Silgan Holdings Inc (SLGN) 2016 Q2 法說會逐字稿

Good day, everyone. Thank you for joining the Silgan Holdings second quarter earnings results conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Kim Ulmer please go ahead ma'am.

Thank you. Joining me from the company today, I have Tony Allot, 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 10K 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 second quarter 2016 earnings conference call. Our agenda for this morning will focus on the financial performance for the second quarter, and a review of our outlook for 2016. After prepared remarks Bob, Adam and I will be pleased to take any questions.

As you saw on the press release, our second quarter results are at the upper end of our expectations as we delivered adjusting earnings per share of $0.60, with each business exceeding expectations. Also, as expected, these results are down compared to the $0.71 reported in the second quarter of 2015 as we incurred startup costs and incremental costs related to our footprint optimization programs.

In the metal container business, the new plant qualification in Iowa is progressing as expected. The equipment is installed and running and we're in the early stages of customer qualifications. Our metal container business benefited from an earlier than expected midwest vegetable pack, exceeding our expectations, but not as early and strong as in the prior year.

Our closure business continued to see strong demand for single-serve beverages in the US combined with strong operation performance globally. Volumes in the European geographies were a bit more muted due to the cold, wet weather in Europe. Our plastics business continues to make progress in their stabilization efforts and in their footprint optimization programs. Plant performance is improving. Inventories have been building, and customers are gaining confidence in our commitment to meet their demands.

While we are advancing the footprint optimization program at a measured pace, results in the quarter were slightly better than our expected, as we benefited from building a bit more inventory during the quarter. As we look to the rest of the year, our metal container and closure businesses are performing very well operationally, but the unfavorable weather conditions in Europe, and current demand indications from certain US pack customers, are pointing to lower than expected back half volumes.

In addition, the slower pace of equipment relocations associated with the plastic footprint optimization program will result in inventory reductions and continued cost further into the year. As a consequence, we've lowered our earnings guidance by $0.10 to a range of $2.70 to $2.90 per share.

With that I'll now turn over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimates for the rest of the year.

Thank you, Tony. Good morning everyone. As Tony highlighted, each of our businesses performed better than expected. Both our metal and plastic container businesses continued to make progress with their respective footprint optimization plans and new plant startups. Volumes were better than anticipated in both the metal container and the closures business, and both performed very well operationally. As a result, our adjusted earnings-per-share were at the high end of our range for the quarter.

On a consolidated basis, net sales for the second quarter of 2016 were $874.6 million. A decrease of $39.6 million, or 4.3%, as revenue declined in each business largely as a result of the pass-through of lower raw material costs. Net income for the second quarter of 2016 was $33.3 million, or $0.55 per diluted share, compared to prior year second quarter net income of $42.2 million or $0.70 per diluted share.

Results for the second quarter 2016 included rationalization charges with an aggregate impact of $0.05 per diluted share, while the prior-year quarter included rationalization charges with an impact of $0.01 per diluted share. Therefore, we delivered adjusted income per diluted share of $0.60 in 2016 versus $0.71 in the prior-year quarter. Foreign currency had very little impact on our earnings for the quarter, and interest and other debt expense was virtually unchanged period over period.

The tax rate for the second quarter of 2016 was 34.4%, roughly in line with expectations, but higher than the prior-year second quarter rate of 31.3%, which did benefit from higher income and lower tax jurisdictions during the year. Capital expenditures for the second quarter of 2016 totaled $49.7 million, compared with $49.4 million in the prior-year quarter. Year-to-date capital spending totaled $111.7 million this year, compared to $98.2 million in 2015.

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 dividend of $0.17 per share in June with a total cash cost of $10.5 million. I'll now review the financial performance of each of our three business franchises.

The metal container business recorded net sales of $529.6 million for the second quarter of 2016, a decrease of $24.1 million versus the prior-year quarter. This decrease was primarily a result of the pass-through of lower raw material costs, and the decrease in unit volumes of approximately 2%, partially offset by a favorable mix of products sold, and the impact of favorable foreign currency translation of about $1.2 million. Income from operations in the metal container business decreased $45.9 million for the quarter 2016, versus $48.3 million in the same period a year ago.

The decrease in operating income was primarily attributable to rationalization charges related to the announced shutdown of the La Porte, Indiana facility. Startup costs associated with the Burlington, Iowa facility, and lower volumes partially offset by a favorable mix of products sold and better operating performance. Net sales in the closures business were $206.5 million for the quarter, versus $207.1 million in the prior-year quarter. This decline was primarily a result of the pass-through of lower raw material costs, largely offset by volume gains of approximately 3%, and the impact of slightly favorable foreign currency translation of approximately $1.5 million.

The volume improvement is a result of strong demand in single serve beverages, largely in the US. Income from operations in the closures business for the second quarter of 2016 increased $700,000 to $25.3 million, primarily as a result of higher unit volumes and strong operating performance, partially offset by the unfavorable impact from the lag pass-through of increases in resin costs. Net sales in the plastic container business decreased $14.9 million to $138.5 million in the second quarter of 2016, primarily as a result of lower unit volumes of approximately 5% due to the continued rebalancing of the customer portfolio in conjunction with the footprint optimization program, the pass-through of lower raw material costs, and the impact of unfavorable foreign currency translation of approximately $1.5 million.

Operating income decreased $8.4 million to $1 million for the second 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, and the favorable impact in the prior-year from the lag pass-through of decreases in resin costs.

Turning now to our outlook for 2016. As you will have seen in the press release, we have revised our full-year estimate of adjusted earnings per diluted share to reflect our year-to-date performance and to take into account the outlook for the remainder of the year. While the first half of 2016 is off to a better than expected start, much of this has to do with timing. On the metal side, the weather in Europe has been cold and wet, which is likely to have some impact on volumes, as will revised indications from certain US pack customers regarding their individual pack plans.

Additionally, we believe it is in the best interest of our plastic customers, our employees, and the long-term performance of the business to take a more measured approach to the footprint optimization plan. This will result in inventory reductions later than expected in the year due to delayed equipment relocations and cost to be incurred deeper into the second half of the year due to these delays. Therefore, we've revised our full-year estimate of adjusted earnings per diluted share to a range of $2.70 to $2.90, down from the previous range of $2.80 to $3.00. This compares to prior-year adjusted net income per diluted share of $2.97.

We're also providing a third-quarter 2016 estimate of adjusted earnings in the range of $1.20 to $1.30 per diluted share, excluding rationalization charges. We do expect some continued incremental spending during the quarter associated with the footprint optimization programs, and the startup of the new plants, which are included in this estimate. As in prior years, given the uncertainties around the timing of the fruit and vegetable pack in the US, and the late start to the pack in Europe, the results of the back half of the year could shift between the third and fourth quarters. Our adjusted net income per diluted share in the prior-year quarter was $1.26.

Consistent with our year-end guidance, we continue to forecast free cash flow generation to be approximately $175 million, largely as a result of the carryover of capital spending from 2015 associated with the footprint optimization programs and the construction of new operating facilities. That concludes our prepared comments so we can open it up for Q&A, and I will turn it to Jim to provide directions for the Q&A session.

Thank you.

(Operator Instructions)

Chris Manuel, Wells Fargo Securities.

Good morning, gentlemen. Thank you for taking the questions.

Let me start with a couple on the plastic side. You mentioned that you are taking a more measured or more diligent approach. But you also mentioned that you're a little bit ahead of where you thought it would be. Your performance in the business is. How would you have a think about putting those together? If you took down guidance by $0.10, how much of that volume was related to that and how much was a related to crops et cetera? To help us think the path forward is really is what I'm trying to understand.

Yes, Chris. Tony let me start with that. And I will let Adam take you through the balancing of the timing in plastics. But first of all just having read some of the stuff from wire today. Let me be clear. To us, there's really no new news on plastics here. While I recognize we moved the earnings around a bit. What we said last call quite clearly was that we're going to of the customers dictate the speed at which we moved here. That our focus was not going to be on the P&L this year. It was going to be about getting this right so we have the customers in place for next year and beyond.

I said in my opening comments, I want to repeated it. That, what you are actually seeing is a reflection of us being pleased with what's happening. Feeling like we're being successful in holding the customers' position. In terms of building inventory for them. Meeting the supplies. We're now fully complying those customers we weren't as you went back three or six months ago. And getting ourselves positioned for the move.

So I want to set the tone here to say, there's not breaking new news on this on plastics. And I know we'll talk more about plastics, but in our mindset here this is a good news in that we been successful in the customer side the way we want to. And then that's changed a little bit. The timing, which, Adam, I'll let you hit that.

Right. And to Tony's point, I think we are pleased with where we are. We are on the right track. And we're seeing the sequential quarterly improvements in our plastic operating performance, which is important for us as we hit the milestones towards ultimately getting to our objectives. But more importantly, as Tony said, it's really about making sure that we are taking care of our customers. And this delay, if you will, of the equipment relocation has allowed us to stabilize our supplies to those customers, as Tony mentioned. It has allowed us to stabilize our operations and build inventory in advance of those line moves. So, while those lines are in transit our customers will be fully supported and supplied by our plants and operations and our products.

So, we're feeling pretty good about where we are. And our customers are feeling good about where we are. Not only have they stayed with us, in some cases they've actually extended or renewed contract agreements going forward. Even through this period of time. So, we got some financial benefits in Q2 of building inventories rather than reducing them for moves. We will now be more moving as we go into Q3, and therefore consuming inventory, which is more harmful to the P&L.

Correct. Originally we had planned on having those equipment lines relocated in Q2. They're underway now for whatever that's worth. And that will extend through Q3 into Q4, which is again, why some of those incremental costs will remain through a portion of the back half of the year.

Okay. That's very helpful.

If I could just have one follow-up. While we are sticking on this plastics business. You've long talked about having lumps in the business as new wins and things come on. And you also mentioned that customers are getting increased confidence in your performance there and your ability to deliver.

Could you at all parse, perhaps, when volumes are off I think mid single-digits, how much of that was stuff that was in line with market versus planned business losses? And perhaps if you had any notable food business wins that would be able to be tangibly talked to us about customers confidence in your ability to deliver, et cetera.

Sure, and Chris, it's Adam.

A couple things. One, you're talking about new wins in the business. And we've had them. I don't think we'll go into a lot of detail about exactly what those are. But, again, our strategy is, we're focusing on key markets with specific customers that value the service model that we're deploying in our plastics business. And we have had some nice wins, certainly in the food market, healthcare, and some others as well.

If you look at what we set coming into 2017, we did expect unit volumes to be down in our plastics business, in large part because of the portfolio rebalancing efforts that we've been going through. And also due to some plant rationalization. So I'd say the majority of the 5% were due to portfolio rebalancing. And the balance are due just ebb and flow in the plastics business.

Okay. That's very helpful. I have a few more questions. I'll jump back in the queue. Thanks.

Scott Gaffner, Barclays.

Thanks, good morning.

Good morning Scott.

Just taking on the plastics for a second. I mean you said you're taking a more measured pace here on some of the switches. Any chance that we get a delay in the 2017 and we're looking at some continued impact there from these moves?

No and it's a great question given what's transpired over the last 12 to 18 months. But I think as both Tony and I said earlier, I think what we've seen is we're in a position now with the stability in our operations, the inventory that's in place to supports the customers during this transitional moves, we feel very good that we've got this right.

This is the beginning of the next step of our plastics business performance. Getting back to that three-year target that we had mentioned on prior calls of 15% EBITDA. So we will see sizable EBITDA improvement going into 2017, as these relocations will be done by the end of the year. And, at this point we don't anticipate any delays in having those lines done. As I mentioned, they are already in transit as we speak. So we are well down the path at this point. We're just been very cautious in making sure we get it right.

Okay. And then just to try to clarify on Chris' question. You have, essentially the three issues. The US pack, softness. The European pack, and then you've got plastics that all lead to this $0.10 decline in the full-year EPS guidance. Is it a third, a third, a third between those items? Or how should we think about what's the biggest impact of the change guidance?

I would think it more as half plastics half to the metal can business.

Okay. And then just last one for me. Then on the free cash flow guidance you did maintain that at $175 million, despite lower earnings. Is there an offset somewhere out? And it sounds like you are building more inventory, so is there an offset somewhere that gets you to that still $175 million of free cash flow?

Yes. I think Scott, what you need to understand is while we built a little bit more inventory year to date, the idea is that inventory will bleed through in the back half of the year. So I think we'll get a bit more benefit coming out of working capital that should work to offset the earnings miss there.

Okay. Thanks.

Thanks Scott.

Ghansham Panjabi, Robert W. Baird.

Hello this is actually Matt Krueger sitting in for Ghansham. How are you guys doing this morning? First, on a high level. How do you view the potential for further investment in the metal food can business? And then its profitability potential currently versus say a decade ago? And I'll frame that up: particularly in the context of shifting market dynamics and changing consumer preferences that you guys have seen.

Well let's see, on investment I'd say what we always have, which is, that it's not easy to find for us metal opportunities. If you mean investment, let me caveat that. On the acquisition side, it's not easy to find things. So we certainly look and would love to find businesses that marry up well to our metal business. But that's not easy to do.

If you're talking more organic investment, I would say that we've obviously just been through a fairly major set of that. So I think that's not high on our priority list right now. I think we would expect to enjoy the benefits of the new plant that we put in over the next couple of years. And so I wouldn't think that's likely to be a major investment there.

But in terms of opportunity, and you're asking a big question there. But we think of the food cans same as we always have. Which is that we expect to be kind of flattish through maybe even modest decline over time. That has been fine for us. But what we continually do is over time will rationalize capacity out, right size, too, what that market is. But we don't see big penetration risks against what is the food can today.

Again, it is primarily everything we do is retorted product and pretty rigorous retort systems. And so we just don't see big alternative packaging threats. Again if you're declining, you're losing share of stomach over time that's always been the case. So, we really don't envision big changes to our historical pattern on that.

Great that's really helpful. And then switching over to capital allocation. Can you provide an updated view on your capital allocation preferences? And then, when could we expect say something like share buybacks in the future a little more heavily?

I don't think anything is really changed in our discipline or our strategy. It has long been the case looking for acquisition opportunities sits at the forefront of the interest. And I think, of the skill set, of the team here to try and build out the portfolio and add to the return element. So we still go down that path looking at every potential acquisition in and around our space to evaluate whether or not it fits the strategic profile and the return profile. It's no secret that valuations are pretty high and price does matter. So I think we have proven that our discipline has remained intact and that will be so going forward.

With that as a backdrop, we have said that we will run the balance sheet at a 2.5 to 3.5 times net debt to EBITDA leverage ratio will be forecasted to end this year in a high 2's, 2.75, 2.8. I think like we've done in previous years, as we start to trend down to the low-end of that where we don't have M&A opportunities right in front of us, we will return capital to shareholders. We have no problem with that, that's the secondary point of capital for us. So, as we start to get down toward that low-end a return of capital is certainly in order.

Great. And then one more quick one, and I'll turn it over. Can you provide a quick update on the vegetable pack? Both in the US and Europe. Considering what you've seen moving into the third quarter.

In the US, really everything about the pack looks fine, normal, ordinary. Whatever words we want to put on that. The fruit's been good. Midwest, as you heard was a little earlier than we thought. Last year was very early and very strong. So the year-on-year comparison is not easy there. But tomatoes are running a little late, but I don't think there's anything much on that to be worried about at this point time.

So that's our view of the US pack. Now, obviously the other thing we haven't really talked much about yet is we did make a bit of a call down on volume around that. That is not about the growing conditions. That's very specific to a few of our customers, who for a variety of reasons around inventory management, share position that they picked up last year that may be they thought they would hold that perhaps the customer won't hold. And then shifts at the retail level. So it has very little to do with the pack, has very little to do with our view of total units of cans sold. Unfortunately it has a little bit to do with our customers versus customers of our competitors, and who is going to get that share for this pack season.

And then in Europe, as Bob said it has been very wet and quite cold. That's changed a little bit in the last couple weeks but that's late news. It's not been a good growing season at all through almost the entirety of the European region. And so, we're just cautious about that. It certainly was late and hurt the second quarter. And I think usually when things get this late and this wet, you lose some things. We're bracing ourselves for some volume loss in Europe.

All right that's it. Why don't we move on. Matt, if you have more you can come back around.

Brian McGuire from Goldman Sachs.

Hello. Good morning.

Morning Brian.

Wanted to clarify on the footprint optimization issues. Just a slow down there. Were there any issues with customer satisfaction or concerns they were having about on-time delivery or performance there? Causing it? Or are these just you being a little bit more proactive about getting ahead of potential issues down the road?

Hey Brian, I will assume you're talking about the plastics business. So no, we were in tremendous amount of dialogue with our customers, making sure that we protected them in every way that we could. As we were experiencing some operational challenges. So, really it's about us just doing our job as a good strategic supplier to our main customers. And doing the responsible thing, making sure that we get this right. And get it right for them first and adjust our timelines to make sure that we are supplying them the product that they need when they want it. So it's really nothing more than that.

Okay. And just so I understand the cadence on the guidance now. It sounds like some of the earnings for the year maybe were pulled forward into 2Q. As you built inventory and there's just a bit of an issue on fixed cost absorption in the back half of the year as you sell that inventory down. And then maybe some incremental costs related to the optimization and the move. Is that summarizing it accurately?

It is. And again, so the incremental cost it'll be at a lower rate per quarter then we've had in the first half of the year as we go forward. Nothing has necessarily changed from that perspective. The startup costs go away as the two new plastic plants are operational. And, you're right; the inventory gain that we got it was less than $1 million in the second quarter. As that unwinds that will be a bit of a headwind for us in Q3 and early parts of Q4.

Okay got it. I wanted to ask on the closures business the volume there has been really strong for a while now. It certainly looks like it's outgrowing the overall beverage can market in the US. Just wondering if there's been some new customer wins there? Or do you think maybe your customers' mix has just been outgrowing the market a little bit?

I think more it's the products that we support in our closures business. So a couple of things. Number one, last year was an all-time record year for our closures segment. So, we're cycling over something that was our best performance in the history of the Company. But we are continuing to see strong demand.

We talked about it on the last call that the pre-fill to the summer beverage season started a little bit earlier this year was a little bit stronger than what we had seen in prior years. And it is continuing to go well into Q3 right now. So the specific products I'm talking about, it's not carbonated soft drinks. We're talking about sports drinks, ready to drink teas, ready to drink coffees, fruit juices, et cetera.

Those are all growing at a much faster rate than the balance of the market. Certainly in the US, but I'd also say globally. And that's where our focus and where we are very skewed to from a product support standpoint.

Okay great. Thanks very much.

Debbie Jones from Deutsche Bank.

Hello good morning. My first question is just a point of clarification on the inventory building. You quantified it for plastic, there was no inventory building benefit in the metal food segment?

That's correct. But to expand your question a little bit. Metal food did benefits in the quarter versus the rest of the year in two regards. One is, that we had more of the Midwest pack than we expected, which obviously will come out of Q3. It's not inventory point. I'm just giving you a more broad answer to that.

And then the mix in Q2 was pretty strong for us and we know that by the end of the year that mix won't be that strong. So that will give itself back and Q3 and Q4. So those are two benefits that you did have in the quarter that will reverse themselves the rest of the year. On the inventory side, nothing unusual there.

Okay that's helpful. My second question. I was hoping I can get your thoughts on the industry data that related to Silgan just given your presence in the market. If you look year to date you're seeing soup down almost 4%. Obviously pet foods doing much better. But do you [agreed] as something more related to the pack? Or is there a message here in terms of packaging format as one? And then just additionally on the two and three piece data just both of them being down. Do you feel like the shift from three-piece to two-piece has occurred? And that we should no longer see that progression going forward.

I think there sort of two-piece to three-piece. My sense is the bulk of that shift has occurred. There are probably a few elements of three-piece that can still go two-piece. But most of what is in three-piece today is there for a reason. It's not a convenient size for a two-piece line.

As to our volume versus market. Recall that we did do an acquisition of the Van Can business and related business that they were working on when we acquired them. So year to date you got some benefit of that. That makes our volume slightly better than the market. But I think from here forward I don't know of any reason why would be meaningfully different what from market moves on volumes.

Okay. And then the soup question related to packaging format?

Sorry. That was in there too? Soup was down, the industry data would say down something like 4%. I think second quarter is not a good quarter to make huge assumptions about the soup market. It is not one of the biggest markets. There also is not a lot of advertising promoting going on for soup during this particular period. So I don't necessarily lock in on that number specifically. I think there's no question that soup has been in some form of decline. We've accepted that and commented on that many times on the call.

I think we have said many times that our customers are looking at all kinds of formats to get themselves more relevant with the younger audience. And so they're definitely trying lots of different formats. And we think that's a good thing. What's important is that people eat soup.

Do we think is a huge penetration against the food can considering the huge investment base and retort install base our customers, the cost advantage of a can of soup versus any other format? We don't. What we see is our customers just trying to be relevant everywhere they can right now. And as we have always said, and we have been clear. We say this, our customers don't. But our view is that ultimately whatever the success they have with those alternate packages, it's going to be financially in their interest to try to drive those back to the cans. That is our view to be clear.

Okay. Thank you for that.

Anthony Pettinari, Citi.

Good morning. You indicated metal container volumes were down 2%. I was wondering of it possible to parse that out between North America and Europe? And then just thinking about the North American competitive environment. Understanding most of your volumes are on the long-term contract. Are you seeing any change in the pricing environment? Or any kind of excess capacity with the new market entrants? Or any impact on your pricing conversations in North America?

As to the volume, I would just say that yes, down 2%. It's a little bit more in Europe, given what we said about the growing conditions already in that market. And slightly less in the US. Although the balance makes -- it doesn't move the US that much. As to the competitive situation, I would say no change. We talked about before. There clearly is some excess capacity in certain markets. That capacity is going to continue to rattle around for a period of time.

We have not seen any significant change to our business from that. Again, our model is a slightly different than most of the rest of the market. We have tended to do very long-term contracts that are pretty transparent on pass-throughs et cetera. And so therefore our pricing gets pretty different from the market at times et cetera. And so, for us it would be a longer-term situation. You would not expected to have changed much in the short term. And it hasn't.

Okay. Okay that's helpful.

Maybe just a follow-up on Scott's question. The $0.10 reduction in full-year guidance; I think you said about half of that was plastics optimization, about half of it was weaker pack. Presumably, the weaker pack is just lost earnings. But from your comments is it accurate to say that maybe the $0.05 from plastics optimization could get realized in 2017, or in the first half of 2017 or is that not the right way to think about it?

Now I would say it's more if you lose the time to get back to the profit level the time is lost. So I think it's lost. It has no further implications going forward in our mind. But if we could have gone back to a more healed situation by Q3, then that would of been earnings that we would've gotten that we have now conceded.

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

Great thanks.

George Staphos from Bank of America Merrill Lynch.

Thanks. Hello. Good morning. My question is maybe going a little bit over the operations. Just because there have been a lot of questions on the volumes to start. Tony you mentioned that Iowa Burlington is coming up the learning curve. You're in the initial commercialization stages right now. Is there any equipment that you're waiting on? Are there any customers who haven't yet, who you anticipate being in the first year of production who have not trialed yet? Or are there any sizes products, what have you that maybe are giving you some trouble recognizing that as a whole things are going well for you?

That's a great question. So the answer is basically no. All the equipment is in. We are not waiting in any equipment. The qualification is running right along the curve we would have expected. I think in our absolute brightest, most optimized answer maybe we could have been a month early to getting ready to qualification. Maybe we could of got a little more sales in to help this year. But if you look at the schedule, as promised, we're running along that schedule. So we didn't quite make the best possible outcome on it but.

You have a lot of irons in the fire this year. So we'll give you a month of slack.

I would say on the learning thing, in truth, Silgan has not built a plant of this scale before. So for us, and I know some of our competitors do this a little more than we do. It is a big deal for us. That's why we talk a lot about it. And it's gone really well on balance. I think we have learned a lot about the capability of the equipment suppliers out there. And of course, we do some of our own work to the equipment.

So I would not want you to think that we didn't have to do a lot of bug fixing and working through on equipment as you would imagine. But I think even we were surprised how much of that there was that we had to work through. But we feel very good now about where we are in the status of it.

Okay. That's interesting Tony. Are there any key mile markers that we should ask about in the third quarter? Obviously are not going to send out a press release. Maybe you will. Hopefully you don't. But there is not going to be anything during the quarter that comes up. So next conference call, what should we be asking about operationally about Iowa in terms of it being up to curve fully?

So Iowa specifically. It would just be qualifications keep moving along. Again as we said, the line is not going to be all that meaningful to this year. Because by the time it is qualified, we're going to be through the pack. So what it could do to help us by the way, is the warehouse that we built next to it. Which is helping us logistically. And we're getting some of that benefits now.

So that's there and its helpful. But the lines can't do much for this year. So it wouldn't be all that big of a deal. Obviously if we ran into a huge operating issue we might spend more dollars trying to solve that. And then it would have some impact on inventories next year. If for some reason we were way off track, which I don't envision, then we have to start thinking about inventories and what we do for next year. But I don't see a milestone in Q3 around that's all that meaningful.

Okay. No thanks for that Tony. It's helpful.

Adam I apologize. I want to go back just to the strategies around where the tax around the optimization program plastics. Again, you produced a lot of tin inventory. It helped you in earnings. Your customers are happy with you. Everything is going well.

One question I had and I missed it if you mentioned it during the discussion. What made for the delay or the decision to delay when you would move the lines? Was it the customers telling you when they were going to take product, which then fed back into the system in terms of when you needed to start producing that product that product to have it in inventory, or was it something else?

Well I think it's a variety of things. But the most important thing was our customers and their demand pattern. Really being able to support their needs and their demands with our products. And again, moving in Q2 for some of our customers is challenging, if you think about add can business etc. It's a big quarter in Q2.

So making sure that we have the inventory in place, making sure that we were able to meet their forecast. We thought it was the prudent thing to do to again, stabilize the operation make sure we had the right amount of inventory in place before we decided to move forward with those relocations. So, it was taking all the information in front of us and making sure that we again, protected our customer in every way that we could. As we endeavored to move those lines.

Okay. Last question, and I'll turn it over. And it's two parts and they are not related. So maybe it's two questions; I apologize. First of all, have you seen any kind of impact? I wouldn't expect that you would. But have you seen any effect from Brexit relative to European demand? I know it's maybe a little bit hard to discern if there was any effect because it's been cool and wet. But that's question number one. And then question number two. Back to an earlier question, I forgot who had asked it. About penetration of other formats into metal cans. And obviously you've stated your view in the past on this Tony. What do you do about the consumer moving to the perimeter of the store relative to the center of the store? And how do you battle that? Relative to the can itself?

Thank you.

George I will take the Brexit question. And then let Tony take the last one. In terms of impact from Brexit. As you know, our food can business is predominantly pointed to the more eastern market. So from a supply standpoint we haven't really seen anything there. And as you said, with the weather conditions it may not be overly evident anyway. We don't really supply a lot into the UK market. We do have a very small closures business that came along with the Portola acquisition. It's a very small business. So as a consequence, we didn't see much and don't really expect to see much of an impact as a consequence.

(Inaudible) great question. And I think within the food can, I think really what we can do is support our customers, make sure they understand the value of the can, the economic benefit that they get from cans sold. As you know we've been sponsoring or helping sponsor a can wide program to market the benefits of the can to consumers. Trying to make them aware. It's all around that very point which is there's really good lower cost, good for your product in the center of the store. I think really on the can side, that's the bulk of what we can do.

But then our businesses, of course, to benefit a little more from perimeter. Our plastic businesses do make packages for customers that get sold on perimeter of store. If you look at our closure business it's even -- convenience stores even more perimeter of store. So, some of our other business benefit from it. But in the food can, I think it's going to be more about the education process of the value of the can.

Thank you.

Thanks.

Adam Josephson, KeyBanc.

Tony, Bob, Adam good morning. And thanks for taking my questions. Tony, just on the call down on US food can volumes. I think you mentioned some of your customers have lost share this year. Are they cutting promotions, or doing something else along those lines that would lead to share losses?

Not that we are aware of. What I had said is in one case at least, it was share gains last year that aren't being held. So I think you get a little bit of share just moving around between a variety of the customers in the marketplace. I don't think it's so much around promoting. And then I did also say that there is some inventory part to it. I think it is fair to say that broadly our fruit and vegetable customers, who are a little bit more sponsor owned than they were a decade ago, are probably a little more inclined to think hard about the inventory level that they're going to want at the end of the year. And even in a good year they may not pack to the maximum that they can. Historically, if it was a good year you would just see cans filled, and they would find a way to sell them. I think you're seeing a little less of that broadly across the market and I think that's factoring in your little bit too.

Thanks Tony. Tony you or Adam just on plastics. Can you just again go back over the past several years talk about the evolution of the plastics business? And talk about why you think 2017 and beyond will be a notably different experience for you than the past several years.

Sure. Let me start and then Adam can fix whatever I said wrong.

Again, the plastics business for us has been a fairly long story as you know. It has changed a lot from what it was. It was very much a custom-designed decorated plastic business. Largely for personal care at a point in time. Pressure sensitive labels came in and changed that paradigm to a degree.

What we've been doing over the last five years more lately is moving a little bit more towards food, which is an area that Silgan knows very well. That will never be a complete move, but more towards that a little bit more selecting customers etc. And then getting out our cost footprint, which we definitely had to do. And our view here was always that we needed to do that to really explore whether there was a strong franchise opportunity. We had to get that cost right no matter what.

So everything I'm describing to you right now is an effort to get the business on a stable point where we could then explore what its future was. So, we made the decision to take a lot of cost out. And as we all know now, we moved a little quickly on that. And a few things went against us. And we got into a bit of a ditch with our customers. And that's what we're working through now.

So, for instance, looking at where the returns of the business against investment this year doesn't make much sense to us. Because we are spending a lot of money just keeping customer supplied this year. So what we're really describing for you, by next year we expect those incremental costs to go away. That gives us some call it $15 million ish of improvement into 2017 and that would take us somewhere around a 10% EBITDA business. We can all agree on this call that against the investment year, a 10% EBITDA business is not success.

And we have said on this call that we think something like over three years the opportunity getting towards 15% EBITDA margin make sense to us and ought to be a reasonably fair threshold to decide whether the business can operate as a franchise. So that's really what we're about doing. First getting out of the ditch and fixing the problem we're in. Secondly, verifying that there is a market opportunity at a slightly higher EBITDA margin level, and returns that fit with that. And if not then we'll have to assess.

We believe that opportunity sits there. We continue to believe that this is a market that is growing. And it is a market that is underserved by quality suppliers who consistently deliver what our customers need. So we still believe there's an opportunity there but we're very focused on how much capital goes in and how much comes out. I mean that's ingrained in our core. So we don't feel good about where we are right now. We understand returns are not good now. They won't even be good if we get to that 10% EBITDA level next year. But first of all we got to do that and fix we began here, and secondly we do at this moment still think that opportunity exists.

Thanks a lot for that Tony. Just two other ones. One related to that answer.

Can you just talk about roughly what CapEx you're planning on putting into that plastics business over the next couple of years? In light of where you expect margins to get to.

It's Adam. I would say will get back to a more historic level of CapEx.

As you recall we just recently built two new plants in that business. So I would say something between $30 million-$35 million range would be what we would expect over the next couple of years. Now, again we will see what happens with our success in the marketplace. And bringing on new business that may require additional investment. But each of those decision points will be a return base decision for us. That will be a cash in cash out kind of decision just like they always are.

Thanks Adam. And Bob just for you on pension. Can you talk about any preliminary thoughts on the 2017 impact from what's happened to interest rates so far this year? I know you're over funded. But just anything you can give us on pension expense or pension income and pension funding if the tenure stays call it 1.5% or so? Thanks a lot.

You keyed in on the one metric that will impacted it for us and that is what happens to the discount rate. Now it's a little hard, because it's a point in time that we'll make that determination for us at the end of the year. So every 25 basis point move in the discount rate in either direction, but in this case we would be thinking downward based on where it is today would cost us about $2 million. So today that headwind would probably be somewhere in the $4 million to $5 million range. And that would be a reduction of pension income from where we are today.

On the positive side, we are fully funded. We sit at about 115% funded today. Our asset returns against the plant have been pretty good year-to-date holding in line with what our return expectations were. So the impact is just going to be on what happens around the discount rate. And regardless, I don't believe we'd be anywhere near a position where we have to make a pension contribution.

Thanks a lot Bob.

Mark Wilde, BMO.

Good morning. Tony, just to clarify. It sounds like with the Midwest pack coming in a little early and you said Burlington could have been maybe a month earlier. Should we assume that there's no real benefit no real contribution from Burlington in 2016?

Yes with one caveat. From the equipment there's really no big contribution. They'll get qualified. It will help us on determining how much inventory we need going into next year. The one except for that part of it that we also built a sizable warehouse logistics was one of our problems. We are beginning to get some benefit of using that warehouse. So that is envisioned in the numbers.

Okay. Can you give us some sense as we move from 2016 to 2017 how much of a benefit you would expect from Burlington?

Sure. And this shouldn't sound like a change to anybody. But if you go back, last year we spent some $20 million of inefficiency costs. This year that number is going to be about $15 million. And a portion of that is start-up costs. So essentially what happens with the line is that $15 million goes away next year. And so you get something in the order of a $15 million, $16 million EBITDA benefit from the line year on year comparison. Now you get the depreciation with that too. So you will pick up some $6 million of depreciation. So something like a $9 million maybe $10 million on the EBIT line.

Okay all right that's helpful. And then Tony, just thinking about growing the franchise going forward. Can you just talk to us about the areas that you're most focused on, whether it's geographic or by product?

Sure.

I'm particular curious about whether there's a way to broaden the franchise in the caps and closures business.

Well I would've started right there; we agree with that. I think caps and closures definitely one area that we do see opportunity. We are pretty selective about where we want to do that, so it's not as easy as it might sound at first when you count up all the caps in the world. But I think that is definitely an opportunity for us. I think that's one of our businesses that is pretty global and so geography is a little bit less important about that.

I think secondly, on the food can side or cans in general side, we certainly have interest around that. Again were going to be pretty disciplined around price and returns that we think we can get from it. But we happily do that. Originally the move into Eastern Europe in a very different economic time I will admit, was a demonstration of the idea that we thought we could take our food can know-how and move globally on that. I think in the right set of economics that you'd continue to think about that as an opportunity.

And then I think we believe we know packaging well. So I would say also we will continue to look around on related tangential packaging areas. Again, our focus though is around this idea of sustainable, competitively advantaged businesses. So it's either going to be something we think really is a franchise that we're looking at in that case. Or it something we believe we can build to a competitively advantaged for long-term type of business.

Okay. And the last question I have is really just a question and a comment. I think a lot of us have a lot of regard for you. But this plastics thing just seems like kind of Bill Murray in Groundhog Day. Really since going back to about 2010 when you closed Port Clinton. Is there anything you could have done or what have done differently in terms of how you have sequenced the restructuring of the plastics footprint?

Yes. Not how you sequence. And I have said this once before; I'll say it again. Because the first question got me a little colder. So I had a chance to think on it and I come back to the same answer.

But, first of all, we agree with you that it's been up and down. We have had great internal discussion about why that is. And I think again one of the things that we have tried to explain to everybody is that our business it's very integrated. So you've got a lot of plants that do a bit for customers. And so when something disrupts in a plant and we try to fix it, we affect the next plant and the next plant. And it is what we call the ripple effect. So it is still amazing to us when things go wrong how fast that affects more than just the plant where it went wrong.

That's why looks like Groundhog Day. And we fully understand. And to be clear, while were not disappointed about what has happened in the last six months, we're obviously very disappointed about what has happened here. The thing I would say we could do different is we could have invested more money up front in new assets. Rather than trying to move the assets that we have. And, at the time the economics of that didn't look so good. And it looked a lot more optimal if we just moved the old asset that we had.

In retrospect, and this is now two issues of this coming through -- in retrospect in both cases that created a lot of problems for us. In the first case, because the assets we moved weren't in good enough condition. And the second time we figure that out a major the assets were in good enough condition. But what we didn't really figure out is the need of inventory throughout that process if anything went wrong. And that's where it started to unravel on us. Both of those would've been solved we had just stepped up and bought the equipment.

Okay. That's really helpful Tony. Thanks a lot good luck in the second half of the year.

Thank you.

(Operator Instructions)

Chip Dillon, Vertical.

Yes good morning Tony and Bob.

One quick question on the tax rate. You did mention it was a little elevated this quarter. And I know you had benefits in previous periods. But should we expect the number to stay in the 34% range in the back half of the year and into next year, or should it come back down?

Yes I think as we came into the year were thinking the rate would be somewhere in the 33% to 34% range. So it's probably a little bit higher near-term than what we were expecting. I still think that's the -- the 34% range is where we will and for the year. The delta is more about the impact that we saw last year, bringing the rate down. Which was really just had more to do with the distribution of where income was earned in being in more low tax jurisdictions. So where it is now is generally in line with what we would expect it to be.

Okay. I know you, in recent years, have done quite a bit in terms of taking advantage of the low interest rate environment. It just keeps getting lower. Are there possibilities that you could do things with your balance sheet on the debt side? Perhaps in Europe where you are all but being paid to borrow money. Are there opportunities or would the cost to call be too high?

Yes well, if you look at the notes, the one is not callable for another, I think it's another two years. One, we are in the call period. But I think even as low as the rates are, remember, they too were financed at the time very attractive rates. So the spread is marginal against its ability to make an early call make sense. But rest assured, it is something that we continue to look at and think about.

Likewise, our bank facility is out there. Not that I think that will have much meaning in terms of lower rates. But it will certainly give us the ability to get it structured and pushed out for a longer term. So those are things that are certainly on our mind as the rate environment continues to be low.

And one more. You've obviously done a ton of changing your footprint and restructuring here in the US and that's winding down. It's been several years sense you got into Europe in the food can business in Central Eastern Europe. And I know that those acquisitions came with the opportunity to grow organically. Are there still opportunities to do that? And secondly, would there, on the other hand be a need, possibly, to do any kind of footprint work in Europe? In terms of rationalization or shifting things around?

It's a good question. We actually have done some of that in fact. We had opened a Ukraine plant which is now been shut back down. So we have done that, and there may be other opportunities depending on what's going on in the individual regions.

I think much of that growth is on hold, certainly the Eastern strategy given the volatility in those markets. Now where we are and have a presence and we certainly are growing organically in those areas. But in terms of making a major investment into a new market right now, that's harder east at this point in time. And on the west side, we cover through Germany, so we're in that part of the region that we do cover. But I think more west than that is a little less likely.

But we will keep assessing it. If the market gets back, particularly in some of the developing regions and we have some sense that's got sustainability to it, which is probably the bigger point here. Then you could imagine looking at, it but that will certainly take some time and change of facts.

Chip the other thing I would point to there too is, obviously that's a much smaller business in scale than the US business for sure. And as a consequence, in the various geographies that it serves, the plants are therefore much smaller. While we don't necessarily rule out the activity, I would just caution not to be thinking that there is a large US-like benefit coming from any of that restructuring activity that may take place.

Okay. That's very helpful. Thank you.

Chris Manuel, Wells Fargo Securities.

Good morning.

Just two very quick follow-ups. One if we could talk for a second about the closures business. Could you share with us a little bit of the differential between say plastics closures versus metals closures? Perhaps Europe versus North America what the trajectories were like there?

Sure Chris it's Adam.

With the 3% growth that we saw in the quarter again, the majority of that unit volume was experienced in the United States. We saw growth in both substrates. But really it's plastic and the drink lines that I mentioned earlier: sports drinks, ready to drink teas were probably the two biggest single items or markets that we serve, that showed the outside of market growth for the US market. And Europe again, is a good mix of food and beverage. And I would say the business was relatively consistent as far as where they experienced their growth across their portfolio.

Okay that's helpful. And then Tony, just help me understand something. So earlier when you walked through the year-over-year lift for what you're going to be having in the metal side of the business from -- you spoke of it in terms of less drag from $20 million in startup costs to $15 million this year to it being not next year but offset a little bit. I thought also embedded in there an element of improvement was that when you were spending $100 million ish of CapEx on a new facility. And then thinking of a return you were getting from all this capital. Also being startup costs and things. A return base something in the mid teens above and beyond that.

Nothing has changed. Start up. You're absolutely right. Start up has no bearing on anything.

If you recall back at the beginning what we said is that we've had a move of customer requirements to the Midwest region. That changed our cost structure. So that is a change that occurred to the business that we were going to absorb one way or another. And so the lines' primary justification and purpose was to diffuse those costs. So in 2015 we experienced those costs completely. And we had a $0.20 to $20 million impact of those costs in the year that had nothing to do a startup, those had to do with just the logistical pressure that set of changes in our market happened to us.

The main benefit of line is getting rid of those costs, having nothing to do with start up. So that's the confusing part. So, we're getting some of that benefit this year. So now that number comes down to something more like $15 million this year which includes $5 million of start ups.

So it really comes down to $10 million. And that is partly because our operations have been better. It's partly because we had the benefit of the warehouse for the back half of the year probably out of the business. Partly because it's generally the business is doing a little bit better. And now you will step up the rest of that into 2017. So the total value of the line is something around the $15 million or $16 million on the EBITDA. The bulk of that was embedded in our cost in 2015.

Okay. I will follow back up. Thank you.

At this time that will conclude today's question-and-answer session. I'd like to turn the conference over back over to Tony for any additional or closing remarks.

Thank you everyone for your time and we look forward to talking about our third quarter in the fall.

That will conclude today's conference. We thank everyone for their participation. End of transcript.