Silgan Holdings Inc (SLGN) 2017 Q2 法說會逐字稿

Thank you for joining 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, Vice President and Controller of Silgan Holdings. Please go ahead.

Thank you. Joining me from the company today, I have Tony Allott, President and CEO; Bob Lewis, EVP and CFO; and Adam Greenlee, EVP and COO. Before we begin the call today, we would like to make it clear that certain statements made during today on this conference call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company, and therefore, involve a number of uncertainties and risks, including, but not limited to, those described in the company's annual report on Form 10-K for 2016 and other filings with the SEC. Therefore, the actual results of operations or financial conditions of the company could differ materially from those expressed or implied in the forward-looking statements.

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

Thanks, Kim. Welcome, everyone, to our second quarter 2017 earnings conference call. The agenda for the morning will focus on the financial performance for the second quarter, provide an update on the newly acquired Dispensing Systems business and review our outlook for the remainder of 2017. After prepared remarks, Bob, Adam and I will be pleased to answer any questions.

As you saw in the press release, we delivered adjusted earnings per diluted share of $0.35 for the second quarter in line with our expectations and 17% better than prior year adjusted earnings per diluted share of $0.30. Each reflective of the 2-for-1 stock split completed on May 26, 2017.

Our results include the recently acquired Dispensing Systems operations, which performed very well since the acquisition on April 5, 2017. As expected, results for the quarter for Dispensing Systems were slightly dilutive, as a result of the required purchase accounting inventory write-up. Both our metal and plastic container businesses benefited from lower manufacturing costs and improved efficiencies resulting from our recently completed footprint optimization programs.

Our closures business benefited from the inclusion of the Dispensing Systems operations in the quarter, and the legacy operations performed well, primarily due to manufacturing cost savings and efficiencies, partially offset by lower unit volumes, which were expected as we compare to a record volume quarter in the prior year.

As we move into our second full quarter of owning the Dispensing Systems business, I thought I'd point out a few of the highlights thus far. We're well underway with the integration process, both in terms of integrating into the Silgan management system and on the administrative side. Culturally, the business and management team fit very well with Silgan, and we're learning a lot from each other.

In regards to the synergy estimate of $15 million we provided upon acquisition, we remain confident that we will deliver the full estimate inside the time frame of 24 months, and continue to seek opportunities to improve our overall benefits. On the operational side, the business is performing very well and continues to build its new business opportunity pipeline. So we remain very pleased with the acquisition thus far.

Based on our year-to-date performance and our outlook for the remainder of the year, we're confirming our full year estimate of adjusted earnings per share in the range of $1.60 to $1.70 as compared to $1.38 for the full year of 2016.

With that, I'll turn it over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimates for 2017.

Great. Thank you, Tony. Good morning, everyone. As Tony highlighted, we delivered quarterly results in line with our expectations. On a consolidated basis, net sales for the second quarter of 2017 were $1.20 billion, an increase of $147.2 million as a result of the acquisition of Dispensing Systems and higher net sales in each of our legacy businesses. Net income for the second quarter was $27.9 million or $0.25 per diluted share, compared to second quarter 2016 net income of $33.3 million or $0.27 per diluted share.

Results for 2017 included rationalization charges of $3 million, acquisition cost of $9.8 million and a loss on early extinguishment of debt of $4.4 million for a total increase to adjusted earnings per share of $0.10, while 2016 included rationalization charges of $5 million, or a total increase to adjusted earnings per share of $0.03. As a result, we delivered adjusted income per diluted share of $0.35 in 2017 versus $0.30 in 2016, or an increase of approximately 17%,

Interest and other debt expense before loss on early extinguishment of debt for the second quarter of 2017 was $29.1 million, an increase of $12.2 million as compared to the prior year quarter. The increase in -- is primarily due to higher average outstanding borrowings as a result of additional borrowings to fund the acquisition of Dispensing Systems and higher average weighted interest rates, including the impact of increasing our long-term fixed rate debt through the February 2017 note issuance.

We also incurred a $4.4 million loss on early extinguishment of debt, primarily a result of the partial redemption of the 5% senior notes in April 2017. The effective tax rates were 33% and 34.4% for the second quarters of 2017 and 2016, respectively. Capital expenditures for the second quarter of 2017 totaled $42.4 million compared with $49.7 million in the prior year quarter. Year-to-date, capital expenditures totaled $81.3 million versus a $111.7 million in the prior year.

Additionally, we paid a quarterly dividend of $0.09 per share in June, with a total cash cost of $10.1 million. I'll now provide specifics regarding the financial performance of our 3 business franchises. The metal container business recorded net sales of $529.7 million for the second quarter of 2017, virtually unchanged versus the prior year quarter as the pass-through of higher raw material costs were mostly offset by less favorable mix of products sold and unfavorable foreign currency of $1.5 million.

Income from operations in the metal container business was $49.4 million for the second quarter of 2017 versus $45.9 million in the same period a year ago. The increase in operating income was primarily due to lower manufacturing costs and lower rationalization charges, partially offset by the unfavorable impact of a $3 million noncommercial legal settlement, a smaller build in inventory in the current period, higher depreciation expenses, foreign currency losses in the quarter and the unfavorable impact of contractual pass-through of index deflation.

Net sales in the closure business increased to $142.6 million to $349.1 million for the quarter, primarily due to the inclusion of the newly acquired Dispensing Systems operations and the pass-through of higher raw material costs, partially offset by 2% lower unit volumes in the legacy operations. The decline in unit volumes was largely as a result of lower sales for single-serve beverages as compared to record volumes in the prior year. Net sales were also negatively impacted by unfavorable foreign currency of approximately $2 million.

Income from operations in the closures business for the second quarter of 2017 was $33.8 million, up $8.5 million versus the prior year quarter. This improvement was primarily a result of the acquisition of Dispensing Systems and manufacturing cost savings and efficiencies, partly offset by lower unit volumes in the legacy closures operations.

Net sales in the plastic container business were $143 million for the second quarter of 2017, an increase of $4.5 million versus the prior year quarter. This increase was largely due to the pass-through of higher raw material costs, partially offset by a less favorable mix of products sold and the impact of unfavorable foreign currency translation of approximately $1.2 million.

Operating income increased $5.7 million to $6.7 million for the second quarter of 2017. This increase was primarily attributable to lower manufacturing costs, partially offset by higher depreciation expense.

Turning now to our outlook for 2017. Based on our year-to-date performance and the outlook for the remainder of the year, we are confirming our estimate of adjusted net income per diluted share in the range of $1.60 to a $1.70 per share, which excludes the impact from certain adjustments outlined in Table B of our press release. This estimate compares to adjusted net income per diluted share for the full year of 2016 of a $1.38.

We're also providing a third quarter 2017 estimate of adjusted earnings in the range of $0.64 to $0.71 per diluted share. And as we have discussed in prior years, given the uncertainties around the timing of the fruit and vegetable harvest in the U.S. in Europe, the results of the back half of the year could shift between the third and fourth quarters. This estimate compares to $0.61 in the third quarter of 2016.

Consistent with prior guidance, we continue to forecast free cash flow to be approximately $220 million, largely as a result of the return to more normal capital spending level as we've now completed our various footprint optimization programs and the construction of the 3 new operating facilities.

That concludes our prepared comments. So we can open it up to Q&A, and I'll turn it back to Dana so she can provide the directions for the Q&A session.

(Operator Instructions) And we'll go first to George Staphos with Bank of America Merrill Lynch.

I guess, a couple of questions on top line. If you had mentioned it, I've missed it. First of all, do you have an organic volume growth for metal in the quarter? It sounds like it was up, but it sound like it was a greater number of smaller cans because of the mix factor that you'd mentioned. And then, similarly, can you -- you gave us closures legacy volumes being down 2%. Do you have a view on what the acquired revenue was? And for that matter, if it was possible to get into the numbers, what Dispensing Systems' like-for-like volume growth was in the quarter?

Sure. George, it's Tony. First of all, on the can side, basically volumes were flat in the quarter. It -- kind of what pass through there. On the Dispensing Systems business, the revenue number there is $142.7 million of revenue. There is kind of 2 parts to that. There's growth and elements for the business, where, for instance, Europe -- there is a pretty good growth. There was growth pipeline coming through on that time. Offsetting that to a degree is the -- and I'm not going to give you a final answer because the weighting of these volumes is so different. Against that, you've got the home and garden and the North American market was weaker during this quarter versus a year ago. And so you had kind of those 2 elements going on. But the revenue came in more or less exactly where we were expecting it to as did the profits on the business.

Okay. Could you remind us what the inventory write-up was going to be for Dispensing Systems? I seem to remember, split-adjusted, it was going to be roughly a nickel, maybe touch over that, if you could provide that. It seems like you took that in operating earnings. And then the acquisition cost, that $9.8 million pretax, what was in that figure, just generally speaking?

Okay. The -- so the inventory was round about $12 million. I think that turns out to be $0.065 to $0.07 EPS impact. Bob, you want to just give them on the cost side?

Yes, sure. On the acquisition cost, there is a bit of legal cost and accounting cost as well as some advisory fees that are in there that makes up the aggregate total.

Both of those were right in line with our expectations that we talked when we first announced the deal last quarter.

Okay. My last one, I'll turn over and try to come back. So would it be appropriate to then take that $12 million in inventory write-up that you took in operations and assume that you can have that kind of step-up from 2Q to 3Q since the inventory charge won't be there? Or what would be incorrect in that methodology?

Sure. That methodology is basically correct, that's sort of a onetime hit that came through. The business tends to have a little bit of seasonality to it, not a lot. So Q2 would normally be a bit of a stronger quarter. So it's not quite linear, but it's pretty close to that. So let me finish the point that, I think, we talked about last time, I know there was at least one question out there today on it. So our view is that this business, including the -- for the inventory adjustment, will be something in the range of $0.08 accretive is kind of our view, and that's what embedded in our guidance that we're giving. So if you then added the $0.07 on top, let's say, for the inventory adjustment, you'd be at split-adjusted for $0.15, which is exactly aligned with $0.30, I think, I said last call. And then where we go from there is you -- obviously, you'd annualize that for next year. And that number does not have all the synergies. So that's more in the range of, on an annual basis, $10 million of synergies in that number. So call it, $7.5 million for the 3 quarters. And then we're saying there's still another 5 of synergies we expect to be getting out in the second year out. So when you do all that, you end up on a split-adjusted basis exactly where we were talking about a quarter ago for the business.

And we'll take our next question from Mark Wilde with BMO Capital Markets.

I wondered, Bob, just first of all, just a few little details. Is there any impact to the weakening in the U.S. dollar in your guidance? In other words, just quarter-to-quarter, the dollar has weakened, you might think that had an impact on your guidance target.

Yes. You might remember that we tend to keep ourselves pretty well hedged by the way we finance the businesses. So what you might to get is some change in the geography around the P&L, but it shouldn't have much of an impact on our overall bottom line. And what I mean by that is, we might see some change in the operational earnings, but you'll see a corresponding change in the interest line as well. So you get to a net number that's pretty well in line with what we forecasted. And that's been the case for several years now. Only in the real extreme cases where we've seen currently moves have we've seen any kind of real meaningful move in our EPS line.

Okay. And then, also, you mentioned the kind of $3 million expense for resolution of a legal dispute. Can you give us any color on that?

Not really. We're not -- we don't want to go any deeper on it. It's not all that material, and it's -- we gave what we could, which is it's noncommercial.

Okay. All right. And then I wondered if there's anything to be made of your comments around sort of pack timing? I mean, are you seeing some things right now which would suggest to you that the pack is going to be loaded a little more than usual into the fourth quarter, Tony?

No. No. The -- first of all, that language we tend to put out at this time of the year, just to remind everybody that our business does have a certain amount of movement between Q3 and Q4. So weren't really intending to convey anything there. I think the -- as an update on what we know about the pack, right now we're still expecting a reasonable pack. Last year, also, it was reasonably good pack. So there's no gain necessarily in our expectation on that. I would say that it has -- the early season was cooler and wetter. So some crops did go in a little bit later. So that means there is somewhat heightened risk of it pushing, but no one is yet declaring that it pushes from Q3 to Q4. The other thing I would just remind you is that we also talked about mix in the first quarter. The can business had a very strong mix in the first quarter. It's one of the things that helped exceed even our expectations for that quarter. And we said at that time, and we still say, by the end of the year, that's going to come back round. So one of the things we're going to see in the third quarter also is reversal of that, meaning negative mix in the third quarter versus a year prior.

Okay. All right. Last thing I wanted to talk about. Just a little bit more color on the dispensing business. First of all, sort of 3 months in here, do you have a sense -- a better sense of sort of what you think kind of a reasonable kind of annual growth target should be for that franchise?

No. I think we talked about this before. I think it's certainly going to be a little higher than most of Silgan's other businesses. So whether that means mid-single digits or a little lower than that or a little higher than that. But I think, certainly, we're expecting it to be a little bit more growth than the typical Silgan. And I'm talking pre-acquisition. There are certain markets that we definitely expect growth as we talked about in the last call. So I think the fragrance market, to pick one, the health care markets, we would expect to see pretty reasonable growth there. There are some parts of that business that are somewhat more mature like trigger sprayers and pumps, although there's developing market opportunities that continue to evolve there. So again, it will vary within the business on that. But I would think it more in the mid-single digits would be my take at it. And then as we talked about in the last call, beyond that, I think there's a lot of edges for acquisition around this in time, which gives us another vehicle for growth down the road.

Okay. And then, Tony, as you've gotten into this business, I'm just curious, one of the former parents here had a reputation for being pretty overhead-heavy. Are you seeing any evidence of this or any opportunities because of this?

Yes. So recall that our synergy was going to be a some $10 million out of the SG&A side of the business. And I think you're -- you can read us well enough to know that we're definitely expressing confidence in that. So I think there is a meaningful opportunity to work at the cost side of it. The business had something in the -- depending on what you put into SG&A, something in the high teens to maybe even higher in terms of SG&A and the business. That, to us, seems like a pretty high number. Now this business will be higher than some of Silgan's other businesses that don't have as much design, development, new product launch, et cetera. So I'm not trying to set the benchmark down to 5%. But for sure, we think there are opportunities, and that has only strengthened amongst us and the business in the time we've been together.

We'll go next to Chris Manuel with Wells Fargo Securities.

I did -- not to beat up too much on this -- on the expensing stuff, because it sounds like we all have questions there. But I do appreciate that this quarter, the home and garden business is probably a bigger component than it is some of the other quarters. But aside from that element, is there anything that changes your view that this is probably, I think what we've talked about, a mid-single-digit growth rate across whether it's personal care, whether it's health care or whether it's fragrance, beauty, et cetera?

No. As I said, it's just it varies by segments. And so it depends a little bit on what happens in those -- there's a lot of different segments in which they sell to with a common technology. But right now, I think there's really good growth opportunities. We talked about our pipeline when we -- before we acquired the business, that pipeline has nothing but built since then. So again, we feel pretty good about the growth. Now you know us to know enough that it's -- we're going to need to be sure it's good return on that, good -- we'd like cash-in, cash-out of it. So each of those will have to go under their own scrutiny. But I think it sits there for us to pursue reasonable growth and see that.

Okay. That's helpful. And then the second question I had was for a couple of the business that you flagged changes in mix that affected profitability, I think particularly in medical, particularly in plastic, could you maybe talk to us a little bit about what you're seeing? Is this just another timing issue? Is this going to be ongoing issue? And then, particularly in the plastics side, I think you talked about growth coming in chunks, it looks like things are relatively flat. If you could kind of confirm what volumes were there. And then kind of your thoughts over the balance of the year, do we start to see any of those chunks come in?

Sure. Let me try the can side of that, and I'll let Adam hit on the plastic side. But the -- what we said about mix was primarily around the first quarter of this year, which was a strong mix. And you heard me say that our expectation is that'll reverse probably the third quarter. So by end of the year, there's no meaningful change in mix. And we said this before, that's very typical of the business. It'll -- what we make and sell will swing between the quarters, but what actually gets filled through a season is pretty constant. So I would tell you it's more just chatter on the quarters and has very little to do with the change and trends of the business.

Yes. And then on the plastics side, again, we've been going through this process of portfolio rebalancing and really that's -- you're just seeing the continued impact of that on the mix line. I think as we go forward, that will stabilize, and that's kind of the direction that we've been moving for some time now. So I think that's -- it's the right trend.

Last point on this, Chris, is there is mix in revenue and then there's mix in profit. I mean, we'll probably always be talking about mix on the revenue line. Because our volume in all of our businesses, there's a big variety in what we sell. So you do get fairly sizable swings on the top line. That's not as true to the operating profits. So a lot of answers to you are more on the operating profit. And we tend -- certainly over an annual basis, we tend to be much more consistent on that side.

And then the last part of the question was the business is, I think you can confirm that it's been relatively flat this quarter, but you talked about chunks coming at times of that business would grow in increments. Now you've got a lot of your realignment, your heavy lifting done there, kind of where are we at with commercialization opportunities for that business to get chunks of growth again?

It's a great question, Chris. So the volume was essentially flat. So you are correct in that. If you go back, 2017, we've talked a lot about it. And really, the objectives are really clear. We were going to get cost of the business. We were going to stabilize the base and then deliver the $15 million of earnings improvement year-over-year. So that's what we've really been focused on, and that's what we continue to be focused on through the balance of the year. As we go forward, volume will be a storyline for us for 2018. We're going to need more volumes. So we are actively working out in the marketplace now. I would say, things will be lumpy, which is what we've said before. There's nothing necessarily in these numbers, in Q2, that would say that there's a lumpy win in there that got us to flat volume. But I think, as we go forward, you'll see some fits and starts as far as the lumpiness of new business coming in.

And we'll got next to Anthony Pettinari with Citi.

I had a couple of questions on metal containers. You saw benefit in first half from footprint optimization, is it possible to quantify the remaining benefit you expect in the second half from Burlington fully running in footprint optimization? And then separately, you cited the headwind from index deflation. Is it possible to quantify the impact in the quarter? And then can you just remind us the timing to get that back?

Sure. So basically, second half, you have almost nothing. The benefits were -- and this was what we talked about right from the very beginning. That the benefits -- by this time last year, Burlington was already up. We were -- we are benefiting from building inventories, so we were at least absorbing cost, which is the lion's share of it. So the comp was always go to be in the front half the year. Where the beginning half of last year, we had all the costs of getting started up. We still had the inefficiency costs of our system at that point in time. So very little benefit. Essentially no benefit in the back half of the year. And then the question on the deflation, it's -- the impact -- that $1 million to $2 million in the quarter, that's an estimate. I'm not actually looking at it as I said that, but I remember the scale from the beginning of the year. It's not an easily quantified number. It comes from all of our customer contracts. But it is meaningful on the year and so it's something in that scale. That comes back if and when we see inflation. There is no -- the only way to get it back is we start to inflate, and we hold our cost, hopefully, behind that inflation and we begin to winning on that again. So I guess we'll all sit here and wait and see when the inflation comes.

Yes, Anthony, if you go back to the metal side in terms of the benefits from the Iowa plant, I think what we said is there are some net $9 million benefit that we'd be getting and would be coming in the front half. And essentially, if you adjust for the settlement costs, you've gotten almost all of it as we sit here year-to-date.

Okay. That's helpful. And then I had kind of a bigger picture question with Amazon and Whole Foods, it seems like e-commerce might finally really penetrate groceries and you sell a lot of packages into the grocery aisle. Just wondering any thoughts on how e-commerce is changing? What kind of packages your customers want? Or maybe the end consumer wants? And do you anticipate an impact and what are you doing to prepare for it?

Sure. It's a great question. It seems like everyone's asking that question at this stage. It's certainly something that each of our businesses thinks about, we're talking to our customers about. I think that it's a broad answer to a broad question, and we're all going to learn a lot over the next 5 years. But I think if you look at our -- the food can, for example, I think it slots in reasonably well in an e-commerce world, right? It's self-stable. It's durable. So it -- I think it has certainly a spot in that, and certainly I don't think it's disadvantaged by that. If you look at our closures business, it depends. We may closures for plastic bottles, which I think could do great with that. We make closures for glass packages, which I think, today, have to be specially wrapped and protected. And so I think that would be -- certainly, that's one you got to watch. Now we've assumed plastics will grow at a faster rate than the metal closers anyhow, so I'm not sure it changes our world all that much. If you look at our dispensing closures, they are doing lots of work on designing packages that are e-commerce so that they don't leak, don't spray, don't -- and therefore, are kind of design specifically for e-commerce. So I think across the board, we would view it as an opportunity, maybe a modest opportunity, but an opportunity. But certainly, it's one that our customers need help with and we're spending time with them on it.

And we'll go next to Ghansham Panjabi with Baird.

Just as a follow-up to the previous question on the mix impact on plastics. I know you're making some adjustments, but can you sort of remind us which product lines you're still optimizing? And how much longer you'll be cycling this through?

Ghansham, it's Adam. Basically, our portfolio rebalancing, I will say, we're nearing the end of it now. It will always be an ongoing process. But the program that we embarked upon, we're coming to the end of as well as our footprint rationalization. So as I talked about one of the objectives for the year was stabilizing our base, that's getting the right mix, the right customer mix into the business. And for the most part, I think we're getting there towards the finish line. So as we go forward in that business to our plastic segment, we will be growing in a more favorable mix type product. And whether that's larger sizes, more differentiated product lines, et cetera, that's really where the focus of the business is going, to more differentiated packaging for our consumers' -- our customers' needs.

Okay. And then just on North American food cans, can you just sort of give us more color on the various end markets? And also, how did Europe do during the quarter for food cans?

Sure. Europe did fine. Our expectation for Europe was more in the third quarter because that's kind of when the pack comes in. So that is an area we are expecting to see some improvement, and that still -- it rolled into the numbers as an expectation of some up in Europe. We talked last call that given the scale of it, that up is -- it doesn't move the total number for us all that much. But the -- if you look at trends, it's actually a really good question. So the market for food cans was down, if you look at the industry for the quarter and year-to-date. The 2 big areas of that decline thus far are in vegetables, at about 110 million cans, I'm talking industry right now; and then the other category, which has in it fish, protein, et cetera. So if we look at that and we look at our own numbers, as kind of a benchmark to it. That makes sense to us in kind of very specific reasons. The vegetable market, some of it's timing base, some of it is a particular customer in there has gotten much more focused on inventories and what markets they serve to make money, which ones they don't. And so you can see very specifically a customer who's kind of working the volume more carefully in that market space. On the seafood side, you kind of see 2 trends going on. Last year was a really bad seafood year. And so I think there's just probably cans in that system that are now coming through the system that are on sale this year. You got some change as you always do on the fish side of where customers fill, and I think that's been a little bit negative to the market in total. So aside from those 2 items, I think the bigger trend points are you continue to see growth in pet food, up some 2% year and quarter. We think that's going to continue and has been that way for a long time. And interestingly, you're seeing for the quarter and for the year growth in soup, which I know we've all spent a lot of time on the decline in soup, but I think that's sort of an important metric. And what we're seeing there right now in its early days, there are, what I'll call, challenger brands who are focused on millennials, on health messaging, et cetera, that are smaller in size doing quite well. And then you see some of the bigger branded CPGs who are launching new labels that are, again, directed at that same group. And everything we're seeing is pretty possible results. So our data tells us that millennials and Gen X don't have any issue with can, view it as a very viable package. It's more about what's inside of the can. And so there's -- early days, there's some progress on that side. So I think I would put us as cautiously optimistic on long-term prospects around food cans, and we've been around long enough to know that this will come in fits and starts.

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

Tony, just one follow-up to that discussion. When you say cautiously optimistic long term, are you thinking flat for the category long term? Up? Slightly down? Can you give us a little -- any more perspective there?

That's a great, great question. I would never take flat out of my disclosure around food cans, right? So I think flat to optimistic part is up from there would be our take on it. And again, that's the overall market. There will be winners and losers in that. And so if your customers are the winners, you may then see some growth in that flat market. But that's -- it's not as unreasonable expectation to see flat to very modest growth.

And within that, presumably you would expect pet to be up, soup to be down, fruit and veggie to be flat roughly?

Yes. I think soup's the one that's more of a question, because you have -- it's come -- over decades, it's come down a lot as you know. So there's a lot of pent-up potential there if you can recap that market. Now I'll get -- I'm not trying to be that bullish. I'm not suggesting that this isn't a hard challenge. But I do think the consumer is package indifferent. I do think soup is a great meal or a snack delivery system, and so I think there are real opportunities there. But we'll see. So maybe soup would be more flattish if you ask me, my own view right now.

Sure. Just, Bob, a couple of clarifications. In terms of the EBIT contribution from the acquisition, I know you said the inventory write-up was $12 million. Inclusive of that $12 million, what was the acquisition contribution? Was it around $7 million, $8 million?

Yes. You're in the right range on roughly $142 million of top line revenue.

Okay. So basically all of the growth in that segment?

No, not all.

Not all. But it did certainly was the main driver was behind the improvement, both on the top line and in the profit line.

Right. Okay. Okay.

But legacy business was definitely up.

And just on resin, what are your expectations exactly for the balance of the year? And I know you talked about this before, but can you just remind us what the lags are in your business? And what you're precise exposure is just pro forma for the acquisition?

Sure. I'll just -- I'll start with our outlook on resin. As I'm sure well aware, there's a lot of moving parts, and we, as you can imagine, buy a lot of different grades and varieties of resin. So there are some puts and takes to the various resins that we buy. So for the balance of the year, we have assumed essentially no impact for resins. So we're saying flat to where we are here at the end of Q2. The lags by business, I'll start with our closures business and I'll say our legacy closures business. We're in the 30- to 60-day kind of range on the lag pass-through. On the plastic container business, we're closer to 90 days, on the quarterly pass-throughs, which is traditionally how we've serviced that market. And then as we talk about the acquired business with Dispensing Systems, we are closer to a quarterly lag there as well.

And just in terms of polypropylene versus polyethylene versus PET.

Again, we buy all 3. They are all 3 kind of in various grades amongst each. So I mean, we have the CDI data, I'm sure you do as well. So I think net-net, we're saying that it's going to be basically neutral for us for the year.

Right. Just in terms of the pounds you buy of each?

I'll say -- polyethylene, I'd say that's probably about 25% of what we buy. PET will be probably closer to 20% of what we buy. And polypropylene is probably about 30%, with the balance of other stuff getting you all the way up to 100%.

Adam, we haven't disclosed what our actual pounds purchased are and wouldn't want to.

Right.

And we'll take our next question from Debbie Jones with Deutsche Bank.

I wanted to ask another question about plastics. You've talked about the portfolio rebalancing and some comments today about looking for new volume. I couldn't quite tell if you know that have some new volume in the pipeline for this business or you're still kind of out there trying to get it? And then if you could talk about the customers that you're targeting, do they fit within what your core competency of what you already produce? Or would your new customers' targets require any incremental investment in this business?

Sure. That's a great question, Debbie, or set of questions. So as we look at the business now, we do have a little bit of new business that we've won that we've incorporated as, again, to offset some of the portfolio rebalancing. The business that we've won as well as the business that we're targeting going forward is much more food focused, versus maybe where we've been in the past with a larger focus on personal care. But I would say, food and health care are kind of the 2 real target markets for us going forward. Our asset base is good. Our asset base will produce the products that we are looking to grow in. We may still require new capital given capacity constraints on certain products. But this is very much what we do and what we've been doing in our plastics business as far as the growth profile going forward. It's just a really fine focus on going more towards food and health care.

Okay. That's helpful. And then, Bob, I was hoping you could just provide us with an update your G&A expectation for the full year? It just came in a bit lighter than we were expecting this quarter.

Yes. I think we probably signaled that at the -- on the last call. We're still in the throes of doing the valuation work. It's not complete. So I think we're -- got some timing of CapEx that's also driving some of the difference that you're seeing. I think we probably guide you to something that looks like $40-ish million of G&A is the best estimate right now for the Dispensing Systems business. So that's probably a little bit better than where we were in the last quarter. But again, valuation work is not done and that could still change a little.

Okay. Happy to do this off-line, but could you give me like a full year G&A target for the company? Is that possible?

Yes, I guess I'd probably -- I think we probably guided you to $180 million to $190 million last time. And it's probably some $8 million-or-so better than that right now.

And we'll go next to Tyler Langton with JPMorgan.

Just on the plastics side. I know you talked about EBIT improving by $15 million from the footprint. Is that still your goal? And then sort of similar in metal container, have most of those savings already been earned so far?

Yes. Good question, Tyler. So yes, we're up quite a bit year-to-date, about $12 million, I think , year-to-date in our plastics segment. And very much, as Tony had said on the metal side and we spoke about this before, we were starting to see improvement in our plastics business towards the end of last year in the back half. So most of the $15 million would've been expected in the first half. We're right on track with where we thought we would be and feel very confident that we'll deliver that $15 million.

Great. And just...

I just wanted -- I want to confirm what you said, the same is actually true on the can side. That in both cases, the projects were completed kind of mid-year, and you got the benefit at the back half of last year.

Great. And then just on the closures side, I think you mentioned that earnings were benefiting from some cost efficiencies. Is that -- I don't know if you kind of quantify that or talk about what's driving it? And then should there still be some benefit in the second half?

Sure. And that was really more targeted towards our legacy closures business. So as with our other businesses, we have spent time and energy on improving the operational footprint in that business and getting our closures manufacturer closer to our customers. And so we've experienced a tremendous impact from our team doing a very good job focusing on gaining efficiencies and getting cost out of that business, and that has been the case for years for our legacy closures business. We anticipate that continuing to go on for the foreseeable future, and we're well capitalized in that business and feeling really good about its performance. Again, what I'll say is, as we've talked about the record second quarter from 2016, the second highest shipment level in that legacy closures business was this quarter of 2017. So we're feeling very good about the performance of the business.

Great. And then just...

Tyler, I might just take you back to the guidance that we provided at the beginning of the year, too. This isn't really new news. We were forecasting in our guidance that the volume would be a tough comparison on a year-over-year basis as Adam said because of a strength of the single-serve beverage last year. But the profit dollars would benefit from some of these very cost-saving initiatives and efficiencies that we're talking about here. But we kind of had planned for this coming into the year.

It's great. Okay. Just a final question on CapEx. Are you still looking, Bob, for $165 million to $170 million for the year?

Yes, I think the last guidance we provided is $175 million, which now includes the dispensing business, and I wouldn't really have a change for that.

Next is Brian Maguire with Goldman Sachs.

It sounds like the acquisition pipeline for Dispensing Systems is pretty robust. Just wanted to know if there's any update on the timing for when you might be able to execute on that. And just kind of how you're thinking about general uses of cash between deleveraging and acquisitions of the next couple of quarters.

Yes. I think as we've said, when we did the acquisition that our primary focus, at least in the near term, is going to be on getting the integration done both the cultural fit, the administrative fit and getting our feet on the ground, of delivering the results that we communicated to the Street. Likewise, we'll also use the free cash flow to delever, get ourselves back toward the ranges that we've talked about. All that said, we continue to keep our ear to the ground for opportunities, building out that pipeline and sticking our nose under the tent where those opportunities exist. So it still is very much a key element of how we see the future growth opportunities of the overall business, not just dispensing systems, but the complete system. So we'll continue down that effort. But again, our priority near term is to use the cash for deleveraging.

And just a point of clarity, the free cash flow was assuming a 5% to 6% CapEx spend level in the Dispensing Systems business, and the growth against the pipeline is intended to fit in there. So there's no disconnect between those 2 points. We intend to grow and we intend to hit the free cash flow. It could be a particular project is so enticing, it takes us up over that. But that's not the way we're thinking it right now, we're thinking the growth will come within that CapEx constraint.

Got it. Okay. And then just one last one. I was wondering if you could give a little bit more detail on the less-favorable mix, maybe just -- back to George's comments earlier, just simply the size of the cans or end markets. Any more color you've got on what the exact mix shift was?

Sure. I mean, it really is -- it's as simple as size of can or does it have easy-open end on it or not. And so we got -- there is a quite a big variety certainly on the top line, and then some cases as that drops down on a per unit basis to the bottom line. And that's exactly what we talked in the first quarter. That we had benefited sizably from that in the first quarter and that, that was bound to reverse sometime during the year. And third quarter looks to be the time.

But the net of that is a consistent mix on a year-over-year basis. It's just timing within the quarters.

(Operator Instructions) We'll go next to Chip Dillon with Vertical Research.

One thing that we noticed is you did not consider the $3 million legal settlement as a onetime item. And is that because there are more of these to come? Or why would you not specifically exclude that?

Boy, that's funny. We had this similar conversation on the last call. I'd love to exclude it. But as a general rule, we try not to exclude too many items that -- and so, it is not expected to recur, obviously, but that's different than saying it's absolutely onetime and can't recur. So with -- in the Silgan way, we took the more conservative answer on it, put it in the numbers and just told you about it.

Got you. Okay. Well, we appreciate that. And of course, that is consistent, especially given how you also treated the inventory step-up. And just so I make sure I understood what you said to the -- in the beginning of the Q&A session, you mentioned the inventory write-up was $0.065 to $0.07, and that's gone. And then you mentioned an $0.08 number, I wasn't sure you were talking about a level of accretion or is that just the full impact of -- or partial impact of synergies. What did you mean by that $0.08 on top of the $0.07?

I was giving you want the -- what our view right now is, in the guidance we've given you, for the accretions from the business for 3 quarters after the charge for the purchase accounting on inventory. So our view right now is the business would be $0.08 on that after basis. If you want to add the inventory adjustment back on, which makes sense to me on a recurring basis, you'd be closer to sort of $0.15 for that 3-quarter period. And then I went on and said, now, if you added a fourth quarter, because you want to talk about a year, you'd be closer to $0.20 if you straight-line annualize that, it would be $0.20 accretion from the business. And then we've said there's, in our mind, another $5 million of synergy that's not in 2017 that we expect to get in the out-period. If you added that, it would be something in that $0.023-ish accretion, which ties exactly what we have said before when we were talking about $0.45 on the presplit basis.

And then -- that's very helpful. Now you mentioned also that you want to pay down debt. So I would imagine, you could push that up a few pennies as you get into '19 just from the lower debt that we would expect you to have, assuming -- I mean, at least if you don't make any other acquisitions and you therefore pay down debt.

That's right. The pay down of debt should give you some benefit over time to the P&L. And quite frankly, as well to the free cash flow.

Now, let's say the world doesn't -- isn't as friendly and you don't find additional opportunities, it would seem to me that by the end of next year, you might be in a balance sheet position to at least consider, as you do from time to time, an accelerated repurchase or, I should say, a Dutch tender which you guys tend to do. Is that -- would that be too optimistic? Or is that possible? Again, assuming, not holding you to anything, that there aren't suitable acquisition targets?

Sure. Well, there's a lot of water that needs to go under that bridge between now and then. But essentially, that would line up pretty well with our thought processes. That by the time you get to the end of this year on a pro forma basis for the deal, you'll be down in the kind of the low 4 to 4 kind of range on a leverage basis. And then generating the '18 free cash flow probably gets you up pretty close to 3 quarters of a turn to a turn of deleveraging. And now, you're kind of back in the range that we've talked about, albeit to the midpoint or higher than where we would typically be.

Right. Right.

But to be clear, what we have said is that our preferred use has always been acquisition first. And so, I think with the Dispensing Systems business, we've increased the opportunity to find acquisitions that can fit on. So I think we would certainly go through that filter first, which hopefully is a tougher filter now than it was. And then I'll go really theoretical on you, but if the world isn't good as you started the question, then probably the leverage desire of the equity market will get tougher and that'll make it a harder decision, because you'd be relevering yourself to do a buyback in a time when maybe leverage is not viewed positively by the equity markets.

Got you. That's a fair point. Now real quickly, last on the volumes. You've suggested the food can volumes, I believe you suggested they were flat if I heard correctly, and correct that. But could you talk a little bit about differences in volumes year-over-year in the U.S. and in the European operations?

So you're talking about in the second quarter?

Yes.

So the -- yes, the volumes were flat. They were actually not that different between the 2. They were down in both markets modestly -- sorry, flattish in both markets. And -- but that's not that surprising because, again, in Europe, the expectation was you see the gain in Q3. And so, we were not really expecting a lot of change in the volume in the second quarter.

Okay. Got you. And I just have to say, certainly it seems like the acquisition you made is certainly going to help reduce, a little bit at least, that seasonal downer we get in the fourth quarter. Just looking at the way you're providing the guidance, it looks like you're going to have a 3 in front of the number in the fourth quarter in almost any scenario, unless there's some massive pull up in can volume to the third quarter. But is that kind of a fair perception?

You're talking about on an EPS level now?

Yes. That having -- yes, having Dispensing Systems will help reduce a little bit of that seasonal variability, especially in terms of the fourth quarter being such a low number?

That's definitely true. That it's -- again, their biggest quarter traditionally would be second quarter, and ours traditionally has been the third. So it already helps there. And then they're steadier on the shoulder quarters, if you will, first and fourth. And so you're right, that it would smooth that out a bit. It's -- on scale, it's not enough to necessarily change it, but it helps.

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

Bob, Tony, I want to go back to metal containers for a minute. So recognizing that you took the $3 million legal settlement into operating results for 2Q. If I wanted to add that back, your results in the quarter were something around $54 million if I'm not mistaken in EBIT terms. And when I look back over all the years of quarters that I've got for Silgan going back, whatever, late '90s, I don't seem to recall ever 2Q being at that level. Clearly, the business has grown some through acquisitions. But nonetheless, that was a good quarter. Now you also said, you got most of the benefit of Burlington, the footprint initiative, et cetera, in the first half of the year implying that most of the gains or all of the gains are now done. And that last year, in the second half, you're already getting that. When I look at last year second half results -- hang with me here, okay? I'm going to come to a point on this in a minute. The results -- yes. The results in 3Q and 4Q, where some of the worst for Silgan in metal containers, if I go back -- I had to go back to, like, 2010, so I'm having trouble reconciling those 2 points. It almost seems like there should be more earnings benefit in metal in the second half of this year than you seem to be willing to talk to given you've already finished with the footprint and you also talked about the mix issue earlier. Can you give us some additional thoughts here in terms of what we should be expecting for this segment, 3Q, 4Q, given that history?

Sure. It's -- I think your history is pretty correct. It was a very good Q2 before you deal with the charge on it. I would characterize that as: one, everything we talked about Burlington et cetera; two, that just generally operations were very good; and then thirdly, I'd just say, sometimes there are quarters where nothing bad comes in that has to be mitigated, which usually is not the way it turns out. And this quarter, I just -- there was really nothing negative that came in. So it was a very good quarter. I would not want you to, therefore, try to take back a quarter and run with it. As much as I would love to do that, I don't think that works. The back half of last year, there's a lot that's going on that isn't going to go way right away. For instance, you've got this deflation in the world that comes through to our customers that we pass-through. We can't recover that until we get back to inflation. That's very meaningful. When you talk about our big quarter, that's very meaningful on the quarter. So that's something that just isn't going to go away until we get back to inflation and start moving that back to our customers. We've talked a little bit about competitive environment. We've talked about a smallish customer that was lost on the West Coast. We told you last call that was kind of a 1% of an annual business, little sub that. But that is going to be primarily coming in through our bigger quarter. So you've got that happening in there at that same time. I talked about the vegetable customers managing inventory, that had some impact in that quarter. So there are reasons why we're saying that while the second quarter was particularly good, there are other complicating factors on remainder of the year, most of which we knew and understood, and most of are kind of unique to a particular time period. So...

Understood. And we appreciate you giving us all those guardrails, Tony. Are the days of doing a $110 million of EBIT in that segment -- not that, that was my forecast, by the way for the quarter, but just bigger picture, are those days gone? And look, anything is possible, so I don't want that type of answer from you either. But reasonable probabilities, the next couple of years, do you have the ability to do $110-ish million in that segment going forward? Or is that a done deal? And then, separate -- and I'll stop here and thank you for your patience with the questions, just when I do the math on closures building in the acquisition, the volume deduction, FX, the implied price -- recognizing there are lots of apples and oranges in all this, was up probably 3% or 4%. So does that give us a picture of the mix of dispensing relative to your base closures business?

Thanks, George. So I think it's a really interesting question. I think the $110 million, and you're talking about, I think, on the -- for the quarter.

Third quarter.

Yes, I would view that as -- I would love to give you answer you took away from me, which is some day somehow. I think that in the next year or 2 is pretty aspirational, and therefore, not likely. I think in time, as we get back to an environment where we can do what we do best, which is we have inflation, we pass it through, we do a little bit better on that over time in our contract. I think that we can begin to build at that. In a deflationary world, we're playing defense the entire time on the customer contracts versus our costs. Which is good for our customers, by the way, and we talked about our Can Vision 2020, our customers have their own challenges that we need to be sensitive as well. So in some ways, it's good, at least the customer has that lower price to deal with their problems, it's not so good for our bottom line. But once we get back to inflationary world then we can continue to pull the levers we usually do and we can build with that. Without that, it's going to be very hard. The other thing you'd want is volume. But you know that we are not -- we aren't going to go out and try to get a lot volume, it's not the way we do this. We try to grow with our customers, et cetera. And of course, we've talked about, there is excess capacity in the market. So I think that all of that just says that it's hard to imagine that it's going to be a big volume growth story there. So we're going to keep doing what we always do. We're going to work hard on the costs. We're going to nibble them out. We're going to make headway on it. But that kind of a 10% improvement on our biggest quarter is -- I think that's several years away at least.

And George, on -- I was just going to jump in on that the selling price for closures. I would say that it is indicative of the difference in prices for a Dispensing System, which I'll just say, it could be anywhere up to, say, 11 pieces in that Dispensing Systems versus our legacy closure business. So if there is a price delta between those 2, and that's dropped into the price line.

So volume will be an increasingly complex conversation in that business, too.

Correct.

And we'll take a follow-up from Adam Josephson with KeyBanc.

Just along somewhat similar lines to what George was asking. So based on your plastics guidance, it sounds like you're expecting EBIT margins for the year of about 5%, which is basically the same as what you earned in the first half, and I assume that would imply EBITDA margins of closer to 9%. Correct me if I'm wrong. I think you said longer term, you want to get to that 15% EBITDA margin levels, if I'm not mistaken. If I'm remembering correctly, what do would you need to go to get from the 9% to the 15%? And over what period of time do you think you can get there?

So I think your math is roughly right. I think we'll end the year somewhere in the 9-ish maybe 10-ish EBITDA margin for the plastics segment for 2017. As we go forward, the longer-term target, to your point, is that 15% kind of EBITDA margin rate. We're going to need sales to achieve that. So back to even, I think, Debbie's question from earlier, we are out selling now. We are looking to improve the mix of products and focusing on very specific markets for growth and having some success. But we'll need to have more success. I don't know that we ever really put a definitive time line as far as an endpoint when we get to the 15% margins on an EBITDA basis, but I will say, being close to or at 10% EBITDA margins for 2017, that is the exact right step this business needed to take, going the direction to achieving, ultimately, a 15% kind of target for EBITDA margins.

And at this time, I'd like to turn the call back to our speakers for any additional or closing remarks.

Great. Thank you, everyone. We look forward to talking to you in October about our third quarter.

And that does conclude today's conference. Thank you for your participation. You may now disconnect.