Silgan Holdings Inc (SLGN) 2014 Q2 法說會逐字稿

Thank you for joining Silgan Holdings' second-quarter 2014 earnings conference call. Today's call is being recorded. And at this time I would like to turn the call over to Kim Ulmer, Vice President and Controller of Silgan Holdings. 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 2013 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 earnings conference call. As usual, this morning I'll make a few brief comments, turn it over to Bob to give you a little bit more detail, and then Bob, Adam and I will be happy to take any questions that you may have.

As you will see in the press release this morning, we delivered a strong second quarter, with a record adjusted earnings per share of $0.73, representing a 14.1% increase over a previous record second quarter. Our metal container business was a bit ahead of expectations as the pack in Europe got off to a better start. In North America, volumes were as expected, and down over the prior-year quarter as a result of the very strong soup and pet volumes early in 2013.

Our closure business continued to perform well, as the integration of Portola remains on track. Our plastic container business continued the process of repositioning its customer portfolio, again resulting in a more favorable mix but lower volume, and also make further headway reducing operating cost.

Based on our year-to-date performance and our outlook for the remainder of the year, we're confirming our full-year estimate of adjusted earnings per share in the range of $3.10 to $3.30. This represents an increase of 13% to 20% over the record 2013 performance. With that, I'll turn it over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimate for the rest of 2014.

Thank you, Tony. Good morning, everybody. As Tony highlighted, we delivered a very solid quarter. We were above the high end of our estimates, as operating income in each of our businesses improved versus the prior year.

On a consolidated basis, net sales for the second quarter of 2014 were $917.3 million, an increase of $37.3 million or 4.2%, as increases in the closure business partially offset declines in the metal container business. Net income for the second quarter was $44 million or $0.69 per diluted share, compared to second quarter of 2013 net income of $59.5 million or $0.93 per diluted share, which did include a $19.8 million favorable tax adjustment, adding $0.31 to the prior-year quarter.

Results for 2014 included rationalization charges of $900,000 and a net loss in Venezuela of $2.9 million, for a total increase of adjusted earnings per share of $0.04. While results for 2013 included the favorable tax adjustment, rationalization charges of $900,000 and a net loss in Venezuela of $1.1 million, for a total reduction of adjusted earnings per share of $0.29. As a result, we delivered record adjusted income per diluted share of $0.73 in 2014 versus $0.64 in 2013.

Interest expense and other debt expense increased $3.6 million to $19 million for the quarter, primarily as a result of higher-average outstanding borrowings. Capital expenditures for the second quarter of 2014 totaled $33 million, compared with $28 million in the prior-year quarter. And year-to-date capital expenditures totaled $60 million versus $53 million in the prior year. Additionally, we paid a quarterly dividend of $0.15 per share in June, with a total cash cost of $9.7 million, and repurchased shares during the quarter for a total purchase price of $7.6 million.

As we move to the specifics of the individual businesses, the metal container business recorded net sales of $518.7 million for the second quarter, a decrease of $12.5 million versus the prior-year quarter. This decrease is primarily a result of lower unit volumes and the financial impact of customer contract renewals and extensions, partially offset by favorable foreign currency of $3.9 million, and the pass-through of higher raw material and other manufacturing costs.

Volumes in the US were lower year over year as a result of the difficult comparison to the prior-year quarter for soup and pet food, and a later start to the Midwest vegetable pack. European volumes benefited from stronger early-season packs for peas and peaches, as well as incremental volume in the new plants.

Income from operations in the metal container business was $50.9 million for the second quarter of 2014 versus $45.7 million in the same period a year ago. The increase in operating income was primarily due to a lower depreciation expense and manufacturing cost, the benefits from a higher inventory build in the quarter versus the prior year, and improvements in Europe. These gains were partially offset by lower unit volumes in the US and the impact from customer contract renewals.

Net sales in the closures business increased $50.8 million to $232.2 million for the quarter, primarily due to an increase in unit volumes, largely due to the inclusion of Portola and the favorable impact of foreign currency of $4.6 million. These gains were partially offset by lower sales in Venezuela. Income from operations in the closure business for the second quarter of 2014 increased $3.5 million to $25.2 million, primarily as a result of the inclusion of Portola and lower manufacturing costs, partially offset by the negative impact from the operating ongoing difficulties in Venezuela and higher rationalization charges.

Net sales in the plastic container business were $166.4 million for the second quarter, essentially unchanged versus the prior-year quarter, as the volume decrease and unfavorable foreign currency of $2 million were largely offset by a more favorable mix of products sold, and the pass-through of higher raw material costs. Operating income increased $1.5 million to $13 million for the second quarter of 2014. This increase was primarily related to lower depreciation expense and manufacturing costs, and a more favorable mix of products sold, partly offset by volume declines.

Turning now to our outlook for 2014, based on our year-to-date performance and the outlook for the remainder of the year, we are confirming our estimate of adjusted net income per diluted share in the range of $3.10 to $3.30 per share, which excludes the impact from certain adjustments outlined in Table B of our press release. We are also providing a third-quarter 2014 estimate of adjusted earnings in the range of $1.25 to $1.35 per diluted share, which also excludes the impact from certain adjustments outlined in Table B of our press release.

Year over year, the third quarter is expected to benefit from the inclusion of the Portola acquisition, slightly higher unit volumes in the metal container business, and lower depreciation and pension expense. Offsetting some of these gains are the financial impact of customer contract renewals, the impact of the earlier-than-expected pack in Europe -- which benefited the second quarter -- and higher corporate expenses.

As we have discussed in the past years, given the magnitude of the third quarter and the potential impact of unforecasted movements in harvest states, the earnings in the back half of the year can also shift meaningfully between quarters. And I'll note that we already experienced some shift forward into the second quarter as Europe got off to an earlier pack season.

We continue to forecast free cash generation to be approximately $200 million, as we continue to invest in areas that will benefit the Company over the longer term, and we continue to manage our working capital to an efficient and sustainable level. In addition, we continue to see 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.

That concludes our prepared comments, so we can now turn it over for questions and answers. And I'll ask Yolanda to kindly provide directions for the Q&A session.

Certainly; thank you.

(Operator Instructions)

Ghansham Panjabi, Robert W Baird.

Hey, guys, good morning.

Good morning, Ghansham.

On just the pricing commentary as relates to metal food on the renewals, I know you've been talking about that the last couple quarters. Does that phase out? Does that comp out, if you will, by the end of the fourth quarter? Or is there more to look forward to in 2015? How should we model that?

Yes, it basically -- the number we've been talking about phases out. The bulk of that got done the tail-end of last year into the beginning part of this year. That doesn't mean that there's not always contract renewals coming up, et cetera. But the big bulk that's coming through happens this year. Interestingly, since you're on that point, it's worth noting that because of the seasonality of our business, you get quite a bit more of it impacting the third quarter. Just, it's not a straight-line number across the quarters.

Okay, that make sense, Tony. And then, just given the stability you seem to be seeing in Europe on the metal food cans side, obviously Q2 was benefited to some extent from the pull-forward. But just generally, what are your thoughts on the region as relates to your metal food can business and for the consolidation there?

I think our thoughts are similar to what you heard last quarter, which is that we -- it seems like there is some improvement in the tone of the market, the economic condition, et cetera. We're definitely not saying all's clear and we are out of the woods. As you'll recall, we're in some pretty challenging areas in Eastern Europe -- Ukraine, Russia, Jordan. So we're watching the geopolitical conditions; we're watching the economic conditions pretty closely.

So I think the big storyline here is, things feel a little bit better. And then the agricultural pack just got off to an early start. It's been a very nice growing season, at least in Southern and Eastern Europe; I can't speak as much to Northern. And so the big point here is just, we're off to a good start in that regard.

Okay, I'll turn it over. Thanks so much.

Okay. Thanks, Ghansham.

Chris Manuel, Wells Fargo.

Good morning, gentlemen.

Hi, Chris.

Congratulations on a strong quarter here. I just wondered if you could go into a little bit of the -- specifically what you saw on volumes by region in metal, or some of the different products if you don't mind, for the quarter.

Sure. I'll will start with Europe. Obviously with the four plants we've turned start-up, we've been climbing over trying to get that up and running, so the volumes there have started to improve as we've gotten commercialized, and they are largely pack-oriented, though not entirely. So the early start there certainly helped those facilities.

On an overall basis, volumes in Europe are up nicely. They're up in the teens on a year-over-year basis. And recall, the other part of that was that peaches were bad last year, and we had a bit of an improvement in the quarter, as peach pack started early in June as well. So between the new facilities and some improvement in peaches in Greece were the big movers.

But I would say more broadly, even in the broad European market, we've seen what I'll call stability; I won't necessarily say broad improvement across it, but some stability. So early days, but feeling pretty good about how the volumes in that business performed.

And then just to keep going, and then therefore the US is down, a little bit more mid-single-digit. So that the blend is down 4% for the combined can business.

And then if you to jump over to closures. On a world-wide basis, when you include the Portola acquisition, we're up obviously substantially in unit volume. But the organic business, both in the US and in Europe, are up a couple percent. The rest of the world for the organic business is really defined by the performance in Venezuela. And while it's adjusted out for EPS, it does show up in our operating income line, and the volumes are impacting that.

So overall, our global closures business, from an organic basis when you take Venezuela out, was up, which is a good thing. And then our plastics business, as you saw in the press release, was down 1% from a pounds basis, as we continue to work on our program of repositioning our customer portfolio.

Okay, that's helpful. And then as a follow-up, I wanted to ask a little bit about the plastics business. It is showing some improvement, and I think obviously at times it's lumpy as a new business. You've talked about that a good bit as it comes in. Where are you at (technical difficulty), if you can share with us on the lumpy nature of that business? Do you have some new wins that will be rolling through the system in the coming few quarters? Or how has that process been going?

Yes, I think that's the right way to think about it. It's in the coming few quarters -- we've had some success in the marketplace with our focused areas of target markets and types of products that we're looking to sell. I think that the team has done an excellent job of repositioning that business. It is going to be lumpy, as we've talked about.

I'll tell you, I personally believe that we continue to work on the right things. We've got the right strategy. We are doing what we need to do to continue to improve that business. And again, it all started with a really strong focus on operations and getting our house in order before we went to market. And that includes repositioning some of the customer portfolio.

So it is -- we're well into the journey now. We are seeing the improvement that we wanted to see. I'd say essentially we're on track with where we wanted to be at this point, and we do expect further growth. But that's going to have to come in the future as growth and new sales continue to flow into that business. And we're just starting to see that happening as we speak.

That's helpful. Is there a way to -- just, last question along this line -- is there a way to delineate between how -- say, high barrier food or legacy plastics or some of the different pieces within there were doing, to get a sense of which of the pieces that aren't performing well and which are still coming along?

Sure. As we talked about, our plastic food container business, which is previously the high barrier food business, that's been incredibly consistent since the acquisition. So there hasn't been a lot of up or down to that business. So what I would tell you is, I think the improvement that you're seeing is really in the legacy plastic bottle business.

Okay, that's helpful. Thank you. Good luck.

Thanks.

Adam Josephson, KeyBanc.

Thanks. Morning, everyone.

Good morning, Adam.

Bob, Tony, just an update on the crops in the Midwest and California, if you don't mind. Just want to know what's embedded in your guidance along those lines. My understanding is that they both -- both the Midwest and California look fine for this year. But any thoughts you could provide would be great.

Sure. The big picture here is that things look okay so far. Certainly, the early packs are coming in fine -- some down a little bit on the pea side. Fruit looked okay; you'll read lots about different varietals had different yields. But the net of that all seemed to be more or less okay, thus far.

The Midwest is running late, which is part of what's reflected in our guidance. We think some of Q3 is logically going to shift into Q4. That happens all the time. There's a lot of focus around the third quarter versus the fourth quarter, and every year we say: it is really about the back half. And so we do think some will shift into the fourth quarter from Midwest. But right now that looks like it's okay.

There's always a little heightened risk around the harvest time. In the case of the Midwest, you worry about frost. So it heightens the risk a little bit, but we won't know anything about that until the end of the quarter and into the fourth quarter.

West Coast looks pretty good right now. There's been lots about the drought; I know we've talked about on this call. But right now it appears that they're getting water where they need to get water, and thus far, the tomatoes look pretty good.

Great, thanks.

Adam, I would just add to that that keep in mind that the tomatoes looking good really is more of a fourth-quarter event, relative to the prior year. Because remember last year, the pack ended kind of abruptly, which really hurt Q4 more than it did Q3. So the improvement in tomatoes is going to be more fourth-quarter loaded as well.

Got it. Thanks for that, Bob. Just on pet food and soup, has pet food been continuing to exceed your expectations? And on the other side, is soup running lower than your expectations. Obviously, Campbell's had some challenges of late. So an update on pet food and soup would be helpful.

Yes and no. Pet food continues to be doing very well. We talked at the last call that obviously we think that pet food in a can is the best delivery of the product themself. And so that seems to be the case, where share continues to be won by our customers, with that package.

So it's been good for a long period of time, and whether it exceeds expectations is hard -- we are starting to expect that. But it never -- and we talked about it -- it's never a straight line. So you'll have a year that just breaks out, and then you'll have a year that gives a little of that back. But on balance, over a long period, that seems to be a good growing product line.

Soup has really been just about at our expectation. You will recall a year ago -- and we're cycling against an incredibly strong volume on soup. And we were the ones saying at that time: hey, guys, don't count on this; this is going to come back.

So to us, it never seemed sustainable. And that's exactly what happened, particularly in Q4, maybe even a little more than we thought in one quarter correction. So now you are hearing some discussion about maybe slightly lower growth rate expectations. But that was always our view of it, is soup is going to be, in our mind, a relatively low-growth category.

Your ready-to-serve is probably going to grow a little more. Your condensed is probably going to be a little bit less. Our hope is that our customers are successful in trying to find younger consumers and getting them back into soup, and we believe that will ultimately, by necessity, be steered back towards the can as the package on that, because that's where the profit sits. So all of it seems to be on expectation for us around that.

Thanks. Bob, on M&A, we've heard from some other companies that multiples in some cases are rather high at the moment -- not surprisingly, given what's been happening with the market. But any thoughts you have about the M&A environment at this point, and the multiples that people are expecting?

Yes, look, there's really not much of a change in terms of the way we think about the M&A market. I'll just remind you that, for us, it's less about the multiple and it's more about what the cash-on-cash returns in the deal have been. But I think there's no question that multiples are improving. You could just look at the public comps and see that as well. Rest assured that is the benchmark that sellers are using right when they try to bring properties to market.

But I think offsetting that a little bit is the fact that it seems now we certainly continue to be in a low-interest rate environment, and where you can get long-term debt at relatively attractive rates, and certainly at historically low rates. That offsets a little bit of it.

So there's nothing about it that necessarily is concerning; there's nothing about it that guarantees a transaction gets done either. But we continue to plod along and look at every opportunity that presents itself, and try and continue to be disciplined in the approach, and find ways to create value for the shareholder.

Thanks a lot, Bob, really appreciate it.

George Staphos, Bank of America Merrill Lynch.

Hi, good morning. It's actually Alex Long sitting in for George.

Good morning, Alex.

Just first question, if you can talk about what specific benefits you guys are achieving from Portola. And then also, when do you think returns exceed the cost of capital? If you could put some timing or parameters around that, that would be helpful.

Sure, Alex. As we think about the Portola acquisition and what we've been able to achieve: A, we're very pleased with how the integration has gone. Our closures teams are working fantastically well together. And just some of the real fundamental aspects of that acquisition were taking the technical expertise and commercial acumen that Silgan brings to the table, combining that with Portola's operational focus and capabilities, and really getting the best of both worlds.

That's something that we've been able to do very successfully in the time that we've owned the Portola business. And we've also expanded that back out into our white cap closures business. So that's been a very beneficial situation for not only us as a Company, but for our customers as well.

We were able to rationalize one of our Gary closure facilities and move those closures onto more efficient assets in the Portola network, or other facilities within our network. And we've also been able to look at the expanded geographic footprint that we have now in primarily North America for our closures business. And really begin making closures closer to where our customers are. That's been an important aspect of the acquisition as well. So all in all, those things are adding up to tangible benefits that we expected when we made the acquisition, but it's going very well.

On the return question, we're already exceeding our cost to capital. I think the conversation we had before is, because we have such a high overall return on assets, that sometimes it brings down -- an acquisition can bring down your overall Company return. So it's a different question than saying: when will it get the Company average?

And that takes time. First of all, that depends on what metric you're looking at. If your looking at a metric that's based on a net asset, which is how we think about it, that takes time. Because over time, you depreciate that asset down and you hopefully hold your returns up, or your profit up; and your return therefore is enhanced. But we're already above our cost of capital. We're very satisfied with that acquisition.

Thanks for that. And just as a second question, following up on the earlier question on European food, has pricing and margin trend in European food improved relative to 2013 levels? Or would you say headwinds are still about the same? I know you mentioned things were improving a bit. But if you could drill into that a little more, that would be helpful.

Yes, that's not really been about price. That's just more been about volume returns, et cetera. So there's no meaningful shift in price realization in Europe.

Okay. And then just lastly and I'll turn it over, if you could just provide an update on Venezuela. Has there been any improvement in the situation there? Or is it still pretty status quo?

No, it remains pretty challenging there. I think as we've talked about in the past, the underlying issue is the fact that it can't get raw material in-country. That continues to be a very difficult situation. There is a little bit of metal that's there that will carry a little bit into the third quarter. But beyond that, it's hard to envision how it gets raw materials. So not much has changed there, and we're just managing day to day.

Thanks very much.

Al Kabili, Macquarie.

Hi, thanks. Just question on the upside to 2Q that you saw versus your expectations. Would you say that's all driven by a little bit of pull-forward in the pack? Or were there some other items that are trending a little bit above how you were seeing things?

Yes, I put it to two things. One is definitely pull-forward, and strong performance in Europe. So it's part pull-forward, part good job on the newer plants, and that being the majority of it. The rest is just across the board. Operations were very good in all of the businesses.

Okay. And then that leads to the second question. Since you've established the initial guidance for the full year, it seems as if Europe's doing a little better. The weather's been conducive to a good pack there. So it would seem that you would be tracking a little bit better, given those factors, relative to maybe how you were thinking things.

The fact that you're not raising guidance, is that just some conservatism as far as, we don't know how the pack is going to turn out in the US, with the later pack, and so there is some cushion there? Or are there other things that are driving that?

I think first of all, to be clear, we had a record year last year, and we're talking about a 13% to 20% improvement on that number. So we feel like we came out with a pretty meaningful year. Yes, there were some depreciation benefits in there, et cetera. But they're also was the fact that we had gone out and done a lot of contract work, so there were pluses and minuses that still led us to a very strong outlook for the year.

But to your specific question, I would say really nothing has changed about our outlook. We're pleased with Europe so far, but we're not blowing an all-clear whistle on that at all. The bulk of that does seem to be about the agricultural season. And chances are, you don't pack more, you just pack it sooner. And so a fair amount of that just looks to be a pull-forward for us.

In the US, we don't feel much different about the pack. As we said, it looks pretty good right now. It's drifting in the Midwest into the fourth quarter, it would appear, or later. Heightened the risk just a little bit, but we've not factored that in here in a monetary sense either. We're still holding our position. So I would just say really nothing has happened yet that has dramatically changed our view of the year, which was a very strong year over a very strong prior-year.

Okay, that's really helpful. I appreciate that, Tony. And then just the last question I had is following up on Portola. It seems as if it's tracking at least to the high end of your $0.05 to $0.10 EPS accretion estimate this year. And if someone can remind us how we should be thinking about the opportunity for additional synergies next year, what's the update there, and if there's any upside to those original synergies that you had identified there?

Yes, keep in mind we came into the year saying we thought it would deliver somewhere between $0.05 and $0.10 accretion for the year. And that our view of synergies was somewhere up to $10 million over the next 18 months. I think what you're seeing is, we're probably getting to the synergy numbers a little faster than what we were expecting. So yes, we are seeing that benefit occur to us or accrue to us in the year. So yes, given what we've seen so far, we're gaining confidence that we do land toward the high end of that this year.

As to what that means incrementally, I wouldn't put a lot of stock there. I think there's probably some marginal opportunities for us as we continue to integrate the business. But I think it's just an issue of we're getting to it faster. And we'll have to see how that all shapes up before we make a call on what any upside is around Portola going forward.

Okay.

But rest assured, feeling really good about having the business, and really good about the synergy plan that we had coming in, and the execution that the team is putting forth against it.

Okay. That's good to hear. Thanks, Bob, and good luck the rest of the year.

Great. Thanks, Al.

(Operator Instructions)

Debbie Jones, Deutsche Bank.

Hi, good morning.

Good morning, Debbie.

I know you touched on this earlier, Ukraine-Russia situation. But I was wondering if you could just talk about from a base case and worst-case scenario. What is the risk to volume and revenue that we could see from this?

Those plants are relatively small against the broader portfolio. You're probably thinking the investment is somewhere in the neighborhood of $50 million of dollars invested across, and a like kind of revenue number in the aggregate. Some of those plants are pack customers, or pack plants. So we're seeing some of that revenue start to stream in Q2 and again in Q3.

So that's the magnitude of the entirety of the new plants. They do sit in pretty volatile places right now. I think we talked about this last quarter, that the borders are open and the plants are operating, so everything's going well for us right now. But as Tony said, we're not signaling that all is clear in that region. Obviously we all know that the political front can change quickly there.

So I would say we're cautiously optimistic about what's going on there right now. The borders are open; we're shipping; the plants are doing well -- operationally, they're fine. So the risk probably sits more against what happens with politics and Civil War more than anything.

Okay. My second question is, are you able to parse out the volume improvements and the legacy closures versus Portola? And then just how you would characterize the health of demands for that market.

Sure. If you look at the legacy business again in closures for the US business, we're up a couple percent. So that business and that demand profile looks to be pretty consistent with what we came into the year thinking.

We're right in the middle of our hot-[fill] season, which is the biggest season for that business as well. Things are progressing pretty well in the legacy business. I would say roughly the same thing about Europe as well. And that's where the overlaps were between Portola and the existing closures businesses.

Okay. All right, thank you.

Thanks.

Scott Gaffner, Barclays.

Good morning. Just wanted to follow-up on the M&A question from earlier. You talked a little bit about the multiples. But just more curious about, first of all, what the pipeline looks like, given the fact that you will generate most of your free cash flow here in the second half, what the outlook is for putting that to work. And then I know you said internal investments and acquisitions was number one. But at what point do we go back to the issue in 2013 where you did an acceleration -- repurchase, I think, in the first quarter of that year?

Yes, sure. Look, there's plenty of opportunities for us to look at. There's plenty of things rumored to be coming to market. I think as we've talked about before, there's generally no packaging asset that's going to trade that we don't at least become aware of and take a look under the hood. Now, none of that means that we will necessarily have success in getting a transaction done. But certainly, we continue to put all of our efforts to the corporate development area.

I think we've said before that what the driving force behind any other decision around deploying capital elsewhere is a leverage range, combined with what the longer view outlook around M&A is. And the leverage range that we've said pretty publicly is 2.5 to 3.5 times. We would expect that we'll end somewhere in that range as we exit 2014.

So there's no sense of urgency necessarily sitting there for us to do anything other than be disciplined and look for opportunities to deploy capital that's going to help us build out the overall platform of the business. That's been our strategy for a long time and nothing's really changed there.

Okay. And when I look at the metal containers business, some of the commentary in the press release, you talked about a higher inventory build year over year. And yet the commentaries that some of the vegetable pack looks like it's going to get shifted, especially in the Midwest, from 3Q into 4Q. One, is the higher inventory build a sign that you're more confident in the vegetable pack this year? And then, two, can you just parse that with the shift in the Midwest?

No, it's really more just the mechanics of our business. This time of year we just produce all we can, because we don't have the capacity for our peak. So we're just running all the time, and it's really just a question of sales volume versus the build. So the interesting thing here is, it would have been even better for us if we had sold it. So even though we carve out the benefit of the inventory build, the fact is, compared to prior-year, where we sold it, it's a negative, not a positive. So that's the simple answer to your question, if it's simple.

Okay, that make sense. Keep building them. Hopefully, they'll keep buying.

That's right, exactly.

Just on resin and the impact in the second quarter, what was the impact on the plastics businesses in the second quarter? I think you had some carryover from higher resin in the first quarter. And then, how does that look like it's trending as we move into the third quarter?

Sure. And if you look at the second quarter, a couple things. One, for the plastic bottle business, our primary resins were up about 14% in absolute price year on year. So there was a significant increase in the absolute price of resin. As we worked through the quarter, the negative lag did occur again. And what I'd tell you is, it was a less than $1 million within the quarter for our plastic bottle business. It's obviously varied a bit by resin type, and so I'll now talk specifically about closures as well.

Closures resin was up about 9% year on year. And again, creating a bit of a lag pass-through of about a negative -- right around $1 million, a little less than $1 million. So going forward, closures resin -- I'll start there -- should be a slight positive, the way the forecasts roll out right now for Q3. So probably something comparable to what we have for Q2, just reversing itself out.

For our plastic bottle business, it's a little more complicated because of some of the supply chain disruptions that have taken place over the course of the last, say, 30 days. As we sit here today, we're not expecting a whole lot of change in resin pricing in our plastics business for Q3. So there is a small benefit that's in our numbers today. But we'll continue to monitor those markets very closely and watch and see what happens over the course of next 30, 60 days.

Great. Good luck in the quarter.

Thanks.

Mark Wilde, Bank of Montreal.

Good morning.

Hi, Mark.

Adam, just to go back to the volumes in Europe, I think I heard you say you were up kind of mid-teens. I wonder if it's possible for you to give us just some ballpark of how much of that was just the seasonal impacts coming a little bit early this year, and how much of that is just how much your underlying volume is growing? Is that possible to do?

Yes, this is Bob. I think most of it is the fact that you've got the seasonal gains coming in the quarter, and the new plant -- remember, the new plants that we are bringing online are seasonal plants as well. So the bulk of it is sitting right there. A little bit of peaches, which is not in the new plants. And then just having the slightly better performance across the broader market in those new plant geographies. So I would put it largely to the new plants.

Okay. And, Bob, do you have any sense of what your operating rate is across that European business right now?

Well, the problem is that it's all different specs for different customers, et cetera. But there is certainly some element of capacity there. But again, it's going to be very specialized for a very tight geographic region and a very specific can.

Okay, fair enough. Just one follow-on. You had a really nice margin quarter in plastics, one of the better ones we've seen in quite a while. I just wondered if you could give us a little better sense of when you think we could start to see some volume gains in that business? And what the upside might be in terms of margin potential in plastics?

Mark, it's Adam. And I think it's a great question. So we have seen the EBITDA margins in that business getting closer to what our expectations are, and probably closer to an industry norm. We're right around 13% in the quarter. So there's still work to do. That 13% -- the improvement that has gotten us to 13% really has been a really strong focus on the operations, a really strong focus on repositioning the customer portfolio that we've been talking so much about.

And now to your point, really the next step -- and it will take some time -- is to get the right kind of growth to put on the top line of that business, and have that drop through at an appropriate EBITDA margin level. So I think your question is dead-on. We think we're getting back to close to the industry norm, and think that we'll continue to enhance that with improvements to the business and the customer portfolio going forward.

But at the risk of being overly repetitive, because you're going to be ramping up new business and making all the investments around that in cases of growth, you're winding out some customers, et cetera, it is going to be lumpy. I hate to keep using the word. So everything Adam says is right, but for us just to say: let's just lock in this margin -- and assume it's here and we go forward and then we get growth on top of that -- it just won't happen that way.

Yes. And this a business you could see getting to a 18%, 19%, 20% margin? Or is that too aggressive?

I think that's probably too aggressive. Again, as we grow the top line of this business, we will be investing in production capacity, et cetera. And inherently, those margins are going to be just a little bit tighter than just doing existing equipment that would push it to those kind of margin levels.

And there are going to be attractive investment opportunities below that number.

Yes, okay, all right. Sounds good. Good luck in the third quarter and beyond.

Thanks.

Chip Dillon, Vertical Research.

Yes, and good morning.

Good morning, Chip.

Looking at the full year -- because I know there's a lot of seasonal moving parts -- as we look at just the US food can market, where I think you indicated the volumes are down mid-single-digits just in the US. What do you think that, based on your feel for things, that the full-year US food can volumes will look like compared to 2013?

Well, our view is definitely that we come back around to positive. Now, there's going to be a bit of the -- because you'll have the soup thing playing through a little bit -- we've already talked about the pet and the timing of pet -- you have some offset to that. But if the pack comes through the way we're thinking, you're going to get yourself back around to a modest positive kind of a number.

Okay, that's helpful. And again, was the improvement more weighted to the fourth quarter than the third?

That's how we have it right now. Yes. It will swing around a little bit, but yes.

From a (multiple speakers) standpoint, that's correct.

Now, you mentioned in terms of your balance sheet, obviously you are still paying down or will be gradually paying down the Portola debt. So I know it's been about -- goodness, it was early last year when you last did your -- a meaningful share buyback. If I hear you right, probably that is less of a likelihood this year.

Let's assume you don't make an acquisition -- clearly that would put it off the table. But would the earliest we would see another major buyback, all things being equal, likely be more something you'd think about late in 2015 or early 2016? Just so that you get your balance sheet further de-levered? Or am I not seeing that correctly?

No, I think you probably have the idea that it's not likely or not imminent in 2014. Putting it off to 2016 might be a little bit longer view, if your assumption is that an acquisition doesn't get done.

But I think there's a lot of water under the bridge that can change that between now and 2016. So like I said in previous calls, we're not so formulaic that says if our leverage is X, we are going to go buy back X number of shares. It really is more about what our longer-term view around the M&A environment is, and that will ebb and flow as different properties come. But rest assured, we're focused on making sure we do the right thing for the shareholders, and doing the right thing to put returns where they need to be.

Got you. And then just the last thing, just looking at the balance sheet. Is there anything notable about this bond exchange offer? Is it just to register the bonds?

And secondly, it would seem like that you like your mix of fixed and floating, especially as you are deleveraging a bit in here. Obviously those priorities would change if there is an acquisition. But anything we should -- any opportunities you see on the balance sheet that might further lower interest expense? I know I'm asking for a lot, because you've done a great job already. But how do you guys think about that?

Yes, well, to your first point, there is absolutely nothing about the bond registration, other than just the administrative process of doing that. So it's just due course there.

In terms of the balance sheet, we are in pretty good shape, right? Short of a use of proceeds, there's no reason for us to necessarily be in the market. We've got our fixed floating right where we want it to be. We're probably 55% fixed as we sit here in June. And then obviously, as we generate free cash flow and pay down the revolver in the back part of the year, we will be even that much more fixed as we come to year-end.

So today feeling pretty good against what the otherwise capital structure could look like. Not that I'm asking for interest rates to rise necessarily, but we feel like we've done the good work to get our capital structure in good shape, give ourselves plenty of liquidity and be able to play where investment opportunities might present themselves.

Okay, got you. Thank you.

Anthony Pettinari with Citi.

Good morning.

Hi, Anthony.

Many of my questions have been asked, but I had a quick one on BPA. I think earlier this month there was a bill introduced in Congress and, regardless of the chances of it advancing, I'm curious. As you engage customers in discussions around Can Vision 2020, is BPA a big part of that conversation? And if we see a move against BPAs sooner rather than later, is there a way to quantify the impact to the cost effectiveness of the can versus competing packages? Or how do you think about that?

That's a good question. First of all, you're right that -- I don't think there is going to be any major legislative change coming right now. You're well aware, I'm sure, there's been no science change. Every international regulatory authority is saying that the level in cans is safe. But as we've said along, that's only relevant if the consumer feels that way, and that seems to be continually shifting. I would say our customers think of it the exact same way probably.

So it's more a question of, is this a hot topic for their customers and the end-users? And in the press, more it seems like it's a bigger topic; when it's out of the press, it's a slightly less topic. But we are always working on it, working on new technologies.

And yes, it is part of Can Vision 2020. There are elements of that, that are impacted by future solutions that exclude BPA. And so we're looking at it all the time. It's a little hard -- because I don't know what the final answer will be for customers, it's a little hard to gauge for you what the impact of BPA is on the can. Initially, it is meaningful.

My own view is, as the entire industry shifts and as we have time to drive down the cost of new solutions, et cetera, I don't think it will end up being meaningful. But that's not the immediate case. And that's why customers are trying to hold off if they can.

So, yes, it's part of Can Vision 2020. I think it will continue to advance, that we will move to solutions over time that don't use BPA in the process. And that ultimately, that will not hurt the long-term competitiveness of the can.

Okay, that's very helpful. And just a follow-up -- I apologize if I missed this. But was there a CapEx guidance for the full year? And when you look at discretionary CapEx, what are the internal investments that are taking up the biggest chunk of discretionary CapEx among the three businesses?

Yes, we came into the year guiding CapEx to be in the upper end of the range. I think the high end of our range is 160. There's nothing about where we are right now that would cause me to come off of that guidance much. We may have some slop-over, just in terms of the timing of when projects get closed out. So that may have a little bit of influence on what really runs through the financial statements by the end of the year. But I think we're focused on the projects that we came into the year with.

I think probably the biggest incremental is really just around Can Vision 2020-type projects, and then just if you look back over the last couple years, we were probably to the low end of that range. So some of it is just ordinary catch-up getting back to the average midpoint of the range. So nothing other than Can Vision 2020, I think, really out of the ordinary across the business.

The only other thing I'd add is, as we get to the growth we were talking about in plastics, then you'll have investments that will be made around that, and getting at some of the cost. So I think the big line is exactly of what Bob just said, which will be all around Can Vision 2020 and the can business. And the secondary smaller point will be, I think you'll see some increase in plastics, assuming we continue on this improvement path.

Okay, that's helpful. I'll turn it over.

Alex Ovshey, Goldman Sachs.

Thank you, good morning, guys.

Hi, Alex.

Couple of questions for you. In North America food looking into 2015, do you expect any negative volume impact to the business from the start-up of the two competitor plants in the beginning part of 2015?

No.

Okay. And Europe food, can you talk about the price cost trend there in 2014, and whether or not there's any visibility for that to change in 2015?

Yes, there's not a lot of visibility there yet. It's not our expectation -- I think I was clear before. The 2014 -- nothing much happened. Whatever happened in steel was what happened in price, more or less. Right now that would probably be our expectation, but we really don't have a lot of visibility yet to what the steel industry is going to finally tumble to on that side. But I would say that if the tone of the market remains, then I would certainly expect that you'd be able to pass through in those annual negotiations what you're experiencing on steel at least.

Okay, that's helpful, Tony. Just last quick one. Just on capital allocation, could I ask it a little differently? If an M&A opportunity doesn't present itself, could we expect an accelerated share buyback catalyst at some point before the year ends from you guys? Or is there some probability that if there's no M&A, the buyback potentially doesn't happen, maybe it falls into 2015?

Yes, look, I think it's largely going to be, as I said, contingent upon what our outlook around M&A is, and other projects internally as we look into 2015. Where we would expect to come out X an acquisition is that we would still be in the range of the normal or preferred range of debt to EBITDA. So as I said before, there's no burning urgency for us to go get something done this year.

Okay, yes. That's very helpful, Bob. All right, thank you very much.

All right. Thanks.

That will conclude our question-and-answer session today. I would like to turn the call back to Mr. Tony Allott for any additional or closing comments.

All right, thank you, everyone. We appreciate your time today, and we look forward to talking about our third quarter with you in October.

That will conclude today's conference. Thank you all for your participation.