Silgan Holdings Inc (SLGN) 2012 Q2 法說會逐字稿

Thank you for joining Silgan Holdings second quarters earning call. Today's call is being recorded. At this time, I would like to turn it over to Kim Ulmer, Vice President and Controller.

Thank you. Joining me from the Company todayI have Tony Allott, President and CEO, Bob Lewis, EVP and CFO, and Adam Greenlee, EVP and COO. 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 2011 and other filings with the SEC. Therefore the actual results of operations or financial conditions of the Company could differ materially from those expressed or implied in these forward-looking statements. With that, let me turn it over to Tony.

Thank you, Kim. Welcome, everyone to our second quarter 2012 earnings conference call. Our agenda for this morning is to review the financial performance for the second quarter, and to make a few comments about our outlook for 2012. After our prepared remarks, Bob, Adam and I will be pleased to answer any questions.

As you saw in the press release our businesses performed well in the quarter but were challenged with the timing of volume and pack concerns in the metal food can business and weakening demand and softer pricing in Europe as a result of ongoing economic instability. Nevertheless, we delivered record adjusted earnings per diluted share of $0.55 posting a nearly 4% gain over the previous record second quarter of 2011 of $0.53 per diluted share.

We are not expecting any quick recovery in European fundamentals, nor has the visibility improved to the Midwest vegetable pack given the dry, hot weather. However, at this time we are confirming our full year estimate of adjusted earnings per diluted share to be in the range of $2.80 to $2.90. On a longer term basis, we're confident each of our business franchises are continuing to be enhanced.

This confidence is based on the operational improvement underway in our plastics business, the new plants being ramped up in important eastern European and Middle East markets and the recently announced acquisitions of the Rexam's Thermoformed Food business and the Ontas Can and Closure business in Turkey. We believe each these enhances our competitive advantage allowing us to better meet the needs of our global customers and to continue to drive long-term shareholder value. With that, I will now turn it over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimates for 2012.

Thank you, Tony, good morning, everybody. As Tony highlighted, the second quarter of 2012 was challenging as we delivered adjusted earnings per share at the low end of our expectations. The biggest impact was in our metal container business where economic weakest in Europe led to a weaker demand in certain categories particularly general line cans and the hot, dry growing conditions led to a slower start to the pack and a less favorable mix of products sold, largely due to the timing of shipments.

As a result, we delivered adjusted earnings per share of $0.55 in the second quarter, versus $0.53 in the prior year quarter. On a consolidated basis, net sales for the second quarter of 2012 was 821.6 million, a decrease of $600,000, primarily as a result of unfavorable foreign currency of $18.4 million, partially offset by higher net sales in the plastic container business and the pass through of higher raw material costs.

Net income for the second quarter was $10.6 million, or $0.15 per diluted share, compared to second quarter of 2011 net income of $51.2 million, or $0.73 per share. The primary drivers behind the change in net income were the $38.7 million loss on early extinguishment of debt recorded this quarter and a $27 million net benefit of the grant termination fee recorded in the second quarter of 2011.

Foreign exchange remained neutral to earnings as we continue to be effectively hedged. Interest expense before the loss on early extinguishment of debt for the quarter decreased a half a million dollars to $16 million versus $16.5 million in the same period a year ago. This decrease was largely driven by lower average interest rates, partially offset by higher average borrowings as a result of the recent 5% senior note issuance and the refinance of our senior secured credit facility in July 2011.

In addition we incurred a $38.7 million loss on the early extinguishment of debt as a result of the make hold position of the 7.25 notes which were retired with the proceeds from the 5% note issuance. I will also point out that the loss on early extinguishment of debt had a bearing on our effective tax rate for the quarter as the $1.7 million cumulative rate adjustments in certain foreign jurisdictions were applied to a much lower taxable base as a consequence of this loss.

Capital expenditures for the second quarter of 2012 totals $33.1 million, compared to $50.7 million in the prior year quarter. On a year-to-date basis, capital expenditures totaled $59.5 million in 2012 versus $84.2 million in the prior year.

And we do continue to anticipate capital spending for the full year to be in the lower end of our range of $125 million to $150 million, as we compress capital in 2011 to take advantage of the accelerated tax deductions. Additionally we paid a quarterly dividend of $0.12 per share in June with a total cash cost of $8.5 million, and also during the quarter, we repurchased approximately 397,000 shares for an aggregate amount of $17.1 million through a series of open market transactions.

I will now provide some specifics regarding to the individual businesses. The metal container business recorded net sales of $479.7 million for the second quarter of 2012, a decrease of $2.6 million versus the prior year quarter, and this decrease was primarily due to unfavorable foreign currency translation of approximately $7.5 million, and a less favorable mix of products sold, partially offset by higher average selling prices as a result of the pass through of higher raw material costs.

Unit volumes were up slightly for the quarter as incremental units from the Nestles Purina steel can operations were largely offset by volume declines attributable to the slower start of the vegetable pack and general softness in European volumes, particularly in general line. Income from operations in the metal container business decreased $2.8 million, to $40.1 million for the second quarter 2012, versus $42.9 million in the same period a year ago.

The decrease in operating income was a result of a less favorable mix of products sold, increased price pressure, and volume declines in Europe, due to the overall economic weakness and the incurrence of start-up costs associated with the four new production facilities partially offset by charges in the second quarter of 2011 that did not repeat.

Net sales in the closures business $1.4 million to $183.1 million for the quarter primarily due to unfavorable foreign currency translation of $9.3 million, and lower sales in Europe as a result of weak market conditions partly offset by favorable unit volumes in the US, as single serve beverages benefited from the hot weather.

Income from operations in the closures business for the second quarter of 2012 increased $200,000 to $22.9 million. This increase was a result of favorable unit volumes in the US, continued improvement in manufacturing efficiencies and operating cost savings and a decrease in rationalization charges. These benefits were partially offset by demand weakness, and increased pricing pressure in the European markets.

Net sales in the plastic container business increased $3.4 million, to $158.8 million in the second quarter of 2012, primarily as a result of favorable mix of products sold, and an increase in unit volumes, both due to strong seasonal sales in the agricultural chemical markets and certain customers who built inventory ahead of plant shutdowns. Unfavorable foreign currency translation offset these gains by approximately $1.6 million.

Operating income in plastics increased to $9.1 million, in the second quarter of 2012 versus $4.5 million in the prior year quarter, as we again benefited from the year-over-year comparison of the lag pass through of resin cost changes. The quarter also benefited from a favorable mix of products sold, cost reduction initiatives and continued improvement in operating performance, an increase in unit volumes and lower rationalization charges.

Turning now to our outlook for 2012, while we expect continued head winds in Europe as a result of the difficult economic conditions, a potentially volatile vegetable pack resulting from the difficult growing conditions in the Midwest and likely resin inflation, some of which may be offset by continued strength in the single serve beverage market in the US we are confirming our full year estimate of adjusted net income per diluted share in the range of $2.80 to $2.90. There is some caution that if the adverse growing conditions in the Midwest persist, there could be further risk to pack volumes this season. In addition, we are expecting lower sales in the plastic business as certain customers will undergo planned shutdowns during the third quarter. As a consequence, we are providing a third quarter 2012 estimate of adjusted earnings per diluted share in the range of $1.15 to $1.25.

Comparatively, we delivered adjusted earnings of $1.14 per diluted share in the third quarter of 2011. Additionally, you should note that given the magnitude of the third quarter and the potential impact of un forecasted movements in harvest dates, particularly as a result of the adverse growing conditions, the earnings in the back half of the year can shift meaningfully between quarters. Despite the near term head winds created by challenging pack conditions and the macro economic outlook in Europe, this business continues to generate significant free cash flow.

As a result, we are confirming our free cash flow estimate for 2012, to be in the range of $200 million to $250 million, excluding the voluntary pension contributions which were funded through the incremental borrowings from the recent senior note issuance. That concludes our prepared comments. We can open it up for Q&A and I will turn it back to Janine who can provide instructions for the Q&A session.

(Operator instructions). And we'll take our first question from Chris Manuel with Wells Fargo.

Good morning.

Hi, Chris.

Good morning, Chris.

I didn't know if you could hear me. A couple of questions for you. You cited a few different elements. In Europe, you cited pricing pressures as well. That's something that's, I think, newer. So I wanted to dive into that a little bit. I know you have opened up four new facilities over there and it looks like you have acquired an additional one after the start of this quarter. So can you talk a little bit about how the environment is there with respect to pricing and also, can you give us a little bit of a flavor for how volumes have been if you can?

That's a lot of questions there, Chris.

It is.

Let me just start by clarifying one thing. We have got four plants that are under construction. They are not all started up yet. So just as a point on that. If you kind of start with your point on pricing first. I think what we would tell you, there are a couple of things going on in Europe, first of all, there are economic conditions which is easily cited. It's also been cooler. So it has not been as hot in Europe as here. Depending what business we are talking about, that's had an impact. So those are the kind of issues weighing on the demand side.

The pricing bit that we talked about as you will recall in Europe that you have annual negotiations in much of the business. So you tend to have a price conversation going on with your customers first quarter, drifting perhaps even into the second quarter. So that's not unusual in that regard. What is, is if demand is not there you get a little bit more activity on the competition side around pricing, and I would not say that's wide spread. It's not across the board. It's specific cases and situations.

I would characterize it as being more Western Europe. So if you think about our business being more to the west of our side, that's kind of where we are seeing it. And then I characterize it coming more from the players that tend to be pursuing growth as a longer term strategy. Although, on the closures side, you also see it a little bit in the players that are a can and closure and they combined those operations. So they're a little less focused, perhaps, on the specifics of the closure side. All of that is pretty situational. That's a long answer to your question.

That's very helpful. The idea being that it's not something that's going to be taking a step down through the balance of the year and continue. That's fair?

That's correct. That's correct.

That's right.

Most of that has played itself through.

Okay. And then with the second component, can you give us a sense of where maybe some of the volumes were?

Yeah, sure I will, start with kind of the canned volumes for the quarter. On a worldwide basis, volumes were up, just about 1%, with the US business being up a few basis points more than that. So, you know, as a consequence, you can conclude, and we said, that the European volumes were down a touch on a year-over-year basis. So that's kind of what's happened there. And I think we talked a little bit about the early part of the pack having some influence there. I think that's more against our expectation of what was happening than on the year-over-year comp.

I think if you look back at what happened early in the year, there was increased plant acreage that was contracted. The weather was pretty good at the early part of the year. So there was some expectation that we would see some early benefit in the pea and green bean category, as well as some expectation that customers would start to build some inventory as they typically do, just ahead of the peak pack season. In fact, what we saw is the weather turned, the pea pack actually turned out a lot less beneficial than we expected, and then the timing of the green bean pack got pushed around a little bit because of the weather. And then just with the general malaise around weather, I think people deferred some of those early purchasing. So we are seeing some move between quarters there. So that kind of rounds out the can discussion. As to the other volumes, maybe Adam can jump in here.

Sure. Looking at closures, on a global basis, the unit volume was up slightly versus the prior year, really driven by a nice volume gain in the US business, where the hot, dry weather, has kind of an counter impact to our closures business, as primarily the plastic side of our business and single serve beverages is hot filled beverages consumed during the summertime. We have seen a really nice run on our hot filled beverage business in single serve here through the second quarter. We talked about it on the last call.

That filling season started early and so we did see some benefit from that volume in Q1 as well, but as we look at our US business, we had literally two of our all-time record shipping months at the tail end of the quarter. So the business continues to do very well. Over in Europe, again, there's been a different weather environment over there. We continue to see softer volume. Tony talked a little bit about the choppiness of price there as well. So all in all, volumes were up slightly in the business. You jumped to plastics, we talked about this a little bit on the last call. Unit volumes is probably not the best measurement of success in this business as we are working to better manage our mix. Our pound volume was up slightly. Our unit volume was up a little bit more than that. So we are low single digits in our plastics business for the quarter and that does include the buy forward of specific customers and advance of summer shutdowns.

So that was a big question, Chris with a big answer.

Thank you so much. I have a few more questions but I will jump back into the queue.

Okay. Great.

Thank you. And we will hear next from George Staphos of Bank of America, Merrill Lynch.

Hi, good morning. A couple to start. As we think about your guidance for the third quarter of $1.15, $1.25, what kind of pack are you anticipating for the third quarter? What's built in your guidance at the low and high end of the range?

I would tell you what's in there is essentially more of a normal pack. You may recall we were thinking we were going to have a better than normal pack because last year I think our quote on that was worst than recent memory so we're expecting some recovery. If you look at acreage planted, et cetera, it all looked like we were setting up for a pretty big year.

Sure.

We brought ourselves back to normal. So, you know, the best I can tell you, if it turns out to be another bad one, then we have not factored that fully in.

Okay. And there's enough operating leverage in your business that normal could be $0.10 lower or well, between $1.15 and $1.25 is what you are saying too?

Well, add a little bit of uncertainty around Europe to that as well. I mean, sometimes it might look like a duck on a pond, but there's a lot of paddling that happens every quarter underneath the water. So there's always some need for room on that. I wouldn't lay all of that to the pack. But certainly there is going to be some movement around the pack that we don't have visibility to yet.

Okay. Have your customer inquiries, have the crop progress reports, whatever you might call on early in the third quarter, suggested that your guidance is reasonable? Presumably it has otherwise you wouldn't have offered that as your guidance. I wonder what trends you are seeing in the quarter.

You pretty much have it, George. I think if we look at our preliminary data as we come into July, we're seeing sequential improvement in shipments, July versus June, which we would expect. You know, and add to that the fact that really the pack season starts kind of end of July and runs to, you know, kind of the peak season all the way to the early part of the September. So we're kind of in line with where we would expect to be right now.

Okay. Bob, would it be possible to parse out what the effect of the slower start to the pack was in the second quarter and similarly, if we want to just bundle it as Euro weakness, what that was in the second quarter, between those two, in pre-tax profit terms?

That's going to be hard. I mean, first of all, to be clear, there's three things here, right? The one that you didn't mention is sort of the mix of the US can business. Now, the mix is impacted by the pull for the pack. And I could probably give you more detail than you want on that, but it was not a great mix in the quarter. That ought to recover itself. So really if you scale it, probably that point, that mix point is the biggest of the group, but a lot of that is around the issue of the pack. And then I think you would probably scale a little more evenly between the European side to cans and the rest of the pack question.

All right. Can you give us maybe 30 seconds on the mix issue and I will turn it over from there.

You got me. Yeah. Essentially there's sort of two components to mix that we are referring to here. One is pretty straight forward which is diameter size of can. You get a variance in that regard. That's the case here where you have smaller cans and so per unit less drop through of profit. The second one is a little more confusing. When we talk volume, we talk cans. So we don't count the end as a unit of volume. That just happens to be the way we do it.

Right.

So what happens in our pack season is because our customers are buying stuff they haven't yet filled, they don't necessarily get the same amount of ends as they do cans. So when you count units it might have an end and it might not at this point in the year. As it happens, we have in our units of volume in Q2, this year versus last, we have a lot less ends and ultimately that needs to catch up, right, because you have to put an end on the can. That's sort of a mix point that's just because of the way we count a unit.

Okay. Thanks, I will turn it over. I will be back.

Okay. Thanks.

(Operator Instructions). And we will now hear from Ghansham Panjabi of Robert W. Baird.

Hey, guys, good morning.

Hi, Ghansham.

Just a clarification on the guidance for the back half of the year are you assuming any further share buy backs?

No, there's no incremental buy backs assumed in our guidance, other than the impact of what has already been done.

Got it. Got it. And then in on closures, you know, one of the big CSD producers in North America was talking about a slow down in the convenience store channel in 3Q. Obviously you had a very, very strong second quarter what are you seeing thus far in 3Q?

So far, we have seen continued good, strong demand. Again, I think the CSD water market is different than our hot fill market which are essentially sports drinks. You know, I think as the warm weather continues throughout the summer, we will see continued strong volume and we don't see that similar shutdown or slowdown, excuse me, of our single serve beverage.

Okay. And then just on the plant start-ups in Eastern Europe and the Middle East, I think all of this was part of the plan when you acquired Vogel and Noot. Can you talk about how much of that production has already sold out and also the what the demand profile is in those specific geographies that you are adding capacity to?

Yeah, essentially we are adding capacity into the Russian market, into Jordan and into the Ukraine. So really pointing to the eastern markets. As we talked about in previous calls, we're expecting the commercialization and the qualification of those plants to run through the end of 2012 for the three plants, the two in Russia, one in Jordan Valley, with the Ukraine kind of moving into the early part of 2013. So if you think about at least a portion of that being pack related volume, you are not going to see the benefit of that coming until we get all the way to the 13th season. So, I can't really give you a specific percentage that's sold out, although I will tell you that we are talking about relatively small plants here as we invest to support the local markets there. So, again, four plants but not sizable capacity being added.

Okay. And those specific local markets, have you seen any deviation in demand, versus the other portion of your European business that you have?

No, we are seeing, those are kind of growth markets. No question, if Europe continues to get worse, those markets will be affected as well but there's an underlying growth that's happening as consumers are starting to get moved from locally grown foods to processed foods. Et cetera. This was a longer term. In fact, I think we were quite clear about everything with Vogel & Noot, it was more of a long term concept. You may get bumps in the road and depending upon what happens in Europe on it but we think these markets will continue to have underlying organic growth for some lodge period to come.

Okay. Thank you.

And we'll take our next question from Adam Josephson with KeyBanc.

Hi, everyone. Thanks.

Hi.

First question, how much of your veggie pack comes from the regions directly affected by the heat wave and drought? And when will you have a pretty good sense,will it be mid-August or even into September, to whether this will be a normal pack or something less than that?

Yeah, essentially the biggest portion of the pack for us that's being impacted right now is corn. Most of the drought discussion is more related to kind of feed corn. It's really the heat in the upper Midwest that impacts the sweet corn which is where we have exposure. Corn is probably less than 5%, in a high single digit in terms of volume perspective. You know, so as mother nature tends to do, it can correct itself over time. So I think you've got it right. We will be into the late summer, or early fall before we really know where that all falls out.

Great. Thanks, Bob. Second question, how have trends in Europe differed in your Vogel & Noot business and in the closures business and so what extent do trends weaken sequentially?

How they differed between them, only that our closures business is a little bit more we Western European. So it's been a little bit more on the volume issues on that side. Now our can business is in Southern Europe in Greece. And we haven't really mentioned it much, but Greece is a very different situation where there we are being very cautious about credit risk. So in some ways we are denying volume there to be sure that we are as much as possible mitigating credit risk. So those are sort of differences between the two. The trends have been on volume have been kind of consistent across the board. It's been, I can't say anything particularly new. I think the consumer is getting a little more concerned and so I think our customers may be feeling a little bit more, but I'm not sure we can really perceive that sensitivity on it.

Right. No, thanks, Tony. And how beneficial was the resin pass through lag for the plastics business in the quarter? And what are your expectations for the balance of the year in that regard?

For the quarter, it was probably a couple million dollars, something close to two. As we go forward into Q3, resin actually becomes a headwind for us. We really do think that the prices for resin, essentially bottomed out in kind of June and now July time period. And there are a bevy of increases that have been announced by the manufacturers. So we are looking at resin increasing through not only the balance of Q3, but also through the balance of the year. So we'll see it as a head wind for the remainder of the year.

Great. Thanks, Adam. Thanks, everyone.

And we'll hear next from Scott Gaffner from Barclays.

Good morning.

Good morning.

Just to get a little more specific on the metal food container business, I think before you had stated that you thought the market in North America or in the US in particular for the metal food can industry could be flat in 2012. Given the shift in volumes and your anticipation that the pack is going to be normal now, do you think volumes are actually going to be down year over year in the US?

I think you are off a little bit. I think what we said for this year was that volumes would be up coming into the year because we were expecting a recovery of the pack. So I think the fundamental directional change is still the same, that we probably lose that up side, given what pack conditions say, but it probably gets back to more of a flattish kind of volume outlook for the year.

Okay. And maybe you could just give us a little bit more color on the comparisons from last year, because obviously if I recall, you had a weak pack in the third quarter. Does that continue into the fourth quarter and that then never materialized? Is that how to think about the comparison year-over-year?

Yeah, essentially what happened last year, the pack was weak and it ran late and it kind of came to an abrupt stop. Typically when you get a late pack, you get some recovery in Q4 and we didn't see that manifest itself last year.

And last year dealt with different variety growing regions. Tomatoes were affected. Right now we are not assuming that tomatoes will be affected by anything that's going on. So it still was a different year last year. We ought to be better this year than last, unless corn really goes south.

Right. Because, I mean, if I have the numbers right, 31% of your metal food can sales you talked about being in the vegetable markets. If corn, you know, 5 to high single digits, there's still a large portion of vegetable food sales that could potentially recover from last year's issues.

Yes, 30% is probably a little high. I would have said it was probably more in the 20%.

Okay.

But, yeah, it goes beyond corn for sure. You know, the big ones would be corn and tomatoes and then you get green beans and fruit broadly.

All right. And just one last question on plastic containers, you mentioned the better manufacturing performance was a big driver of the margin improvement in the quarter, and that, margins in that segment definitely came in better than we were expecting. Is there anything in particular that is going on there that you can point to as the improvement there and maybe some lessons you can take from that business to the other businesses?

Well, sure. I guess I would start by saying, we have expected kind of a gradual improvement in that business now for sometime. What we have really done in our plastics business for 2012 is really focus on blocking and tackling, focus on the customer and meeting their needs. We have done a good job at that. Obviously there are lots that we can learn and share amongst our businesses, unfortunately the plastics story is one of the recovery, to be perfectly honest with you. We are learning in plastics from our other businesses and how well they have been executing over the course of the last several years to help us continue to recover in plastics, and as we said last quarter, it's not going to be a straight line of improvement. We have had two good quarters. It was the right first step in our recovery plan, but now we have got some head winds that we're looking at here for the balance of the year as well. And we'll continue to block and tackle and execute and work to offset those.

Okay. Thank you.

Thanks.

And we'll hear next from chip dill op with vertical research partners.

Yes, good morning.

Good morning, Chip.

You know as you look at your footprint here in north America, I know that over the years you guys tend to find very solid synergy benefits and operation efficiencies in your plants and I just didn't know if we were close to a point given the flattish volume that you laid out for us, to maybe seeing more facility rationalization in North America, if not later this year but perhaps next year?

I wouldn't necessarily say it. I agree with your premise. We are looking all the time. There is always some analysis going on around is there something we can do? Right now we are fairly well utilized across our business.

And that's specifically to metal food cans as we have closed two plastic container facilities already this year.

Yes, good point. Absolutely. So I wouldn't necessary think that but I also wouldn't want to leave you with the sense that we aren't always kind of twisting that question in our own mind. We are always doing that.

Gotcha. And then could you talk a little bit about the scale and if there is a difference and your typical food can plant here in North America versus the ones you acquired in Central and Eastern Europe. I think the ones you are actually building. If they are different, do you think that's something that will, for the foreseeable future, be a structural benefit or do you think that in time, you will see the scales converge?

Yeah, there definitely is a difference between the scales between the U.S. plants and the regional plants that are in the Eastern European markets. You know, most of the plants in the European markets are much smaller plants and in many cases, one or two line operations serving that local market. Most, maybe all, of our capacity in Europe is all three piece capacity versus a fair bit of two-piece capacity in the US. I don't necessarily, at least in the near term, see any change to that part of the model, between the two geographies. So I think what is advantaged for us is the ability to get into those local growing markets, support the local customers first, and be ready when and if multi-nationals come in to those growing regions.

Gotcha. And then as a follow-up on the plastics segment, which I understand the Rexam business will be part of, is there any change or any, I guess, just a look out we should have for seasonality as you bring that business in? Should the seasonal pattern change significantly? Should we see a seasonal pattern there?

No. We're not anticipating any change in the seasonal pattern.

Gotcha. Okay. Thank you.

Thanks, Chip.

And we'll take our next question from Albert Kabili with Credit Suisse.

Hi, thanks. Good morning, guys.

Good morning, Al.

I guess first on, I guess, for Bob, the outlook, with the second quarter coming in at the low end, and certainly the pack outlook with the Midwest drought worsening, how do you bridge how you maintain the full year outlook? What's the positive variances that you're seeing that help you maintain that full year outlook?

Yes, I think what you are getting is some of that is coming from shift of both mix and volume between Q2 and Q3. Obviously some of that is around what we saw in plastic performance. I think it's all just leading up to kind of how we see the world today, and that's kind of where we are with the guidance. No question that there are more risks, if you will, in front of us given two very well known items that are out there, which is the European economy and the weather pattern right now in the Midwest.

Just one other thing that we haven't said on this call yet, but we have said in the past. That we are a little bit better at forecasting the annual can business than we are quarterly, because the seasons of our pack bridge over quarters. And so we don't even know how much of what we are here talking about today and the disappointment, to use the word we use, has to do with just shifting around between quarters, before anybody over reacts to it, we just don't know the answer to that yet. As Bob points out, the mix side, we are feeling pretty good that a lot of that shifts into next quarter. It's not lost. It's just deferred. Now, the question on corn, we don't know yet.

Okay. That's fair, but Tony, wouldn't you know that answer already given you have seen your July data. So I would assume you at least have a pretty good handle on timing shift in terms of mix and timing. Correct me if I'm wrong there. And kind of what's the read on that thus far?

That would be great if the answer to that would be yes. The fact is that you are going up a curve right now and we are seeing that. Obviously we are seeing increase in volume in July versus June, but you would absolutely have to see that. The question is how does it come out at the end. There is no question right now that corn is more fragile than we would like it to be. You really don't know until you get through to the end of the pack season.

Okay. Got it. All right. Now, on the pricing side of things in Europe, and metal food, is there a way to help us parse out, you know, what the impact was, you know, EBIT or margin, just related to pricing? Which presumably kind of drags on the rest of the year.

Yeah, I would say you are somewhere between 1 million and $2 million if you tried to isolate just a price piece, some where in that range.

Okay. Okay. Got it. All right. And as we look to the third quarter on the start-up costs which I think was a couple million bucks of a head wind this past quarter, do you get to a flat? What is the impact on the start-up in the third quarter on these new geographies in Europe you are expanding into?

Yeah, I think what we would say and it is kind of in the release if you look kind of back at the table, that we will expect to see some of that start-up cost continue at a declining pace through the back half of the year, and, as to the Ukraine, could have a small amount that falls into the early part of 2013. I think we have scoped it in the release that we would see something round about $0.02 in the third quarter, declining to $.01 in the fourth quarter.

Okay. Got it. All right. And then the last question on my end is the US food can business, were the earnings taking in Vogel & Noot out of the equation, were the earnings in the US food can up year over year in the second quarter or down because of the mix issue.

They were down.

Yeah, down.

Okay. So even with the 1%, volume growth in the US, mix still was that much of a factor? I just don't remember mix ever being so much of a huge factor to how down were they? How big of a factor was mix?

Well, I tried to put them in order for that reason. Mix was one of the biggest points to the quarter. Again, some of it is very understandable. You either have ends or you don't have ends that you will ship next quarter. It was meaningful.

Okay. All right. And then lastly, high barrier food, will that be neutral in the third quarter or with purchase accounting, is that going to be a slight headwind?

Well, some of that depends on when it closes. Right now, we probably say it's September 1. But we don't know that. Excuse me. Could be as early as July, beginning of August, but I doubt it. So that would have some impact. It's not going to be accretive for the quarter for sure. If you only picked up one month, and you had the inventory coming through for that month, it could even be a little bit dilutive on the quarter.

Okay. I appreciate it. Thanks, Tony. Have a good luck in the quarter.

Thanks.

And we'll take our next question from Christopher Butler with Sidoti & Company LLC.

Hi, good morning, guys.

Good morning, Chris.

Not to beat metal cans into the earth, but, coming at this again from a slightly different perspective, it sounds as if you need some improvement to the growing conditions in order to get to what you are considering normal. If things stay exactly kind of as they are right now, and we don't really get any improvement or it doesn't get any worse, what kind of effect would that have on, you know, EPS?

Maybe I will try and scope it for you in a slightly different fashion. Again, corn, which is primarily where the risk sits for us around weather conditions right now is a bit less than 5% of the total. So if you make an assumption on how bad you think corn can actually get, because it won't all go away, right? So, if you miss a percentage of the pack, you lose, some small percent, low single digit, less than 1% of your total volume. Again, that's going to be in a quarter where you generally get pretty good drop through. So if the pack really falls apart, it could have some meaningful impact, but right now our guidance assumes that corn largely kind of has a normal kind of pack as we come through the weather pattern.

Okay. And shifting gears towards the high barrier food acquisition. Going through the releases, it looked like as a company, that the two businesses they sold had EBITDA margins of about 16%. Is your part of that acquisition significantly different?

We think that it's a very good business we bought. It drives a lot of value to customers. That may be a good assumption. I don't know that we can provide much more than that for you.

Then sort of the follow-up then would be, working off that assumption, can you talk to some of the growth opportunities that you would see that would make the valuation more compelling?

Happy to. We think it's a great fit for our business. Essentially we think we are combining our leading position in the process, the prepared food segment, with by the far the best thermo forming techno capability in the market. In fact, we at one time competed with this business, and through their technical prowess, they essentially managed to take a big chunk of businesses from us, because they had a lower cost structure and managed to get thermo forming to do some pretty complex packages.

So we have seen the power of their technical side. We think what we can bring to it is the customer base that we serve, and that's a customer base that is very focused right now on expanding the brands and finding more customers, whether you want to call them millennial, on the go, whatever word you want to use. But those customers broadly are all focused on how do they take their brand and expand it to a more mobile customer audience.

And so we think that plastics is going to play an important part of that brand expansion. We want to be part of it bringing it to the customers and we think our position will help us. Also when we were in this business we had quite a bit of interest from the international markets, Asia, in particular, for us. The Rexam Thermoform food business had been finding some opportunities in Europe. And so our thinking is our global footprint will also be very helpful for this business, again, same customers just on a global basis.

Finally, we think there will be good growth in these ready meals for all the reasons I just said. Just the markets that are serviced by this business, we think are the same kind of markets that the demographics say will continue to be growth and interesting markets. Again, we think it's a well positioned business and believe one plus one is three in this case.

As you look to the globalization part of that, can you utilize your existing assets or will this require a build out as well?

It would be totally different on the asset side. It would be more about commercial position and maybe geographic location but certainly not assets.

All right. I appreciate your time.

Great. Thanks.

We will here next from Alton Stump from Longbow Research.

Yes, thank you. Good morning. I just had two quick questions. I guess the first one and, hopefully I didn't miss this but with the food can volumes being up just more than 1% in the US, I assume that includes with the Ontas acquisition last fall, if we strip that out, how much did the extra core food can volumes decline if you can tell me that in the quarter?

Yes, you are right. It does include the incremental volume coming from The Nestle acquisition. I think if you strip that out, we would be down slightly on a core basis, which is generally in line with what the industry has done for the quarter.

Okay. Thanks. And then I will ask one other question. On the share buyback topic, obviously you guys haven't bought back a lot of shares since the end of 2010. Is there any plans as you move into the back half and the first part of next year?

2010 was the last large share repurchase through the Dutch vendor. We have been active in the open market transactions over the last couple of quarters. I think it still stands that we look at our leverage point in the two and half to three and a half times range and to the extent that we don't have opportunities in the M&A front to manage that, then share repurchase or in general return of capital to shareholders sits as a very viable option. So, while there's no imminent decision that's been made, it certainly sits out there as a possibility.

And we do have outstanding authorization of $250 million to $260 million at this point.

Gotcha. Okay. Thanks, guys.

And we'll hear next from Alex Ovshey with Goldman Sachs.

Good morning, guys.

Hi, Alex.

Good morning.

A couple of clarification question. Did you quantify what the positive impact from resin was for the plastic business during the quarter?

Yeah, it was about $2 million.

Okay. Thanks, Adam. And did I hear you correctly are you expecting resin to be a headwind in the third quarter?

We are. Resin prices really did bottom out in the June/July period and we are staring increases down right now as we are into August for pricing. And we anticipate further increases the balance of the year.

Okay. So it seems like there's really no lag in terms of the way resin impacts the P&L of the plastics business?

There is a bit of a lag there, but, we have benefited from the lag pass through for the first six months of the year and, again, there's kind of a perpetual catch up there, that will happen on Q3 that will turn negative on us.

The only lag on the cost side is working through your inventory.

Okay. Right. Got it. Thank you. Is there any update open what's going on with the BPA issue in metal food cans and can you update us on what percentage of your food cans now is BPA-free and then how you see that number evolving over the next couple of years?

Sure, there's certainly to start with, there's really no update from the governmental side. As you know in March the FDA came out with what we characterize as a pretty robust defensive science. So that's still the position. That seems to have broadly slowed the debate for now, at least. Nonetheless, we continue to move forward and are working all of our alternatives, and, our goal is to make it available to our customers to have an alternative in every case. Interestingly, we got asked this question, I think two calls ago, and in answering it, I failed to think about pet food, about our side. So I think we gave a pretty high number of our cans that still have BPA, but I forgot that 30% of our business is in the pet food, which is kind of a not relevant point here. So that number is probably more like 50% of everything we do today, because we are all the time taking BPA out of some packages but, again, our view is in the next couple of years, we will have a non-BPA solution to offer our customers on all of our packages.

Okay. Thanks, Tony.

Yep.

And we'll hear next from Mark Wilde from Deutsche Bank.

Yeah, Tony, just a couple of clean ups for you. I wondered just with the slowdown appearing to kind of move into some of the emerging markets whether you think this is going to open up some more opportunities for you on the M&A front over the next 12 to 18 months on markets you would like to enter.

Hmm. That's a good question. Let me start by saying that is how we think about turmoil. We tend to think turmoil creates opportunity so I think in honesty so far, we are not seeing this turmoil in the developing markets. I don't think we have gotten as far as you are thinking. If it does get to that level, yeah, we would view it as a possibility.

Okay. All right. And then just secondly, can you give us just an update on what you are seeing with tin plate prices right now? I know a lot of this is done annually, but just like to get a sense of where the market seems to be moving at the moment and whether you are able to take advantage of any short-term weakness you might see?

Yeah, sure. There's really not much difference from what we talked about at the end of last quarter. We are seeing price increases coming through in the US market in kind of mid-single digit range, a little bit less than that in Europe, largely because Europe had taken a couple of years of more significant inflation so it's keep of a kind of a balancing of the global market, if you will. There had been some noise and periodically continues to be some noise around mid-year price increases. As we sit here today, we haven't seen that and don't really see anything on the fundamental side that would warrant that, but periodically that does kind of flare up. As we sit here today, everything is pretty stable from our point of view.

Okay. That's very helpful. Thanks a lot and good luck in the third quarter.

And we'll hear next from Phil Gresh with JPMorgan.

Hey, good morning.

Good morning.

The comment you made about 1 to 2 million of price headwind was that just for your food or was that kind of overall for all of Europe, including closures?

That was actually meant as a food answer.

Could you tell me what the overall was, including closures?

Not really accurately, quite honestly. I would venture a guess there's another 1 million or so on the closures side but you can't print that exact number.

Got it. Okay. And then, just on the acquisition that you made, the Rexam acquisition. The last call you made a comment about, the ability to get back to your prior peak margins there, or something close to that would be dependent on either market penetration or some kind of acquisition cycle occurring in the business, and I'm wondering if should we see this as the first step of a multistep process in plastics or is it just kind of a one off opportunity that you saw out there? And how do you think that this may or may not impact your ability to improve your core margins?

First of all, I view it as one off. It does not have to do with a particular other effort on improving our plastics business. To be honest, we don't really think about when we buy things, we are not thinking about the margin as much, and by the time you get through all the purchase accounting. The margins will be different than they were before we bought it because you will get all the amortization on top of it. So when we talk margins, we are talking more about the fundamental business and making real improvements to the fundamental business.

Understood. So you don't see this as something that will help you, I guess, absorb, or maybe get rid of similar margin business and your core business and absorb additional capacity or anything like that?

No. This is a pretty different business, and so while it is part of plastics and it is a plastic package, it's pretty unique. It's a unique plant servicing, a unique set of customers and I don't think it has much impact on the remainder of the plastics business.

Understood. Okay. And then just in Eastern Europe, are you guys seeing capacity changes over there? Increases from anybody else? Or would you say your approach with the plants you are adding is more unique?

No, I would say there are other participants that are adding capacity as the market grows and the opportunities grow. So I don't think we're that unique. What is a little unique for us is that we aren't deep in the Western European can side and yet we have, we think, kind of a good worldwide position to bring to global customers as they go into those developing regions, but we're not the own ones only ones would want to supply growth into those regions.

Right. Right. Okay. And then just in terms of the other opportunities that might be available to you, on the food can side, is Asia a region you are considering at this point or is that not something that's on the table?

In food cans specifically?

Yes.

No, I would not put it very high on the list. I think what often happens is you will get a developing market that some markets are likely to become a retort food can type market and others are not. And in Asia, we would be more watching that and undecided at this point that will be a huge market opportunity.

Okay. All right. Thanks a lot.

And we'll take a follow-up question from George Staphos with Bank of America and Merrill Lynch.

Couple follow-up's and then one bigger picture. I think you were answering Alton's question about Rexam and whether if you grow that business internationally, obviously assuming the deal closes, whether it will require brick and mortar or whether you will be able to grow it within your existing operations. So if you could provide more clarity there, I that would be helpful.

I think I was trying to say that the assets that make the package are new assets. Whether we could use the footprint is a possibility.

Okay.

So yeah.

I would imagine so. I mean these lines are not food can lines.

Exactly.

So hopefully, okay. Secondly, back to the mix question, I totally understand the lack of an end, perhaps, not being sold with the can in a given quarter, with hopefully that pickup in a later quarter, but why would less volume, if that's the key issue and uncertainty lead to a trade down to smaller units versus larger units? I'm guessing presumably, whatever your larger customers are hoping to display on the shelf, is going to be driven by what we are all buying and finding favorable, at the store level and based on how we feel about our personal income, if anything larger size packages would tend to be more in favor than smaller sizes. Why are you seeing a mix shift to lower units in this case?

I wouldn't say trade down. I think it's just a question of the timing of when the cans get filled and certain businesses go to bigger cans. Certain businesses go to smaller cans. So fruit and vegetable, for example, tends to go to larger cans because there's a certain amount of that to the restaurant industry and institutional and so it just has more to do with the timing of all of that, George.

Okay. That makes sense. And I guess the last question I had for you, and not trying to overdo, one quarter that you thought was disappointing largely for issues that were probably out of your control Over the last number of years, you bought Vogel & Noot and you made a number of acquisitions, you expanded internationally, you are acquiring Rexam. You are doing Ontas. Do we get to a point where as investors we need to start worrying whether Silgan has too many irons in the fire? How do you feel about your ability to manage the business, control the business given the expansion that you have seen the last two or three years? Thanks, guys.

Great question. I would start by saying that is absolutely something we think about all the time. I think we have said before, the very first question we do in acquisition, we think about management. So right from the beginning we are on that point. I think we have said in the past there are capital projects that we don't do because we think our people have enough in their hands. So regularly we walk away from opportunities because of that same question. Now with that said, do I think we are anywhere near that? I don't think so.

I think the depth of our management is as good as it's been. I think we have got great managers over each of our businesses. I think as you know, the way we operate is we believe in fairly autonomous, independent individual management teams and so we really can leverage that in so many different ways. And then I look at I look at the Vogel & Noot team and I think we brought in a great team there, who frankly are doing an excellent job in the dealing with the adversity of the market. So frankly, as I look at the acquisition we have done so far, I think we have just gotten deeper on the management team and things we can leverage in the future.

I think it's a good question. I think everyone will form their own opinion on it. If you ask us here in the room, that's not what we think is happening. I think the packs come and go. And I don't want to under play it. We'll see how it all plays out. And Europe, I think you could have asked a different question which is we have done a couple of acquisitions in Europe and Europe looks a little rough right now. How do we feel about that? All I would say this is we think long term. On a long-term basis, we think that's an important market for the packages and the customers that we work in and we do think that development of the Eastern European market is going to continue. Even on my own question, we feel very good about the spot we are in.

I would say maybe not for you, growing often times is tougher for our companies to do than they anticipate, rather than, proving performance from existing operations. We will see how things play out for you. You would conclude though, nothing in this quarter was related to lack of execution or a lack of information coming up the chain of command, would that be fair?

Absolutely fair.

Quite the opposite.

Okay.

In fact, if you look at the Vogel & Noot business, despite everything that we talked about, it's basically flat with the same time a year ago. That's not how we view this quarter at all.

All right, thanks, guys.

Thanks, George.

And we'll take another question from Chris Manuel with Wells Fargo.

In the plastics business you had teriffic performance there in the first half and I know you've had some resident help there but just looking at the numbers have you done more in the first half this year than you did in either all of 2011 or 2010. So clearly off to a good start and I know a lot of that is execution changes. When you talk a little bit about customer pulling ahead and some movement from 2Q to 3Q can you give us a little more color there? And then maybe what should we expect the back half of the year? When we look at what the business did last year in Q' s 3 and 4, there was a lot more pull to the front half than the back half of the year. Is what you did second half last year maybe something we can anticipate second half this year? So maybe a little more color there number one.

I will start by saying, I sure hope not for the second half of the year, but I guess to go back to the beginning of your question, as customers pull inventory in advance, there was probably an operating income pull of about $1 million from Q3 into Q2. So we'll start there. Resin, again, we said was about a couple million dollars in the quarter. That's going to now go against us. So we are losing the profit pull through, and the tailwind of resin. So the next point, I would like to try to make is that, as we look at this business now, the core of the business has improved versus where we were last year. And so on a steady state basis, I think we are looking at this business right now at a $6 million or $7 million from an operating income per quarter standpoint and when you take out the noise of resin and customer pull forwards or buy ahead you will have to put the noise back on to that to get to a projection, but, we are feeling much better about the core of the business itself.

Okay. That's very helpful. My second question was around, a couple of the acquisitions you have done. And I recognize that this year, I'm going to borrow your term, is going to be kind of noisy as those things come on stream, given timing in purchase accounting and, step ups as you load, depreciation and things on to businesses. If we were to look at 2013, what type of multiple would you anticipate that these would have looked like or, give us a sense as to what you have added and then also kind of in relation to, what you paid? I'm guessing it will be quite different between the plastics piece and the food can piece, but could you give us some sort of sense as to sizes or how we should think about that?

Sure. First of all, I think we said and nothing has changed in this. Our view is a modest accretion as we get into next year, and that's primarily with the Rexam Thermoform business there. Our view is that it will be about growth going forward, again, there will be some accretion but not big. I think if you look at what our expectation is for next year, that business is probably going to be after taking a tax benefit in, it will probably be something like seven times next year's numbers, something like that. So a pretty full price for anything Silgan has acquired and the reason is the fit, we think the fit is there and the growth opportunity. You are right that the can side in Turkey is lower than that and so that one would be more accretive, except that its size is so small. But that should give you an idea that one has purchased more of what you would call a metal multiple.

That's helpful. And then just the last two little ones. When you think about the plant you acquired in Turkey is that of similar size to the plants that you are building today?

Yeah, it's probably a little bit bigger than the ones we are building today but not a lot. I mean, yeah, that's the right way to think about it. Again, as Bob said, that's true of much of the former Vogel & Noot business. They tend to be a little bit smaller plants, very regional focused and as Bob said, the advantage you get from that is sort of that entrepreneurial focus on the market. The disadvantage which is where the question came from, you don't get the same efficiencies of economies of scale. The trick for us, try to balance that and try to where we can bring our manufacturing capability to improve the cost side but to retain the regional market entrepreneurial focus that they have. And that's what we are quite focused on trying to accomplish.

Okay. And then the last question. That's very helpful, by the way. When we think about what CapEx would look like, going forward, obviously with a couple more acquisitions, but, less on the expansion stuff from a lot of these plants that you have been building. What would, that new $1.25 to $1.50 range look like with all of these new businesses and all of those elements taken into account on a go forward basis?

I will stay with the theme of the term here, we have seen some noise over the last couple of years just as we have stepped up where we have accelerated capital for tax purposes and now we have kind of decelerated it. But I don't know that there's anything fundamentally creating a step change in the capital needs of the combined business. So I think the $1.20 to $1.50 is reasonably okay. The one caveat I might put around that is if we saw quick growth around the Thermoforming business where we needed to make a geographic change, then maybe there's a little bit of capital that falls into that, but not significantly outside of that range.

Okay. That's helpful. Thank you, gentlemen.

Thanks.

And we'll hear again from Adam Josephson with KeyBanc.

Thanks again, everyone. Just one question. To the extent that consumer pending in the USremains weak, how much of an impact would that have on the high barrier food business? I'm just trying to better understand how stable that business is compared to your food can business.

That's an interesting question. It's not part of the growth I talked about. It's a higher price product that they sell to and that our customers sell. It's one that you would expect and I think experience shows that in a down economy, it probably pulls back some. So if the economy in the US gets worse, I would expect that would put a little bit of pressure on it. If the economy would ultimately gets better, I suspect that would give you a little bit of benefit. I think that answers your question, right?

Yeah, thanks, Tony.

Okay.

It appears there are no further questions at this time. Mr Allott, I would like to turn the conference back over to you for any additional remarks.

Thank you everyone for your time. We appreciate it. We look forward to talking to you about the third quarter in late October.

And this does conclude today's Silgan Holdings second quarter earnings call. Thank you for your participation.