Silgan Holdings Inc. Q1 2009 Earnings Call Transcript

May. 1.09 | About: Silgan Holdings, (SLGN)

Silgan Holdings Inc. (NASDAQ:SLGN)

Q1 2009 Earnings Call Transcript

April 30, 2009 11:00 am ET

Executives

Malcolm Miller – VP and Treasurer

Tony Allott – President and CEO

Bob Lewis – EVP and CFO

Adam Greenlee – EVP, Operations

Analysts

Claudia Hueston – JP Morgan

Mark Wilde – Deutsche Bank

Alton Stump – Longbow Research

Christopher Butler – Sidoti & Company

Al Kabili – Macquarie Research

Chris Manuel – KeyBanc Capital Markets

Richard Skidmore – Goldman Sachs

Kurt Meyerhoff – Consumer Edge Research

George Staphos – Banc of America

Operator

Thank you for joining Silgan Holdings First Quarter 2009 Earnings Conference Call. Today's call is being recorded. From the company today, we have Tony Allott, President and Chief Executive Officer; Bob Lewis, Executive Vice President and Chief Financial Officer; Malcolm Miller, Vice President and Treasurer; and Adam Greenlee, Executive Vice President of Operations.

At this time, I would like to turn the call over to Mr. Miller. Please go ahead.

Malcolm Miller

Thank you. 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 2008 and other filings with the Securities and Exchange Commission. 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, let me turn it over to Tony.

Tony Allott

Thank you, Malcolm. Welcome everyone to our first quarter 2009 earnings conference call. Our agenda for this morning is to review the financial performance for the first quarter and to make a few comments about our outlook for 2009. After these prepared remarks, Bob, Adam, and I will be pleased to take any questions.

As you saw in the press release, we had a solid first quarter delivering adjusted earnings per diluted share of $0.75, which was the high end of our estimate of $0.65 to $0.75 and 19% over the prior year as we successfully navigated a pretty challenging economic environment.

As expected, the most notable impact was on the demand for our plastic containers, largely in personal care where we experienced moderate volume declines for the quarter. Our closures business also continued to experience volume declines in single-serve beverage products. Offsetting these declines were very good cost controls at each of our businesses flexed their cost structure consistent with the demand they experienced for the quarter.

Our food can business came in right in the line of our expectations as volumes excluding any buy-forward effect, are holding up well. As a result of the strength of our first quarter performance, our volume outlook for the full year and the momentum we have in our businesses around cost control and manufacturing performance improvements, we remain confident in our full-year forecast. And as a result, that confirmed our guidance in the range of $3.75 to $3.95, adjusted earnings per diluted share, which at the high end represents a 7% over a very strong 2008.

For the second quarter, we are forecasting $0.75 to $0.85 per share which is down slightly from our Q2 2008 results, but we would note that that quarter was a very strong one, up 24% from its prior year comparison.

With that, I will now turn it over to Bob, to review the financial results in more detail and provide additional explanation around the earnings estimates for 2009.

Bob Lewis

Thank you, Tony. Good morning, everyone. As Tony highlighted, with the first quarter behind us, we’re off to a pretty good start to the year. As expected, the first quarter of 2009 was impacted by continued raw material volatility as tin plate steel costs increased significantly year-over-year, aluminum costs were nearly cut in half and resin saw continued declines early in the quarter.

As anticipated certain of our products continued to experience moderate volume declines as a result of the economic environment and the food can and closure businesses dealt with the impact of the fourth quarter buy-ahead in advance to the 2009 tin plate price increase.

We incurred incremental pension expense of approximately of $4 million which was offset by year-over-year interest savings of $6 million. In light of these challenges, our businesses did an outstanding job of staying focused cost controls and operating performance, allowing us to drive solid bottom line earnings. As a result, we delivered first quarter of 2009 adjusted earnings per share of $0.75, up 19% from the prior year quarter of $0.63.

In addition, as part of our ongoing efforts to pursue the most efficient low-cost platform, we approved the rationalization plan in our closures business during the quarter, which provides for a reduction in workforce in our German operation. As a result, during the quarter, we incurred pre-tax rationalization charges of $1.4 million or $0.03 per diluted share. At this point, we have not included any further estimates for this rationalization plan in our guidance.

On a consolidated basis, net sales for the first quarter of 2009 were $655.4 million, a decrease of $24.4 million or 3.6%, primarily as a result to the pass through of lower resin costs, the impact of the unfavorable foreign currency translation and volume declines across each of our businesses, partly offset by the pass through of higher tin plates deal costs.

For the first quarter of 2009, we converted these sales to net income of $27.7 million or $0.72 per diluted share compared to first quarter of 2008 net income of $21.2 million or $0.55 per diluted share. Foreign currency has very little impact on net income as we remain effectively hedged, having financed the international businesses in their local currencies and we maintain a business practice of balancing out cross-border activity to help mitigate the effect of currency on our earnings.

Interest expense decreased $5.9 million to $10.4 million for the quarter as a result of lower market interest rates and lower average borrowings including revolver borrowing as we used part of our cash position to fund working capital. As you will note on the balance sheet, we built our cash position to $201 million by the end of the quarter as we’ve adjusted our capital structure to reduce our reliance on bank borrowings during the year.

Our effective tax rate of 35.9% in the first quarter of 2009 is inline with expectations, but 80 basis points lower than the previous year quarter, as we benefited from a research and development credit which was not recorded in 2008 until the third quarter when Congress approved the credit in October.

Capital expenditures for the first quarter of 2009 totaled $23.9 million, compared with $23.8 million in the prior year quarter. As we discussed in our year-end call, we continued to focus on generating solid free cash flow and therefore we anticipate tightening our capital spending and expect to be closer to the low end of our normal range of $110 million to $140 million.

Additionally, we paid a quarterly dividend of $0.19 per share in March with the total cash cost of $7.3 million. This dividend represents an 11.8% increase versus the previous quarter’s dividend.

I will now speak about the individual businesses. The metal food container business recorded net sales of $371.6 million for the first quarter of 2009, an increase of $20.4 million versus the prior year quarter. This increase is primarily due to the effect of the pass through of higher tin plate and other inflationary cost, partly offset by the pass through of lower aluminum costs.

Unit volume declines of approximately 3% partially offsets a net increase related to the raw material pass through. The volume declines are attributable to the customer buy-ahead in the fourth quarter of 2008.

Income from operations in the metal food container business increased to $26.6 million for the first quarter of 2009 versus $25.1 million in the same period a year ago. The increase in operating income was a result of improved manufacturing efficiencies including benefits resulting from replenishing inventory that was reduced in the fourth quarter of 2008 and lower rationalization charges versus the prior year period. These benefits were partially offset by lower unit volumes, higher pension expense, and increased depreciation expense.

Net sales in the closures business decreased $14.1 million to $144.3 million for the quarter, primarily due to unfavorable foreign currency translations of $8.9 million and moderately lower unit volumes, largely due to the decline in global demand for single-serve beverages and as a result of the customer buy-ahead in the fourth quarter of 2008 ahead of the tin plate price increase.

These decreases were partially offset by the impact of slightly higher average selling prices as the pass through of higher steel costs for metal closures were partly offset by the pass through of lower resin cost for plastic closures. Income from operations in the closure business was essentially flat to the prior year at $14.3 million.

However, the first quarter of 2008 included $2.2 million benefit from the management fee income associated with operating the Brazilian business prior to closing and the first quarter 2009 had lower rationalization charges of $1.2 million versus the prior year quarter.

After adjusting for these differences, the change in operating income was driven by the benefits of ongoing cost reduction and improved manufacturing efficiency offset by lower unit volumes.

Net sales in the plastic container business decreased 17.8% or $30.7 million to $141.5 million in the first quarter of 2009, primarily as a result of a moderate decline in unit volumes as general demand weaknesses continued during the quarter.

Lower average selling prices, as a result of the pass through lower raw material cost and unfavorable foreign currency translation in our Canadian operations of $6.8 million, also negatively impacted net sales for the quarter.

Operating income in the first quarter of 2009 increased $3.5 million to $16.1 million. As expected the year-over-year resin impact was the primary driver as 2009 benefited from the lag pass through of fourth quarter 2008 and early first quarter 2009 declines in resin costs.

The first quarter of 2009 also benefited from the ongoing focus on cost reduction, improved manufacturing efficiencies and lower rationalization charges for the quarter. These benefits were slightly offset by lower volumes and higher pension expense.

Turning now to our outlook for 2009, we are off to a good start for the year with a solid quarter behind us. While we remain cautious regarding the macroeconomic environment, we operate in relatively stable markets and our businesses have done outstanding work, flexing their cost structure to react to the modest volume impact they experienced and to focus on improving manufacturing efficiencies.

As a result, we are confident and are current estimate of adjusted earnings per diluted share for 2009 and we are confirming our estimate in the range of $3.75 to $3.95, which excludes the impact of rationalization charges.

We’re also providing second quarter 2009 estimate of adjusted earnings in the range of $0.75 to $0.85 per diluted share also excluding rationalization charges. We continue to forecast that 2009 free cash will be inline with 2008, as lower cash interest and reduced capital spending will offset incremental pension fund for the year. We did make a $23 million voluntary contribution to the pension plan during the first quarter.

That concludes our prepared comments, so we can now open it up for questions and answers. Nikki, would you kindly provide the direction for the Q&A session.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we will take our first question from Claudia Hueston with JP Morgan. Please go ahead.

Claudia Hueston – JP Morgan

Hi, thanks, good morning.

Bob Lewis

Good morning, Claudia

Tony Allott

Good morning.

Claudia Hueston – JP Morgan

I was hoping you could just provide a little bit more color on the volume trends within your businesses maybe as they progressed over the quarter and if you’ve got any read into sort of early April here and what you’re seeing would be helpful. Thanks.

Tony Allott

Sure. I think Bob hit it a little bit. This is Tony speaking. On volume, essentially on the food can business and I'm sure we'll have lot more questions on this, so I’ll just say that we were down round about 3% in that business in the first quarter. We need to remember that we had an (inaudible) pre-buy. We were up 6% in the fourth quarter. So you really got to look over that period and we'll come back to that, because I'm sure it’ll come up.

As your question – trends – I think – let me finish with all the businesses. So the – on the plastics business, we essentially saw high single-digit volume declines. Remember, we are cycling again kind of the stronger part of last year, so no real surprise there. And pretty much comparable type levels on the closure side of the business and again that’s primarily driven by two things. One, the single-serve beverage side, which, again we had seen in the beginning last half of 2008. And then also you had on the metal side of that, you had pre-buy going on as well. So you had the negative side of the pre-buy with strong December.

I think your question is a little more to the trend in the quarter and I think probably we would just say that it’s pretty tough about month-by-month. It’s – what we would say is you kind of see choppy performance across the board, you get some good weeks and you get some off weeks. So it’s hard to read that.

I think we could tell you that March for instance was a little bit stronger than it was in the first part of the quarter. But really when you look shipping days, in our case, that could just as easily be explained by shipping days. So I don't think we would necessarily say there is a lot to read into the monthly trends at this point in time nor were we surprised by what happened in volumes. So I don’t think we are looking for them.

Claudia Hueston – JP Morgan

Okay. So looking at sort of your guidance for the full year, your expectations for volumes really haven’t changed much today versus where they were in January.

Tony Allott

That’s correct.

Claudia Hueston – JP Morgan

Okay. That’s it. Thanks.

Tony Allott

Great, thank you.

Operator

And our next question comes from Mark Wilde with Deutsche Bank. Please go ahead.

Mark Wilde – Deutsche Bank

Good morning.

Tony Allott

Good morning, Mark.

Mark Wilde – Deutsche Bank

I wondered if you can just talk about the market for acquisitions right now certainly are in a very good condition to look at acquisition.

Bob Lewis

Yes, Mark, this is Bob. I think you’re exactly on the point. I think our balance sheet is in very good stead. We continue to make sure and focus on liquidity for the company. For that very reason we said from the very beginning that we still have a focus on acquisitions and keeping our balancing sheet position for that was important to us.

All that said, I think, the markets have still run against us a little bit. Although I would say that the credit market seem to be opening a little bit. There is money flowing, which I think is that coupled with the fact that the sellers have been out of the market so long, it’s starting to feel like there is a little more activity at least in properties that are being ventured about as coming to market. I still think though that the sellers will continue to be patient here and wait for the right opening. But on balance, it feels to me like there’s a little bit of traction that’s starting to loosen up.

Mark Wilde – Deutsche Bank

Okay. And maybe if you could Bob, just a kind of give us some sense of kind of how you would prioritize opportunities?

Bob Lewis

Prioritize – amongst the segments you –

Mark Wilde – Deutsche Bank

Yes exactly.

Bob Lewis

Well look they’re going to be opportunistic as they come to market, so I am not sure that we necessarily have that luxury of taking what the priority is. But I think what we’ve said often is that anything in the US food can business would be synergistic and probably fit well.

Plastics, most of the opportunity is that we would likely see would sit in the US and we will see there because that seems to be one area where the competitive landscape anyway is a bit more distressed on a relative basis. And then the closures segment, either in the US or in the international segments would be just fine.

So I think the priority is really going to be what comes to market that fits up well with our franchises that’s at the right price to give us the kind of return that we’re accustomed to them and we would need to pull the trigger on a deal.

Mark Wilde – Deutsche Bank

Okay, all right. That’s helpful. Thanks very much.

Bob Lewis

Thanks Mark.

Operator

And our next question comes from Alton Stump with Longbow Research. Please go ahead.

Alton Stump – Longbow Research

Thank you, good morning.

Bob Lewis

Good morning, Alton.

Alton Stump – Longbow Research

I think as you said on your last conference call that your ’09 estimates factored in flat to maybe up slight in terms of food can volumes for the year. Just for the last question that was asked, it sure looks like we’re seeing though some evidence of a trade down on the positive side for consumers going to – not with cheaper meal items but also to the overall packaged food versus takeout space. I just want to get an idea – is that simple conservatism on your end only assume a slight uptick or is there something there that were missing?

Adam Greenlee

Alton it’s Adam. No, I think you’re right. If you look at our trends in the food can business and now just combine essentially the fourth quarter buy-ahead in our actual results here for Q1, if you put those two quarters together, the underlying volume is slightly up, we’re up probably 1.5% to 2%. So we are seeing a general uptick in the food can market.

If you take a dive into the details of our business a little bit further, some of our – our markets where we experienced softness which is a – in a core part of our business, pet food, adult nutritionals, that – those types of markets are seeing softness. So I think you peel those away from our core food can business, you would see an uptick in the overall volume for the food can.

Tony Allott

I think what Adam’s given you is a little bit of a peel back of kind of why we thought flat to modest growth make sense, because there are some parts where food cans go that we knew we’re going to be a price sensitive in this kind of market that’s proving out that way like pet food is a good example, where it's a relatively higher-priced choice than dry pet food, same with diet, supplement, nutritional beverages.

So there is some markets we kind of thought would perhaps show some elasticity in that demand, and that seems to be the case. But if you again, if you peel that out, you’ve got a – the reminder is up in the mid-single digit, so to your question about substitution or anything else going on, not at all. We feel like the food can continues to prove itself out as a very strong product in a recessionary environment. It’s just there is a lot of moving pieces in that that we’re giving you a little more flavor on.

Alton Stump – Longbow Research

Okay, great. That’s all I have. Thank you.

Tony Allott

Thanks.

Operator

Thank you. And our next question comes from Christopher Butler with Sidoti & Company. Please go ahead.

Christopher Butler – Sidoti & Company

Hi, good morning, guys.

Tony Allott

Good morning, Chris.

Bob Lewis

Good morning, Chris.

Christopher Butler – Sidoti & Company

I wanted to circle back to the acquisition question a little bit. Is it simply a situation where because of the credit market, potential targets haven’t even been out looking for acquires so there is no conversations even taking place or are we in a situation where they’re still looking for evaluations that are too high or possibly our financing costs are just too expensive with the credit market that they are?

Tony Allott

Well I wouldn’t categorize as there is no conversation. I would say that they’re limited and probably now the thing that’s limiting most is that as the credit markets have perhaps tightened up and the overall economic environment is such that it is, multiples have kind of compressed. And in many cases they have compressed so far that when companies think about the idea of selling at those multiples, there is not much of an equity position that’s left. So it sort of positions them with a free option to sit tight so to speak.

So I think it’s a combination of just the multiple compression and whether or not potential suitors would be able to finance the transactions comes into play as well. But there are certain properties that are out there that dialog is occurring. To what degrees of seriousness is really the question?

Christopher Butler – Sidoti & Company

And changing gears, if we look at the softer than usual demand in the first quarter, was there any part of that that was inventory de-stocking from the customers or even the end markets, the pantry de-stocking that we heard a little bit about or you have been on the personnel care side and is that a part of the first quarter story at all?

Adam Greenlee

Chris, it’s Adam. We certainly saw examples of specific de-stocking at retail chains both in the fourth quarter and also through a bit in the first quarter here as well. But potentially every retailer and then each of their customers is going to deal with this current economic situation in their own way and a different way. So it’s really not clear to us if the current activity in de-stocking is really any different than prior quarters or what’s going to happen down the road. So it's a pretty foggy picture as we sit here today.

Christopher Butler – Sidoti & Company

All right. I appreciate your time.

Tony Allott

Let me just add one thing Chris on that, because you started with a theory of softer than normal demand and I guess I just want to go back and say that if you take pre-buy out and you look over the six months, food cans are up almost 2%. So I might start with the question of the first hypothesis. I think we would actually characterize demand is only (inaudible).

Christopher Butler – Sidoti & Company

I appreciate the clarification.

Operator

And our next question comes from Al Kabili with Macquarie Research. Please go ahead.

Al Kabili – Macquarie Research

Hi thanks guys. On the food can business, in the outlook of second quarter, are you thinking volumes are up there flat, down in the second quarter outlook that you gave us?

Bob Lewis

I think we’re – right now the thought on that is kind of flattish, kind of consistent with the comments we’ve made so far. We are not looking for much different on that at this point in time.

Al Kabili – Macquarie Research

Okay. And so the thought being, then, that the closures and the plastic containers business, then that’s driving the year-over-year decline in earnings on volume weakness, is that fair to say?

Bob Lewis

Well – one part we made in our prepared remarks which is you got to remember that Q2 of last year was a very strong quarter, we were up 24%, much stronger than the whole year was up over the prior year. So I think part of it is just had lot of things all clicking on all cylinders in Q2 last year.

You got to remember we got high retention cost this year than we did last year, which we have talked about in the past. And so really I think we’re expecting all of the businesses to perform reasonably well. I think probably yes in one part, I think plastics will have, I would guess, the toughest comparison just because we are expecting volumes to be off there a little bit, you did have the benefit of a resin lag pass through this quarter that wouldn’t have next quarter. In fact maybe a little bit to the negative, it actually had some increase in resin going on a bit in the second quarter. So – but aside from that, I think we're expecting business to perform well and it’s just got a tough comp there. It's still – we're talking was a very strong second quarter.

Al Kabili – Macquarie Research

Okay. And then – and speaking of the resin benefit in the first quarter, any way you could quantify what that was and then also in the food can business, did you see any inventory holding gains with respect to metal in your non-contract business?

Adam Greenlee

On the resin side Al, if you take out the favorable effect of the past that Tony was talking about, essentially we would have seen a decline in income in the resin business or the plastics business, excuse me, of essentially the same kind of value that we had the increase versus prior year, so about $3.5 million decline.

Al Kabili – Macquarie Research

Okay.

Adam Greenlee

And then on the food can side, we did replenish some of the inventory that was depleted with the buy-ahead of the fourth quarter – in the first quarter for food can, so there was a slight benefit there as well.

Tony Allott

Just a point of clarification, what Adam is talking about there is that we consumed inventory our own inventory in Q4 last year. And so we essentially it suffered the consequences of that in the operation side. And what he’s saying is that we essentially started replenish some of that in Q1, we got the benefit.

To your point about kind of the purchase of steel, et cetera, not really because you got a – there’s essentially not everybody goes to the new price January 1. So by the time you work out the timing of the pass through, et cetera and the fact our contract pass through what we actually experience there is none of that holding gain as I hear you – if I understand your question completely.

Al Kabili – Macquarie Research

Right, okay. Thanks for the clarification. And then final one if I may, any read into April food can volumes thus far how they’re – how they’re tracking year-over-year.

Tony Allott

No, and based on what we said before, reading in that tightly will just likely get you into the conclusions anyhow. So there is nothing worth sharing out of that. Again we’re perfectly content with where our food can volumes are right now. Really not surprised at all and so we’re not expecting any big shift in what we have seen.

Al Kabili – Macquarie Research

Okay, thank you.

Tony Allott

Thank you.

Operator

And our next question comes from Chris Manuel with KeyBanc Capital Markets. Please go ahead.

Chris Manuel – KeyBanc Capital Markets

Good morning, gentlemen.

Tony Allott

Good morning, Chris.

Bob Lewis

Good morning, Chris.

Chris Manuel – KeyBanc Capital Markets

Couple of questions for you. First, when we think about the pre-buys that you had, you gave us some color there to help us. Do you think that the pre-buy is essentially done at this point and food cans are kind of beyond that or is there still some carry forward here into the second quarter?

Adam Greenlee

Chris, it’s Adam. If you look at the pre-buy, not all of our contracts come up January 1 as far as the new pricing for 2009. So they’re kind of staged in through the first quarter. So I think you’re seeing some of pre-buy also occurring throughout that period prior to their contracts coming up. So there is certainly were some that we talked about in Q4, but it was also staged into Q1 of it as well.

Chris Manuel – KeyBanc Capital Markets

Okay. But as we move into second quarter, whatever excess inventories that your customers may have had or depleted inventory as you may had, but essentially be – this is a one quarter event, 1Q – one-line event, would that be fair?

Tony Allott

No. What Adam is saying though is therefore you would expect some downside of that into Q2. For those that did a pre- buy later in Q2, now have them having that inventory and working a bit of that off.

Chris Manuel – KeyBanc Capital Markets

Okay, that helps, because where I was having trouble is that you indicated that second quarter volumes would be flattish, but yet your earlier comments that a absent free volume will be up one to two – you said underlying volume was up a couple of percent. Does that – is this continuing in the second quarter, does that essentially explain that difference?

Tony Allott

Yes, certainly a part of it. Part of it is that, it's we're one quarter into this year. I think you know us well enough that we're going to want to keep seeing before we kind of declare any more than that.

Chris Manuel – KeyBanc Capital Markets

I heard that before. I am just kidding. Next question I had was the plastics – you had a resin benefit you talked about in the first quarter, is that done as well or will there be some carry forward in the second quarter there as well?

Bob Lewis

Yes that was a Q1 event. In fact as Tony mentioned I think earlier in some comments, it potentially can start going against us now as we’re seeing some increases already announced for Q2 that will be a negative lag effect to some degree, but it will be very small.

Chris Manuel – KeyBanc Capital Markets

Okay. And let’s just talk a little bit about volumes in this business as well. When we think about – when we look back over the last two, three, four years, we have had customers – volumes have – normally we think of volumes in that business is being up low-single digit sort of a trajectory longer term, but we have been for the last few years at a flattish or even modestly downward trajectory. What do you think it takes to – do you think we can get back to eight, low-single digit growth or is that sort of an antiquated concept? Or what do you think it takes to get back there?

Tony Allott

I think we are expecting to get back there. I think you actually summed it up pretty well. Even this year, our expectation – remember that we're against the toughest comps now. As the year went on, you saw more of the decline last year. So our expectation is the high-single digits is not where we expect to end up in the plastic business this year, we expect that to be more low-single digit still.

And again that is impacted by kind of the general consumption demand of primarily personnel care. But we very much believe that business should get back to a low-single digit kind of growth business. We have been making as we talked about a last couple of years.

We’ve been making investments for them and some of that is actually in these numbers, so I think actually we’ll be seeing more decline quite frankly if it weren’t for that. But so, yes, we still believe that’s a low-single digit growth business and very much like our position in it.

Chris Manuel – KeyBanc Capital Markets

Okay. And the last question I had – as you look across your three business segments and you think about returns on capital today and as you’re making some of these investments – how do – it's difficult for us to look and see how returns are across the different businesses. And I know if we went back two, three, four years ago, you used to tell us that things were comparable. Well, certainly, trajectories and things in each have changed. How would you rank those three businesses today in terms of – the returns versus cost of capital and the returns versus say a corporate average?

Tony Allott

Well, look, you'd have to clearly say that our plastic container business is a little bit behind that, but it’s not significant. And still when we make investments in there we don’t – it gets no path, every new investment in that business has to meet the same threshold as a new investment in our other businesses.

So – a lot of what that is, is just kind of what’s happening to the rest of the business and the dynamic around it. So we hold everyone to the same expectation on that. And over long-term that would be our – that that is what we expect as you will see the same kind of returns out of businesses or else we ought to be deploying that capital elsewhere and that’s how we think about it. So right now behind, but we wouldn’t expect that in permanence.

Bob Lewis

Chris, the only thing I would add to that is to make sure that everybody understands that each of those businesses is outperforming its cost of capital.

Chris Manuel – KeyBanc Capital Markets

Right, okay. So if I were to look at it with respect to say your corporate average return on capital, metal food can above, plastics a bit below, where would closures fall?

Tony Allott

Closures will be above.

Chris Manuel – KeyBanc Capital Markets

Okay. Thank you, guys. Good luck.

Tony Allott

Thanks, Chris.

Operator

And our next question comes from Richard Skidmore with Goldman Sachs. Please go ahead.

Richard Skidmore – Goldman Sachs

Good afternoon. Just a couple of quick questions, guys. First, can you just remind us when your PPI adjusters kick in, I think it was in April, is that correct?

Tony Allott

No, it’s – well it’s all over – depends on what contract you’re talking about. There is no one point of time on that.

Richard Skidmore – Goldman Sachs

You don’t have like a big part of the business that’s getting price adjustments in the second quarter.

Tony Allott

That’s correct.

Richard Skidmore – Goldman Sachs

Okay. Second question, can you just remind us A, what your pension expense year-over-year increased in ’09 versus ’08 and where does that show up? Is that in the corporate expense line or does that get allocated to the businesses?

Tony Allott

It gets allocated to the businesses. It will be up for the full year about $16 million and it gets allocated out to the businesses and it also gets allocated between cost of goods sold and SG&A, so geographically it’s spread through the P&L.

Bob Lewis

So in the quarter it was about $4 million, right?

Tony Allott

That’s right.

Richard Skidmore – Goldman Sachs

Okay, okay. And then just last question – a couple of weeks ago you filed a shelf. Can you just comment – is that just normal course for Silgan to have that outstanding or any additional color you can provide on that?

Tony Allott

Yes, there is really not much to say about it. We’ve talked for a long time now that that we want to keep all avenues open around liquidity, and this was just another kind of belt and suspenders against that to put it out there. We thought it was prudent, so we went forward and did it.

Richard Skidmore – Goldman Sachs

Okay historically you haven’t had a shelf out there, and this was just putting one out there just to make sure that you have it out there.

Tony Allott

Yes, well, historically we haven’t operated in this kind of credit environment either.

Richard Skidmore – Goldman Sachs

Got it. Okay, okay. Great, thank you guys.

Tony Allott

Okay, thanks.

Operator

(Operator instructions) And we will take our next question from Kurt Meyerhoff with Consumer Edge Research. Please go ahead.

Kurt Meyerhoff – Consumer Edge Research

Hi, I had a question just on the back of the acquisition talk. You spoke of US food and US closures as well as US plastics is being an interest. How would you feel with regards to US beverages?

Tony Allott

Well, the – what we've said always is that our acquisition strategy is around two things. It’s around bolstering the franchises that we have in place and it’s around if there are other franchises in consumer goods products, and as we define franchise, you're talking about sustainable competitive positions.

So you could pick any market you wanted that's a consumer goods packaging market, and what all we could say to that is, if there was a franchise business in the market then that could be interesting to us. But aside from that it would just be adding to the franchises we currently have.

Kurt Meyerhoff – Consumer Edge Research

Thank you.

Operator

(Operator instructions) And we will take a follow up from Mark Wilde with Deutsche Bank. Please go ahead.

Mark Wilde – Deutsche Bank

Yes, Tony, just a fairly simple one. Is it possible in your food and vegetable packing business to get any kind of a read on what the packers might be committing to in terms of planting this year to give you some indication of whether they’re planning to put more in cans this fall?

Adam Greenlee

Yes, sure. Mark, it’s Adam. We’ve had fairly good visibility and to although it’s still early in the year. But if you look at our core vegetables, corn and green beans, peas that type of product, well we are seeing a slight increase in the acreage that has been contracted for plantings. If you look at tomatoes they’ve also had a slight increase there as well, actually, probably more than slight increase in tomatoes.

One thing to keep in mind with tomatoes though it’s in the Central Valley of California where they’re suffering from a severe drought as we sit here today. So tomatoes have been allocated zero water for the current period. So you’re talking about well water restrictions now for those plantings and when they’re using well water versus state supplied water, you’ve got different minerals in the well water versus state supplied, so your yields typically will go down a bit on the tomato product. So, getting back to some of the previous commentary, we feel good about the volume that we are looking at and certainly fruit and vegetable would fall in that category as well.

Mark Wilde – Deutsche Bank

Can you give us just some sense of what that acreage increase excluding the tomatoes might be?

Adam Greenlee

Core vegetables, I would say they’re up slightly, so I don’t have a percent for you off hand here. Fruit, actually, the mature trees are doing well, but they did pull some of the acreage on fruit for peaches, apricots, et cetera, out in California.

Tony Allott

That’s over the last couple of years.

Mark Wilde – Deutsche Bank

Okay. That’s helpful. Thank you.

Operator

And our next question comes from George Staphos with Banc of America. Please go ahead.

George Staphos – Banc of America

Thanks. Hi guys, good morning.

Tony Allott

Good morning, George.

George Staphos – Banc of America

Just maybe piggybacking on that, the water restrictions in California, now that’s not new news as I recall or have the conditions worsened for you here in the last several months?

Adam Greenlee

No, it’s not new news. It’s been a threat if you will for sometime. If you look at what our growers have done in California, they’ve invested fairly heavily in the infrastructure to support well water supply of irrigation here. So this is not a new subject, it’s just there are more prepared to deal with it today than they had been in the past.

Tony Allott

And probably George as I think you and I have talked about before, probably most of what we're talking about here isn't even very relevant because the fact is that canned tomatoes is only a small part of what happens to tomatoes – tomatoes on the West Coast. There is a huge paste market.

So even if yields are down, there still is a separate decision to be made about how much of the total tomatoes grown are going to end up in canned tomato product. So I think it's a lot of interesting information. It does give you a feel for how the growers are thinking about what they want to can, but in the end, it may not tell you much. They have may lower yield and still can more if they wanted to.

George Staphos – Banc of America

Right. Well, it's helpful, though, because sometimes the concerns crop up, and so the review of this helps address those concerns before they do.

Tony Allott

I agree with that.

George Staphos – Banc of America

Now in terms of SG&A, you might have mentioned this, what was behind the pickup there is at largely when I look at the P&L – is that largely the pension that I am looking at?

Bob Lewis

Well there is a couple of things in George. In 2008, we had a benefit on the SG&A line of roughly $2.2 million, which was the management fee for the Brazilian operation.

George Staphos – Banc of America

Yes.

Bob Lewis

Pension is just under $1 million year-over-year on the SG&A line, you have got some year-over-year acquisition comp in here for about $0.5 million. And then there is just some professional services in there for about $0.5 million. The rest is just kind of timing. So on the overall balance, we still feel like SG&A will be right in line with kind of historical levels.

George Staphos – Banc of America

Okay. And what would – therefore what would your guidance be for the year? What are you defining as historical levels either as a percentage of sales or dollar terms?

Bob Lewis

Yes I think if you look at percentage of sales that’s the right indication there.

George Staphos – Banc of America

Now the tax credit, can you go back, how much was in that in the quarter for you and it was related to the R&D as I heard.

Bob Lewis

Yes, essentially, you might recall that last year in the third quarter, which was after the Congress approved the research and development credit, we booked that credit all in the third quarter, which incorporated the first and second quarter component of it. And now we're just booking it on a real-time quarterly basis. So it's not very significant. I think it's about $700,000 for the full year.

George Staphos – Banc of America

Okay, fair enough. And when we look at some of the subcategories within food cans, whether it’s pet food or adult nutrition, and I guess I'm thinking more about pet food. Why do you think those markets are proving to be more price elastic. I mean you would think that can food might be a little bit less expensive than some of the pet products that are out there or some alternatives like table scraps. So why you’re seeing the volumes in the business down so much given the economy?

Tony Allott

Yes, I would say that, in fact, that's not so – that the wet pet food is a more expensive option than dry pet food. So if you're on a tight budget, and you're worried about feeding your family and kids, then there is something you can do to cutback your budget by moving into the dry pet food.

George Staphos – Banc of America

Okay. So we should be looking at down 10 or so over the course of the year within that business? Would that be fair? I know it's hard to forecast but –

Tony Allott

My guess is that that's a little too dramatic. There won’t be that kind of magnitude, but that it will be down more than the rest of the food cans, for sure.

George Staphos – Banc of America

Okay. Is there any residual effect in that market from who is the packer that had some bad product that wound up requiring product being taken off the shelf, is there any residual from that in these numbers now one or two years down the road or is that now certainly through the market?

Tony Allott

We would think that's through the market. There is no sign of that. Remember, that kind of became a broader problem than just the pet food problem where it was over with. So –

George Staphos – Banc of America

Right.

Tony Allott

No I think that’s worked through.

George Staphos – Banc of America

Okay. Last question, having had experience with you folks for a while, I know that you like to put the points on the board when you finally score the touchdown as opposed to when you're on the 30-yard line. But if you could give us some flavor for how much cushion you think you're building in or conservatism relative to the broader macro comment and uncertainty that you list on your press release that would be helpful. Otherwise, good job in the quarter, guys.

Tony Allott

Thanks, George. I would only say that that what we are doing is the same as what we have always done and we might characterize it slightly differently. I think what we’ve always said is that good news takes a long time to actually turn into P&L. When you win new business or something, you take a long time to get that. Bad news comes up really quickly.

So I think the one thing we always do when we put our forecast, et cetera, we leave some room for the bad news that’s going to creep in quickly. And essentially that’s all we do. So I would characterize what we're saying for the year is fairly typical from what we’ve been saying this time in any year, maybe with one caveat. There are a few more uncertainties out there in the general market. But again I think we’ve been clear, we think we are fairly well positioned against those general market issues. And so we think that kind of factored in here as well.

George Staphos – Banc of America

All right, maybe a last related question, I apologize for taking one more. If you think about where your expectations were, say, two or three months ago, across the businesses and across the metrics within those businesses whether it's volume, customer development, contract rebids, if there are any out there, et cetera. Are there any line realizing that you are – as you said before, perfectly happy with where trends are right now. Are there any things that are off negatively relative to your expectations as the year begins? Thanks again guys. Good luck in the quarter.

Tony Allott

Thanks, George. This is Tony. I would answer that no. I mean, look, there's bound to be puts and takes across it. But on balance, we feel that really this quarter was right in line with we expected and we’re feeling the year’s kind of unfolding so far as we had expected and so no real change in any of that.

George Staphos – Banc of America

Fair enough. Thanks.

Tony Allott

Thanks.

Operator

Thank you. And that does conclude today’s question-and-answer session. I would like to turn the conference back over to Mr. Allott, for any additional or closing remarks.

Tony Allott

Great. I just want to thank everybody for your time on what I know is a busy day. And we look forward to talking about our second quarter in not that far distant. Thanks.

Operator

And that concludes today’s conference. Thank you for your participation.

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