Silgan Holdings Inc (SLGN) 2016 Q1 法說會逐字稿

Good day and thank you for joining the first-quarter earnings results conference call. Today's call is being recorded. At this time I would like to turn the call over to Kim Ulmer, 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 may me 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 risk, including but not limited to, those described in the Company's annual report on form 10-K for 2015, 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 first quarter 2016 earnings conference call. The agenda for this morning, as usual, we'll focus on the financial performance for the quarter, review our outlook for 2016, and then Bob, Adam and I will be happy to take any questions.

As you saw in the press release our first-quarter results are at the upper end of our expectations, but below prior year levels as we delivered adjusted earnings per share of $0.45 as each of our businesses performed in line or better than anticipated. As expected, we continue to experience inefficiencies and incremental costs related to certain logistical challenges associated with changes in customer demand and our footprint optimization programs.

We also made progress on our new plant startups. The buildings are generally complete and we are working toward production qualification on installed lines. In the metal container business, we've begun certain customer qualifications which are expected to continue for the next several months. Despite these activities, our metal container business experienced solid volume growth in the quarter, and continued to experience higher spending due to logistical challenges and the start-up costs associated with the Burlington, Iowa plant.

Our closure business continues to perform well, with a strong operational quarter and solid volumes. The volume gains came as the US beverage industry got off to a strong start in filling for the upcoming season. Our plastics business continues to make gradual progress in the footprint optimization program, which resulted in a continuation of higher manufacturing costs as well as plant startup costs for the two new facilities.

Thus far, we're pleased with recent progress we're making in each of our footprint optimization programs and new plant startups. But we understand there is much left to be done. As a consequence, and based on these first-quarter earnings and the outlook for the rest of the year, we're confirming our earnings guidance in the range of $2.80 to $3.00 per share. 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 2016.

Thank you, Tony. Good morning, everyone. As Tony highlighted, both our metal and plastic container businesses are making progress with their respective footprint optimization plans and new plant startups, and our closures business continues to deliver strong operational performance. As a result, our earnings per share were at the high end of our range for the quarter.

On a consolidated basis, net sales for the quarter were $792.7 million, a decrease of $23.9 million or 2.9% as revenue declined in each business, largely as a result of the pass-through of lower raw material costs. Net income for the first quarter of 2016 was $26.6 million, or $0.44 per diluted share compared to first quarter of 2015 net income of $33.3 million or $0.53 per diluted share.

Results for each of the first quarters 2016 and 2015 included rationalization charges with an aggregate impact of $0.01 per diluted share. As a result, we delivered adjusted income per diluted share of $0.45 in 2016 versus $0.54 in 2015. Foreign currency had very little impact on our earnings for this quarter.

Interest and other debt expense was unchanged period over period. The tax rate for the first quarter of 2016 was 35.2%, slightly higher than expected largely due to a cumulative change in tax law in a certain foreign jurisdiction.

Capital expenditures for the first quarter of 2016 totaled $62 million compared with $48.8 million in the prior-year quarter. As we continue to advance our footprint optimization programs and complete the new plant startups, we anticipate capital spending for the full year to be approximately $170 million. Additionally, we paid a quarterly cash dividend of $0.17 per share in March, with a cash cost of $10.5 million.

Turning now to our three businesses: The metal container business recorded net sales of $453.4 million for the first quarter of 2016, a decrease of $5.5 million versus the prior-year quarter. This decrease was primarily a result of the pass-through of lower raw material costs and the impact of unfavorable foreign currency translation of approximately $1.2 million, partially offset by higher unit volumes of approximately 2%. Income from operations in the metal container business decreased to $37.6 million for the first quarter 2016, versus $40.7 million in the same period a year ago. The decrease in operating income was primarily attributable to higher manufacturing costs including startup costs related to the new plant in Burlington, Iowa and foreign currency transaction gains in the prior year, partially offset by the impact from higher unit volumes.

Net sales in the closures business were $196.1 million for the quarter versus $198.1 million in the prior-year quarter. This decline was primarily the result of the pass-through of lower raw material costs and the impact of slightly unfavorable foreign currency translation of approximately $1.5 million. These headwinds were mostly offset by a mid-single-digit increase in unit volumes, largely for US beverages. Income from operations in the closure business for the first quarter of 2016 increased $2.9 million to $24.5 million, primarily as result of higher unit volumes and manufacturing efficiencies, partially offset by the favorable impact from the lagged pass-through of decreases in resin costs in the prior year.

Net sales in the plastic container business decreased $16.4 million to $143.2 million in the first quarter of 2016, primarily as a result of the pass-through of lower raw material costs, lower volumes of approximately 1%, and the impact of unfavorable foreign currency translation of approximately $3 million. Operating income decreased $9.1 million to $100,000 for the first quarter of 2016. This decrease was primarily attributable to higher incremental costs and inefficiencies incurred to service customers during the footprint optimization program, startup costs associated with the new manufacturing facilities, lower volumes, the favorable impact from the lagged pass-through of decreases in resin costs in the prior year, foreign currency transaction losses and higher rationalization charges.

Turning now to our outlook for 2016, based on our first-quarter performance and the outlook for the remainder of the year, we are confirming our guidance for adjusted net income per diluted share in the range of $2.80 to $3.00 per diluted share, excluding the impact of rationalization charges. This compares to prior year adjusted income per diluted share of $2.97. We're also providing a second quarter 2016 estimate of adjusted earnings in the range of $0.50 to $0.60 per diluted share, excluding rationalization charges.

As discussed during the year-end earnings call, we expect continued incremental spending during the quarter associated with the footprint optimization programs and the startup of the new plants. These costs are included in this estimate.

Our adjusted net income per diluted share in the prior-year quarter was $0.71. Consistent with our year-end guidance we continue to forecast free cash flow generation to be approximately $175 million, largely a result of the carryover capital spend from 2015 associated with the footprint optimization programs and the construction of the new operating facilities.

That concludes our prepared comments so we can open it up for Q&A. And I'll turn it back to Joe to provide details for the Q&A session.

(Operator instructions)

Chris Manuel, Wells Fargo Securities.

Good morning, gentlemen. Congratulations to a strong start to the year.

Just wanted to run through a couple pieces. First, were any adjustments in the business regarding tinplate prices that came down? Were there any losses that flowed through either North America and Europe. Could you remind us about what the adjustment in tinplate was? A few things like that?

Sure. Chris, the tinplate varies by region a little bit, but let's say it's down mid-single-digits, and again it will vary a little bit from that. I think the other part of your question is, there is an inventory effect through that. I would just point out we are a LIFO company and so there really is no impact. It would have already been incurred in the year that we experienced it which, by the way, ties to the way our contracts work.

Okay. That's helpful. Second question is a couple times in here you referenced higher logistics and startups and different elements of that nature. I think you noted in here that one of the two plants you were going to close will be done in the second half of the year.

Any update on timing for the second plant closure and the costs and things you're referencing. Were those in line with what you are expecting, or are you signaling to us that maybe there's a few extra headwinds you are seeing or something along those lines?

No. It sounds like your question is all around the can business, if I have that right.

Yes.

I would say everything is moving along as expected. You'll recall we said that we would expect to get the lines up and running in the first half of the year and get qualifications going through Q2 and Q3 basically. And so we are online with that. Both lines are running in some form. They're going through internal qualifications at this point in time, so no big change there.

And then I think your other part goes to capacity and where are we on that. Recall that the new plant is roughly 1.5 billion units of capacity. As you noted we have made a decision of our intention to shutdown our La Porte, Indiana plant, which is roughly a billion units of capacity. That would leave about 500 million left, or actually a little closer to 400 million when you get down to the numbers. That is essentially what has shifted or can shift from three-piece to two-piece.

We end up being still quite slow on our two-piece capacity, and we're out all the time looking to shut down three-piece capacity, or find areas where we can shut individual lines down. That's particularly true right now as we look at the West Coast, because we did have some customers that moved from the West Coast to the Midwest that precipitated the move.

So I would not be looking necessarily for another plant at this point in time, but we're always looking to find other opportunities to take capacity out. As we said this was not intended to be an increase to capacity to the market. That's not how are treating it. So it'll be three-piece capacity throughout our system that we're working on.

Okay. That's helpful. Thank you.

Mark Wilde, BMO Capital Markets.

Good morning and congratulations. Tony, any chance we can get your sense of where can volumes are likely to move this year? And can you talk a little bit about this whole process of getting Burlington qualified? How much is that actually likely to be able to run in 2016?

Okay.

Waiting for these qualifications?

Sure. So as to can volumes, what we said at the beginning of the year we will hold to, which is probably flattish for the year. There will be a little bit of pack around that, et cetera, but that is our expectation. We have a little bit of some of the Van Can business that came in cycles. We saw some growth in this quarter, but that's really just cycling over that piece. Flat feels about right to us. It could be up a little bit because of that for the year.

On Burlington as I said, it is a two-line plant. Both lines are running. The first thing that happens is we go through internal qualifications and make sure cans meet spec, et cetera. One line has already gotten through that bit, and it begins at customer qualification. That means we have to ship to customers, they have to fill it and make sure it runs on their lines, et cetera.

Some customers need to do more thorough testing of that where they have to hold the can for a period of time and see how it performs. Others it's a little quicker, strictly on dimensional attributes of the can.

So we'll go through that and as we have said that would be Q2 and Q3, so our expectations aligned ought to be fully qualified and running in Q4. And a point we made at the end of the year I'll make again, which is by then you've missed the pack for the year. So the plant is not going to have a big impact on this year in terms of what it can produce at the end. It may allow us to work back inventories a little bit that we've built up for it, but aside from that it's not going to have huge impact.

Tony, what would the drag from that be financially this year?

Well, what we've said is, what we experienced on inefficiency side last year we talked about was some $20 million. This year we talked about $15 million, and that's a combination of the inefficiency costs that we've had embedded in the system now for two years and some startup costs.

So essentially you would expect that $15 million to go away on a run rate once the line is up, running and shipping, but be careful. That's true on a cash basis. That is stand pat. That is the answer we're looking for. On a EBIT basis you also have to deal with depreciation of new line, which is some $6 million. On an EBIT basis maybe that's a run rate of $9 million.

Okay. That's very helpful. Can you also just update us real quickly on the can business over in Europe in the Middle East?

Sure.

Actually the can business in Europe had, including the Middle East, had a pretty nice quarter, right in line with expectations. The profit was down a little bit, which was largely oriented around an FX gain that we had in last year, but the volumes were pretty nice across the board for the core products, and then we had some incremental volume come to us for exports to some emerging markets. So, off to a pretty good start, albeit still a pretty small quarter for that business to the overall segment. So we're happy with the start that we're off to.

Okay. And finally in metal packaging, Tony, I wondered if you could give us a little more color on where you see the growth opportunities in the metal packaging business for you going forward. Either by product or by geography, understanding you don't want to provide too much of a hint to competitors and others here, but just generally what should we think about?

Sure. Let me also just say that we were going to try to hold to two questions per person. We will move from here, but I'll answer it, because it's hard not to once it's out there.

Remember for us, growth is not something that we're particularly pursuing in our businesses. Our view is where there is significant growth there tends to be a lot of investment in capital, and that drives down returns. So we're very happy just investing in the business, trying to grow with our customers as they find success and so that's where we've always been.

We did -- as you know -- we moved into Eastern Europe to look at some developing markets. I think you'll still see some growth in those markets in time, although we're going to want to make sure that those markets settle down a little bit politically and economically first. So you'll see some opportunities there, but mostly it's going to be around servicing our customers as best we can, allowing them to grow, generating cash and deploying that cash into either the efficiency of that system or elsewhere in our business.

Okay. Fair enough. Thanks.

Ghansham Panjabi

Hello, this is actually Matt Krueger sitting in for Ghansham.

First question, can you comment further on the strong volume growth in the closures segment, while also quantifying any weather impact during the quarter for that segment? And what are your expectations for volume growth moving forward for the remainder of the year? Is that a sustainable level in your opinion, the 5%.

Good question.

The closures volume growth really was really subject to good operating performance around the world in our closures business. As we talked about in the release and Bob mentioned as well, the hot fill single serve beverage business in the US business actually did see significant growth. And what happens there is either sports drinks, ready-to-drink teas, there is a benefit of weather that we got in the first quarter so our beverage customers are feeling good about their business and moved some of that filling earlier in the year.

And we've seen this happen historically over the past several years. So what we do know right now is Q1 was very strong. Q2 will also be strong, and that's when the beverage companies will look up and assess where they are and their markets and the demand for those products for the back half of the year.

Historically we see the back half unwinding that volume growth we see early on a little bit. But as we sit here today, the demand is quite strong for the single serve beverages that we service.

Okay. Great.

And then, in the prepared comments you mentioned a heightened level of caution related to risks associated with the business for the remainder of the year. Can you comment on some of these risks and call out some of the specifics for the rest of the year?

Sure. I'd say that we've got three new plants under construction. We've got a lot in the plastic side of course. We have a lot of moves going on that -- certainly by the end of the year we're expecting to get the costs out that have been associated with that. I'd just say there's a lot going on this year, that we yet need to see.

As Adam said you start out with pretty good beverage filling but you don't really know how that's going to end yet. And so were a little cautious on will that be a gain for the year, will it give back a little bit. We also have the benefit of a little bit more inventory build in the first quarter on the can side because the plants were running well. That helped us in the first quarter. Presumably somewhere by the end of the year we will need to reverse that off again. So I'd say there's just a lot of parts moving as we go through what we're calling our second transition year in a row.

Okay. Great. Thank you.

Anthony Pettinari, Citigroup.

Good morning. In plastic containers I was wondering if you could talk maybe qualitatively about how the footprint optimization activities have gone versus your expectations at the beginning of the year? I know you had some management changes there. How are the teams performing? And that segment I guess will break even in the quarter. As we look to Q2 should we expect a similar performance or, any color you could give there?

Anthony, it's Adam.

What I would say is our Q1 performance for plastics and their performance was essentially right in line with our expectations. We did say that Q1 was going to look a lot like Q4 of last year, so we did incur those additional incremental costs again, right in line with what we were thinking.

As far as the management team running the business, we're feeling pretty good about what are doing right now. We are making improvements on the ground. Sometimes those don't necessarily translate to a financial spreadsheet, but we are making solid improvements in the business. We're doing what we said we were going to do and I'd say from here we are cautious about where we're going, but we feel good about what's been executed thus far.

Okay. That's helpful.

And switching to Europe and metal containers. I thought you said that maybe earnings were down year over year. Are margins down year over year? And you have a competitor that is seeing record margins in Europe, food -- obviously they are in a different part of the continent -- but I was wondering if you could talk about the margin profile in European food?

The margins in that business operationally have been pretty steady and pretty good. The commentary around the earnings being down is related to nothing more than last year we had an FX gain in there, which did not recur this year. So if you strip that out, operationally the business actually improved.

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

Adam Josephson, KeyBanc Capital Markets.

Good morning everyone. Bob, Tony, just a couple on capital allocation. I'll start with a transaction that I'm sure you've heard nothing about. There was obviously one announced earlier this week in a business quite similar to yours at a post synergy multiple of seven, that I would think have been a franchise business for you. It's rigid consumer packaging, which is your sweet spot. Can you comment at all on what transpired, or in your case what didn't transpire?

Sure.

I'm not sure I can comment on what transpired, I probably don't know. But let me just say what we said about this, which is we indicated that the beverage industry for us was something that we had interest in. It was something that we said it was not a strategic imperative for us and we did not have synergy to it. What we've always said about it is opportunistically if something shows up there it could fit with us, if that made sense.

What has ultimately unfolded here is a player emerged who did have commercial and manufacturing synergies and more of a strategic imperative, so I think what occurred made more sense than us being the buyer in this case. So, that's the long and the short of it.

Thanks.

And a couple others on the same subject. Can you update us on your views of share buyback versus acquisitions versus reinvesting in the business, and what your criteria are for each? I know they differ somewhat by bucket.

Yes. Adam, I think as we've always said the strategy remains pretty constant and that is we look for opportunities to deploy capital back into growing the business where and when we can. And in the absence of those as we start to delever the balance sheet. And I'll remind you that the 2.5 to 3.5 times leverage ratio is the benchmark that we use as we start to delever. And there's not an opportunity to invest in the business either through capital or through M&A, then we'll think about returning capital to shareholders as we've done in three previous transactions over the years.

So there's nothing fundamentally changed about how we view it. Each of those decisions goes through a similar process, whether it's a M&A or a CapEx program. We look at it on a cash-on-cash return with low- to mid-teen return hurdles. And in the absence of those that's when capital return back to shareholders comes into play.

Thanks.

I don't think there's anything you should read into that as changing from our strategy.

And just related, it's my last question. In terms of investing in the plastics business at this point, I think you put in about $50 million last year. Can you talk about what returns you're expecting on those investments and why, just giving all the difficulties that business has had over the past few years?

Well, our expectation for all of our investments is the same. We want good, solid returns for every investment that we make. So, every single investment that's gone into plastics was based upon a good return on that investment made. Now, did that count in the fact that we were going to have the incremental costs and slow down the implementation over the course of two years? Obviously it did not. So those returns certainly have been impacted during this time period. But the investments were and will always be made on that concept, that we are going to get a return on it.

The other part of that I would say is, as we've said here before, our view is that business ought to be able to get to 15%-ish EBITDA. Once we get through this process, once we get the sales back where we want them and we prove out the franchise capability of the business. So, I am clearly looking out a little bit.

So using a slightly different metric for you, I think that's the benchmark that we're going to be using. In time, is can this get to a 15% EBITDA margin over a period of time. And then the returns again will be justified in order to get that done, or it won't make sense for us.

Thank you, Tony. Appreciate it.

Scott Gaffner, Barclays.

Thanks, good morning. Tony, following up on that last comment, you said 15% EBITDA margin over a period of time. It's hard to judge what you mean by that. Are we talking three years? Two years? Five years? Just how can we benchmark that, so that we know whether you are on track or not?

I would put it in that three-year time frame. But I have to say if we're sitting three years from now and we're at 12%, and we see a path to 15% or better, that doesn't mean we're going to pull a cord at that moment in time. So, just to be clear.

It would seem to me that three years is a reasonable amount of time to get back on our feet, get the footprint the way we want it, to get the sales back in which, by the way, is a slow process. Every sale you make you have to tool it, get it equipped and so it is slow on that up curve. But three seems reasonable to me.

And focusing back on the North American food business. One of your competitors earlier in the week talked about not being able to recover non-material inflation in their contracts. Are you having the same issue? And what kind of effect is the excess capacity in the North American market having on your business now?

Sure. Good question. Let me go back.

First of all recall with us that we are more than 90% under long-term contracts. And those are contracts that are dissimilar to the most of the rest of the market. They were based upon the idea that we had transparency on cost with our customers. We got a reasonable return on our investments and our customers got a long-termed surety of quality supply and knowledge of what the pass-throughs of costs were going to be. So that's been true since the founding of Silgan and it's still true. That's the primary share of what we do.

So to remind everybody, that means we pass through our raw material as its incurred and then we pass through on things like labor, et cetera. We have indexes that we pass through on that, and then on other inflation, generally speaking, there are indexes on that, as well. And so over time you pass through and that's the way the contract works.

This year as we indicated at the end of the year, you have an unusual situation where some of those indexes are actually negative. You have deflation -- I'll give you labor as an example. The labor index in some cases is negative. Well, obviously we're not paying our employees less, so that is a negative for us that is embedded in the cost of the business. But it's only true of our long-term contracts, which are different than the rest of the market.

And so two things. One is will we get that back in time? Absolutely, by contract. As inflation comes back in we absolutely get it in our price.

The second thing is, is the rest of that last 10% or less for us, which I'll call the open market, traditionally our contracts have had little to do with pricing in the open market, because it's a totally different equation with a customer. Those customers don't have a long-term surety of supply and don't have that same understanding. So we don't treat those nonmetal inflation costs the same way in that market at all. That to us is something that needs to be covered, and needs to get paid for.

Again, in that open market, we really seek just to supply our customers. We don't seek to drive capacity and transactionally fill capacity in that market. We never have and that's not the way we operate.

The second thing on capacity -- I think our answer -- we don't operate with excess capacity. We don't have it today. If you look at our two-piece, once we're done going through these rationalizations as part of why we made the tough decision to shut down a two-piece plant, is that we don't like having excess access capacity around. It's not the way we tend to operate.

And again for every plant we have in the food can business in North America, we've shut down a plant, so that's how aggressive we've been on capacity in the marketplace, and nothing will change on that. As I said earlier the three-piece, there is a little bit of excess three-piece that comes out of this new plant and we're out looking for ways to down size that. It's harder because it's over our entire system, but we're after that capacity, as well.

The last piece of your question is, in that open market, yes, there is some excess capacity now. You have a participant who came into the market and built more capacity than was needed for the business they were taking on. You have a participant who I'm not sure has shut down the comparable amount of capacity. So absolutely there is excess capacity in that open market, which hopefully will work itself through over a period of time. But we don't have that capacity.

Okay. Thanks, Tony. I really appreciate it.

George Staphos, Bank of America.

Hello, everyone. Good morning. Thanks for the details and congratulations on the progress so far in the year.

I wanted to go back to the question of capital allocation and I recognize, again, you're going to be somewhat limited in what you can talk to relative to some of the assets that have traded hand or are likely to trade hands here. But, how does the opportunity set of available assets, Tony, and optionality fit into how you will look at an asset and whether it will fit within Silgan. Or are you purely looking at a discrete set of attributes, whether there is synergy, whether customer overlap, et cetera, in terms of how you evaluate transactions.

And the backdrop behind the question is, in the last decade there has been another fairly large beverage can asset that traded hands and obviously Silgan did not pursue that one. Perhaps if that had been in the portfolio would that have changed your calculus at all in terms of some of the assets that have changed hands or look to be this quarter?

And then I had a follow-on, unrelated. Thanks.

It's a good question and I understood it from the earlier question that it was still hanging out there. I think to be clear I believe we've been really consistent. We believe that we have great franchise businesses.

Our whole mission and principle is about building out those franchises and strengthening them, growing them where we see we can. And then we've always said if we can find other franchise and we can invest in it like we did in closures, we'd be happy to do that. But we don't sit here feeling like we need a catalyst, some change to where we are.

We feel very good about the wealth generation that we can create from what we have. And as Bob said we have a very disciplined manner in deploying capital. Sometimes it's organic, which were doing a lot of right now, and we believe were going to get improved results from that as we've been talking about on this call.

Sometimes it's through acquisition. You look at the Portola acquisition was a great one for us, closures before. And sometimes it's through return of capital to shareholders, and we try to be very dispassionate about deciding between those. Because for our shareholders, any one of them can create value. And if I sat here today and said no, we really feel we have to have a catalyst to a new market opportunity I would worry that that would be a moment when we would destroy value, not create it.

So we do tend to look at a little more -- as you said -- it's a little bit more discrete in terms of what are the opportunities of that particular acquisition at that point in time. Or what we call opportunistic around acquisitions. Now that doesn't mean we don't think about could we build on it, is there more of an opportunity after that, of course we do. But we don't say here's a market I have to be in and now whatever I have to pay to get to that market I'm going to pay. That's not the way we think about it.

Okay. I appreciate the thought process on that, Tony. I would to switch gears a little bit and I might have missed it. I know you touched on it a little bit, but La Porte I remember, I don't think you built that facility, I think it was an American National can plant. But I remember it, if correctly, as being something of a battleship, two-piece plant. It was I think one of the first, and certainly had a low cost structure at one point in time.

I know it's difficult to talk about specific plants, but can you talk a little bit about why that facility fits less well, both from a competitive standpoint and a capability standpoint. Two-piece versus three-piece relative to your portfolio now.

And thanks, I'll turn it over, but I will be back with more questions.

Sure. The La Porte plant has been a great plant for this business for a long period of time, and a workforce that has worked very hard for us for a long time, as well. It really comes down to costs and geography. And so you're right, it's an older plant but it's a D&I plant. Again, all of the new D&I's coming in the market. It's a competitive plant. But it's a single-line plant and older, so when we looked at all the costs and compared to what was coming in on the new Burlington plants, it was just the one that made sense for us.

Thank you very much.

(Operator instructions)

Debbie Jones, Deutsche Bank.

When I looked at how your volumes have progressed in the first quarter of the year, at least over the past two years, I think that they've been better than your full-year number and maybe last year you mentioned something about your mix changing in the first quarter. I was just wondering if that has anything to do with the positive number we saw this quarter. If you could talk a little bit more about what's driving that.

Yes. Debbie, what you're seeing and then I assume you're speaking more directly to food cans.

What's really driving the improvement in volumes on a year-over-year basis in the food can business this year are a little bit of what I talked about in the European market, we saw some better volumes. And then in the US, I think it's just a matter of the fact that we anniversaried some of the volume that came to us through the contracts coming with the Van Can business. So you're just seeing the anniversary effect in 2016 versus what we had in the later part of 2015.

Okay. Thanks. That's helpful.

And my second question on M&A but not related to the can space, is there's also been some transactions that have occurred in the plastics and closures space in the last year or so and I'm just wondering, what is holding you back from pursuing M&A in those sectors. I understand that you don't believe this is a necessity to grow, but there was a big closures acquisition in Europe I think that was completed in December that maybe a year ago would have seemed like something that you would've been more focused on. And so I'd just like to get some thoughts on what you see your limitations are in those two segments.

Sure.

The simple answer is nothing is holding us back. There's probably very few rigid packaging assets that have traded that we haven't looked hard at, we haven't gone through the thought process.

I think maybe the difference between the question and the way we're thinking is that we like what we have. And so we aren't feeling like we have to do anything. Each one has to stand up its own. It's got, as we said in the past, first off it has to have a really good management team. That's extremely important to us.

Secondly we have to believe it either strengthens the franchise we have or, it is a franchise unto itself, which is sustainably, competitively advantaged. So those are pretty high benchmarks that we hold. And then we've got to get returns that are justified versus either organic investment or return in cash to shareholders.

And when you put all those combinations together and you compare that to what's broadly, over the time period you're talking about, been a very cheap cost of money, pretty heavily sponsor-driven world, it's not easy to get all of those to line up for you. Which is fine for us. Because were trying to create value, and so if we push it when we shouldn't, then were not going to create value.

Great. Thanks. I'll turn it over.

Chip Dillon, Vertical Research Partners.

Good morning.

First question is, obviously the closures volumes were quite impressive, and I know the plastics business you're certainly making a good strong go at it, but as you think about those two businesses and you also think about some of, at least what we hear about from shifts in the drink space, many of which are helping you. Nonetheless, are you concerned or is there any thought you have about cans and specialty cans taking share from some of the plastic substrates that benefit your plastics business and your closures business?

No. No.

Recall that our plastic container business is really not a beverage business. It's much more around food, household, personal care and so really there's no trend that fits that at all. And on the closures side we're both metal and plastic closures on the vacuum side, so really that wouldn't particularly matter in either case there. But the growth there has really been, on the hot fill side, has been on plastic packaging.

Okay. I got you.

And looking at the metal food can volumes. I don't think you gave us a split, I might have missed it, between Europe and the US. But I know last year the whole segment was slightly negative from the first quarter 2014. And 2% might be some catch-up. But is there anything going on seasonally there. I know that you tend to get most of your shift between the second and third quarters. But anything that might have happened that helped you or do you think this was a normal first quarter?

To be clear I think as best we know, the North American market grew by let's say a 0.5% in the first quarter. That's the first benchmark on that. For us the US, we were up 2%, it was a little lower of that in the US a little higher of that in Europe. But near enough to 2% in North America. And so that increase was primarily driven by the fact that we had the Van Can and related business coming on in the quarter. More than anything else, drove that.

And in Europe, we happened to have a bit more export to developing markets during the time, a one time item in the quarter. So those were the two main points.

And as a quick -- Van Can closed when, again?

It closed September the year prior, but we had some tag-on business. They were working a contract at that time that came in a little bit later. So that cycle is just a bit -- cycle this quarter and it's comparative for the rest of the year.

Thank you very much.

George Staphos, Bank of America.

Just a couple of follow-ons to wrap up, at least for me.

Number one, Tony, can you get into what production, what percentage growth you saw in production in the quarter in food can versus shipments? You'd mentioned that you obviously had some favorable unit cost because you were producing to some degree into inventory. I'm just trying to get a sense for what the magnitude of the swing was there. And as I said I have a couple follow-ons.

Okay. So we were up nearly 2% on the sales side. We built inventory a little bit more than normal. So that would be closer to a 3%-ish number.

Okay. Thanks for that. Secondly, recognizing there's been a lot said about BPA and whether it's a risk or not. Do you get the sense that with the advent of these alternative coatings and your customers being able to advertise that they are now, at some point will be in BPA-free cans, that the consumer will actually be willing to pay for, and that you may actually see a volume pick up from it. Again, not getting into the editorial whether it's real science or not in the first place.

You already know where that editorial will take you anyhow.

We share the same view, but anyway.

I don't think so. I think this is more getting out of the way of trouble than it is anybody is going to pay you more for it. And now I'm talking about the consumer, to be clear.

I think the consumer is not going to pay more for a can because it is BPA-free. I think where we stand now is the consumer is going to demand BPA-free essentially. And I should be clear -- non-intent -- there will be BPA, it's in everything. So to be clear, you're not intentionally putting it into the coating.

Understood. But to be clear I wasn't assuming people would pay more for things, because that's been debunked over the years whether it's BPA-free or recycled plastics or what have you, but do you think it might actually lead to a pickup in volume that we've now knocked down the straw man, that you don't have BPA within the coatings.

Well, I'd like to think so. I think I'm going to be my normal realist self and say I doubt it. I think it will take the weight off from here, but it's hard for me to imagine there will be a huge return to can -- by the way I don't think there was a huge exodus, to be clear. There may have been. I wouldn't think so. I hope you're right, but my gut would tell me no.

Okay. Go ahead I'm sorry.

I do think most of our customers are now committed to moving. I think within the next, by next year, end of next year at least I think most everything will be out of epoxy coatings with BPA in them.

Okay. Last one for me, recognizing it's the end of the call.

Is there anything that you could talk to in terms of the next Can Vision 2020 innovation that we may hear from you on. If you can't talk specifically, is there any timing that you would at least mention to us to look to the next development or initiative that comes out of that program that actually begins to drive results.

Thank you very much. Good luck in the quarter.

I think the biggest thing that's been worked hard now is just metal reduction in cans. And so that you really won't hear a lot about, because it will happen step-by-step. There are a few capital components to that, that if it really works the way we hope then there would be some capital investments, and so we would be talking about them to explain exactly what we are doing.

Then there are, as I've said all along, there are more development-type ideas here around how food is processed, et cetera. I think there is possibility of news on that, but that's going to be a ways out. Meaning years before we will probably talk about it.

So I think really what will happen in the near-term is we are going to consistently be taking costs out of our system and getting it to our customers, and again we may talk capital a little bit about some of that, and then down the road if we are really successful there will be something talk about. But there's still high risk on that for sure.

All right. Thank you very much.

Thanks, George.

Adam Josephson, KeyBanc Capital Markets.

Thanks. Tony, just one follow-up on capital allocation. I think you used the word catalyst earlier that investors or analysts were looking for and you talked about how you don't feel like you need any such catalyst. Just, do you think there's an over-emphasis on that and if so, what do you think investors, analysts, whomever should be looking for, given that the story has always been about how you allocate your cash flow?

I think you just said it. I think you get moments of time when big acquisitions happen and everyone looks around and says okay, the world's just changed and you maybe didn't change with it. So, I think it's natural. You're bound to go through that.

For us it's really about a consistent execution of how we think value gets created. And again to be clear, acquisition is part of that. I don't want to send a message saying we wouldn't do something that was very change-oriented. We looked at the Graham, got very deep into the Graham acquisition. That would have been very significantly transforming to the business. So I'm not saying we won't do it.

The only thing I would say that I hope everyone understands is that it's only one of the levers that we're going to pull to create value. And we're perfectly happy if the levers we end up pulling because the sponsor market drives up prices, or a variety of other issues, if it's organic investment in return to shareholder, and we can maintain and grow our franchises, we're very happy with that as an answer.

Now if we can get an acquisition -- and by the way I think there will always be bolt-on acquisitions as part of that, it's almost like organic -- but then if there's a bigger acquisition that comes along and we can find a way to create value, we will do that too. But we're not going to feel compelled to do it.

Completely understand. Just related to that answer, where do you think we are in the M&A cycle? Do you think we're basically at the peak, or is there more to go? Just based on how low interest rates are?

I think there's more to go. I'm not exactly sure how you mean it in terms of size, scale.

I mean multiples, right, we're back to where we were in the 2007 timeframe and I'm just wondering how you'd compare where we are today, where we were back in 2006, 2007, 2008, whatever you think the appropriate comparison is.

We're definitely high. I think there's no question that we are at a high point. Now the credit markets were shaky, if you go back just a couple of months. Now they're coming back fairly quickly. It could be that it gets a little bit better over the next quarter or so, a little bit maybe worse from our perspective, higher multiple. But it's hard for me to imagine that it moves a whole lot from here. To the upside.

And did that factor into your thinking at all as it relates to the acquisition that was announced earlier?

No. Again, I'm not in any way saying that we're part of that process or not, but would that factor into any decision?

We're long-term holders, so what we're going to look at is what's the discounted cash flow from it. If we can get relatively low cost of capital, that's a consideration that would drive up multiples. And so we can understand why cheap debt drives multiples up, and we're willing to participate in that. We've bought businesses at nine times. We bought Portola at near that level and it was a great acquisition for us. We bought the Wrexham barrier food can -- plastic business and it's been great business for us.

So we don't sit here and say, look, there's any multiple which we won't go past. We'll go through exactly what I said earlier, which is the what is the management, what's the future opportunity, what's the free cash flow we can generate from it and that's really what's going to be on our minds.

Thanks, Tony. Best of luck.

And at this time we have no further questions in the queue. I'd like to turn the call back over to Tony Allott for any additional or closing remarks.

Great, thank you everyone for your time. We look forward to talking to you about our second quarter in July.

And that concludes today's conference call. We thank you for your participation. You may now disconnect.