gentlemen. Congratulations on a very strong quarter.

Thank you.

Couple of questions for you. First, let me fine tune it a little bit on the free cash this year. I mean you indicated at the high end of the range, but yet you have raised your earnings outlook. Is there anything unusual with working capital or such that holds you back from also raising your free cash outlook as well?

Well, Chris, this is Bob. I might argue that we have raised our free cash outlook for the year. Remember, we came into the year thinking that we were going to be somewhere in the $150 million to $200 million and I think we said that was kind of a sustainable level, but we were pointing more to the mid-point of that range. That was at a point where our earnings estimate at the high end was $395 million. So if you look at going from $395 million to the high end today at $410 million, that's about $9 million of incremental earnings. And we're now saying that we think that we'll be up in the near high to the $200 million range. And kind of to put that in perspective, at that kind of level, we're generating about $5 a share in cash and a cash yield of about 9.5%. So, I think we're seeing the benefit of the earnings improvement come through in the cash flow generation.

Okay. Fair enough. And one other thing you touched on was pension. You said it was a head wind this year. Any thoughts as to what that might look like in 2010? I'm assuming it may get a little bit better, but --

Yes. As we come through the budget process here, I think our thinking is that it's flattish. There may be some small improvement on a year-over-year basis. More from a P&L perspective. More importantly, from a cash standpoint, we don't see any significant cash requirements, at least in a formal obligation, however, we may choose to continue funding. I think we've said we've averaged about $20 million a year over the last five or so years. We made a $23 million payment in February of this year. We could see ourselves continuing to fund at those kind of levels. So even on a cash flow basis, not a material difference from where we are in 2009.

Okay. That's helpful. And then, two final questions. With the plastics business kind of taking another, a little bit of a downturn, further downturn here in the third quarter versus the last few and also recalling last year in the fourth quarter you had a pretty nice lift in that fourth quarter, would it be unreasonable to expect maybe not a similar size lift, but directionally an improvement 3Q to 4Q in your plastics business this year as well?

Well, first of all, the lift you got in Q4 last year was a one-time resin, sizable resin lag, so there's nothing like that going to repeat. So you're right about, that that is not comparable and won't be. Directionally, are we expecting improvement in the fourth quarter, yes, we are. Partly, as you listen to what Adam said about the causes, you've got some resin head wind in Q3 that we are not anticipating at this point in Q4. We are thinking that the volumes would be a bit better, although we're not thinking any kind of major recovery in personal care, etcetera. And so we are expecting improvement. Now, I have to say quite honestly, we were expecting a little bit of improvement in Q3 as well. So, we got still have work to do there and we're not trying to say anything other than that right now.

That's fair. And then my last question is, and again, I appreciate that you're in the throws of to use Bob's term of working through your 2010 budget, but you've had four consecutive years of double digit earnings growth. Looking at this year, clearly there were some significant head winds where you had higher pension expense. Next year that might be flat or slightly down, as you indicated. You had what will end up probably being food can volumes this year that are flattish overall after taking into account a big -- it looks like with all of your efforts would there be any, would it be unreasonable to assume that 2010 could end up being another potential double digit earnings growth level?

Well, I'll start by saying that's certainly what we will try to do, although we don't put a target out there. So, sure, we're always looking for ways to get there if we can. I think you got to remember that this was a very good pack year that we'll be climbing over next year.

Yes.

Now, we can talk at length about what that means. We are hopeful that that is an indication that the vegetable category is strengthening in this economy and that our customers are getting serious about moving more of the volume at a competitive price point. So, time will tell on that. But I know for sure we'll be cycling a pretty strong growing season next year.

The plastics benefit as we said in Bob's comments, plastic had the advantage of some more of that one-time resin benefit in the first quarter. We have to climb over that. Then I agree with you. We're looking forward to climbing over Q2 and Q3 of plastics this year. So I would agree with you there. But there's puts and takes on it. So there's plenty of us to work on in order to try to get to your goal.

Okay. Fair enough. Last question, actually, is when you mentioned sell through of the fruit and vegetables, some of those categories potentially becoming more value conscious. Do you have any industry data that you could even anecdotal data that you could share with us as to what you think is happening at the store shelf? Is there a pickup? In soup, for that matter?

I'll focus specifically on core vegetables. We have seen prices come down, promotional activity go up, not only in the quarter of Q3, but we've also seen that activity so far in the month of October. So I'll kind of reiterate what Tony said. I think our customers are getting very serious about the fact that realizing the fact that core vegetables do well in this kind of economy and that they are going to move that volume.

So just a reminder for you, many of our customers kept their prices high from the high ingredient costs of 2008, they kept those prices into 2009. So for the first part of the year, it was hard for us to answer that question because you had a relatively high price canned vegetable on the shelf and so through that time, the volumes were kind of lack luster, if you will, off the shelf. Now as Adam just said, you're seeing prices come down and what you're seeing of late seems to be at the scanner level some volume climb on core vegetable.

Going over to the soup category, soup -- we're entering soup and -- well, soup season and the quarter was up for soups and year to date we're down just a smidge versus prior year, but we have good expectations for soup in Q4 as well.

Okay. Thank you much, gentlemen. Good luck.

Okay, Chris.

Chris, before the next question, one other thing I didn't say, this will be true for all companies, I think it's worth putting out there, we didn't talk about interest costs yet, but I think as you think about next year probably every company also needs to be thinking about what's going to happen to interest costs. That will be something else that I will guess is going to look more like a head wind than a tail wind for next year.

That's a fair point, Tony. Thank you.

Moving on to Christopher Butler with Sidoti & Company.

Good morning, guys.

Good morning, Chris.

Circling back to the plastic container segment, could you give me an idea of what kind of inventory destocking continued, especially on personal care products in the third quarter that may have hurt the demand a little bit?

Sure, Chris. We think that the inventory destocking has gotten to a very low level at this point. So we didn't see really any further activity in Q3.

And do you, have you gone through the process of figuring out what kind of hindrance it was during the first half of the year then that would possibly go away as we look to 2010?

I don't have that number with me as I sit here.

I'm not sure we really know how to even get at that number in terms of through the channel how much destocking happened. We're not sitting here thinking it's all been an inventory issue so it's necessarily going to come back. I think we're preparing ourselves that this is the state of the personal care market until the economy starts to come up some. Now hopefully we're wrong about that and there was some inventory. It's hard to know that for sure.

Then changing gears to acquisitions, you had mentioned that you have now a global footprint with the closures business and that that's not necessarily an area that you're looking to bolster. From those comments can we assume that there's no need for you to, fill in any of the geographic spread at this point from the closures business?

Yes. It -- first of all, if I said that I didn't mean to. I think what I was talking about was that plastics international -- plastic bottle business. Internationally would be a little bit harder of a stretch to consider. Our closures business, absolutely we would look at acquisitions to compliment and add to that business. In answer to your direct question, there is not an obvious hole in that business that we think is a weakness of the business. So, it would just be more about are there things we can do to strengthen the franchise that we currently have for that business. And we absolutely would look at those.

And looking at spreads of targets, have those come in at all. Is it getting to a more attractive level or do they continue to remain fairly separate?

Well, Chris, I think what we've seen is for a while they were extremely high coming through the credit crunch I think valuations got compressed. My view is that they're kind of starting to moderate now and I think that will be evident as M&A activity starts to pick up. There is some comfort on our part given some of the more recent transactions that there's at least a point of negotiation for where valuations should be based on current activity. So all of that kind of says we think they've moderated to a level where the activity should start to take place. And hopefully we can find opportunities to take benefit there.

Similarly, what would be more important to you as you look at, possible valuations of targets? Would you be looking at the economy and how your forecast goes or would you be more looking at the credit market and the availability of cash? Which of those two is more important to you?

Well, I think it -- ultimately that's going to depend largely on size of deal. We don't feel constrained today by an access to capital. We're more than adequately sourced to be able to take advantage of opportunistic deals. And I think that's really the important part. Is that we're going to continue to be disciplined and look for acquisition opportunities where we can earn a good return by putting capital to work, that we don't necessarily buy into the whole strategic element of an acquisition, that it's got to be all around what kind of returns you can earn. And that will be our focus.

I appreciate your time.

Thanks.

Next is Al Kabili with McQuarry.

Good morning, guys, thanks a lot for taking the call.

Good morning, Al.

Just a question on the 2009 outlook. If you look at the size of the 3Q earnings and where you took the guidance, it seems as if you're tempering your fourth quarter outlook a little bit versus where you were, oh, say three months ago. And just wanted to get your thoughts on the puts and takes there?

Actually, Al, thank you. It's a good question. And actually, I have to admit it's one of some frustration. We always talk about this. For us it's really about the back half. We have a big pack season, as , that bridges over Q3 and Q4. And so quite frankly when we come out with the Q3 guidance, we're doing our best shot at guessing where that pack season is going to bridge over the quarters. And then a consensus sets up around that between the two quarters which can't be a better guess than our own and we know ours is a guess. So you end up trying to talk to a move and a consensus that has really no bearing. Really we should be talking about what happened in the last six months. And in the last six months what essentially has happened, if you take what we just delivered plus our outlook, we've gone up between $0.12 and $0.22 on the six-month time period. That's the news here. The consensus of Q4 doesn't mean anything. So, the answer is that essentially we got a little more in in Q3 that we were hedging a little bit and leaving some of it in our own thinking as to Q4 and it didn't happen that way this

Okay.

Last year was part of Q4.

Got it. And that's just really food cans and timing of the vegetable pack and you just got more in Q3 than you had anticipated.

That's it.

Okay. And then if we could switch to the plastic containers business a little bit. And if you can just talk, I guess a different tact would be to look at the business sequentially in term of EBIT. Volumes went up. It doesn't sound like from your earlier comments that destocking head winds got any worse in the third quarter. I'm wondering if you can just kind of help us bridge, why plastic containers EBIT went down sequentially when you had better volumes, etcetera?

Well, first of all, as we said, you had resin head wind, essentially you're going into a rising resin market in Q3, so you had that. Secondly, the problem is volumes not volume. Some containers are big and highly decorated and a high profit margin on those, some aren't. And so it's the rub of volume. Thirdly, as we talked about, a big part of what happened in Q3 is a few very narrow segment areas had strong volume. We already said kind of cold and flu. So what we had to do is scurry because we had let more than 20% of our plant force go. We had to scurry to get those lines fully manned again. In some cases we actually had to move production around to the wrong plant so we could get it out. So all of a sudden you're incurring higher costs just to get that volume so it's not as profitable as it would normally be. And so, that's essentially what happened in Q3 on the plastics side.

Okay. Is there any way to quantify what the incremental resin head wind was. What the incremental costs were from these short run times to get the volumes out on the cold and flu. And how that may alleviate in the fourth quarter?

Sure. I think I mentioned earlier that the resin head wind was about $2 million, the costs associated with the inefficiencies that were created for the volume peaks. But as Tony mentioned, was close to $2 million as well. And --

And those are sequential or those are year -- sequentially you're talking about when you're talking about resin and --

Actually, the number he's given you is not. The sequential is not going to be that. Sequentially would still be a head wind. The big increases were coming in in Q3.

Okay. Okay.

And Q4 will continue to experience those inefficiencies as we deal with the spikes in demand in cold and flu and any other markets that recover. As Tony said, we've taken out significant head count from our operating facilities.

Okay. And any leverage you can -- given the performance isn't where you want it to be, is there any additional leverage you've recently identified that you can do in terms of cost savings to improve the performance of the business near term?

Sure. I think the -- I mean first of all I want to go back and repeat that we still believe it's a very good business. We think it's got a very good position in the markets it serves. We've got very good people doing a lot of really important good things. So I -- and again, if you look on a return basis, etcetera, this business is still -- it's a good business, okay, but directionally, none of us are happy with it for sure and I've been open that we believe we can do better here. So around that, I just to repeat, what we've done so far in this business is we've downsized the kind of the variable costs as much as we can. We took out a lot of labor at the plant level, but we left essentially the infrastructure there to service the market, what it looked like before. So the answer to your question is there's not much more we can do on that side. What's left for us is to keep watching the personal care market and more importantly the custom bottle market. And if we conclude at some point that that's not going to restore to the level we think it will at this point, then we have to think more about infrastructure footprint changes, which we've not done so far. So that's the long way to answer your question is that you would then look a little bit more on in terms of if you really don't think that market is going to come back where it was, then what are these costs of this business do you no longer need to carry.

Okay.

And we're not there yet. By any means, I don't want to send the message we're there. As I sit here now, I believe this market for custom bottles will come back, so I'm not trying to send any signal. The truthful answer to your question is the next thing you have to think about is those kind of bigger decisions.

Got it. And then final one. You mentioned the interest expense for your initial first quarter 2010 guidance. Are you assuming any deleveraging versus current levels or are you kind of assuming interest expense is flat versus today's levels when you're giving that initial first quarter guidance? And then given the fact that the credit markets have improved, have you changed your thinking at all about your, in terms of tapping the willingness to tap the revolver during peak seasonal working capital months so that instead of building cash, you can look to pay down some more debt near term?

Yes, this is Bob. I would say that as we look out at interest expense for next year on a full year basis, I think we'll see rates be higher, largely because of the impact of the 7.25% bonds on a full-year basis. So that sits out there. We're kind of in the throws of trying to decide whether or not we're going to pay down debt and, if so, how much at the end of the year. Which I think goes to the second part of your question. There's no question that we're feeling a little bit more favorable to the credit markets. Credit is flowing. If you look at the high yield market, that's a pretty hot market right now. Albeit the rates we would see in that market are kind of equivalent to the rate we got back in May. So it's more, the comfort is around the liquidity side of that, not so much around the price side of it.

On the bank market side, it certainly seems that it's improving. There's some liquidity there, although there's also, I would say, some things there that don't feel quite great to us right now. There's tenor is shorter than we'd like to see it. Spreads have certainly come down, but there's still discussion of a LIBOR floor. So we're staying pretty close and watchful of the market and we'll take advantage where we think it makes sense for us. The good news is given our capital structure, we don't necessarily have to do anything. So we have the luxury of waiting here. And thereby, time is on our side. That all brings to bear the question of what do we do with our cash at the end of the year? I think there is at least some possibility that we use that cash flow to pay down at least some portion of your debt at year end so as to minimize the negative carrying costs of that cash.

Okay. But that's not in your initial first quarter 2010 outlook right now?

Well, we really haven't given that kind of 2010 guidance, I don't think. I think all we've done is really reminded you what was in last year's 2010 first quarter. As I sit here today, I would still guess that interest costs would be up next year, even if you follow what Bob just said. And I think it will be for most every company out there.

Okay. Okay. Thank you very much.

Thank you.

And moving on to Richard Skidmore with Goldman Sachs.

Good morning, guys. Just one question. If you could just elaborate a little bit on the year-over-year operating profit change in the food can business. Can you categorize the buckets, what drove that significant increase. How much was it -- how much of it was cost savings, how much of it was volume, how much of it was price?

Well, no. I mean the big driver, again, as we've said is we had a very good volume in the quarter. And then you had almost to the same magnitude of what we've done on the manufacturing side. That kind of allows you to roughly get at it. But again, some of that manufacturing, it's hard to separate you had a lot of drop through of volume over top of it. So it's, I'm not saying that you'd get that same kind of magnitude in manufacturing every quarter. You get more of it in a big volume quarter.

So as we look at maybe the fourth quarter, Tony, you had roughly something in the mid to I think high single digit volumes last year in the fourth quarter and it sounds like if the pack was pulled forward in the third quarter of this year, that volumes will be tough to be up year over year in the fourth quarter. Would you expect to have some negative leverage, operating leverage in the fourth quarter, such that margins or absolute profits in food cans are going to be maybe down year over year in the fourth quarter?

I wouldn't necessarily expect that, although I think your line of reasoning is about right. Absolutely, it's reasonable to expect the volumes to be down in Q4. One because of that pull forward you talked about. Two because there was a buy ahead fourth quarter a year ago because of the increase in steel that was coming. Yes, there were a lot of things that drove volume in Q4 a year ago and so that does create some head wind for the business. Against that you've got a pretty good operating performance. So I think net net I'd like to believe that we'll see Q4 will be a little bit ahead, but that's, we'll wait and see on that.

Okay. Great. Thank you.

(Operator Instructions) Next we'll take George Stappos with Merrill Lynch.

Hi, guys. How are you?

Hey, George, how are you?

Oh, I've been trying to get through the blockade here. But in any event, I figured out I'd start out by asking what tax rate you expect for the third quarter next year to 100 basis points if you've got that by any chance? I guess the first question I had is we've seen trends pick up in terms of the food market, you've seen Dell Monte marketing a lot more aggressively, their product. You've seen Campbell doing the same. Hopefully that helps the volume outlook as we get into next year. What are you seeing out of the personal care side vis-a-vis plastics and closures I guess to a lesser extent? Are PNG and Unilever, these folks coming out of their cave from a promotional and marketing standpoint?

I'd say they're still in the cave somewhat. It's been a difficult period as you obviously know. Again, I would say that the branded companies are not taking this market lightly and they're taking lots of activities in order to combat the private label, trade down that's happened to put new products out into the market with some marketing splash to it. So some promotional items as well. But really it's more targeted at the lower end of personal care that they're going after at this point.

Okay. Now, as you look at the closures business, did you see any kind of pick up sequentially in any of the end markets, , as the quarter progressed such that maybe we're looking at a pick up in volume next year in that business? And maybe as a related point, it sounds like maybe it's not an issue, then, why don't you finish that

Not really. The essentially it looked pretty much what we've seen. There are brands that show signs of life and there are competing brands that show weakness. I would just add one thing which is we haven't made a big point of it, but this was not a very hot summer, either. So on top of a bum economy, you really did not have a great season for our kinds of beverages anyhow. So if you want hope, maybe the hope would be a hotter summer next year.

Okay. A related question, maybe we're talking about 2011 then until this ultimately happens. You don't have a heck of a lot of labor typically in these types of businesses. I would expect that you would be able to manage a moderate volume pickup in closures without adding a lot of fixed costs or stumbling in terms of any other expenses or inefficiencies. How worried are you really about that when and if that happens?

I think that's a good point. Not very. I think you first of all, you're doing, in our case, most of those closures come out of a few plants. So you don't have queue the same plant intricacy you do on our plastic bottle business. Generally you'd expect that volume to come up more gradually anyhow. So you would be perfectly able to deal with that. I would not put that as a major worry. I think what you saw in the plastic business was a sharp spike in a few product areas where all of a sudden you had customers who absolutely needed containers immediately. So you had no choice but to be inefficient in that task.

As you think about 2010, there have been a lot of questions around this. Understandable given what kind of year you've had this year, you should be con grad late for it.

Thank you.

Food, hopefully we're looking at a relatively flat year, perhaps up. Hopefully closures could see some pickup next year. Can plastics be any worse than what you've seen this year? I guess anything is possible, but if the answer is no, then hopefully we're looking at an up year from an EBIT standpoint, your comments on interest expense notwithstanding.

Yes. Yes. I mean that's how we approach every year. I think the, yes, we're very optimistic about the prospects of the business as we were a year ago. I think, we'll dig deep to find out what issues might loom out there and we'll talk about them and we'll try to manage them. That's what we do in our budget process. But, yes, I think right now we're looking, I would believe the plastics business is going to need to improve itself year on year. But resin aside, the first quarter had some resin benefit in it. So I'm putting that aside. But yes, the expectation is even if the markets don't improve, it's going to improve itself.

Okay.

Closures actually had a really good year. So I think closures is, it really is much more market dependent. If there's market improvement, I could see closures improving. If there's not, there's -- there's, , marginal things we can do to keep getting bet, but not a lot there. And then food cans we think are showing the kind of strength of the food can in this economy. Our expectation is it will be good. I don't know if volumes, we will he see how it turns out there this year and we'll be able to set the gauge on that. But all in all, we're expecting food cans should be good,

All right. The last question, back to plastics and kind of the quarter, regular quarter question we have regarding the performance and I think it was Chris was asking you some questions on this before. Yes, you've taken out fixed costs, yes, you're doing everything you can to restructure. But take it a step back. Name me one plastic bottle company that has seen its performance improve over the last ten years. And I realize you feel you have a, a good business in the market and you've clearly done what you can to improve the performance. But when we take a step back and look at the longer performance of the whole sector, why do you think that going forward what you're doing in your plastic container business is going to lead to anything that's different than what we've seen across the rest of the sector? And again, I don't mean to overdo that relative to the great performance you put up in the rest of the business. Thanks, guys. Good luck in the quarter. Good luck in the quarter.

Thanks, George. I would just say, it won't surprise you, but what's important is talking about returns on capital investments. And I think there are businesses, ours included, that are continuing to have pretty good returns on capital invested in the business. Now, are the returns where we want them to be in our business? No, they're not. And I already said our thinking is there's room to improve that. But I think there absolutely are plastic businesses out there that get very good returns on capital investments and will continue to do so as you go forward. I would also say that a lot of great businesses that we all look at today emerged from troubled industries and troubled performance amongst the peer group. So some of what you say may well set the opportunity as we look forward. So we remain focused on our plastic business, a little disappointed about this quarter's results, but believing still that there is room to get good returns on the capital we put in.

All right. Well, we'll pick it up next quarter, Tony. Thanks very much.

Now a follow-up question from Mark Wilde with Deutsche Bank.

Two of them. One of them right on George's question. Tony, does that mean that even as we stand today, you might be willing to invest more capital in the plastics business for the right acquisition at the right value?

Yes, it does mean that, sure. That's what we do is we find opportunities where we think we can get it, make a good investment, get a good return.

And the other follow up I had. Did you guys get any benefit in the can business from lower natural gas prices in the quarter?

Yes, we did.

Is it possible to get a sense of how big that might have been?

Yes, it is.

Yes About $1.5 million in Q3.

Okay. And that really -- it lands in the cans and that's really a matter of just, heat to dry coatings or whatever?

Yes, that's exactly right.

Mark, keep in mind that energy as a total is only about 2.5% or 3% of our total cogs. So it's, while we got a benefit on a year-over-year basis, it's perhaps not as impactful for us as it may be for others in the space.

Yes, absolutely.

One more point to that which is what Adam just gave you a cost answer, but the fact is that through our PPI pass throughs, there is a mechanism by which our customers ultimately get the benefit of that, and so that's not factored in there. Some customers might already get a price concession for that and if they haven't yet, they will ultimately.

Okay. All right. Very good. I appreciate that, Tony.

Thanks.

Gentlemen, we have no additional questions at this time. This will conclude the question and answer session and the conference for today. We'd like to thank everyone for your participation.

Great. Thank you, everyone and we look forward to talking about our fourth quarter and 2010 estimates early in February.