Silgan Holdings Inc (SLGN) 2009 Q4 法說會逐字稿

Good day everyone, thank you for joining Silgan Holdings' fourth-quarter and full-year 2009 earnings conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I'd like to turn things over to Mr. Malcolm Miller, Vice President and Treasurer. Please go ahead.

With me on the call this morning I have Tony Allott, President and CEO; Bob Lewis, EVP and CFO; and Adam Greenlee, EVP and Chief Operating Officer.

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 on the forward-looking statements.

With that, let me turn it over to Tony.

Welcome everyone to Silgan's 2009 year-end earnings conference call. I want to start by making a few comments about our achievements during the year. Then Bob will review the financial performance for the full year and fourth quarter. Afterwards Bob, Adam and I will be pleased to take any questions that you may have.

As you've seen in the press release, 2009 was another strong year for Silgan with record income and free cash flow. Adjusted net income increased over the prior year by over 19% to $4.19 per diluted share as compared with $3.51 in 2008. While there were many challenges in 2009, our businesses managed to stay focused on effectively managing costs, improving manufacturing efficiencies and providing top quality customer solutions, and once again proved the strength of our business franchises.

Among the milestones for 2009, we achieved record income from operations and increased adjusted earnings per diluted share by 19.4% versus the prior year. Delivered another year of solid earnings growth, achieving 12% compounded annual growth in adjusted earnings per diluted share over the past five years. Improved consolidated operating margins by 160 basis points versus the prior year. Enhanced already strong returns on assets, and managed capital investments to $100 million to support growth and productivity improvements. Generated record free cash flow of $264.1 million, or $6.86 of free cash flow per diluted share, a nearly 13% free cash flow yield. Significantly improved our credit statistics through debt reduction, improved earnings and cash generation, and increased the annual dividend $0.76 per share.

In summary, we believe Silgan has continued to demonstrate the strength of its sustainable competitive positions, and our adherence to our core business and financial disciplines has continued to serve us well.

We remain committed to strengthening these franchises by investing to enhance our capabilities, working to provide the best-value products to our customers, and ultimately with a goal to deliver high returns on capital for our shareholders. As you can see in our growth outlook, we believe we are well positioned to do so again in 2010.

With that I'd like to turn it over to Bob.

Thank you Tony, good morning everyone. There's no question 2009 was yet another challenging year, as the recession took its toll on consumer spending, raw material pricing and the global credit markets. We saw significant inflation in tin plate costs, aluminum prices experienced considerable deflation versus the prior year, and resin costs continued to be extremely volatile during the year. Each of our business franchises reacted in kind, managing through these ever-changing dynamics and collectively delivering record earnings and free cash flows for the year.

As important, we are forecasting continued earnings improvement in 2010.

On a consolidated basis, net sales for the year were $3.07 billion, a decrease of $54.2 million or 1.7%, largely as a result of lower average selling prices due to the pass-through of lower resin costs, volume declines in the closures and plastic container businesses, and the impact of unfavorable foreign currency translation of $25 million for the year -- all of which were partially offset by higher average selling prices in the metal container business due to the pass-through of higher raw material and other manufacturing costs.

We converted these sales to net income for the year of $159.4 million, or $4.14 per diluted share compared to 2008 net income of $125 million or $3.26 per diluted share. After netting out rationalization charges and the negative impact of the loss on early extinguishment of debt, comparable adjusted earnings per diluted share increased 19.4% from $3.51 to $4.19.

Interest expense before loss on early extinguishment of debt declined $10.4 million, primarily due to a lower average outstanding debt balance in 2009, partially offset by slightly higher interest rates as a result of the May 2009 issuance of the 7.25% senior unsecured notes. The proceeds of the note issuance and cash on hand were used to prepay certain term loan amortization and other foreign debt, which also related -- resulted in a loss on early extinguishment of debt of $1.3 million.

Our 2009 effective tax rate of 35.6% is generally in line with expectations and the prior year.

Full-year capital expenditures totaled $100 million, which is notably lower than the 2008 spend of $123 million and well below our normal range of $110 million to $140 million. Our 2009 capital spend was distributed across each of our businesses as we invested in a combination of growth opportunities and cost reduction initiatives in addition to our ongoing maintenance capital.

As you can see, we did manage capital fairly tight as the macroeconomic challenges hit, allowing our businesses to focus on effectively managing costs. However we continue to believe plenty of return based investment opportunities exist in each of our businesses.

Additionally we paid a quarterly dividend of $0.19 per share in December. The total cash cost of the dividend was $7.3 million. And for the year we returned $29.4 million to shareholders in the form of dividends.

As outlined in Table C, we delivered record free cash flow of $264.1 million in 2009, representing an increase of $83.4 million or 46% versus the prior year. The primary drivers of the increase were significant reductions in working capital, particularly due to the timing of receivable collections, improved earnings, and lower capital expenditures. This free cash flow was used for net financing activities of $95 million, including the repayment of term debt and to pay dividends of $29.4 million, with the excess reflected in our year-end cash balance of $305.8 million.

In addition to paying down bank term debt, we paid down our entire domestic revolver at year-end, which reduced our total outstanding debt balance by $85.5 million versus the prior year. We are currently holding cash sufficient to meet our peak working capital needs for 2010.

I'll now provide some specifics regarding the financial performance of the three business franchises. The metal food container business recorded net sales of $1.920 billion, an increase of $129.9 million versus the prior year. This increase is primarily due to the effect of the pass-through of higher raw material and other inflationary costs.

Income from operations in the metal food container business increased $44.2 million to $206.4 million for the year. The increase in operating income was a result of improved manufacturing performance, particularly as the third quarter of 2009 benefited from significant pack volume, continued cost controls and lower year-over-year rationalization charges. These benefits were partially offset by higher pension and depreciation expense.

Net sales in the closures business decreased $73.7 million to $609.1 million, driven primarily from lower unit volumes due to continued demand weakness in the single serve beverage markets, the impact of a buy-ahead in the fourth quarter of 2008 and the impact of unfavorable foreign currency translation of approximately $16 million. These declines were partially offset by higher average prices due to the pass-through of higher tin plate costs.

Income from operations in the closure business increased $14.3 million to $74.1 million in 2009, primarily due to ongoing cost controls, improved manufacturing efficiencies, and $6.6 million lower rationalization charges, partially upset by the impact of lower unit volumes.

As disclosed in the press release, we elected to change the inventory method of accounting in our US plastic container business from LIFO to FIFO during the fourth quarter. As a consequence, the prior year periods have been adjusted to reflect the change as if it had been effective in the beginning of that period. The rationale for this change is to provide better matching of revenues and costs, thereby reducing but not eliminating the magnitude of the profit swings resulting from resin pricing lags.

Net sales in the plastic containers business decreased 16.9% or $110.4 million to $541.5 million in 2009 as a result of lower average selling prices due to the pass-through of lower raw material costs, a decline in unit volumes, and unfavorable foreign currency translation of approximately $9 million.

Operating income decreased $12.5 million to $31.3 million for the year, largely as a result of lower unit volumes and higher pension costs, which were partially offset by the benefits of ongoing cost controls.

For the fourth quarter the company reported earnings per diluted share of $0.62 as compared to $0.40 in the prior-year quarter. The fourth quarter of 2009 included a loss on early extinguishment of debt which impacted earnings per diluted share by $0.01, while 2008 includes rationalization charges which negatively impacted earnings per diluted share by $0.05. Adjusted earnings per diluted share increased to $0.63 as compared to $0.45 in the fourth quarter of last year.

Sales for the quarter decreased $36.3 million versus the prior year, driven primarily by the effect of lower unit volumes in the metal food container and closure businesses due to the buy-ahead in 2008 and lower average selling prices in the plastic container business as a result of passing through lower raw material costs. Higher average selling prices in the metal containers due to the pass-through of higher raw material and other manufacturing costs, favorable foreign currency of approximately $11 million, and higher unit volumes in plastics helped to mitigate these declines.

Income from operations for the fourth quarter of 2009 improved $15.9 million over the same period in 2008. The improvement in operating income was largely a result of the improved manufacturing performance, ongoing cost controls, and $2.3 million of lower rationalization charges, partially offset by the impact of lower unit volumes in our metal food containers and closures businesses due to the 2008 buy-ahead.

Comparatively foreign currency was favorable to earnings in the fourth quarter and the full year, largely due to the negative impact caused by short-term volatility in the Canadian dollar and the Polish zloty during the fourth quarter of 2008.

The tax rate for the fourth quarter of 2009 was 35.6% versus 28.3% in the prior-year quarter. The prior-year quarter, which reflects the change in the method of accounting for inventory in the plastic business from LIFO to FIFO, also benefited from certain state tax credits and full year impact from the research and development credits.

Turning now to our outlook for 2010, while the economic climate is likely to remain challenging, we expect improved earning performance across each of our businesses. We currently estimate adjusted earnings per diluted share for 2010 to be in the range of $4.25 to $4.45, which excludes the impact of rationalization charges and the impact from the re-measurement of net assets in Venezuela. These results would represent a 3.8% increase to the midpoint and a 6.2% increase to the high end of our range, against a very strong performance in 2009.

Reflected in our estimate for 2010 are the following. We are forecasting the metal containers business to return to more normal seasonality in 2010 as volumes in the first quarter of 2010 are expected to be up versus the same period in 2009 due to the effect of the fourth quarter 2008 buy-ahead, and overall pack volumes are likely to decrease slightly. As a result, we expect full-year volumes to be consistent year-over-year.

The closures business is expected to regain volume as we expect modest recovery in the single serve beverage market.

Unit volumes in the plastic business are expected to benefit from demand recovery throughout the year. We are also expecting slightly higher year-over-year resin costs, both of which will result in net sales gains in the plastics business.

We expect continued benefit from cost reduction and productivity programs across each of our businesses. In addition we expect interest expense to be flat versus 2009 as the benefit of lower outstanding borrowings is offset by the full-year impact of the 7.25% senior unsecured notes issued in May of 2009.

We currently expect our tax rate to be consistent with 2009, and we expect capital expenditures in 2010 to return to a more normal range of $110 million to $140 million.

We are also providing first-quarter 2010 estimate of adjusted earnings in the range of $0.60 to $0.70 per diluted share, which also excludes rationalization charges and the re-measurement of net assets in Venezuela, as compared to $0.73 in the first quarter of 2009.

We expect a negative impact from the lagged pass-through of rising resin prices to 2010 versus a significant benefit in the resin price pass-through in the first quarter of 2009. Additionally we expect higher interest expense as a result of the interest rate associated with the 7.25% senior unsecured notes.

The first quarter of 2009 also benefited from a significant rebuild of inventories in our metal container and closure businesses as a result of the fourth quarter 2008 buy-ahead.

Given our current outlook for 2010, we expect free cash flow to be in the range of $175 million to $225 million as improved earnings are offset by higher capital spending, and the significant reduction in working capital in 2009 is not expected to repeat.

I'll point out that at the midpoint of our free cash flow guidance it equates to nearly $5.20 per share.

We continue to seek disciplined opportunities to reinvest in our business while optimizing our free cash flow generation.

That concludes our prepared comments. Before we open it up for questions I'd like to point out that we have been fortunate to gain a broader group of analyst coverage and investor interest over the past few years. As a result we have a fairly large participation on the call today. In an effort to be more efficient and allow everyone to have their questions addressed, I'd kindly ask that you try and limit the questions to one or two when you are selected from the queue, and should you have follow-up questions, please reenter the queue. We will be happy to answer all questions during the call today.

So with that, Miranda, I'll turn it back to you to provide directions for the Q&A session

(Operator Instructions). George Staphos, Bank of America.

(technical difficulty) [congratulations] on the year.

I guess the first question I had, could you give us a bit more granularity on what the volume trends looked like in the fourth quarter by business and if there were any interesting or unique end market developments along the volume trend? Then I had a follow-on.

I'm going to start with our plastics business. Our volume is down mid single digit year on year but did show some signs of recovery, certainly in the second half of the year, and we continued with that through the fourth quarter. So we did also see sequential volume improvement versus Q3. So (multiple speakers)

So what was it in the fourth quarter versus fourth quarter last year?

Mid single digits.

Okay.

And moving over to the closures business, again, we continued to see softness in single serve beverages, and the fourth quarter versus fourth quarter comparison was down low double digits. Remember that in our closures business we also had the impact of the Q4 2008 buy-ahead, so that impacted the year on year comp as well.

Moving to the food can business, it's a little more complicated, so I'm going to walk you through where we are in food cans. To answer your question directly, the year on year comparison in Q4 is that we are down mid to high single digits. Now, when we adjust for the pre-buy, we are actually only down a couple of percent.

So I want to talk for a minute about the market. If you look at the CMI data, the market for food cans was down 4.5% year-on-year, and kind of digging into those details a little bit, George, our market share is roughly 50%. Our pre-buy effect was approximately 200 million units. So as we look at an adjustment for the pre-buy for the market, we'll use 400 million units. When you do that, the year on year comp for the market itself is down only 1.8%.

So if you look at our business, again, I think for the year now -- and you'd have to factor in our participation in the seafood and all other markets, and the wet pet food market as well. Seafood/all other was down significantly for the year. And we are under-represented in that market, so we essentially adjust that out, and we are talking about our view of the market.

Also if you look at the wet pet food market, our business is slightly different than CMI. Our brands seem to be winning in the markets, we are a little more heavily weighted to the cat food side of the business, which did outperform the wet dog food side of the business. So even though CMI said wet pet food was down 4.7% in the year, with no change in customers or filling locations for us, we actually were up slightly in the year.

So we can rationalize essentially our volumes adjusted for the pre-buy on a full-year basis to up about 2.5%. And with those adjustments I just walked through on the market analysis, we think the market was up at about 2.5% in those markets that we serve.

Thanks for that. I guess maybe to tee up a question that will come up a couple of times on the call, Bob, you mentioned $5 of free cash flow as something perhaps investors should focus on, yet the company has, while generating a lot of cash flow, has not been in a position necessarily to utilize it. So I guess the question is, why should investors necessarily care? I know they should, but I want to hear your thoughts -- care about your free cash flow generation given that you are seeing a cash build on your balance sheet? Thanks.

Sure. Well, I'll answer the -- maybe the second point you made first, to the cash build. We are sitting on roughly $305 million of cash on year-end. So let's use -- I think the tone where you were heading was that assuming an M&A transaction or other investment isn't in front of us, what do we do with that cash?

Remember that this business builds working capital starting pretty early in the year that historically we would use our revolver for. And we peak that out at something that looks like $290 million or $300 million. So in the absence of an M&A transaction, we'd redeploy that capital back into the business through working capital, effectively having it look like a further debt reduction on a year-over-year basis. So as we sit here today, we can utilize the cash that we have on the balance sheet.

In terms of we have not been able to find opportunities, I'd kind of turn the tables and say, sure, we have been very active in looking at opportunities that are out there across the broad-spectrum of consumer packaging. I think the credit market turnaround kind of gave some relief to some companies that may have otherwise been part of the consolidation effort, and thereby they didn't become part of the acquisition game.

We've also continued to deploy a very disciplined acquisition strategy, and not only do candidates for acquisition have to fit up against a very direct strategic view for us, but they also have to fit up against a financial model that allows us to earn good cash on cash returns, which I think has been the hallmark of Silgan's performance.

We have not found something that fits that just yet, but we are pretty optimistic given our pipeline that we will be able to find those types of opportunities as we go forward. And I think why the investor should care ultimately about the amount of free cash flow that we generate is that I think we've got a pretty long history of deploying it and of deploying it effectively. And if it happens that we kind of go through another year of de-levering or cash generation, then we are squarely focused on returning that to shareholders in some form or fashion. So I think ultimately in one way or another the shareholder will reap the benefits of that free cash flow.

Thanks for the thoughts, and I'll turn it over. I'll be back.

Ghansham Panjabi, Baird.

Could you give us some more color on what drove the decision to shutter the Port Clinton, Ohio facility? Was it just a measure of reducing some excess capacity in your footprint? Or maybe some market share loss? And also your thoughts on capacity in the industry and rigid plastics in general? Thanks.

Sure. Well, I'll take the rationale behind Port Clinton and what it means. Essentially we will be moving equipment throughout some of the other locations in the Midwest, so it's not so much about shuttering capacity necessarily as it is about rightsizing our footprint and being able to take costs out of the system and ultimately earn return. And it's unfortunate that that is the facility that sat on the bubble, but effectively it puts us in a better position to meet our customers' needs and our customers' demands. So that was the decision-making behind why we chose Port Clinton, and the rationale there.

And the specific products from the facility? And also the industry capacity? Thanks.

Mostly it's personal care products that will shift to other locations.

To answer one of your previous questions, there was no share loss associated with those. As Bob said, this was really about rightsizing the operational footprint.

Regarding capacity in the industry, there is available capacity in the industry as our markets have suffered pretty significantly over the past 18 months. So this is again more about rightsizing our footprint for what we do and for our customer base. (multiple speakers)

Okay. Helpful. Thank you very much.

And this is what we've done in our past. One of the things we always talk about is kind of a relentless focus on operational efficiencies and cost control. It's what we are all about. If you look, for every two plants we have today, we've shut a plant down. It is never easy to do it and make that decision, but we've learned that you've got to make the hard decisions that come at you. Otherwise, you don't have as strong a competitive position in the future. So it's -- we don't do it lightly, but it's the right thing for the business.

Understood, thank you.

Alton Stump, Longbow Research.

I don't know if you touched on this in your comments, sorry if I missed it. But could you talk a bit about the soup in general, how things went on [it, demands, end point]? Over the last couple of months here I see some data that has been less than impressive. Was that a factor at all in your fourth-quarter volumes? Or was it all just simply that comp issue?

Mostly it was the comp issue. Certainly the soup business was a little disappointing for us here late in 2009. What we had seen was less promotional activity in soup than what we had originally anticipated. So again, I think that we are right in the heart of soup season as we speak, but the Q4 effect of our soup business was a bit disappointing.

Okay. Great, that's all I had. Thank you.

Claudia Hueston, JPMorgan.

Just taking sort of a broad look, when we see where you came in for the fourth quarter, it was ahead of the guidance. What surprised you in the quarter? What performed better than what you'd expected?

I would say really all the businesses essentially on the cost side performed a little bit better than we thought. So it would be hard to pick any one. I know against some models, the closures business maybe on a comparative year-over-year stood out a little bit. In truth, some of that we had expected, we kind of understood what had happened last year in terms of the volume side of it.

So it would be hard for us really to pick any one. I think each of the businesses did a really good job of blocking and tackling. Frankly, that's the truth of the year, is this year really was a lot about good blocking and tackling, good operational execution, more so than anything else. Q4 is just another example of that.

That's helpful. And then just shifting gears, do you have any comments on your pension expectations for the expense and contributions in 2010?

Yes. Actually we exited 2009 in pretty good shape actually. As we came into the year, we had pension assets of about $291 million. Through the contribution that we made during the year as well as asset performance, we brought that up to kind of -- it's about $360 million.

More importantly, we kind of made headway against our unfunded percentage, so as we sit here today we're kind of in the high 80's on a funded percentage basis. So as we look to 2010, the expectation as we sit here is that pension expense is going to be relatively flat as those benefits of the performance are offset largely because we are looking at, net/net, more conservative pension assumptions as we look into 2010.

As to pension contribution, not necessarily are we faced with a required contribution, but we may well again make a contribution to keep pace with our liability.

Thank you very much.

Chip Dillon, Credit Suisse.

I apologize. We'll move on to Mark Wilde with Deutsche Bank.

Tony and Bob, I wondered if you could just talk a little bit about what you see as both kind of the risks and these sort of potential upside levers to that 2010 guidance number.

Sure. I think the -- by far market is one of the risks. We've said in the plastic side that we do expect some modest market recovery. As Adams said, we saw a bit of that as the year of '09 came on, but a fair chunk of that had to do with H1N1, so it's a little hard to call that a personal care recovery, if you will.

We hear, as I think you do, that promotion by branded companies is on the rise, and so we are somewhat hopeful of that. So I would just say, if I think about it, certainly the plastics side, they're going to need a little volume through the system, that would be pretty important.

Likewise, we are expecting some -- I'll use the word "modest" again -- recovery on the single serve beverage side. That is also part of our plan, and it's got a bit of a risk around it. We're not assuming it that gets back to double-digit growth that it came from several years ago. But some improvement there.

And then, again, we're coming up on the can side against a really tough season -- pack season comps. Now, we've assumed some of that in the forecast. But we are still -- our assumptions are a pretty good pack year, all told, so that's always with -- as I said, there's a bit of a risk. But aside from that, it's -- what we've told you is mostly built on more of the same in terms of strong execution and costs. So we -- a lot of what we put out there has to do with things we can control and expect to do so.

And then just as a follow-on, in the past I think you've talked about sort of acquisition targets being kind of -- food can is the lowest risk for you, and probably the most likely, and then you've also talked about closures. Has any of that really changed over the last three to six months?

No, I wouldn't say any of that's changed. I think we've always said we would look to plastics as well, I wouldn't leave that out. Or I would say more broadly, just consumer goods packaging is what we know, and we would look to kind of broadly. Obviously the closer it gets into existing franchises, the better that is. And so we still look at the same kind of assets we always did.

I think Bob already alluded to this, but we've looked at a lot. I think George's question kind of sounded as if there's -- that we are up against a deadline, if you will, about finding something. We don't view it that way at all. We take a disciplined approach to it, we look for acquisitions that we think can be not just strongly accretive, because frankly that's a little bit easier, but also strengthening of our franchise position. So we are pretty picky about the assets that fit in.

We know how to use the cash in any case if we don't find the acquisitions, and that includes considering returns to shareholders. It also includes more investment in our own businesses where we can invest and get good returns on that as well.

So again, we don't feel constrained on the opportunities. We are looking at about the same kind of properties. We said before, and I'm sure the question will come up again, there is a pretty good backlog of properties that are available in the market. I can tell you it's been active in terms of what's out there for us to look at.

But we are going to remain disciplined, and as soon as you feel like you have to do a deal, pretty often that ends up being the deal you regret doing. So we are not going to let that settle in on us.

Right. Good. Thanks Tony.

Chip Dillon, Credit Suisse.

We'll move on to Christopher Butler with Sidoti & Company.

Just wanted to kind of follow up on the -- your last statements. Do you have any kind of timeline that you're looking at as far as when returning cash to shareholders is something that you really need to consider? You had mentioned at least another year of deleveraging if the right target doesn't come along. But do you have any kind of soft idea of what you are thinking about there?

Yes. I think we've said before that 2010 is kind of the horizon for us. As you will remember, most of our cash flow, if not all of our free cash flow, gets generated in the fourth quarter. So that's really the -- kind of the horizon we are looking at where we would further de-lever from where we are now. And so in line with that, we've said before that 2.5 to 3.5 times is kind of the range that we would find as optimal. So as we progress through the year, A, we will have a better view of what our free cash flow is looking like, and we will have a pretty good view of what M&A activity has either transpired or is out in front of us. So that's kind of, at least in our view, the horizon we are working against.

I think we said on the last call, but I'll repeat it because it's pretty important -- these are not binary decisions. To go from essentially a one-time -- 1.1 times leverage on a net basis to what Bob just said is a range that we could live with, there's plenty of room in there to consider a menu of options if we so choose.

Shifting gears to the plastics business, you seem fairly cautious on growth in 2010. I'm just interested in a little more color on -- was it a speed bump that you may be looking at in terms of inventory levels seem to be fairly low throughout the chain? You may actually be benefiting or you may at some point in time benefit from some sort of inventory rebuild, and rising raw material costs may spur purchases as well?

I just would answer that by saying that it's been a long 18 months of a difficult period of time for our plastics business. So there's nothing in front of us that makes us overly cautious about it. We are expecting increased volumes next year. We are expecting a recovery in specific markets. We have not forecasted a restocking essentially of retail inventories at this point. And we are optimistic about where our plastics business is going. We made good progress in Q3 and Q4 of '09, so we've got some momentum behind us now. And we're just looking forward to 2010 and what that's going to bring to our plastics business.

I appreciate your time.

Al Kabili, Macquarie.

Also just wanted to circle on the plastic container business a little more, and if you could help us quantify what the cost savings might be from this closure of the Ohio facility and when we might see those rolling through.

Essentially this is an activity that will take us the lion's share of 2010 to actually get out of. There is roughly about $5 million of expense that's associated with it. There will also be some capital dollars associated with the moves that we are making. So we'll start to see savings in 2011 and beyond. And consistent with the way we view these activities, always, is it's kind of like capital activity and we are expecting good returns on it. So it measures up against our mid teen kind of return hurdle with a -- it's slightly more than a three-year payback. But again, those savings being more oriented to 2011 and beyond.

Thanks. And then to follow up, we've heard some fairly sizable increases in resin prices for January and February, and I wanted to get a sense of what you are seeing there and how much of a potential headwind that could be in the first quarter, and if you've responded yet on the noncontract business with the price increases. Thanks.

And we are experiencing much of the same with our increased resin costs. It really did run up for the most part all the way through 2009. We've already had increase announcements for the first quarter and also for the second quarter. So we do have headwinds. We brought into the year a negative lag into Q1 2010 that goes against a very favorable lag that we brought into Q1 of 2009. So you've got a bit of the opposite effect happening, compounding the issue. But I would say on the magnitude of $2 million to $3 million of unfavorable lag associated with increased resin costs in the first quarter.

And then in terms of price increases, have you announced any -- do you feel that you can on the noncontract side make up for the resin cost escalation in the second quarter and beyond?

We do. To your point, we have announced those price increases, consistent with the cost increases that we have incurred. So we are staying in pace with the market, albeit on a lag basis.

Okay, thank you.

Alex [Opshay], Goldman Sachs.

Can you provide a little more granularity around the main drivers for such a solid improvement in the operating earnings for the metal food container business? How much of the improvement was driven by the stronger pack season volume growth in operating leverage? How much of it was efficiency gains? And to the extent that you can provide a few examples of what the productivity gains actually were, that would be hopeful. Was there any inventory holding gain in the improved number?

Sure. I'll start at the end and work my way back. The inventory holding gain, if you remember last year with the pre-buy that occurred in the fourth quarter of 2008, we actually incurred an inventory hit as most of those sales came out of our inventory. So on a year on year basis, we did rebuild that inventory through the course of 2009, so there was an inventory gain in the fourth quarter.

As far as efficiencies and seasonal pack, I'll start with kind of the operational improvements that we talk about through all of our businesses, so I know your question was specific to food cans, but I'll take a step back and talk about each of our businesses quickly, and just say that every one of our businesses is completely focused on reducing the cost base in the business, improving our operational flexibility, and they've all done a very good job, not only in 2009 but in prior years as well.

So for some specific examples, we can start with the food can business, and really what we have done there is we've initiated a cultural systemic change in our operating philosophy. We've incorporated lean manufacturing philosophies into that business over the past several years, and at this point it is absolutely driving bottom-line improvement. We've got a clear path on the direction we are going forward, and we expect reasonable improvements in profitability and cost structure as we go forward, driven from those operational efficiencies that we are gaining.

Jumping over to our closures business, in 2008 as you probably recall, we did close a facility in Turkey, of our European closure business. We also significantly reduced SG&A in some of our European locations and took headcount out of our German facility as well. So mostly responding to difficult volume situations in our respective businesses, we've been able to take headcount out of our operating companies and respond in kind to the lower volumes.

Similarly in the US closure business, we've seen significant drops in our single serve beverage business throughout '08, and accordingly we took a sizable headcount reduction in that business. Again, we'll be able to flex back up when the market recovers, but we were able to flex down very well.

Finally in our plastics business, again, we've talked a lot on these calls about the personal care market and the challenges they've seen in the last 18 months. In certain plants we've taken out over 20% of the headcount in our plastics business. So we've responded strongly to the volume shortfalls. Obviously Bob mentioned the announcement yesterday about our Port Clinton, Ohio facility. Again, the focus on lowering the cost base and improving the overall efficiency.

So in summary, again, we are completely focused on reducing costs (technical difficulty) more flexible in our businesses. If you want to know kind of a target number, typically what we say, our cost reductions have to offset the general inflation that we see in our businesses from a kind of a target perspective.

Moving over to our volume for the year in our containers business, it was a significant impact. The size and scale of our containers business and the operating footprint we have, we were able to fully leverage that scale with the additional volume, so the drop-through on the additional volume -- while I won't give you a specific number -- was a significant piece of the operating improvement that we saw year on year in our containers business.

Great. Thanks. Just to follow up on that, if you were just to rank order those three drivers, would the operating leverage and improved volume, would that be more than the benefits from the improved efficiency? Or would that -- it would be about the same? Or a little bit less? How would you rank order those two?

I would rank operational improvements as the number-one item for our food can business for 2009.

Okay. Great. Thank you.

Chris Manuel, KeyBanc Capital Markets.

I kind of want to follow up on that question a little bit, because it is noteworthy. You guys did a terrific job both in the metal food and the closures business of improving profit year-over-year in spite of volumes that were flat or slightly off. I guess the area where I would like to, well, maybe take you to the woodshed a little bit or ask some questions would be around the plastics side. Over the past couple of years the probability in that business is off pretty sharply, from -- down 40% over the last couple of years from the peak, and even 20%, 30% from the last couple of years, what you'd done previous to that.

So can you talk a little bit about -- I think you indicated that profits might be up modestly there. What would it take to get from a 30-ish million run rate of EBIT in that business back to something in the neighborhood of 50 over the next couple of years? Is -- does it need some restructuring in that business? Or maybe a little more color there as to what you're thinking about with that business.

I'll take that. I probably have the most experience in woodshed. (laughter)

Let me start with the answer you don't want, which is -- I'm going to go back for you and give you a background in this business. This is a business that designs and sells custom containers for high-end products for the consumer goods industry. We always knew and would have always said that in a bad economy this business was going to be impacted by that economy. And it -- and we see that even when there were historically little dips as inventory corrections, etc., this business has always been most affected by that.

Then we come into a "once in a 70 year" kind of economy, and the business falls off by mid single digits, and that is even deceiving in that there's a mix element of that. It's the higher-end stuff that we make that's more dollars per unit drop-through that we are losing, so it's a worse mix than that might imply. Nonetheless, our EBITDA margin falls all the way down to 14.3% versus a company average of 14.5%. Our EBITDA return on net assets is 17.4%, which is, yes, several points below the peak and below the company average but well above our weighted average cost of capital.

And so you got to start with -- where are we? It's interesting to look backwards, and I can understand from a Street perspective the trend of that matters. But we've got to stay with the absolute first and say that this is a business that is -- it's a pretty good business, it's performing reasonably well. We've said it over and over again, that doesn't mean we are happy -- which gets me to your question.

But we are -- we remain committed to it, we think the business is doing the right things. How do we get it back to where we had it before and liked it at the time? It's a good question. The answer to that is a bit of various things.

One is that we've got to keep doing what we have been doing, which is to flex our cost structure to the volume that we actually have. And I can do nothing but totally commend Adam and our plastics team on the work we have done in that regard.

But obviously we have to do more, we've got to get at infrastructure costs, and so that's where we are shutting down Port Clinton. It might only sound like one plant, but it's a big plant to us. And so it's -- that is a big move for us in terms of an infrastructure change. We will have to keep looking at more of those. I'm not saying we are doing more, but we will have to keep looking and keep assessing in terms of what is the right infrastructure.

Thirdly, we've got to keep investing in the business. And that's a big part of this is that as opportunities come up and we see them with our customers, we have to invest to pursue that growth. And that's where you kind of grow from the 30's to 50. And so you shouldn't be surprised to hear that we remain committed to the business, that we will be making investments in it at the right time. You hopefully can trust that we are going to be sure we are getting good returns on those investments. And that sort of -- the combination of all that creates the opportunity for us.

And I said it last call, I'll say it again, but sometimes when an industry is out of favor, that's where the real opportunity to create value comes from. It's when our competitors are reeling as well, and it's when you can kind of get in and find better opportunities. And so we are working on a lot of different elements.

We are not sitting back on this at all, and our view is that it will recover. But it will take -- it's going to take some years. We are talking about hard stuff, shutting plants and then getting more business in and making investments. None of it happens in one quarter.

When you -- to follow up on that a little bit, when you look at -- I know you've always been more weighted in this -- just to stay on this segment -- towards branded guys as opposed to private label. It seems as though there's been a lot more chatter out of the branded product guys of late to develop products, to go back to try to recapture some share. Have you seen any changes in new product development, design activity, things of that nature that would support a pickup in volume over the next six, 12, 18 months that you think would roll through?

Good question. I read the same things you do, so I keep hearing it. I think I can honestly say, and there are some exceptions both ways on this, so there are some examples where, yes, but I would not necessarily want to say wholesale we are seeing a lot more work going on on new product design, etc., right now. So far I would put it more in a category of promoting and price management, etc., and that it will take longer for that to come through a chain in terms of package design development. But we believe that will happen.

We also still believe that even private label and non-branded will also at some point spend more on packages and will want to be more differentiated over time. And there are examples of that where we see it today.

So -- and we've talked about this over the years. There just -- there seems to be a cycle of when people want to invest in a better package and when they don't want to. And as you can imagine, the last year, 18 months have not been a good time to be investing heavily in your package. Our feeling is that too will come around.

Thank you, I'll jump back in the queue.

George Staphos, Bank of America.

Maybe following on the subject of plastics, do you have a technology or capital rebuild cycle ahead of you? Or is this more just adjusting the footprint, if you will, and realigning capacity relative to your customers within the overall investment strategy within plastics?

That's a great question. This really is just about footprint. We have been investing all along on technology, etc., so when we invest in a new project, it's state-of-the-art technology, and there's plenty of that out there. This really -- most of these assets are being moved. There are some examples where we will put in some new assets. But this is not a recap, this is just a footprint consolidation.

And too, the comments you were making about -- or the implication you were raising that when times are tough, perhaps that provides the best opportunities -- and certainly plastics has been going through a more difficult time in recent years. How did the Cousins-Currie acquisition play out thus far? Have you been pleased with that? Has it been hitting your return goals?

It has. It is -- it's been fine. In fact that -- it -- what it got us a little more to -- we were already in kind of a larger ware category. It had helped us move into that category more so and find other opportunities in the US. Remember that was a Canadian acquisition.

The only caveat I would give you to that is if you look at the industries that it sells to, some of those are a little more economically sensitive as well, photochemistry, and so I would say that it too had a little bit of a market dependency on it. It had a little bit more of a credit dependency on it, so as we hit tough credit markets, you saw some of those customers who were smaller and not as strong -- had a little bit more impact.

So I wouldn't want you to say it's been all downhill, easy for us, there's certainly been work involved there. But we look back, and we are satisfied with that acquisition as well.

Would it be fair to conclude then it's earned cost of capital, or perhaps a bit better but been below segment average in terms of returns?

No. I would say it's probably been at or around segment average.

And clearly well above its cost of capital.

Thanks guys, I'll turn it over.

(Operator Instructions). Chip Dillon, Credit Suisse.

Do you hear me? (laughter) (multiple speakers)

Yes sir.

Three times -- the charm.

Thank goodness. Okay. I was two sentences into my question when -- anyway, but thank you. I'm glad I'm on here.

Hey listen, I just had a question to make sure I understand this, and I hope you haven't answered this yet. You mentioned I believe that last year the food can marketplace was actually about -- down about I think in '09 4.5%. But I think you indicated it would've been up 2.5% without the pre-buy in '08. And if that's right, does that mean the size of the market is about 5.5 billion to 6.0 billion cans? Is that a way to think about it?

Actually no. What I was trying to get to was the reported statistics by CMI would indicate the market is down 4.5%. The math I went through was about a 400 million unit pre-buy for the market. That would adjust the 4.5% down to a number more like 1.8% down. (multiple speakers) And then I walked through a couple of other comparisons where we are under-weighted or over-weighted versus market that got us to essentially a kind of like market to our business of 2.5% growth. So the total market for CMI in 2009 was about 29 billion units, just on (multiple speakers)

29. Got you. Okay. And the second question is, just having looked at your history, you have had a period of time I think in late '98 and '99 when you bought back quite a bit of stock. And I know maybe not all of you were there, but could you just sort of talk about why you bought back stock then? Was it for the lack of good opportunities? Certainly it was a pretty frothy period for M&A, so it might have been prohibitive to do that. And -- but just give us your thoughts on that.

Sure. The -- you are right that only Malcolm in the room here was actually here at the time. But the answer to the question is that the stock had come under such pressure -- the overall market for packaging stock had come under such pressure, we were not immune to that, that it was just so compelling that it made sense to do that. And the business could do some of that. It -- quite frankly, at least as somebody watching after the fact -- didn't look like it had a huge impact on the stock price. But cheap stock was purchased at that time. So that's the answer to your question. It's not -- it wasn't -- it was nothing more than that.

It has never been a case where we have felt like we did not have good opportunities in our business, nor is it today (multiple speakers)

Okay. And again, I'm just trying to get on -- I'm -- you might've answered this. But I've noticed in the -- since '04 when you initiated a dividend, you've tended to raise it early in the year, and I don't think I saw that you've raised it or have announced it yet. Correct me if I'm wrong. But -- or have the -- are the potential tax law changes or the lack thereof -- which means the tax rates go up -- on dividends next year influencing your decision on what you might do with the dividend in 2010?

I would say it's obviously a factor that has to be considered in the overall menu of options, to use my earlier expression. So sure. It's one element that's on our minds.

Okay. But you are not willing to say that you are -- this would be the first year you wouldn't have raised it, if you don't, and is it fair to say maybe that what we have seen in the past, we should sort of see a similar pattern in the future?

Yes. I wasn't trying to force our view at all about our ordinary dividend. You're right that it has been raised each and every year. That is something that is decided by the Board at the first meeting of the year, which has not happened yet. So I don't think you can read anything on that yet.

(multiple speakers) I think if you went back and looked at the timing of when that dividend raise happened in prior years, it kind of happened as we released first-quarter earnings, not as we are talking about year-end -- for that very reason, that it's a Board decision and that those increases have largely been in line with kind of a 1.5% yield and in line with what earnings performance has done. So as to the normal dividend, I think the Board will evaluate that along those same -- same method of thinking. But the special dividend kind of falls into the broader view of how we deploy cash.

Totally understand. Thank you.

George Staphos, Bank of America.

Chip teed up my last question. Having covered you since '97, I would agree that you have been good stewards of capital in total, and certainly your investors over the years would agree with that as well, given where the share price is. Obviously that's not a guarantee of the future, but certainly that's the past. What would be the risks, in your view, or the reasons not to perhaps redeploy capital back to shareholders in advance of perhaps finding that good acquisition, do you think?

Well, I think there's -- you've answered your own question. It's just a question of, would it have bearing on a -- the right acquisition? And so again, there's -- as Bob went through earlier, we've got a use for the cash that we have on our balance sheet right now. That use is effectively debt reduction because we don't have to use our revolver. So we're -- it's not a case where we essentially just have cash sitting around doing nothing.

It is a case that it's an inefficient balance sheet. We are not hiding from that at all. So -- but let's just kind of scope the challenge here. So the cost for us to take some time to see what the acquisition opportunities are while we assess other options, to us makes sense. But clearly there comes a point, and it isn't binary, where we will -- we may get to a different answer on that.

But again it's -- acquisitions and internal investment -- I don't want to ignore that -- have been kind of the hallmark of how value has been created here historically. And so that -- we kind of look to that first, but not necessarily exclusively.

Tony, one follow on there. On the one hand, when we look at the leverage or the balance sheet as you currently have it constructed and your ability to generate cash, it would seem that relative to your past acquisition history, anyway, you have more than abundant capital to take on whatever opportunity might be in the market at the current time. Obviously we are not aware of those, you are. You know what's on your radar screen. So I guess the first question would be, could there be something in the marketplace that would outstrip your existing ability given your current balance sheet and cash flow?

And the second question would be, again, back to the track record. If -- I guess the concern is, if you found an acquisition after you did a buyback or a larger dividend, it suggests that investors -- you are worried that investors wouldn't perhaps give you capital at a time when you need it if you found an acquisition, despite your track record. Why do think that would be the case?

I'll answer in backwards order. But the difference on that is there's just a lot of friction caused around that, if you have to go back to who you just gave money to and get it back, that's not a very efficient way to do it.

And secondly I would say, you should recall that we have a fairly sizable bank facility that's also coming due in the middle of all this. And so when you talk about doing an acquisition, you often are also talking about refinancing our own credit facility at the same time. So if the credit markets did tighten up some between here and there, it could be harder than you think to do a meaningful acquisition, even because of our own credit facility and getting it refinanced.

So it just all fits together in saying if we had all of our credit facility in place and renewed on a long-term basis right now, then the decision would be slightly different. And then if -- and even then you might still say you got a little bit of time to look for acquisitions before you're forced to make the decision, since we can use the cash against the revolver this year.

Okay guys. I get. I appreciate all the thoughts and color. Good luck in the quarter.

Robert Kirkpatrick, Cardinal Capital.

Could you talk a little bit about the historical context in terms of your ability to successfully close/integrate a substantially larger acquisition than you have done in the past? How have your processes changed? How have your resources dedicated to this type of issue changed?

That's a good question. The -- it depends on the acquisition, of course. If you look at our history, many of the acquisitions have fallen directly into our franchises, and so our businesses are able to do that. So if you talk about a can acquisition, for instance, then we have a lot of good can resources able to do that integration fairly quickly. So the history on that would be up to as sizable as the Campbell acquisition, which was a very sizable to the business of the time -- I don't have the numbers right here in front of me. But it was a meaningful acquisition that got done and integrated within our can business.

I think probably the -- maybe to your question the more relevant one may well be the European closure business, which was a -- now, the White Cap business in Europe was a sizable acquisition for us at the time. It was a very complex acquisition for a lot of reasons, not least of which was kind of the geographic presence of it all over the world in countries that we had no infrastructure at the time we did it. So that I would say was a -- quite a complex transaction to get done, and from an integration perspective you essentially had us in the room to try to get that integrated into our business. And I think the numbers support that that was a pretty successful acquisition.

So I think we've got the experience. We view this as a core competency, that we have a good idea of understanding value of acquisitions, we understand the consumer goods packaging market, and we think we can create value there. But you don't create value by paying too much for an acquisition. So it comes, hit or miss, because if you're not willing to overpay, you got to wait till somebody is willing to pay at the right price.

Thank you. Maybe I could get some commentary on the progression of easy open lids in your metal food can business as you look out the next couple of years in terms of being able -- is there any movement in getting anybody to shift over any particular product categories? Where do we stand on that?

We are continually talking to our customers about innovation and convenience, and easy open ends for us, our Quick Top family of ends, always is a top -- is at the top of that list. So those conversations continue to progress.

Unfortunately with the economy that we have experienced over the past 12 to 18 months, it's been a difficult time to typically add cost to a package. Again, these easy open ends essentially do add cost to the package. Typically they are offset by -- I'm sorry -- those costs are offset by the market share gains and the growth of volume that our customers see, and we've got documented cases that show, with that conversion there is increased volume to follow.

So as we sit here today and look at 2010 specifically, we don't have anything teed up right now for a conversion in 2010. We are still about 65% of our ends that we sell are Quick Top ends.

And as we look out into the future, the next logical category really is a conversion of the vegetable market. And again, we just continue to talk to our customers about when that is going to happen, because we view that as an eventuality, it's just a matter of time.

Do vegetables have a lower per-unit cost, so therefore the -- putting on the end onto a vegetable package is therefore a bigger deal than it was first soup or fruit or some of the other places that have already converted?

I don't necessarily think that's the case.

No. I think if anything it has a little bit more to do with kind of consumer sentiment around the importance of easy open end by product. And I think you could make an argument for yourself that some products, the consumer desires it more for than others. I'm not saying I buy into that necessarily, but that would be the argument that a customer has to get themselves through, does the consumer care enough that they're going to buy, as Adam says, enough volume to pay for it? Our feeling is strongly the answer to that is yes.

Great, thank you very much, and keep up the acquisition discipline.

Chris Manuel, KeyBanc Capital markets.

I promise, no woodshed questions this time.

(laughter) Ah, darn.

So anyway, when we look at 2009 and here into 2010, what you've got queued up on the capital side -- I think you've always talked about maintenance CapEx being more like a 65-ish, 60 to 65-ish number and the balance being more return or growth oriented stuff. As you look at what you did in 2009 and what you're planning on doing 2010, can you kind of maybe give some light as to what areas you're most targeting for investment, specific -- maybe not getting too specific on exactly what, but types of projects, which segments therein, etc.?

I would say that it's probably more around cans and plastics and a little less around closures, only because we have made pretty good, sizable investments there. And as we've said, the single serve market's been down. So there's capacity that sits in that marketplace. So I would say it would be more -- if you want to talk by business segment -- around cans and plastics.

You didn't ask this exactly, but 2009 we pulled the reins back pretty hard considering the kind of credit market, etc. I think you could arguably say we pulled them back too hard, that would apply mostly to the plastics side. I think again that is a business that you -- your growth is driven by your willingness to invest in individual projects, etc. So I think as we get comfortable with the condition of that market and the prospects individually for capital investment, there's more room there whenever we want to do it.

And then around the can side, I think it would predominately be around cost reduction side, where we continue to have plenty of opportunities to look at the cost side there, and again, what we've always said on that is that's more pacing our management and how much do we want to put on their plate. Again in 2009 we were pretty focused on blocking and tackling, and we really didn't want to put projects too heavily in the way of that.

That's helpful, that's all I had. Thanks guys.

I think I heard that was our last question, so I want to thank everybody for your time today, and we look forward to talking to you about our first quarter of 2010.

That does conclude today's conference call. We would like to thank you all for your participation.