Thank you for joining the Silgan Holdings second quarter 2019 earnings results conference call. Today's call is being recorded. At this time, I would like to turn the call over to Kim Ulmer, Vice President, Finance and Treasurer. Please go ahead, ma'am..

Thank you. Joining me from the company today, I have Tony Allott, Chairman and CEO, Adam Greenlee, President and COO and Bob Lewis, EVP and CFO. Before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward-looking statements.

These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks including but not limited to those described in the company's annual report on Form 10-K for 2018 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 will turn it over to Tony..

Thank you Kim. Welcome everyone to Silgan Holdings' second quarter 2019 earnings conference call. Our agenda for the morning will focus on the financial performance for the second quarter, review our outlook for 2019. After prepared remarks, Bob, Adam and I will be pleased to answer any questions that you might have.

As you saw on the press release, we delivered record second quarter adjusted earnings per share of $0.55%, a 6% increase over the prior year quarter and at the upper end of our range for expectation for the quarter. We are pleased with the performance and the prospects for each of our businesses.

The increase in adjusted earnings per share was primarily due to a 6% volume improvement in the metal container business as a result of higher volumes to a seasonal customer who had been destocking inventory in the prior year as well continued growth in pet food.

The metal container business operator successfully managed the continued challenges of significant metal inflation instigated by tariffs. Our closures business was slightly lower in EBIT as a result of foreign currency and lower pension income.

The plastic container businesses reported its 12th consecutive quarter of improved results despite similar pension headwinds.

As part of our relentless focus on cost, we also announced a footprint optimization program in the second quarter, which included the shutdown of two metal container manufacturing facilities and the withdrawal from the Central States Pension Fund.

We recorded an aggregate restructuring charge of $39.3 million, primarily related to the pension withdrawal liability. Given our performance for the first half of 2019 and our outlook for the remainder of the year, we are reconfirming our full year earnings guidance in the range of $2.10 to $2.20 per share, as compared to $2.08 in the previous year.

With that, I will turn it over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimates for 2019..

Great. Thank you Tony. Good morning everyone. As Tony highlighted, our aggregate results for this quarter were at the high end of our expectation as we benefited from improved volumes in the metal container business and stronger operating performances across each of our businesses.

These benefits were partially offset by lower non-cash pension income across the businesses, unfavorable foreign currency translation and a less favorable mix of products sold in the closures business. As a result, our adjusted earnings per share were $0.55 for the quarter, as compared to $0.52 in the second quarter of 2018.

On a consolidated basis, net sales for the second quarter of 2019 were $1.090 billion, an increase of $34.1 million or 3.2%, largely as a result of the pass-through of higher raw material costs in the metal container business, partially offset by lower sales in the closures and plastic businesses.

Results for the second quarter of 2019 includes rationalization charges of $39.3 million, primarily for the announced shutdown of two metal container facilities in the U.S.

and the recognition of the withdrawal liability associated with the withdrawal from the Central States Pension Fund which had an aggregate impact $0.27 per diluted share while the prior year quarter included a loss on early extinguishment of debt with an aggregate impact of $0.02 per diluted share.

Foreign currency translation negatively impacted our earnings for the quarter by $0.01.

Interest and other debt expense before the loss on early extinguishment of debt decreased $1.5 million to $28.4 million due to the lower average outstanding borrowings as a result of repayment of debt at the end of 2018 and the impact from foreign currency translation.

The loss on early extinguishment of debt of $2.5 million in the second quarter of 2018 was a result of the redemption of the 5% notes due 2020 and the amendment of the credit facility, each in early 2018.

The tax rate for the second quarter of 2019 was 23%, slightly lower than expected as a result of the favorable resolution of a prior year tax audit. The 2018 tax rate of 22.8% benefited from the timing of certain state tax rate changes.

Capital expenditures for the second quarter of 2019 totaled $54.4 million compared with $42.1 million in the prior year quarter. Year-to-date, capital spending totaled $116.2 million this year compared to $91.3 million in 2018.

Now we do anticipate capital spending for the full year to be approximately $200 million and this compares to $191 million in the prior year. Additionally, we paid a quarterly dividend of $0.11 per share in June with a total cash cost of $12.2 million and on a year-to-date basis, cash dividend payments totaled $26.4 million.

Moving on to the performance of each of our businesses. The metal container business recorded net sales of $575.6 million for the second quarter of 2019, an increase of $50.7 million versus the prior year quarter.

This increase was primarily a result of the pass-through of higher raw material and other manufacturing costs and higher unit volumes of approximately 6%, partially offset by the impact of unfavorable foreign currency translation of approximately $5 million.

The unit volume improvement was primarily the result of higher volumes for a seasonal customer who had been destocking inventory in the second and third quarters of the prior year as well continued growth in pet food.

Segment income in the metal container business decreased $34.2 million to $14 million for the second quarter versus $48.2 million in the same period a year ago.

The decrease in segment income was primarily attributable to the rationalization charges of $39 million in the current year, primarily as a result of the recently announced footprint optimization and withdrawal from the Central States Pension Fund and lower pension income.

These decreases were partially offset by higher unit volumes and strong operating performance. Rationalization charges for the second quarter of 2018 totaled $300,000. Sales in the closures business were $363.4 million for the quarter versus $378.8 million in the prior year quarter.

This decrease was primarily the result of unfavorable foreign currency translation of approximately $10 million and a less favorable mix of products sold. Unit volumes in the quarter increased slightly as higher unit volumes for the U.S.

beverage market were largely offset by lower unit volumes in the international markets due primarily to weather challenges.

Segment income in the closures business for the second quarter of 2019 decreased $800,000 to $46.9 million primarily due to the impact of unfavorable foreign currency translation, lower pension income and a less favorable mix of products sold, partially offset by strong operating performance.

Net sales in the plastic container business decreased $1.1 million to $154.2 million in the second quarter of 2019, primarily a result of the pass-through of lower raw material costs and the impact of favorable foreign currency translation of approximately $1 million, partially offset by volume gains of approximately 1%.

Segment income increased $200,000 to $13.4 million for the second quarter of 2019, primarily as a result of higher unit volumes, largely offset by lower pension income. Turning now to the outlook for 2019.

As you will see in the press release, we have confirmed our full year estimate of adjusted earnings per diluted share in the range of $2.10 to $2.20, which includes the headwind from the reduction of non-cash pension income of $0.13. This compares to prior year record adjusted net income per diluted share of $2.08.

We are providing a third quarter 2019 estimate of adjusted earnings in the range of $0.73 to $0.78, which includes a $0.03 headwind from the lower pension income versus the prior year record adjusted earnings per diluted share of $0.76. Given the uncertainties around the timing of the fruit and vegetable harvest in the U.S.

and Europe, results for the back half of the year could shift between the third and fourth quarters. And consistent with our prior guidance, we continue to forecast free cash flow generation to be approximately $275 million. That concludes our prepared comments. We can open it up for Q&A.

And in an effort to allow everyone to participate, I would like to remind everyone to limit their time to one question and one follow-up. So with that, I will turn it back to Rochelle and she will provide the directions for the Q&A session..

[Operator Instructions]. And we will take our first question from Chip Dillon with Vertical Research..

Yes. Good morning and thanks for all the details..

Hi Chip..

Hi Chip..

By the way and thanks for that the meeting a couple months ago or several weeks ago. My first question has to do with the food can business. You mentioned the 6% volume growth and I think back in April, you were expecting something actually slightly negative and maybe a 4% decline for the full year, if I understood you right.

What has changed there? And with the very strong volumes in the second quarter versus what you mentioned back in April, why would we see an increase in the guidance for either volume which you may have and certainly for EPS which you don't have?.

Hi Chip, it's Adam. Good questions. The 6% growth that we saw in the quarter, obviously as both Bob and Tony alluded to, that was a partial recovery of a seasonal customer who we have been talking about for some time.

So just for clarity, that volume recovery that we did see was not nearly to the extent of the decline that we saw in the prior year's quarter. So it's only a partial recovery of that customer's volume.

I think as we look forward and now being at the beginning of Q3, that customer is continuing to hold product, continuing to fill products and really the hard part is in front of them. They now have to go sell that through to the market. And we are going to see how that all plays out over the rest of this quarter, certainly.

I think our expectation and in conversations with that customer, the volumes are really focused on Q2 and Q3. So we will see another fall off of them in Q4 which now getting back to kind of the full year expectation that you asked about, we don't see much change for them now year-over-year versus having expected a decline as we came into the year.

So moving to the entire category of our food can volume, you are right. We had talked about 4% down as our expectation. We are likely to do better than that. I think we are right in our seasonally largest quarter. As Bob mentioned, we have got some potential shifts from Q3 to Q4.

Any pack volumes that moves into Q4 would be subject to late risk of pack which is frost, which is mold on tomatoes for the West Coast, et cetera. So kind of normal stuff. We think we will do better than the 4% but not moving beyond that at this point..

Okay. And then just as a quick follow up.

Could you talk about the free cash flow guidance, I think, of $275 million? And now that we have a few, the plant rationalizations, the two plants that are being taken out plus the pension, Central States withdrawal, can you talk about how that will impact free cash flow? And I would assume that $275 million does not include the impact of those but I might be wrong..

Yes. So the $275 million is consistent with the guidance that we started the year with. Essentially, the restructuring activity that we recorded doesn't really have much of a cash impact to us.

So the biggest part of that which is $36 million to recognize the present value of the liability for the withdrawal, essentially just basically records the future payment obligations which we have had historically as well.

They have just been treated as a pay-as-you-go under the normal accounting treatment and now that we have initiated the withdrawal that comes on the balance sheet but there is not much of an annual difference in the payment stream. And then the remaining part of the restructuring, a big part of it is asset write-down. So again non-cash.

So, no real impact from that restructuring activity on the free cash flow guidance..

Okay. Great. Thank you..

And next, we move to Anthony Pettinari with Citi..

Good morning. We saw some pretty extreme weather in 2Q. I guess record weather in the U.S. and then the heat wave in Europe.

I guess, can you talk about the impact to your volumes across the three businesses? And then kind of any early thoughts on the impact to 3Q pack season?.

Sure Anthony. Good question. As we kind of look at the Q2 result, there are a couple things that I think maybe were slightly different than our expectations and one was driven by weather. So you are right. We had extreme kind of across the regions in which our product to sold, certainly for food cans, but for closures as well.

So when you think about the extreme heat in Europe, that did affect the packs in Europe. And so we see a delay pack in Europe, probably a weaker pack in Europe than what we had originally expected. Again, we are cycling over a poor crop or harvest last year in Europe. And if you come back to the U.S. markets, the early packs in the U.S. market were okay.

So we are talking things like sweet peas, et cetera. Fruits were fine as well. The balance of our Midwest pack for vegetables in our West Coast, vegetables, fruit and tomato harvest are going to wind up being delayed a couple of weeks. So that does push us a little bit more into Q3.

It brings in the risk of slight into Q4 that we talked about a little bit earlier as well. But that was one of the big items that probably was different for us than we had anticipated. Secondly, I think broadly across all three of our business segments, again, we see a slight softening in some of our personal care markets that we serve as well.

And that's probably more of a global perspective just as part of what affected volumes in the quarter, maybe a little more to the closures than plastics, but pretty evenly spread between kind of our core markets in Europe and the U.S. as well..

Okay. That's very helpful. And then just following up on Chip's earlier question on metal containers and the customer inventory program. This is presumably a fairly big customer.

Is there anything about this decision that might be a read through for the broader customer set and how they are managing their inventories? Or was this just sort of a one-off turned out maybe a little bit better than you earlier expected?.

I think as we look at this specific situation, a year ago when we first surfaced this concept, it was a one-off a year ago and I think it continues to be a one-off..

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

And we will hear from Mark Wilde with Bank of Montreal next..

Good morning, Tony, Bob..

Good morning..

I wondered just if we come back to the food can volumes, it didn't seem like there was a lot of drop through to margins. I might have expected margins were essentially flat year-over-year. I know there was that pension change in there. But even with that, I might have expected a little bit of improvement in the year-to-year margin comparison..

Mark, it's Adam. As we look at the margins in the container business, there are a couple of things. You mentioned the negative impact of the lower pension income. That's about $2.5 million for the container segment.

The other item is, you have to also consider that we have significant inflation in raw material then labor and other that we are passing through to customers. Let's call that 10%. It's a significant change to the topline of the business without any margin impact.

So as we look at the margins kind of on an adjusted basis, margins are right where we expected them to be you. It's the negative mathematic impact of inflation on the margin rate..

Okay.

And then Adam, that inflation that you are seeing this year, is that something that will kind of pass-through next year? Or will you be able to recapture any of that later this year?.

Well, for the containers business, again we are passing that through essentially on a real-time basis. We have had two years in a row now and significant inflation for 2018 and 2019. We are in the throes of negotiating steel and understanding what other impact of inflation will have as we go to market for 2020.

But at this point, I would say it's kind of a real-time pass-through for us. So there is no lag on the steel siding over that..

Okay. And then just a follow-on. I am just curious about that 1% growth that you had in plastics volumes.

Were you satisfied with that? And how much more room there is in terms of loading additional volume through your plastics business?.

Sure. Good question. As we have said all along, the growth in plastics is going to be a little lumpy for us. And looking at it by quarter, it's difficult at the time. For starters, I would say we were cycling over a pretty good comp last year where we saw 4% volume growth. So that's good growth on top of really good growth.

But we think the business is well positioned for further growth. We have got kind of the operational costs platform where we wanted it to be. The business is at a profit level that allows us to continue to invest to grow the business. We do have some capacity. I think that function changes to our volume growth profile will involve capital.

And we will continue to evaluate those. We were right in telling we are winning in the market and we are back to where we are getting good opportunities for growth in the business, both on organic capacity and through growth capacity as well..

Okay. That's helpful. Good luck in the second half, Adam..

Thank you..

And Adam Josephson with KeyBanc Capital Markets will have our next question..

Thanks. Morning everyone. Adam, just a couple of follow ups to what's been asked earlier. So just to be clear, your food can volume expectations for the year have improved despite the weaker than expected pack in Europe and the delayed U.S. pack.

Is that correct?.

Yes, that is correct. Obviously, we had the pre-buy impact that we are going to be cycling over in Q4. But given the partial recovery that we talked about with the seasonal customer here and some good strength in other markets, the expectation has improved from the down 4% that we had talked about previously..

Thanks for that.

And so given that, why are you not raising EPS guidance?.

There is sort of two on that I would give you. One is just broadly, Europe is a little bit weaker across the board and when you look at all of our business you see that. So we are maintaining a little bit more caution on that. Add to that the packing in Europe is not going to be up.

So sort of it's blending into a very strong volume but it's one that's on our mind in there. And then of course, [indiscernible] has been a bit of headwind for us one way. So those two. And again, I don't think that, Adam, kind of signals that the volumes are going to be raging against that. I think it's going to lapped down on the year.

That's going to be all entirely driven by probably the pre-buy. But we are talking about a fairly modest movement in the volume just to help us, again, with some of the other concerns we have on Europe and foreign exchange..

Thanks.

And Tony, with respect to the weakness in Europe you are talking about, is that separate from the weaker than expected pack? Are you talking about the economic weakness you are seeing there as well?.

Yes. I would say both. I would say, the bigger one that impacts us right now is definitely weather and you can see it in those weather categories. But then I just look across all of our European position which is still relatively small to the total. And I would just say, Europe feels a little bit weaker to us than North America does..

Right.

And on the personal care comments, Adam or Tony, can you just elaborate a bit on where you are seeing that slight weakness?.

Sure. I think it's in both geographies, North America and in Europe for us. I think what we were talking specifically about is kind of our large branded CPGs categories, both on the bottle side and on the dispensing side. We are just seeing softness.

And it's more of a general softness versus anything in particular for one specific market, but just an overall trend that we are seeing that is just a little weaker than we expected. And again, we are going to see how things roll out here in Q3. But that's where we sit today..

Right. Thanks Adam. Just last one for me on sustainability.

Forget about what may happen at some point in the future, have you seen any actual impact on either your food can business or your plastic container business today?.

Nothing material for us..

Thanks a lot, Tony..

And next we will hear from George Staphos with Bank of America..

Hi. This is actually Molly Baum, sitting on for George. He is traveling today. But thanks for taking my question.

The first question I wanted to ask, could you give a little more color or breakdown for growth in closures between dispensing systems, metal closures and hot-fill?.

Sure. I think we will try to focus on the markets that we serve maybe than product categories..

Okay..

But I think the first point is that our U.S. beverage business did quite well. So we were expecting growth coming into the year in the U.S. beverage segment. Again, this is products like hot-fill, beverage et cetera. But that did well for us in the quarter and we expect continued growth going forward as well.

Dispensing systems were flattish for the quarter. And again, I think you can really focus that in growth in certain areas offset by weaker demand in our personal care categories. And then I think one of the bigger items that we talked about was pack related metal closure business that affect both the U.S.

but it's a larger effect to our international markets, particularly in Europe..

Thank you for that. And then a quick question on footprint rationalization for my follow-up. The first part of that being, do you expect savings associated with this rationalization? And then should we expect additional footprint rationalization? Or was this particular action kind of more related to that Central States pension? Thank you..

Yes. Molly, maybe Adam and I will split that. I will take the first part of that. So there is a small portion of savings associated with kind of the shutdown of some of the overhead of the two plants. When you think about Silgan like returns, but again, it just wasn't that big. So it doesn't really move the needle.

And in terms of the withdrawal from Central States, that really has a bit more of an ongoing cash impact because the ongoing payments will be slightly higher than what our historical payments were. Not materially but slightly. So no real meaningful impact one way or the other from that restructuring activity..

But now determined and so we were no longer subject to an unknown inflation of that number that we had in the past life. It was much more determined which is why it's going on the balance sheet..

Got it..

And then as far as the ongoing footprint optimization programs, particularly in the metal container facilities, I would just step back and say, one thing that Silgan has always done and we talked about it a lot, is this relentless focus on cost reductions and getting cost out of our systems and that will never change. We are good at it.

We continue to look at opportunities and we have no issue with continuing to tighten the system as we are looking for those cost improvements..

Got it. Thank you. I will turn it over..

And we will hear from Ghansham Panjabi with Baird next..

Hi guys. Good morning.

I guess, going back to Europe on the food can side, can you break out for us how volumes just specific to Europe in the second quarter? What did you initially plan on for the full year? And where do you think it's going to shake out as it relates to the revised outlook? And then also one of your peers was talking about competitive pricing in the region.

Are you seeing some of that as well?.

Sure. So that's good questions. So we don't confuse everybody. So Europe had a miserable pack last year, you will recall. For us, that was more later in the year not so much early in the year, but that was the case. So Europe was us slightly likely during this time period.

But we had expected quite a bit more and we expected quite a bit more in the remainder of the year. And so the caution in earning from us things are not setting up to be the kind of rebound that we had been hoping for. It could be comparable with last year. It could be a little bit better than last year. But that's sort of what's setting up.

As for competition in Europe, I would say that there are some times, particularly in kind of the Eastern markets where there is a sizable competitor who seems to be a little more focused on volume than they are on getting cost recovery through. So we have seen a little bit of volume loss. Now I am talking particularly Eastern Europe.

We supply Central and Eastern. So I don't think that's a big storyline of the business, but that is something that we have seen..

Okay. That's helpful. And then just in terms of metal food can ownership in the U.S. and Europe. Obviously, quite a few assets have changed hands. You guys are the leaders in North America. You have a very committed position across the industry for many decades and presumably going forward.

Does that, Tony, open up any sort of commercialization opportunities for you as you engage your customers, just given your commitment to the business versus maybe some of the others? Thanks so much..

Okay. Thanks. Interesting question. Yes. I don't think it changes a lot. You still have sizable food can competitors who are out there. There are still sizable entities. So the owners of them before still have equity ownership in the remaining business. So we don't view it as a change to the fundamental competitive environment in the market.

Again, our focus has always been, we have great stable customers, they have very low cost and we try to provide to those customers the opportunity for them to grow in the market. And that has always been our mean to expand and grow our food can business. And I don't really see any big change to that..

Thank you Tony..

Yes..

And our next question, we will hear from Kyle White with Deutsche Bank..

Good morning everyone. Thanks for taking my question. In your investor presentation back in June, you provided a down 1% to 2% growth estimate for the soup category going forward. Only two days after this, a large soup customer hosted its Analyst Day where the company talk about kind of winning in soup and taken a big full swing on soup.

I am just curious about your thoughts on this in general.

Does it change your growth estimate for this category? Or was that already factored in?.

Good question. I think, first of all, the story that you are talking about makes a lot of sense to us. We still think there is a great story for soup to be told. It is a great food product. It's been in our mind a little undersold in the market.

And so you have sort of a whole generation of consumers coming up who aren't fully aware of the value they can get at a very low price on the food side. So we are very heartened to see our customers getting into that game. The last time they did that, they really did see progress. So we are in every way as possible in support of that effort.

I think it's a really good idea. We haven't really changed yet because that's going to be a long-term goal that you just not get instantaneous. You can discount and get instantaneous response. But hopefully, that's only one element of a much bigger plan that will take longer.

So I think it's a good question for us to be talking about in a year or two now with that customer really stays or the market stays with this program. But you can't quickly turn this tide..

Got you. Thank you. And then just a quick one for Bob.

Are you maintaining the tax rate guidance for the full year of around 24%? I know it's trending a little bit lower here in the first half?.

Yes. I think we w came in to the year thinking it was going to be 23% to 25%. We sort of settled around 24%. Obviously there have been a few one-offs of changes in tax rates on the state level or settlement of some audits that bumped it around. But I think the 24% range is a good spot, at least, to forecast..

Thank you. I will hand it over..

And our next question, we will hear from Arun Viswanathan with RBC Capital Markets..

Great. Thanks for taking my question. Just kind of trying to ask this in a slightly different way.

If you think about the volumes, would you expect your other customers to kind of go through this seasonal restocking as well? And is that what's giving you some caution, the sense that maybe some of them start destocking? Just trying to understand given the strong performance in Q2, again, why you are not a little bit more optimistic on the year? Thanks..

To answer this, we weren't as pessimistic as you all were a year ago. We told you then, it was a one-off going on for that market and some believed, some didn't. We are telling you now, it's a one-off for that market. So I wouldn't characterize us at either side of that. We view food cans as being a very stable marketplace.

And so that's what you are hearing from us is stability. So to the specifics of your question, I mean, the particular, you have one customer doing something very unique. They were going to a very unique set of challenges and opportunities. The rest of costumers, as a general rule, manage their inventories appropriately each year.

And so they are trying to predict the path ahead which is part of the trick of their business.

How much do they fill and then they spend the rest of the year selling that off and then they come onto another pack season, look at how much inventory is left, what's their expectation for sales for next year and they have got to figure out how much to pack. That's the nature of our customer's business.

And so they do have to think about what's the right amount of bill against the inventory. But this was one unique customer who came out very publicly and said we are going to make a major move on our inventories and they did sell. And then they did, there was some amount of market selecting they did and pulled away from some markets.

And I think fortunately in hindsight, I think they looked at that and said, there is only so low you want to go before your fixed costs become important. And I think that's what's playing out now is a little bit of a question of how, what's the right scale for this. And we thought we would get some back and that just happened..

And since, just to clarify, you did get a portion of that back.

I you are not necessarily expecting this customer to go through a large kind of destocking because maybe they thought that last time they went too low in their inventories? Is that right?.

I think we are expecting some volatility here. I think that first of all, it's a little hard to know for us and for them how much of that market they can reclaim by refilling and stuff. I think we will probably be talking about this customer next year too about how things turned out, et cetera.

So I think there will be a little bit of wait and see on it. The last thing we want to make sure we clear is that our total view on volumes for food cans is still, it's going to be somewhat of a negative, not much as we said, but that's really all about it a buy forward. So that's not about the fundamental food can market either.

Just to make sure we are clear on that point..

Okay. Thanks. And just a quick question on the plastic containers market. Have you seen anything from your customers in the area of sustainability either positive or negative? Coke was talking about rPET the other day.

Is there a greater push towards certain areas of your business that you are well positioned to handle? Or is there a move away in other categories that you would want to highlight?.

Well, I think a couple of quick comments. Number one, I would say, as we have talked before, we think that it's really the sustainability focus that's going on right now and particularly in plastic products is much more around single use beverage products.

so when you take a step back and you look at the entirety of Silgan, we are just over 2% of our total revenue goes to single use beverage application. So it's really not a big part of what we do that we think it is the primary focus of the ocean plastics discussion, if you well.

Secondly, as we have said all along, we spend a great deal of time working with our customers, talking about alternative packaging concepts and now I am more talking about bioresins, I am talking about recycled resins, et cetera. They go into the products that we currently supply them.

But as Tony said earlier, there has been no meaningful change to our business around sustainability. Conversations have increased. I think awareness is greater. But no fundamental change..

Okay. Thanks..

And our next question, we will hear from Daniel Rizzo with Jefferies..

Good morning. You mentioned that you had a terrible pack in Europe last year. I was wondering just how you would characterize the U.S.

pack from last year? Are you facing a much more difficult comp domestically then you were overseas?.

Sure. The pack in the U.S. was okay last year, not necessarily a good or bad pack, just kind of as an expected pack. I would say, as we look at 2019, we are expecting a similar pack to last year.

I would tell you now that we are further into the year, as we talked about the late taxes, call it one to two weeks at this point, we are pushing more into Q4 and that brings a little greater risk profile to the pack. But our expectation is that it would be essentially a comparable pack to prior year..

Which is probably a good time to remind everybody what we said in the release which is predicting Q3 and Q4 is tricky business. So we have assumed, even though we know things are running a little late, we have assumed that most of it gets done in Q3 in the guidance.

So one of the risk we face always is that might be wrong when they shift a little Q3 to Q4. That has no impact of the year, but just as a reminder, that's always down there..

But as you said though, I mean if it does gets delayed repeatedly, you could start losing sales, that would be a Q4 event, if the weather turns again..

That's correct. You have an excellent point and that's right. If what happened it got delayed, you gat a little more chance of mold on tomatoes and browns on corn. So that's correct..

Okay.

And then just with the personal care softness, is it connected to the tariffs at all? Or is it just a general economic malaise in Europe?.

I think I would put it more to the general economic malaise and maybe more broadly than just in Europe, but certainly in Europe as well. So it's not related to the tariffs..

And it can be wrong. That business, it can be promoting activity in various products. And so some times, it's a question of what the end consumer is doing in promoting their products and timing of that and feeling for timing of that. You do see ups and downs some times in that marketplace..

Okay. Thank you very much..

[Operator Instructions]. Next, we will hear from Zachary Holt with Wells Fargo Securities..

Good morning gentlemen. This is actually Gabe. Two quick ones for you. I am scratching my head a little bit with respect to the closures volumes. I am looking at some scanner data that suggests some of the hot-fill products that you sell into, volumes have been off and part of that hit admittedly is probably weather related.

Can you talk about any risk that as we roll into the back half of the year, those products were filled in the springtime sell-through may not be as strong and the potential for volumes to follow a little bit in the back half of the year? Or am I missing something, not thinking about it correctly in closures?.

No. I think you got that right for the beverage market and particularly for the hot-fill segment in the U.S. That pre-filling season starts sometime in the late February, early March range for us.

So depending upon how much inventory our customers want to come into the season with, but the reality is again we will just use one example being sports drinks. That sports drinks consumption by consumers is much broader throughout the summer months in the U.S. market.

So our customers don't have capacity to handle those peaks so they fill prior to the season and roll-through the season with inventory.

So if you look at our hot-fill volume, Q2 is a big quarter for us, early part of Q3 is a big quarter and that is now subject to kind of the ongoing weather as to how our customers continue on in the hot-fill segment and selling product in the back half the year..

So there is little bit of risk that they fill that won't sell and that's normal for our business. Again I think things have gotten really hot since all that information we saw. So I think we feel somewhat better.

And then finally, I will just remind you what we talked about at our Analyst Meeting, which is, we spent a lot of time talking about this hot-fill volume, because the units drive a lot.

But as I think that we helped explain, the dollars and contribution are a little less on this business and so it's probably more focused on it that need be in terms of what's going to happen to our closures business..

Understood. Did you guys have, can you remind me if there was a volume expectation coming into the year for closures? And if you had to revise it or could revise it, what that might look it? What I am hearing is maybe marginally the risk skew to the downside, but nothing material..

Yes. I think I would agree with that. I think our broad closures assumption is probably two to three percentage kind of growth rate. I would say no real change to that, but if anything, the risks are outweighing the upside as we look at the balance of the year..

And the operating performance on that side. And again, if you look at the results thus far, it's really been about pension and foreign exchange.

Foreign exchange become less of a headwind for the rest of the year but the results have reinforced the fact that despite volume being a little less than we have had been expecting, the numbers look pretty good. And so, we think they will deliver on the results..

All right. And last one for me. Bob, if you can maybe address kind of just the M&A climate. If anything has changed with respect to seller expectations? There were a just few benchmarks out there recently with some larger transactions and my gut tells me, with a more dovish Fed, probably expectations haven't come in quite yet enough.

But I am just curious if you can update us there?.

Yes. I think I will start with the fact that we are well on track to get our leverage back in the range of, it's to the midpoint of the range that we have talked about pretty consistently. So that puts us squarely in a position where we could take advantage as opportunities come to bear.

We do continue to look and maintain an active pipeline Obviously, we have got a keen focus on the closure side. But we also look at other parts of the packaging market where we think we can develop a competitive advantage or where we have a competitive advantage already. So we are active. Obviously the multiples are a bit high.

So we need to find the right opportunities where we either have good synergies or we can buy them right. So I would say, I would put it broadly in the category that the Silgan discipline is still in play here as it always has been with a balance sheet that's poised and ready to take advantage should we find the right opportunity..

Thank you gentlemen. Good luck in the second half..

And we will next hear from Edlain Rodriguez with UBS..

Thank you. Good morning guys. Just one quick one on the sustainability issue. I mean, you said you are not seeing any shift yet.

But do you expect to see some shift? Like how do you expect this to play out over the next couple of years? And kind of like does that change your view on where you see attractive M&A opportunities?.

Sure. So Adam sort of covered, but I will do it again. So our view is that the big issue that probably will manifest here is going to be around single-serve beverage primarily because out of home and it's a lot of volume on that thing. So that's our view. We will see. I think against that, so that's roughly 2% of what we are.

It's just not a huge business to us. And then secondly, what we are primarily around food, personal care and home use, places where you really aren't going to want glass, where cost matters a lot, there's a lot of functionality that comes with plastics in most of the products we sell.

When we get into our dispensing business, there's immense amount of functionality that I really can't imagine anything but plastics doing. And it's not a huge amount of quantity of plastic. It can all be put into recycling. So our efforts will be more around making things recycle, being sure maybe it's bio. So we will keep working down that path.

So I really believe for our business, it's going to be more about the technology that goes into it than it is about replacement of those products. But as to M&A, then I would say roughly the same thing. So those kinds of products we would still see as being very reasonable M&A opportunities.

And you just got to be really careful around the edges of that. So thing that are closer and closer to that single-serve beverage will have, if not problems from the consumer then problems from the capacity that's being abandoned if single-serve starts to fall off. That's sort of the way we are going about it.

So as you get in the single serve beverage area, of course, we are thinking hard about that too and would be more worried about that marketplace..

Okay. And on plastics, I think in the past you have said this is a business that can grow at 3% to 4%. It seems to be lagging a little bit so far this year.

Do you think the 3% to 4% is still achievable? And like what are the puts and takes in there?.

Yes. I think a 3% growth rate for the plastics businesses is definitely attainable. We had posted really good growth last year as we were, again, kind of recovering and putting volume back into our system. So there is still opportunity here.

As we have said all along, we don't think anybody is really winning in this market that we serve with our plastic bottle business. And in fact, we probably are at the forefront of now winning in that business. So I do think there is opportunity for growth. I think 3% to 4% is probably a little high.

Somewhere around 3% is a pretty reasonable expectation for that business..

Good. Thank you..

And we will move on to Brian Maguire with Goldman Sachs..

Hi. Good morning everyone. Just kind of a bigger picture question on the metal food container volumes. There's a lot of moving pieces this quarter and the last couple of quarters between the customer destocking and now restocking and discrete weather events and things.

But I am just wondering what your sense on end-market trends and the longer term outlook is and whether it's changed at all? And, just looking back at the last couple of years, you are down a little bit in 2017, down more in 2018 in volumes and some of that was the customer destocking.

It sounds like this year, even with that customer restock happening, you are still expecting it to be down a little bit.

So do you still think that post 2019, we could be in a flat volume environment for that business? Or is there some risk that there could be volume declines ahead?.

Yes. Good question. So we talk about a lot at a recent meeting. But I think what we would say is that we still think there's a flattish market. I think to us, that encompasses down one or up one and flattish. So if some of the cans that I think is definitely down a percent, we are not going to fight that point.

The reasons that drive that, there are elements of the market that definitely have been declining and probably will continue to. So if you look at certain veg markets, fruit being the easiest example of that. It has been on a very steady decline as there's been alternate packages that are better for kids and the consumption of fruit in that case.

So our view is those will continue to decline but the point that we have been trying to show everyone is that they have become de minimis to the total volume of food cans anymore. And the things that's been on a steady growth over that same time, like pet foods are becoming a bigger and bigger part of the total.

And so, the weight of the things have been growing. So long as they keep growing, we are going to overwhelm the weight of the things that have been declining because of the relative scale of them. That's sort of our view of the market that you will continue to see that happening, but that ought to stabilize food cans in total.

And then, if you look at Silgan and kind of look at that mix, we get to gain a little bit more from that because we are a little heavier into that pet market, as an example. There's others, so there's elements of the protein area is another example of that. So broadly, we would say we still think food cans ought to be relatively flat.

It will change the nature of what it is. There was a question on the call about soup. We do think soup is an untapped potential that could change its trend. We don't see why that trend necessarily has to continue that. We haven't factored that in but that would be good news to the story. And then there's sustainability.

We should remember that this is definitely the most sustainable package that there is, right. It's the most recycle package, infinitely usable. And so as we said on the call, we don't see anything specific on that. But that doesn't mean that calls aren't coming in and there aren't opportunities.

So, we feel pretty good about this being at least flattish in the future and that we are well positioned within that marketplace..

Okay. And then when you look specifically at 2019, the reasons why volume will be down. Obviously you have got the tough comp in the fourth quarter from some of the pre-buying on the metal inflation. But other than that, it seems like you have an easy comp and you are up. You have got in some of the restock.

Anything else that you would call out sort of driving the volume declines other than that sort of tough comp later in the year?.

No. That's something as we have said before, that's roughly a 3% impact and that affects a fair bit affects Q1 than it affects Q4. So that is by far the big one. I think what we have said on this call now is, our feeling is that and we were calling for 4% for the year.

So we were calling for a little bit more than that pre-buy initially because we thought this customer might continue to destock and do what they were doing. We are now saying that doesn't look to be the case. So it's probably going to be the total will be less than the impact of the pre-buy. So less than the 3% down.

Maybe it's down, I don't know the number. I know you would write it down. I am not sure but something better than before, would be our sense on it..

Okay. Got it. I appreciate it. Thanks..

And we will move on to Mark Wilde with Bank of Montreal..

Hi Tony. I would like to just come back to that point you were making about the pressure on single-serve plastic beverage and all the interest that we are seeing now about potential moves from things like bottled water into cans.

Is there any scenario that you could see that would bring Silgan into the beverage can market?.

Well, I think we have said publicly, if we haven't I am about to, that we have certainly looked at beverage before..

Yes, I know..

Yes. So there's nothing that would say we wouldn't do it. We make quite a few cans and we understand the can market. And so it's just not a market that we found a reason and a presence to step into at this point in time. But I can't sit here today and tell you that that could never happen..

Okay.

And just general thoughts, I mean, with so much interest and speculation about growth, you think there's a risk that that business might get over-capitalized?.

Well, that's a tricky question. I think what Silgan has always said is we like businesses that are more stable, relatively low growth, because growth attracts capital and drives down returns. So I don't know why the beverage industry, if in fact it happens, would be any different than that. I think you get a lot of capacity will come in.

I will see if I can get through this dry cough..

I don't know what you are talking about..

Then you are old enough to wake me to drink. So I think we will see. We will if it grows enough and we will see how fast it comes in. That's all I know right now..

Okay. All right. Thanks Tony. Good luck with second half..

Thanks Mark..

And we will move on to Adam Josephson with KeyBanc Capital Market..

Thanks everyone for just taking one follow up. Adam, just back in personal care for a moment.

Is that, would you say, the most economically sensitive market that you serve? Or are there other markets within closures that you would consider as if not more economically sensitive than personal care?.

I would say it's probably one of the more economically sensitive markets we serve. It's certainly more than our food and beverage markets, just thinking about the products that we sell into. So yes, I think that's a fair statement..

And do you have any reason to think that the weakness you talked about was not economically related? In other words, is there any reason why your customers would suddenly be reducing their promotional activity or anything else for that matter?.

No. There's nothing that we see in the markets that would indicate that there's anything else at play there..

Only possibly timing of things. But just again, like promoting. Sometimes you will see that market slow up for a period of time and then it comes back. And it wasn't a long-term permanent shift..

Got it. Thank you Tony..

By the way, now that I can speak, can I go and make clear. I wasn't trying to send any strong signal on food can and beverage cans. And that was really just a joke. So main point is just that, who knows? But growth, our view has always been growth just naturally attracts capital. If that's the question..

Thank you. That will conclude the question-and-answer session at this time. I would like to turn the call back over to Tony Allot for any additional or closing remarks..

Great. Thank you all and we look forward to talking about our third quarter late in October. Have a good day..