Silgan Holdings Inc (SLGN) 2013 Q2 法說會逐字稿

Good day everyone. Thank you for joining Silgan Holdings Q2 earnings release conference call. Today's call is being recorded. At this time, I would like to turn the call over to Ms. Kim Ulmer, Vice President and Controller. Please go ahead.

Thank you.

Joining me from the company today, I 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 2012 and other filings with the SEC. Therefore, the actual results of operations or financial condition of the Company could differ materially from those expressed or implied in the forward-looking statements.

With that, I'll turn it over to Tony.

Thank you Kim.

Welcome everyone to our second-quarter 2013 earnings conference call. Our agenda for this morning is to focus on the financial performance for the second quarter and review our outlook for 2013. After our prepared remarks, Adam, Bob and myself will be pleased to answer any questions. As you saw in the press release, we delivered a strong second quarter with record adjusted earnings per share of $0.63, a nearly 15% increase over a previous record quarter, and consistent with our guidance.

We did continue to experience greater than expected volatility in certain international markets, such as Venezuela and the Middle East, and specifically were $0.02 per share below our expectations in Venezuela as we continue to have sourcing issues for raw materials as a result of government currency restrictions.

Our Metal Container business continued to benefit from stronger volumes, particularly in soup and pet food. Our Plastic Container business performed well as a benefit to the recently acquired plastic food operations overcame volume declines in our legacy business, as we continue to rebalance customers and market segments. Our Closure business was negatively impacted by the challenges in Venezuela as well as softness in the US single-serve beverage market.

Based on our year-to-date performance, we are revising our full-year estimate of adjusted earnings per share to a range of $3 to $3.15 per share, a reduction of $0.05 per share, which is equivalent to the year-to-date negative impact on the Venezuelan operation. This represents an 11% to 17% increase over a very strong 2012 performance.

With that I'll now turn it over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimate for 2013.

Thank you Tony. Good morning everyone.

As Tony highlighted, we delivered a very solid quarter. Generally, our businesses delivered results in-line with expectations. Food container volumes were strong and we continue to make operational improvements in our plastics operations. As Tony discussed, we did suffer head winds in certain international geographies as a result of the continued political instability, most notably in Venezuela, Turkey and Jordan.

During the quarter we also completed an IRS audit for periods through 2007, which resulted in a favorable net tax adjustment of $19.8 million. Excluding the tax adjustment, the effective rate for the quarter was in-line with expectations at 33.2%.

On a consolidated basis, net sales for the second quarter of 2013 were $880 million, an increase of $58.4 million or 7.1%, as increases in metal containers and the plastic business were slightly offset by declines in the Closure business. Net income for the second quarter was $59.9 million, or $0.93 per diluted share, compared to second quarter of 2012 net income of $10.6 million, or $0.15 per diluted share.

Results for 2013 included a favorable tax adjustment of $19.8 million and rationalization charges of $900,000, for a total adjustment of adjusted earnings per share of $0.30, while 2012 included rationalization charges of $200,000, costs attributable to announced acquisitions of $700,000, plant startup costs of $1.9 million, and a loss on early extinguishment of debt of $38.7 million for a total impact of $0.40 per diluted share.

As a result, we delivered adjusted income per diluted share of $0.63 in 2013, versus $0.55 in 2012. Interest in other debt expense decreased $39.3 million to $15.4 million for the quarter, primarily as a result of the second quarter 2012 loss on early extinguishment of debt of $38.7 million, attributable to the redemption of all the $250 million of the $725 million in senior notes that were due in 2016.

Capital expenditures for the second quarter of 2013 totaled $28 million compared with $33.2 million in the prior-year quarter. Year-to-date capital expenditures totaled $53 million, versus $59.4 million in the prior year. Capital spending for the full year is expected to be in the range of $125 million to $150 million. Additionally, we paid a quarterly dividend of $0.14 per share in June, with a total cash cost of $9 million and we repurchased shares during the quarter for a total purchase price of $14.3 million.

I will now provide some specifics regarding the financial performance of the three businesses. The Metal Container business recorded net sales of $531.2 million for the second quarter of '13, an increase of $51.5 million versus the prior-year quarter. This increase is primarily the result of improved unit volumes of approximately 10%, predominantly in soup and pet food in the US. Higher average selling prices as a result of the pass through of higher raw material costs, the benefits of the new plants in Eastern Europe and the inclusion of the acquired Turkish operation. Foreign currency also benefited the quarter by $1.3 million.

Income from operations in the Metal Container business was $45.7 million for the second quarter of '13 versus $40.1 million in the same period a year ago. The increase in operating income was primarily the result of increased unit volumes partially offset by the overhead costs of the new operations in Eastern Europe, which are currently underutilized and lower than expected volumes in the Middle East as a result of political instability.

Net sales in the Closure business decreased $1.7 million to $181.4 million for the quarter, primarily due to lower single-serve beverage volumes in the US, as volumes in the second quarter of 2012 benefited from the unseasonably warm weather during that period and significantly lowered sales in Venezuela. Foreign currency benefited the quarter by $1.4 million in this segment. Income from operations in the Closure business for the second quarter of 2013 decreased $1.2 million to $21.7 million, primarily as a result of difficulties in Venezuela and the decline in US unit volumes, partially offset by improved manufacturing efficiencies.

Net sales in the Plastic Container business increased 5.4% or $8.6 million to $167.4 million in the second quarter of '13, primarily as a result of the inclusion of net sales from the plastic food container operation acquired in August 2012 and a more favorable mix of products sold, partially offset by an expected decline in unit volumes in the legacy plastics business. This volume decline is attributable to higher volumes in the second quarter of 2012 as certain customers accelerated inventory purchases ahead of third quarter 2012 shut downs and our ongoing efforts to rebalance the portfolio of the Business.

Operating income increased $2.4 million to $11.5 million for the second quarter of 2013. This increase was primarily related to the inclusion of the recently acquired Plastic Food Container business, favorable operating performance, and a more favorable mix of products sold, partially offset by lower volumes in the legacy operations and the unfavorable impact from the lag pass through of increases in resin costs in the current year quarter.

Turning now to the outlook for 2013, based on our year-to-date performance including the impact in Venezuela, we're revising our estimate of adjusted net income per diluted share to a range of $3 to $3.15 per share, which excludes the impact of the tax adjustment, rationalization charges, plant startup costs, the loss on early extinguishment of debt, and the impact from the re-measurement of net assets in Venezuela.

We're also providing a third quarter 2013 estimate of adjusted earnings in the range of $1.25 to $1.35 per diluted share, excluding rationalization charges, as compared to a record $1.17 in the third quarter of 2012. As we have discussed in past years, given the magnitude of the third quarter and the potential impact of unforecasted movements in harvest dates, the earnings in the back half of the year can shift meaningfully between quarters.

While political volatility in various international regions and the tax settlement represent a headwind to cash flee, we continue to forecast free cash generation of approximately $250 million as we currently expect capital expenditures and working capital to mitigate these effects. On the other hand, we continue to seek capital deployment opportunities directed at yielding the best possible return for our shareholders.

As a consequence, we continue to view internal capital investments and acquisitions as the best use of our cash flow. In the absence of a meaningful opportunity, we'll make decisions regarding alternative uses to the end of 2013. That concludes our prepared remarks, so we can open it up for Q&A. I'll turn it back to Farah to provide directions for the Q&A session.

(Operator Instructions)

Chris Manuel with Wells Fargo.

Here to start, first, when you -- if we could start with the metal food business here in North America, what do you think -- you know it was pretty strong, but if I heard you correctly, up 10% volumes globally. First, if you could maybe parse that a little bit as to what kind of base business was in North America, and then what maybe acquired businesses or what some of the other pieces were in Europe to help us rectify that? And then two, what is driving this strong pet and soup volumes here in North America, and do you think it's sustainable?

Chris, Tony. First of all, the 10% is true aggregate. It's also true for the US. In fact, if you include all of the international operations, it's up more, but it's such a small component in total, it doesn't move the number much. So think of the US 10%, think of the global system 10% as well.

In terms of the drivers, I think, as we said -- we have been anticipating volume growth this year, not 10% on an aggregate, annual basis. It will certainly not be that much -- food cans do not grow at that kind of rate, but our expectation was for growth, and it -- on the year it's going to come from -- we think we're going to have a solid pack. I know we'll talk more about that.

That's less the story in this quarter. This story is more about the fact that the soup and pet markets look very strong, and we attribute that, on the soup side, to -- kind of the main players in the market getting to a very good focus on growing their core, marketing around the benefits of their food product to the end user, and really seeing some benefits from that.

I think you also have to mention, in the case of one of those customers, they are shutting down one of four fill locations. So, you have to wonder if there isn't some inventory build going through that. We don't know the answer to that, but I think it would be smart to assume some of that, and we have assumed a bit of that in our full-year numbers.

And pet has just continued to grow. As it happens, our customers are winning in their markets, and so nothing particularly unusual about that.

Okay. In particular, if I could just dig a little further into some of the (inaudible) and stuff, as I look through the quarterly can data, it actually suggests that maybe your mix is a bit different, but that the vegetable was up almost 5.5% or even more than what soup and some of the other categories were. In your release, and I think in some prepared comments, you cited some timing with respect to how things may come in over the season, but that would seem as though maybe we're already a bit ahead? Can you maybe comment a bit --

I would say a bit. I think it's really important to understand that the bulk of our pack business is a Q3, sometimes drifting into Q4 -- so yes, you're right. But if you look at the second quarter, the bulk of the move in units is in soup and pet. It's just not enough to move the second quarter all that much.

The broader point to your question is -- we are expecting a good pack. Some of the early pack crops, peas for example, have been mixed, but okay. It was definitely a slow start kind of across the board. As we all know, it was cool and wet early in the spring. That got a slow start going, but every indication we have right now is the weather, of course, has come on strong -- since then, growing seems to be pretty good. So our view at this point is still for a strong pack on the year.

Okay. Last question and then I'll move back into the queue -- is still in the metal food segment. As we look at some of the issues in the Middle East, can you help size that up for us? I think you're probably referring to your plant in Jordan potentially, but can you talk about what you're seeing there? Is there anything that impairs part of that business, or is this just a temporary issue or how do you view that?

Yes, by far the biggest point there is the Middle East, and again, I want to say -- most of this was in our expectations. It's not -- that's not particularly creeping up as a surprise on us, but by far, Jordan Valley is the most important on that. That plant, again, was situated right on the Syrian border. Its intention was to sell to Jordan, Syria and Lebanon, and with a civil war going on in Syria right now, we can't sell into Syria. You can't ship through Syria to get to Lebanon, and so that plant is pretty much sitting idle and waiting. As to how long term it is, I can't guess any better than anyone else on the call. Until we're allowed to sell into and ship through Syria, that's going to continue to be a problem for that location.

Okay. That's helpful. Thank you.

Ghansham Panjabi of Robert W. Baird.

As it relates to the lightweighting technology that one of your competitors is rolling out in Europe, and possibly in the US at some point, can you just share your thoughts with us on this, and is this a competitive threat, and how do you see this evolving over time in the US? Thanks.

Sure. Thanks, Ghansham. Basically as we understand it, there is one customer in Europe that has done -- perhaps is now in market with lightweight technology. We and others in the market have, for more than a decade, developed lightweight technology. There's nothing particularly unusual about that. It's even been commercial in some food cans historically. Essentially it's what the beverage can does in a way. The interest in the US historically has not been that great for a lot of mostly I think end-use issues. Historically, you kind of don't want a can to exhale when you open it up. That usually means that something has gone wrong with the can, so you would have to change consumer sentiment quite a bit.

So I would tell you there's nothing particularly new about it. We're not aware that there's a huge drive for a change in this market or even in the European market on it. We think -- our can vision 2020 project is looking at all kinds of ways to take costs out of the food can. We think there are a lot of other ways to get at costs on the can, which could include pressurized. I'm not saying that isn't one of the avenues, but there are a lot of avenues to get at down-gauging and the material in a food can. So, no, we don't see it as a meaningful competitive threat at all.

Okay. And then another question, if I could, on the new product momentum out of one of your big soup customers, it also looks like they're experimenting with new packaging, looks like you've maintained some of their relative share. Can you just talk about how that new packaging has affected the category, if any, and maybe talk to us about some of the other customers that might be looking at that? Thank you so much.

Sure. It is true that we have -- and we've talked about this before, many of our customers are looking at multiple ways to get to a younger consumer audience. And so I think the view is that pouches, plastic rigid packages -- which we, of course, sell through our plastic food container business -- all of them are being tested as ways to drive new end use, younger end use audiences. And so we think this is a good trend in that it's basically our customers trying to expand the interest of their product line.

Our view is that -- and this is our view, not necessarily our customer's view, but our view is that the food can is such a low-cost delivery package, and will always be such, compared to the alternative, that there is going to be -- bound to be a drive to -- once you get those consumers interested in your new products, we believe that you will ultimately want to bring them back to a food can because it's low-cost delivery, and our customers all have significant install base of filling before food cans. So we kind of view it as a positive trend that our customers are out looking for that new consumer, and we hope they get them, and we expect they'll bring them slowly back to cans.

Okay. Thanks so much, Tony.

Adam Josephson of KeyBanc.

Thanks. Good morning, everyone. Tony, question on the Rexam business -- how would you characterize volume in that business, and what are your expectations for the remainder of the year?

Sure, Adam, it's Adam. Actually, the volumes have been quite good. We've been very pleased with the business. They're essentially meeting the expectations that we had when we acquired the business almost a year ago now.

The one issue that the business is facing is -- we talked a little bit about it on the last call -- is in their military market segment with the sequestration -- really the orders have essentially dried up for that market. It's a very small part of what they do, but I would say outside of that, volumes are good, and volumes are right in line with the expectations that we had. We're very pleased with the business at this point.

Great, and just -- thanks, thanks, Adam. Just two others. One on M&A. Can you just -- I ask this every quarter, but can you compare and contrast your M&A opportunities in food cans and closures, and in plastics for that matter, and are certain geographies looking most appealing at the moment?

Adam, as you know, we don't talk a lot about the specifics of what we're looking at. What I can tell you -- and we talked about this on one of the last calls -- was that coming out of 2012, it felt like there was kind of a catch-your-breath moment around M&A activity, not just in packaging, but probably more broadly across the industrial space. I think as we've come through the middle part of the year, we certainly have felt that. There's been less activity in the news.

I think as we're moving toward the back part of the year, it's starting to feel like that tide is turning. Through all of that, we've done a pretty good job through our corporate development efforts to keep a pipeline of things that we would want to acquire, and so we're pretty happy with the pace that we're moving forward. That doesn't necessarily guarantee that we'll be successful for closing the acquisition, but rest assured we've been active on the front of trying to farm for activity there.

Thanks, Bob, and just one more along somewhat similar lines. Is your inclination to deploy capital into the [global] new business versus the Rexam business, has your view changed at all in light of what's happening in Syria, Lebanon, elsewhere?

Sure. Good question. I think the -- mostly the capital has been deployed in those regions. There's not a very relevant question for us on that. But sure, if we could go back, would we be building a plant right on the border of Syria? No, we wouldn't. But we do have an excellent plant there, and so we are certainly looking to see if there are ways to fill or keep that plant full until the conflict settles down.

But sure, we're always looking at the risk of where we spend capital and the return we expect for it. As we look at some of those regions, clearly the risk has gone up, and we need to be a little more cautious. If we look at kind of our base, Central European to Eastern European operation, it continues to perform very similarly to last year despite the economic challenges, so we feel a little bit better about that fact. I don't want to paint too big of a brush. It's not as if we would look at all of Europe and say -- there's no investment opportunity there. But sure, we're cautious about what the risks are against the returns.

Thanks a lot, Tony. Appreciate it.

Thanks.

Phil Gresh of JPMorgan.

Hey, good morning. First question just on Venezuela -- you noted that you lowered the full-year EPS by the amount of what you've seen in the first half. Just wondering if there is any assumption that some of those costs continue into the second half of the year, or if that would be a source of risk if that's going to continue?

Yes, Phil, this is Bob. We have continued to encounter difficulties because of governmental monetary policy of getting raw material in country there. You might remember we talked that there is no domestic steel supply in Venezuela, so it comes in through outside sources that require access to US dollar equivalents to acquire the raw material. That has plagued us both in Q1 and Q2. Right now it is starting to loosen, so it -- [feels] it's on its way into that facility now.

So the assumption that we have is that we won't continue on the loss pattern that we have in the front half. We ought to be able to get back to kind of an equivalent status of where we were last year, which, quite frankly, is down on a sequential quarter last year versus this year, but we shouldn't continue to see the continued decline.

I will point out, though, that the government in Venezuela can change course at any moment, and when they do that, we maintain a policy internally that we don't want to have any more US dollar investment in Venezuela than we need to. So if that policy does change again, then, yes, there's further risk. But at the moment, it feels like it's starting to open up.

Okay. That's helpful; I understand that there is a lot of moving pieces there. And then just on the unabsorbed costs that you've called out, on the metal side, could you quantify for us how much that is right now with the European operations in the quarter?

Yes, it's somewhere between $2.5 million and $3 million, which moves the -- which would move the margin roughly 60 basis points or so in that segment.

And that's not all -- that's not all unexpected. I mean, some of these plants are seasonal plants, so that will be true in the future for some of these plants in any case, right, that they basically are sitting for a third-quarter pack season.

Okay. So if I were to think about kind of the annualized impacts of those costs for this year, I mean, probably don't multiply that by four, but maybe $6 million to $8 million, something like that?

That sounds high.

Yes.

Okay.

That would imply that the plants don't have stronger -- meaningfully stronger sales in Q3. I think the -- you'd be right -- on a linear basis, you'd be right to think about Jordan Valley that way. What we saw in that case in this quarter probably will continue until something changes. But certainly in some of the other locations -- like Russia -- we do expect more sales volume to come in Q3, which will significantly lessen that.

Okay, and what was the volume performance in the other businesses? And for metal food, was it 10% just in pet food and soup, or 10% total?

10% total.

Okay. And the other businesses for the quarter?

Closures business was down, kind of high-single digits in total, and our plastics business, we were down mid-single digits in volume. Pounds were down a little bit more than that. As Bob had mentioned, we're continuing to work on the long-term project of rebalancing the portfolio, so that was basically in line with our expectations. And we're also cycling over the -- not only the inventory build, that Tony had mentioned last year, but also with the weather, we had extremely strong shipments of Ag/Chem and lawn care products in Q2 of last year that, with the weather in 2013, we just did not see that again this year.

Okay. On the M&A pipeline, to Adam's question, you talked about the tide turning there. Did the tide turn around valuation? Is that where you're seeing a turn, or just on properties available? How should we think about that?

Yes, I think it's got more to do with the level of activity that's coming to market. So you've got certainly more bankers active in the space bringing properties to market, and just in our own conversations with those that we continue to develop relationships with, there seems to be an interest in the market these days that wasn't there at the end of last year.

Okay. Okay. Helpful. Thanks. I'll turn it over.

Anthony Pettinari with Citi.

Good morning. Just following up on closures, I think you said that volumes were down in the high-single digits in the quarter, and I'm assuming that's all due to weather. And I'm just wondering, is that something that -- when we think about closures volumes, maybe for the remainder of the year, how are you thinking about that, and would you expect the weather impact is basically reversed at this point?

Okay. And I'll clarify the mid-single digit. That was in the US single-serve market that I was specific to on the mid-single digit, so when you look globally at our closures business, we're down kind of low-single digit to maybe mid-single digit. So as we get back to the US market and kind of what happened in the second quarter, again, we're going off of very difficult comps last year where the pre-season, hot fill season for sports drinks and nutraceutical products were very, very strong. So we were flat on the first quarter versus prior year. Second quarter we did see an inventory correction by one of our large customers, so I guess what we would refer to as the go-forward position is there was a one-time inventory correction. We don't necessarily see that coming back from a volume standpoint in Q3.

Yes, Anthony, the other thing that you've got impacting that segment, too, is that's where the Venezuela impact is hitting on a volume side, and they were down pretty significantly -- down some 30% in the quarter because of the lack of steel.

The net of all that would be more comparable volumes for the remainder of the year, but not necessarily recovering everything we saw thus far.

Okay. That's helpful. Maybe just one question on can vision 2020. I think last quarter you had talked about the spend for that program maybe being about $1 million a quarter, if I got that right. And then maybe there's some acceleration there in 2014. Is there anything that you can -- is there any update you can give us on spending for can vision and how that program is progressing?

I think we said more $1 million to $2 million would be kind of the expense on a quarterly basis. That will be -- and as you point out, that's two things. That's the marketing, which is sort of a set number in there, and then it's the project expense of development efforts, et cetera, which should build over time. So that's where it's going to grow in 2014 and forward. But for right now, those numbers are about right -- $1 million to $2 million a quarter.

Okay. That's helpful. I'll turn it over.

Scott Gaffner of Barclays.

Good morning. Can you give us an update on what you're seeing from your customers in Europe -- in particular, in France -- around BPA, and if you're hearing anything from your customers in North America regarding accelerating the push into BPA-free cans or BPANI cans?

Yep, sure. First of all, just drop back and say that on the BPA front in total, there's no particular new science out there. Most regulatory authorities continue to say that -- and reiterate that the current levels are safe. Nonetheless, as you point out, France has moved forward with a new requirement that by 2015, no longer can product be sold packaged with BPA. So as a result of that, we're seeing -- Europe had been very quiet for years leading up to that, and it was more of a US focus. Now, of course, Europe's coming around on that, and so we're hearing more. We are working with customers beginning the process of talking about alternatives, and so that's going to ramp up more as we go forward.

We have been working on solutions for many years now, doing thousands of test samples, et cetera, and so for most of our business, not all, but most of our business we believe there are replacements that can work. They may be more expensive. They may be harder to manufacture. They may reduce shelf life in some cases, but for much of the business, there are solutions that exist. And so those are -- and those were primarily worked on in the US, but we think they're quite transferable to Europe. So we feel like we're in a very good position -- vis-a-vis the market -- in offering BPA non-intent into Europe, although a lot of work will have to get done in the next couple of years.

In the US, it's still quieter right now. We still work with certain customers who are focused on it, but it does seem to be kind of a media-driven effort. When we hear something in the media, it gets hot again. I think most of our customers just don't want to incur the costs if they can help it, but nonetheless, we're pressing forward with all due course to have solutions, and be ready to make the change.

Okay. And you mentioned the cost -- just to clarify, if there was an incremental cost, are most of your contracts set up so that that cost would get passed on to your customers?

Yes, they do. Yes, which is good, but not perfect, because it still means that our package gets more expensive, so we don't -- yes, you don't pass those costs on lightly. We're going to fight every way we can to work that out of the system. But the quick answer to your question is -- we have mechanisms by which we would pass that through to our customers.

Okay. And moving over to plastic containers, I think you mentioned you've been in the middle of this portfolio rebalance, and in the quarter you actually mentioned the favorable mix. Can you just give us some more details on both of those again?

Sure, as we talked about, we've focused the business on growth target markets primarily in food and health care, and we've put a lot of resources towards those markets, and we're having some small wins now, nothing significant, but we're getting singles, if you'll use a baseball analogy. We're cycling over some business that was lower profitability that we've elected to either raise price or move away from, and again, that process is very lumpy as we go forward. This is a long-term process that we're working through, so unfortunately it doesn't happen perfectly that your new wins come in at the same time that you've got something that's kind of falling off as well. So it's a long process, but it's something we're working on, so as we add new business in our target markets, it will be at a better return rate than what we're seeing on some of the existing business.

So the current quarter, the better mix is mostly coincidental to what customers were pulling at that point, having less to do with the long-term item that Adam's referring to.

Okay. Thanks for the color.

Chip Dillon of Vertical Research Partners.

Hey, yes, good morning. When you look at the -- hi, there. When you look at the plastic packaging business, I don't believe a year ago the Rexam business had been folded in yet -- I think that happened in what, I think August -- and I was just wondering if you looked at the year-over-year change, I think you said that the volumes there were down, I believe mid-single digits. Is that excluding the impact of the acquisition or would that even be with the acquisition?

That's excluding the impact of the acquisition.

And how much would you say in revenue it added in the quarter?

The Rexam business was about $20 million of revenue in the quarter.

Okay. Got you. Got you. And then just to re -- and you may have addressed this, but I can't remember a quarter where you guys had food can volumes up close to 10% like you mentioned, and did you say whether you thought some of that was an acceleration of some of the season into the second quarter or not?

Well, we didn't quite say that. What I did say is that we -- you should not expect that kind of magnitude beat over the course of the full year. First of all, the second quarter is a lower volume quarter, so you can beat 10% in that quarter. You really can't do that in the third quarter unless something phenomenal is happening. So definitely that is not a run rate volume beat.

The only other thing I had said is that the possibility certainly exists that you had little bit of one soup customer doing some inventory building because they were shutting down a fill location, so there could be a little bit of inventory move, although we don't have any data to prove that point but it's possible.

So maybe something for the full year, like in the $3 million to $4 million range might be where it ends up?

Sure, and even -- I mean, I think probably $3 million feels more accurate to that than $4 million.

That's still quite -- quite good compared to recent years, for sure. And when you look at that, how much of that -- we focused a lot on the soup situation here in the States, and I know Europe isn't that big, but how would you sort of split that between -- let's say we agreed that $3 million-ish sounds good for the year. How would the US versus the non-US -- I mean, which would be higher or lower, kind of by order, and what order of magnitude would you feel good about?

Again, this will move around a little bit, but I would speculate for you that something like two-thirds of that would be growth in the US, and one-third would be growth in new locations in Europe.

Which means the European part is growing faster than the US part?

Absolutely. Because the European part's building new plants and into developing markets.

Okay. And then I guess the last question is -- I believe over the last few years you've started to let the -- it's still relatively low, of course, but I believe the payout ratio has started to creep up a bit. Is there sort of a level where you feel that's going to get to? I mean, on balance, obviously, let's leave acquisitions aside, but you guys have clearly depended more on buyback in terms of distributing cash versus the dividend, though that -- I guess that balance might be shifting a little bit. How should we think about your dividend policy, and do you see the payout ratio creeping up in the next few years?

Yes, Chip, I think what I would say is we focused -- or have historically focused anyway -- more on the yield around the dividend. And that was kind of -- it was designed to bring the income investor to the table. And the research that we had done kind of said -- 1% to 3% is kind of the range that would do that. So typically we increased -- or have increased -- the dividend annually based on profit improvement and free cash flow, kind of keeping it sort of toward the midpoint of that yield when it gets increased, and it sort of changes during the year based on what the stock performance has done.

I would say there's no real change in dividend policy from that perspective. I will put out there -- and have put out there in the past -- that if there's any significant change in tax policy around dividend, then we'd take a look. I'm not saying we would do something, but we certainly would do the prudent thing and think about what implications that had for our shareholders and that may change it. But steady-state tax probably stays in the normal view, and then any kind of special return to deploy capital in the absence of M&A gets evaluated on a one-off basis.

Got you. Thanks very much.

Al Kabili with Macquarie for our next question.

Thanks. Good morning. I just wanted to revisit metal food cans, and just given the 10% volume growth in the segment, understanding I guess there was $2.5 million to $3 million you called out on unabsorbed fixed costs, but the profit growth year on year still seems a bit lower than I would have expected given that volume growth. Was there anything else happening in the quarter that was a headwind that offset some of that volume growth?

Yes, Al, if you look at it, so I guess if you look at the margins in that business, we talked a little bit about the unabsorbed overhead impacting it, and that hurt margins by 50 or 60 basis points or so. That business also had an inventory reduction that drove some decline in the margin there. And because a lot of that growth comes in the pet food segment, which are smaller cans, I would attribute that to a less favorable mix, and that's maybe why you're not seeing some of the drop through that you would ordinarily think about when you think about that kind of volume improvement.

Okay. That helps. From a productivity perspective, Bob, how are you feeling this year versus prior years?

In terms of how the businesses are doing, we're feeling really good. I think we commented early on that we're seeing good improvement in the plastics business, which is a really good sign. The can business typically does a really focused job there and continues to do so. And the closures business kind of offset some volume decline very nicely in the quarter, specifically through some manufacturing efficiencies. So there's nothing about what we're seeing right now that gives us any pause around our ability to continue to do well there.

Okay. And then the last couple questions is -- I guess the resin headwind in the plastic containers business, how much was that in the quarter? The lag?

In the quarter versus prior year was about $1 million.

Okay. That helps. And then finally, is there any substrate change that your customers did to help drive some of that volume growth in the second quarter in pet or soup that you can think of? It was a pretty strong performance.

No, no, again, I think we have to be careful in that, the second quarter is not one of our biggest quarters, so not that much volume swings a lot in terms of percentage, so -- but specifically to answer your question, we are unaware of any kind of substitution back to the can. We just think it's doing well.

Okay. Thank you very much.

Alex Ovshey of Goldman Sachs.

Thank you. Good morning, guys. A couple of questions for you. First on the competitive landscape for food cans in North America -- we all know now that one of the smaller competitors is aggressively expanding their capacity. Do you have a sense of how much incremental food can capacity will be entering the market over the next couple of years, and what are the implications for your business in terms of potential leakage of customers and/or impact on pricing of any customer negotiations that are coming up?

Sure, good question. You're right that a player who has been in the market for some period of time has apparently been awarded some new business, has indicated that they will be building some new capacity. It's sort of impossible for us to know what that means to overall capacity in the market because the question is -- what happens to the replaced capacity? And so we really don't know the answer to that question.

I would remind you that the dominant majority of what we do is under long-term contracts, and so our business model has always been long-term contracts, a fairly transparent means by which we pass through inflation, et cetera, over time, and our focus is on driving advantage to our specific customers and allowing them to gain share in their markets. And so I really don't -- I don't see any near-term meaningful impact that comes from this. I think it's all about one specific customer and one situation.

Okay. That's helpful. I appreciate you commenting. And just one follow-up. I believe you have an important customer where you are renegotiating a contract at the end of 2013. Correct me if I'm wrong on that, but if that is the case, do you feel pretty comfortable that the terms of that negotiation process are going to go as you hope they will?

Yep, you are correct that one of our larger contracts is coming up at the end of the year. We are in kind of an ordinary negotiation process on that. At this point we feel we're aware of nothing that makes us concerned that that's not going to renew in kind of an ordinary-type fashion. So at this point we feel fine; obviously, nothing's done until it's done, but that's what we know and understand at this point.

Got you. And one last one from me. Can you just talk about how the integration of the Rexam plastics business has been progressing, and whether or not there have been any surprises in terms of the opportunities in that business on a go-forward basis as you've integrated that into the plastics segment?

Alex, it's Adam. The integration's gone incredibly well. It is now fully integrated into our Plastic Containers business, and honestly I'd say there really haven't been any surprises. We thought we were getting a very good business. We thought we were getting a very good management team, and that's all proved to be very true. Their operations have been very strong in 2013 from a performance standpoint.

I think as we look at the Silgan footprint around the world and the opportunities to expand their product offering throughout the world with Silgan footprint is something that's very exciting. It will take time, but we think there are great opportunities internationally as well as domestically for their product lines to continue to grow. So, I would say, literally everything has been just about as expected.

Excellent. Thanks, Adam.

And we'll now take a follow-up question from Chris Manuel.

Yes, and that's a good segue because that's what I wanted to ask you about, was the (inaudible) food business. As you sit today, if memory serves, when you brought that in, it was running at a reasonably high utilization rate, but I think your target growth rates there were sort of double digit,10%-ish. Where do you think you sit today on utilization, and at what point in time do you have to pull the trigger to potentially do some expansion, whether that's domestically or internationally or what have you?

That's a really good question, Chris, and one thing to remind you of is that this operations team is outstanding, so through productivity improvement programs we've gained incremental capacity in this business. So while our volumes may not be expanding as quickly as we wanted overseas, or with the military business that we talked about earlier, we're running at utilization rates that are very comfortable right now for the business. As we get additional wins and additional volumes, we will have to invest in further capacity. And, again, whether that means another facility or just lines, we'll see what the opportunities that are brought in house bring to us. But we're feeling really good about where we are from a capacity standpoint and from a utilization standpoint.

And just one point of clarification on that. Our view was that it would have very good growth prospects, but we were pretty clear that that was going to have a lot to do with international markets, that their position in the US is strong enough that that's more -- individual customers making packaging change decisions, and so we're hopeful there, but that will come as our customers make decisions. And the international will take a little bit more time so you would not have expected -- nor would we have expected -- to see that kind of growth yet, or a new plant being announced yet. It's going to have more to do with finding those international markets, working with them to kind of seed the market, get commercial, and then you would expect to hear about some expansion.

Over the last roughly 12 months, what have the organic growth rates been running at in that business?

Low. As Adam said, you had this military business that's on sequestration right now, so that pulls away a little bit. The rest has been pretty flattish, ups and downs, and that's about what we would have expected in the domestic market. And so I would say it's all on our expectation. It is going to take us finding new international opportunities, which we are working on busily, and do see some opportunities, but that will take time.

Okay. Another question -- as we look forward to 2014, your maintenance CapEx level is something in that $65 million-ish range. You've been spending a chunk above that, added some capacity in the new European plants, et cetera, but what -- typically you've been more in that, call it, $120 million to $150 million range. What would kind of make you be towards the higher end of that or lower end of that, or how would you think about early thoughts with respect to capital in 2014?

Good question. I would tell you that our capital thoughts are the same as they always have -- although there's a nuance here, which is that we really -- we hope to find more ways to spend capital, right? Because I think you've been around long enough, you know that we're pretty tough on the return criteria we put on capital. And so, so long as projects meet that, we see that as a great opportunity.

The change here a little bit is this can vision 2020 project, where we are looking at really big opportunities to make really big changes in the market and the package itself. So I personally am hopeful that CapEx is actually going to start to grow more as we begin to bring those projects out. How much that's in '14 versus '15, I don't really know the answer to that yet, but our hope is you'll hear more about bigger CapEx spending and specific projects that you'll begin to ask us when we're going to see returns on those projects.

Okay. That's helpful. That's all I had. Thanks.

Mark Wilde of Deutsche Bank.

I'm just curious, just to kind of go back to this lightweight can one more time. Is the stories that we've seen around the adoption by one player in Europe, and then I guess the eventual adoption by another in North America, has that created more customer inquiries about the technology?

Not really, no. I'd say more kind of our efforts on our can vision 2020 has created more open dialogue about lightweighting cans, of which pressurize is one way to do that. But, no, I would not say that, nor do I have any reason to know that this is -- that the US customer is in any near term looking at this. I've heard that rumor. I've heard the other side. I honestly -- I don't know the answer to that question. But no, is the answer to your question. That has not increased interest that we've seen.

All right. And Tony, on can vision 2020, can you just give us a couple or three examples of what types of things you might be able to do to really bring down the total cost of a food can?

Sure, I mean, we've done a bit of this, but lightweighting is clearly a big one, right? A lot of the cost is in the steel. So there are several means of lightweight, pressurizing would be one example. But there are others. Lightweighting is one.

There's a lot of costs in the stream between -- as the customer takes the package and moves downstream -- filling operations, et cetera -- we're looking at all of that. The kind of steel that gets used in the process and the coatings that go on it. All of that is in evaluation, and really it's -- we've started from kind of a clean piece of paper and saying -- why not do it this way? Forget about all the history of what we've been doing, but why not do it this way?

And again, we've surprised ourselves in all of the things that came up, some of which are old technology efforts that never finished. Some are brand new ideas. But it really -- it's all around the design of the can, the material going into the can, the way the can is handled before and after. In some ways even how the end user relates to the can. So it's pretty broad.

Okay. And do you have any idea of sort of a time when we on the outside might start to see some fruit from all of this effort?

I have some idea. I don't have as much idea as you would probably want. As I said to Chris's question, my expectation is we'll begin talking about capital in '14, so you'll -- and then as we do that, I'm sure you guys will hold our feet to the fire to talk specifically on what we're spending capital on. I think you'll begin to hear about capital in '14, even more so in '15. The project's called 2020 for a reason. I mean, it's meant to be a long-term effort at this.

So this will take many years to have a meaningful impact. But it already -- just the sheer fact of what we can talk to our customers about in opportunities has already changed their view of the cost position of the can in the future because they see that these are pretty real ideas, and they see the power of them. So it's already beginning to change the thought about package alternatives.

Okay. And then just back to the Rexam, you mentioned that sort of the core business in North America is fairly flat. And I would -- just a thought that given that plastic seems to be picking up some share in food packaging, and that you've clearly brought some new energy to the business, the business -- the core business might be showing a little more growth than what you suggested.

Yes and no. The fact of it is, if you talk about high-barrier plastic, the business is -- and you'll recall we talked before -- their market share in that very narrow definition is extremely strong. So it really is a question of who else is going to want a high-barrier package? So it has more to do with customers in terms of wanting a high-barrier solution in plastic, and that's just a gradual change. It doesn't come real quickly.

So we -- I think you're right. Broadly, we agree with you -- and I think I said before, as we talk about our customers trying to get to a younger generation -- I think plastic package is a means for them to do it, and we are hearing that out there as a thought. But it just -- it comes slowly.

Okay. And then finally just any thoughts on what you're seeing in terms of business trends here early in the third quarter?

Just everything is on expectation. I mean, we're -- it feels like what we've said, that again the pack looks pretty good so far. Could drift a little bit late. Closures sort of a continuation we saw so far, although I look outside and the weather's warmed up, but I would not say that we've necessarily seen the surge yet in the hot-fill closures. I'm not sure you would yet, right? Because it would take some time for that to affect the inventory levels. Everything is kind of on track with what we've said thus far.

Okay. Fair enough. Good luck in the third quarter and the balance of the year.

George Staphos of Bank of America Merrill Lynch.

Hi, everyone, good morning. Sorry to join the call a little bit late. It sounds like there's already been a fair amount of discussion on lightweighted can, and that's been in the news the last couple of months and can vision 2020. I just want to confirm -- you've always had this ability to do lightweighting with nitrogen pressure in your tool kit, and presumably within can vision 2020; is that right?

Absolutely, yep, and it's been commercial in other applications for food and food-like product before -- as you know, it's out there in beverage.

Forever.

Yes, is the answer to your question. It's definitely part of the tool kit.

Okay. In terms of some of the changes that you might make to the can that you're talking to customers about right now -- if you've talked about this already, Tony, I apologize for not remembering, if you could remind me -- are you willing to share in some of the investment that might be needed by your customers if they need to change the way they fill or handle their product in the newer version of cans over time? Or is that going to be something that is really going to be the customer's job?

We absolutely would share. We would look at that like anything else -- what's the cash in, what's the cash out? But we love doing that, and of course, our sales manufacture takeout model is exactly that. We love to invest with our customers on that, as long as we're getting our return.

Okay. Fair point. Fair point. Again, I apologize, maybe you've already talked about this already. In plastic bottles, you mentioned that volumes were down. One of the key metrics we're obviously looking to, to gauge the progress of the transformation of the business ultimately and its sustainability is some stability in volume at some point. Where do we stand in terms of getting to a more status quo kind of volume picture with obviously higher margin? And overall, Adam, are you pleased with the way the business has been turned around thus far?

Yes, I think when you look -- take a step back and look at the business operationally, we're performing very well, so we've stabilized the business. We've stabilized the operations, and as we've talked about on a couple of occasions, the rebalance of the portfolio is going to be a longer-term project, so that's not something that just happens overnight. And as we focus on our target markets going forward, those wins will be a little bit lumpy as they come in. We've started to see some wins now on the smaller scale side, and as business is falling off the back end, if you will, the lower profit business that we're kind of moving away from or trying to price up from does not necessarily match up with all the wins that we're expecting.

So I guess, George, to answer your question, it's a long-term project. I'm not sure when we're going to see the stability of volumes. I think the base operation is stable now, so it's a good platform to build off of, and I mean, I enjoy this question every quarter because at some point the answer is -- we're going to be there. It's just going to be into the future.

Okay. Two last ones, and I'll turn it over. If you didn't provide an update already, what's the latest on easy open, and in terms of your penetration, and what projects might be out there for you and your customers over the next year? And then -- I've asked this before of you -- one of your peer broadly speaking packaging companies has been discussing trialing with some retailers our cartridge-based filling systems as a way of promoting the can because it saves labor at the retail level. Have you seen much progress on this thus far, at least at the food can level? Thanks, guys. Good luck in the quarter.

Easy open, we have continued to see growth, although slow because the penetration levels are so high now, 65%-ish. We continue -- if customers in those remaining industries -- by the way, some portion of that are big institutional cans that, if they go, it will be some other technology than what we traditionally here think of as the easy open end.

You'd have a powerful weapon.

Right you are. So I think it's gone as good as we can expect. I think from here on in, it's probably going to be pretty small gains over time on it.

Okay.

I did, after your last call, do a little more work on this question of the cartridge. We are not getting a lot of pull on that. It has certainly been thrown into our overall thoughts on -- is it part of the can vision 2020? It would be a small part in that point, so it's in our consideration, but as for the question -- are we being pulled in any way? We're not. We just haven't seen that yet, that that's kind of registering that much at the retail level.

Okay. Thank you very much.

Thanks, George.

We'll take a follow-up question from Phil Gresh.

And we'll make this the last one, if that's okay.

Just one quick follow up to Chris's question on the CapEx. He was asking kind of within the $125 million to $150 million range, and you were referencing the can vision opportunities. I just wanted to follow up and I guess clarify as to, based on the traction that you've seen so far from can vision 2020, whether the type of capital investments you're thinking would still kind of be in that range, or whether it's potentially something that could kind of go above that range? I'm just trying to kind of triangulate what you've said so far about some of the operating investments and things like that, and what kind of magnitude we're thinking about?

I'm glad you asked the clarification. Again, we're thinking about a lot of things around the can. So absolutely it could significantly increase our capital expenditure in some cases, and so -- and we and you would be expecting returns for that, and so I view that as a good thing. But without doubt, it could significantly change that CapEx curve.

Okay. All right. Thanks a lot.

Thanks, Phil.

And that will conclude the question-and-answer session. I'll turn the conference back to Tony Allott for closing remarks.

Thank you, Sarah, and thank you, everyone, for your time. We appreciate it, and we look forward to talking to you about our third quarter in October.

Ladies and gentlemen, that will conclude today's conference. Again, we do thank you for your participation.