Silgan Holdings' (SLGN) CEO Anthony Allott on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: Silgan Holdings, (SLGN)

Silgan Holdings (NASDAQ:SLGN)

Q2 2014 Results Earnings Conference Call

July 23, 2014, 11:00 AM ET

Executives

Kimberly Ulmer - Vice President and Controller

Anthony Allott – President and CEO

Robert Lewis – EVP and CFO

Adam Greenlee, EVP and COO

Alex Wang - BofA Merrill Lynch, Research Division

Albert Kabili - Macquarie Research

Deborah Jones - Deutsche Bank AG, Research Division

Scott Gaffner - Barclays Capital, Research Division

Chip Dillon - Vertical Research Partners

Anthony Pettinari - Citigroup Inc, Research Division

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Analysts

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Christopher Manuel - Wells Fargo Securities, LLC, Research Division

Adam Josephson - KeyBanc Capital Markets Inc., Research Division

Operator

Thank you for joining Silgan Holdings' Second Quarter 2014 Earnings Conference Call. Today's call is being recorded. And at this time, I'd like to turn the call over to Kim Ulmer, Vice President and Controller of Silgan Holdings. Please go ahead.

Kimberly Ulmer

Thank you. Joining me from the company today, I have Tony Allott, President and CEO; Bob Lewis, EVP and CFO; and Adam Greenlee, EVP and COO.

Before we begin the call today, we would like to make it clear that certain statements made today on this conference 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 2013 and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements.

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

Anthony Allott

Thank you, Kim. Welcome, everyone, to our second quarter earnings conference call. As usual this morning I'll make a few brief comments, turn it over to Bob to give you a little bit more detail and then, Bob, Adam and I will be happy to take any questions that you may have.

As you'll seen in the press release this morning, we delivered a strong second quarter with the record adjusted earnings per share of $0.73, representing a 14.1% increase over a previous record second quarter.

Our Metal Container business was a bit ahead of expectations as the pack in Europe got off to a better start. In North America volumes was expected and down over the prior year quarter as a result of the very strong soup and pack volumes early in 2013.

Our Closure business continued to perform well as the integration Portola remains on track.

Our Plastic Container business continue the process of repositioning its customer portfolio, again resulting in a more favorable mix but lower volume and also made further headway reducing operating cost.

Based on our year-to-date performance and our outlook for the remainder of the year, we're confirming our full year estimate of adjusted earnings per share in the range of $3.10 to $3.30. This represent an increase of 13% to 20% over the record 2013 performance.

With that, I'll turn it over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimate for the rest of 2014.

Robert Lewis

Thank you, Tony. Good morning, everybody. As Tony highlighted, we delivered a very solid quarter. We were above the high end of our estimates as operating income in each of our businesses improved versus the prior year.

On a consolidated basis net sales for the second quarter of 2014 were $917.3 million, an increase of $37.3 million or 4.2% as increases in the Closure business partially offset declines in the Metal Container business.

Net income for the second quarter was $44 million, or $0.69 per diluted share, compared to second quarter of 2013 net income of $59.5 million, or $0.93 per diluted share which did include a $19.8 favorable tax adjustment adding $0.31 to the prior year quarter.

Results for the 2014 included rationalization charges of $900,000 million, and a net loss in Venezuela of $2.9 million for total increase of adjusted earnings per share of $0.04. While the results for 2013 included the favorable tax adjustment, rationalization charges of $900,000 and a net loss in Venezuela of $1.1 million or total reduction of adjusted earnings per share of $0.29. As a result, we delivered record adjusted income per diluted share of $0.73 in 2014 versus $0.64 in 2013.

Interest expense and other debt expense increased $3.6 million to $19 million for the quarter, primarily as a result of higher average outstanding borrowings.

Capital expenditures for the second quarter of 2014 totaled $33 million compared with $28 million in the prior-year quarter, and year-to-date capital expenditures totaled $60 million versus $53 million in the prior year.

Additionally, we paid a quarterly dividend of $0.15 per share in June, with a total cash cost of $9.7 million and repurchase shares during the quarter for a total purchase price of $7.6 million.

As we move to the specifics of the individual businesses, the Metal Container business recorded net sales of $518.7 million for the second quarter, a decrease of $12.5 million versus the prior-year quarter.

This decrease is primarily a result of lower unit volumes and the financial impact of customer contract renewals and extensions, partially offset by favorable foreign currency of $3.9 million, and a pass through of higher raw material and other manufacturing costs.

Volumes in the U.S. were lower year-over-year as a result of the difficult comparison to a prior year quarter for soup and pet food and our later start to the Midwest vegetable pack.

European volumes benefited from stronger early season packs for pears and peaches as well as incremental volume in the new plants.

Income from operations in the Metal Container business was $50.9 million for the second quarter of 2014, versus $45.7 million in the same period a year ago. The increase in operating income was primarily due to a lower depreciation, expense and manufacturing cost, the benefits from a higher inventory build in the quarter versus the prior year and improvements in Europe. These gains were partially offset by lower unit volumes in the U.S. and the impact from customer contract renewals.

Net sales in the Closure business increase $50.8 million to $232.2 million for the quarter, primarily due to an increase in the unit volumes largely due to the inclusion of Portola and the favorable impact of foreign currency of $4.6 million. These gains were partially offset by lower sales in Venezuela.

Income from operations in the Closure business for the second quarter of 2014 increased $3.5 million to $25.2 million, primarily as a result of the inclusion of Portola and lower manufacturing cost, partially offset by the negative impact from the ongoing difficulties in Venezuela and higher rationalization charges.

Net sales in the Plastic Container business was $166.4 million for the second quarter essentially unchanged versus the prior year quarter as the volume decreased and unfavorable foreign currency of $2 million were largely offset by a more favorable mix of products sold and the pass-through of higher raw material costs.

Operating income increased $1.5 million to $13 million for the second quarter of 2014. This increase was primarily related to lower depreciation expense and manufacturing cost in a more favorable mix of products sold partially offset by volume declines.

Turning now to our outlook for 2014. Based on our year-to-date performance and the outlook for the remainder of the year, we are confirming our estimate of adjusted net income per diluted share in the range of $3.10 to $3.30 per share, which excludes the impact on certain adjustments outlined in Table B of our press release.

We're also providing a third quarter 2014 estimate of adjusted earnings in the range of $1.25 to $1.35 per diluted share, which also excludes the impact from certain adjustments outlined in Table B of our press release.

Year-over-year the third quarter is expected to benefit from the inclusion of the portfolio acquisition, slightly higher unit volumes in the Metal Container business and lower depreciation and pension expense. Offsetting some of these gains of the financial impact of customer contract renewals, the impact of the earlier than expected pack in Europe, which benefited the second quarter and higher corporate expenses.

As we’ve discussed in the past years given the magnitude of the third quarter and the potential impact of unforecasted moments in harvest dates, the earnings in the back half of the year can also shift meaningfully between quarters. And I'll note that we already experienced some shift forward into the second quarter as Europe got off earlier pack season.

We continue to forecast free cash generations be approximately $200 million as we continue to invest in areas that will benefit the company over the long term and we continue to manage our working capital to an efficient and sustainable level.

In addition, we continue to see capital deployment opportunities directed to yielding the best possible return for our shareholders. As a consequence, we continue to view internal capital investments and acquisitions as the best use of our cash flow.

That concludes our prepared comments, so we can now turn it over for questions and answers, and I'll ask Yolanda to finally provide directions for the Q&A session.

Question-and-Answer Session

Operator

Certainly. Thank you. (Operator Instructions) And our first question will come from Ghansham Panjabi with Robert W. Baird.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Hey guys, good morning.

Anthony Allott

Good morning, Ghansham.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Just the pricing commentary as it relates to metal food on the renewals. I know you've been talking about the last couple of quarters, does that phase out, does that compound if you will by the end of the fourth quarter or is there more to look forward to in 2015. How should we model that?

Anthony Allott

It's basically the number we've been talking about phases out. The bulk of that get done, the tail end of last year and the beginning part of this year that doesn't mean that there is not always contract renewals come out et cetera, but the big bulk that's coming through happens this year.

Interestingly since you are on that point, it's worth noting that because of the seasonal of our business, you get quite a bit more of it impacting the third quarter just it's not a straight line number across the quarters.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Okay. That makes sense Tony. And then just given the stability you seem to be seeing in the Europe on the metal food can side, obviously 2Q has benefited to some extent from the forward. But just generally what are your thoughts on the region as it relates to your metal food can business and food to consolidation there?

Anthony Allott

I think our thoughts are similar to what you heard last quarter which is that we seems like there is some improvement in kind of the tone of the market, the economic condition et cetera. We are definitely not saying all is clear and we are out of the woods, as you'll recall we're in the pretty challenging areas in Eastern Europe, Ukraine, Russia, Jordan. So we are watching the geopolitical conditions, we are watching the economic conditions pretty closely.

So, I think the big story line here is things feel a little bit better and then the agricultural path just got off to an early start. It's been a very nice growing season at least in Southern and Eastern Europe, I can't speak as much the Northern.

And so the big point here is just we're off to a good start in that regard.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Okay. I'll turn it over. Thanks so much.

Anthony Allott

Thanks Ghansham.

Operator

Our next question will come from Chris Manuel with Wells Fargo.

Christopher Manuel - Wells Fargo Securities, LLC, Research Division

Good morning, gentlemen. Questions on a strong quarter here. I just wanted if you could maybe go into a little bit of the specific of what you saw on volumes by region in metal or some of the different products if you don’t mind for the quarter?

Robert Lewis

Sure. I'll start with Europe. Obviously what the four plants that we – with term started off, we've been climbing over trying to get that up and running. So the volumes there have started to improve as we’ve kind of gotten commercialized and they are largely pack oriented though not entirely. So the early start there certainly helped those facilities.

On an overall basis, volumes in Europe are up nicely. They are up kind of in the teens on a year-over-year basis and recall the other part of that was that peaches were bad last year and we had a bit of an improvement in the quarter as peach pack started early in June as well.

So between the new facilities and some improvement in peaches in Greece we're the big movers but I would say more broadly even in the broad European market we've seen what I'll call stability, I won't necessarily say broad improvement across it but some stability.

So, early days but feeling pretty good about how the volumes in that business performed.

Anthony Allott

And then just keep going, then therefore the U.S. is down a little bit more mid single-digit so that you have blend to cut it down 4% for the combined can business.

Adam Greenlee

And then if you jump over to Closure [incentives] (ph) our worldwide basis when you include the Portola acquisition we are up obviously substantially in unit volume but the organic business both in the U.S. and in Europe are up a couple of percent.

The rest of the world for the organic business is really defined by the performance in Venezuela and while suggested out for EPS, it does show up in our operating income line and the volumes are impacting that.

So overall our global Closures business from an organic basis when you take Venezuela out, was up which is a good thing. And then our plastics business as you saw on the press release was down 1% from a [pounds] (ph) basis as we continue to work on our program of repositioning our customer portfolio.

Christopher Manuel - Wells Fargo Securities, LLC, Research Division

That's helpful. And then there was a follow-up I wanted to ask a little bit about the plastics business. It is showing some, - showing some improvement and I think- obviously Tony just lumpy as the new business you've talked about better good, better it comes in. Where you are at - if you can share with us on maybe kind of lumpy nature of that business? Did you had some new wins that will be rolling to the system in the coming few quarters? Or how is that process been going?

Anthony Allott

Yeah. I think that’s the right thing to think about it. It's in the coming few quarters. We've had some success in the marketplace some with our focused areas of target markets and types of products that we're looking to sell. And I think that the team has done an excellent job of repositioning that business.

It is going to be lumpy as we've talked about. I'll tell you I personally believe that we continue to work on the right things. We've got the right strategy, we're doing what we need to do to continue to improve that business and again it all started with really strong focus on our operations and kind of getting our house in order before we went to market. And that includes repositioning some of the customer portfolio.

So it is – we're well into the journey now. We are seeing the improvement that we wanted to see. I'd say essentially we're on track with where we wanted to be at this point and we do expect further growth but that's going to have to come in the future as gross and new sales continue to flow into that business and we're just starting to see that happening as we speak.

Christopher Manuel - Wells Fargo Securities, LLC, Research Division

That's helpful. Is there way to – just last question on this line. Is there a way lineate between maybe how – say high barrier food or like legacy plastics or some of the different pieces within there, we're doing to get a kind of sense of what set of pieces are performing well and which are kind of still coming along?

Adam Greenlee

Sure. As we talk about our plastic food container business which is previously the high barrier food business that's been incredibly consistent since the acquisition. So there hasn't been a lot of up or down to that business. So, what I can tell you is that the improvement that you're seeing is really in legacy plastic bottle business.

Christopher Manuel - Wells Fargo Securities, LLC, Research Division

Okay. That's helpful. Thank you. Good luck.

Adam Greenlee

Thanks.

Operator

Our next question comes from Adam Josephson with KeyBanc.

Adam Josephson - KeyBanc Capital Markets Inc., Research Division

Thanks, morning everyone.

Anthony Allott

Hi, Adam.

Adam Josephson - KeyBanc Capital Markets Inc., Research Division

Bob, Tony, just an update on the crops and bit Western California if you don’t mind, just wanted to know what's embedded in your guidance along those lines. My understanding is that the both Midwest and California looks on for this year but any thoughts you could provide would be great.

Anthony Allott

Sure. The big picture here is that things like look okay so far. Certainly the early packs coming in fine, some down a little bit on the food side. Fruit looked okay, you'll read lots about different vitals had different yields but the net of that all seem to be more or less okay thus far.

The Midwest is running late which is part of what's in reflected in our kind of guidance. We think some of Q3 is logically going to shift into Q4 that happens all the time. So there is a lot of focus around the third quarter versus the fourth quarter and every year we say its really about the back half and so we do think some will shift into the fourth quarter from Midwest but right now it looks like it's okay, there is only a little heightened risk around the harvest time in the case Midwest you worry about crop.

So that it heightens a risk a little bit but we won't know anything about that till the end of the quarter and end of the fourth quarter.

West Coast looks pretty good right now. There has been lot about the drought, I know we've talked about in this call but right now it appears that, they are getting water where they need to get water and that the – thus far the tomatoes look pretty good.

Adam Josephson - KeyBanc Capital Markets Inc., Research Division

Great. Thanks Anthony.

Robert Lewis

I would just add to that that keep in mind that the tomatoes looking good, really is more of a fourth quarter but that relative to the prior year because remember last year the pet ended kind of abruptly which really hurt Q4 more than it did Q3. So the improvement in tomatoes is going to be more fourth quarter loaded as well.

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Got it. Thanks to wrap-up. Just on the pet food and soup. Has pet food continuing to exceed your expectations and on the other side the soup running lower than your expectations obviously Cambell had some challenges of late. So and up there on pet food and soup would be helpful?

Robert Lewis

Yes and no. Pet food continues to be doing very well. We talked at last call that obviously we think the pet food in a can is the best delivery of the product. And so, that seems to be the case where share continues to be one by our customers with that package.

So that – it's been good for a long period of time and so whether to see the expectation, is how we are starting to expect that but it never – and we've talked that's never a straight line. So you have a year that just breaks out and you have the year that gets a little that back but on balance over the long period that seems to be a good growing product line.

Soup has really been just about add-on our expectation. You will recall a year ago and we're cycling against an incredibly strong volume on soup, and we were the ones saying at that time, hey guys, don't come on this, it is going to come back.

So to us it never seem sustainable and that exactly what happened particularly in Q4, maybe even a little more than we thought in one quarter correction.

And so now you're hearing some discussion about maybe slightly lower growth rate expectations but that was always our view of it. Soup is going to be in our mind a relatively low growth category. You're ready to serve, is probably going to grow a little more, you are convinced, probably going to be a little bit less, our hope is that our customers are successful in trying to find younger consumers and getting them back into soup and we believe that will ultimately by necessity be steered back towards the can as the package on that because that's where the profit fits.

But so all of it seem to be kind of on expectation for us around that.

Adam Josephson - KeyBanc Capital Markets Inc., Research Division

Thanks. And then just Bob on M&A, we've heard from some other companies that multiples in some cases you rather hide the moment, you're not surprisingly given what's been happening with the market. But any thoughts you have about the M&A environment at this point and the multiple that people are expecting?

Robert Lewis

Yeah, look there's really not much of a change in terms of the way we think about the M&A market, I'll just remind you that, for us it’s less about the multiple and it’s more about what the cash-on-cash returns in the deal have been.

But I think there's no question that multiples are improving. You could just look at the public comps and see that as well and rest assured that is the benchmark that sellers are using right when they try and bring properties to markets.

But I think offsetting that a little bit is the fact that it seems now we've, we're certainly continue to be on a low interest rate environment and where you can get long term debts at relatively attractive rates and certainly at historically low rates that offsets a little bit of it.

So, there's nothing about it that necessarily is concerning. There's nothing about it that guarantees that transaction gets done either. But we continue to plot along and look at every opportunity to present itself and try and continue to be disciplined in the approach and find ways to create value for the shareholder.

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Thanks a lot Bob, really appreciate it.

Operator

Our next question comes from George Staphos with Bank of America Merrill Lynch.

Alex Wang - BofA Merrill Lynch, Research Division

Hi, good morning. It's actually Alex Wang sitting in for George.

Anthony Allott

Hi Alex.

Alex Wang - BofA Merrill Lynch, Research Division

Just first question, if you can talk about what specific benefits you guys are achieving for Portola and then also, when do you think returns exceed the cost of capital? If you could put some timing or parameters around that, that'll be helpful.

Adam Greenlee

All right, sure Alex. We think about the Portola acquisition and what we’ve been able to achieve, and we're very pleased with how the integration has gone. Our Closures teams are working fantastically well together and just some of the real fundamental aspects of that acquisition were, taking kind of the technical expertise and commercial acumen that Silgan brings to the table, combining that with Portola's operational focus and capabilities and really getting the best of both worlds, and that's something that we've been able to do very successfully in the time that we've owned the Portola business.

And we've also expand that back out into our white cap closures business. So, that's been a very beneficial situation for not only us as a company but for our customers as well.

We were able to rationalize one of our dairy Closure facilities and move those Closures onto more efficient assets in the Portola network or other facilities within our network.

And we've also been able to look at the expanded geographic footprint that we have now in primarily North America for our Closures business and really begin making Closures closer to where our customers are. And that's been an important aspect of the acquisition as well.

So, all-in-all those things are adding up to tangible benefits that we expected when we made the acquisition, but it's going very well.

Anthony Allott

And on the return question, we're already exceeding our cost to capital. I think the conversation we had before is, because we have such a high overall return on assets that sometimes it brings down an acquisition to bring down your return, the overall company returns.

So, it's a different question then when it will get to the company average and that takes time, first of all that's kind of what metric you're looking at. If you're looking at our metric as based on a net asset which is kind of how we think about it, that takes time because over time you'd appreciate that asset down and you hopefully hold your returns up - your profit up and your return therefore is enhanced.

So, but we’re already above our cost capital, we're very satisfied with this, with that acquisition.

Alex Wang - BofA Merrill Lynch, Research Division

Thanks for that. And then just, as a second question, kind of following up on earlier question on European food, has pricing in modern trend in European food improved relative to 2013 levels or would you say headwinds are still about the same. I know you mentioned things were improving a bit but if you could deal onto that one more that'll be helpful.

Anthony Allott

Yeah, that's not really been about price, that's just more been about volume returns et cetera. So, there’s no meaningful shift in kind of price realization in Europe.

Alex Wang - BofA Merrill Lynch, Research Division

Okay. And then just lastly and I’ll turn it over, if you could just provide an update on Venezuela, has there been any improvement in the situation there or is still pretty status grow?

Anthony Allott

No, it remains pretty challenging there. I think as we’ve talked about it in the past, the issue, the underlying issue is the fact that it can’t get raw material in country, that continues to be a very difficult situation.

There is a little bit of metal that's there that’ll carry a little bit into the third quarter but beyond that it's hard to envision how it gets raw material. So, not much has changed there and we’re just kind of managing day to day.

Alex Wang - BofA Merrill Lynch, Research Division

Thanks very much.

Operator

Our next question comes from Al Kabili with Macquarie.

Albert Kabili - Macquarie Research

Hi, thanks. Just a question on upside to 2Q that you saw versus your expectations, would you say that's all driven by a little bit of pull forward in the pack or were there some other items that are trending a little bit above how you’re seeing, how you were seeing things?

Robert Lewis

I'd put it to two things. One is definitely pull forward and strong performance in Europe. So, it's part pull forward, part good job on the newer plans and that being the majority of it, the rest is just kind of across the board operations were very good in all of the businesses.

Albert Kabili - Macquarie Research

Okay. And then that leads to second question, so since you've established the initial guidance for the full year, it seems as if Europe's doing a little better, the weather has been conducive toward a good pack. And so it would seem that you'd be tracking maybe a little bit better given those factors relative to maybe how you're thinking things, I mean the fact that you’re not raising guidance as that just some conservatism as far as, we don’t know how the pack is going to turn out in the U.S. the way they’re packing so, there’s some cushion there or are there other things that are sort of driving that.

Anthony Allott

First of all, we need to be clear, we had record year last year and we’re talking about 13% to 20% improvement on that number.

So, we feel like we came out with a pretty meaningful year. Yes, there were some depreciation, benefits in there et cetera. But there also was the fact that we had gone and done a lot of contract work and so there were pluses and minuses that still led us to a very strong outlook for the year.

And so, but to your specific question, I would say really nothing has changed about our outlook. We're please with Europe so far but we're not blowing an all clear whistle on that at all. We’re really, the bulk of does seem to be above the agricultural season and chances are you don’t pack more, you just pack it sooner and so fair amount of that just looks to be pull forward for us.

In the U.S. we don’t feel much different about the pack as we said it looks pretty good right now, it's drifting in the Midwest into the fourth quarter it would appear or later. Heightens the risk just a little bit but we’ve not factored that in year end and a monetary sense either we're still kind of holding our positions.

So, I would just say really nothing has happened yet that has dramatically changed our view of the year which was a very strong year over a very strong prior year.

Albert Kabili - Macquarie Research

Okay, that's really helpful, I appreciate that Tony. And then just a last question I had is following up on Portola it seems as if it’s tracking at least to the high end of your $0.05 to $0.10 EPS accretion estimate this year. And if someone is going to remind us how we should be thinking about the opportunity for additional synergies next year, what's the update there and if there's any upside to those original synergies that you had identified there.

Robert Lewis

Yeah, keep in mind we came into the year saying we thought it would deliver somewhere between $0.05 and $0.10 accretion for the year and our view of synergies was somewhere up to $10 million over the next 18 months.

I think what you’re seeing is, we’re probably getting into the synergy numbers a little faster than what we are expecting. So, yeah, we are seeing that benefit occur to us or accrue to us in the year, so, given what we've seen so far we’re gaining confidence that we do land toward the high end of that this year.

As to what that means incrementally, I wouldn’t put a lot of stock there, I think there’s probably some marginal opportunities for us as we continue to integrate the business. But I think it's just an issue over getting to it faster and love to see how that all shapes up before we make it on what any upside is around Portola.

Albert Kabili - Macquarie Research

Okay.

Robert Lewis

But rest assured, feeling really good about having the business and really good about the synergy plan that we had coming in and the execution that the team is putting forth against it.

Albert Kabili - Macquarie Research

Okay. That's good to hear and thanks Bob and good luck rest of the year.

Robert Lewis

Thanks.

Operator

(Operator Instructions) And we’ll go next to Debbie Jones with Deutsche Bank.

Deborah Jones - Deutsche Bank AG, Research Division

Hi, good morning.

Robert Lewis

Good morning.

Deborah Jones - Deutsche Bank AG, Research Division

I know you touched on this earlier, Ukraine, Russia situation but I was wondering if you could just talk about best case and kind of worst case scenario, what is the rest of volume and revenue that we did sea from this?

Robert Lewis

Yeah, those plants are relatively small against the broader portfolio. You probably think and the investment is somewhere in the neighborhood of $50 million invested across and are like kind of revenue number in the aggregates.

Some of those plants are pack customer or pack plants. So, we’re seeing some of that revenue start to stream in Q2 and again in Q3. So that's sort of the magnitude of the entirety of the new plants. They do sit in pretty volatile places right now.

I think we talked about this last quarter that the borders are open and the plants are operating, so, everything is kind of going well for us right now but as Tony said we’re not signaling that all is clear in that region. Obviously we all know that the political front can change quickly there.

So, I would say we're cautiously optimistic about what's going on there right now, the borders are open, we're shipping, the plants are doing well, operationally they're fine, so the risk probably sits more against what happens with politics and civil war more than anything.

Deborah Jones - Deutsche Bank AG, Research Division

Okay. And I guess my second question is, are you able to pass out kind of the volume improvements and kind of the legacy Closures business versus Portola and then just kind of how you would characterize the healthiest demand for that market?

Robert Lewis

I'm sure. If you look at the legacy business again and Closures for the U.S. business we're up a couple of percent. And so that business and that demand profile looks to be pretty consistent with what we came into the year thinking. We're right in the middle of our hostile season which is the biggest season for that business as well things are progressing pretty well, in the legacy business.

And I'd say roughly the same thing about Europe as well and that's where the overlaps were between Portola and the existing Closure's businesses.

Deborah Jones - Deutsche Bank AG, Research Division

Okay. All right, thank you.

Operator

We’ll move next to Scott Gaffner with Barclays.

Scott Gaffner - Barclays Capital, Research Division

Good morning. Just want to follow-up on the M&A question from earlier I guess you talked a little bit about the multiples but just more curious about first of all what the pipeline looks like given the fact that you'll generate most of your free cash flow here in the second half, what the outlook is for putting that to work.

And then I know you said internal investments and acquisitions is number one but at what point do we go back to the issue in 2013 where you did accelerate the purchase I think in the first quarter of that year.

Robert Lewis

Yeah, sure. Look there is plenty of opportunities for us to look at. There's plenty of things rumored to be coming to market and I think as we've talked about before, there's generally no packaging asset that's going to trade that, we don't at least become aware of it and take a look under the hood.

Now, none of that means that we’ll necessarily have success in getting a transaction done but certainly we continue to put all of our efforts to the corporate development area.

I think we said before that the what the driving force behind any other decision around deploying capital elsewhere is kind of a leverage range combined with what the longer view outlook around M&A is. And the leverage range that we’ve set pretty publicly is two and half to three and half times.

We would expect that will end somewhere in that range as we exit 2014. So there's no sense of urgency necessarily sitting there for us to do anything other than be disciplined and look for opportunities to deploy capital that's going to help us build out the overall platform of the business, that's been our strategy for a long time and nothing's really changed there.

Scott Gaffner - Barclays Capital, Research Division

Okay. And when I look at the metal containers business, some of the commentary in the press release you talked about a higher inventory build year-over-year and yet the commentary that some of the vegetable pack looks like it’s going to get shifted especially in the Midwest from 3Q and 4Q, one is the higher inventory build, a sign that you’re more confident in the vegetable pack this year and then two, can you just sort of pass that with a shift in the Midwest.

Anthony Allott

No, it's really more just the mechanics of our business. This time of the year we just produce all we can because we don’t have the capacity for our peak so we just run in all the time and it’s really just a question of sales volumes versus the build.

So, the interesting thing here is, it would have been even better for us if we had sold it. So even though we carve out the benefit of inventory build, the fact is that compared to prior year where we sold it, it’s a negative not a positive so that's kind of simple answer to your question.

Scott Gaffner - Barclays Capital, Research Division

Okay. That makes sense. Keep building them, hopefully they’ll be fine.

Anthony Allott

That’s right exactly.

Scott Gaffner - Barclays Capital, Research Division

Just on resin and the impact in the second quarter, what was the impact on the plastics businesses in the second quarter, I think you had some carryover from higher resin in the first quarter and then how does that look like it’s trending as we move into the third quarter?

Robert Lewis

Sure, If you look at the second quarter, couple of things, one are for the plastic bottle business, our primary resins were up about 14% and absolute price year-on-year. So, there was a significant increase in the absolute price of resin.

So, as we work through the quarter, the negative lag did occur again and what I’ll tell you, it was less than $1 million within the quarter for our plastic bottle business. It's obviously varies a bit, by resin type and so I’ll now talk specifically about closures as well.

So Closures resin was up about 9% year-on-year and again creating a bit of lag pass through of about negative right about $1 million less than a $1 million, - little less than a $1 million.

So, going forward, Closures resin, I'll start there, should be a slight positive the way the forecast roll out right now for Q3. So, probably something comparable to what we have for Q2 just reversing that self out.

For our plastic bottle business it’s a little more complicated because of some of the supply chain disruptions that have taken place over the course of the last say 30 days.

As we sit here today, we’re not expecting a whole of change in resin pricing, in our plastics business for Q3. So, there's a small benefit, that's in our numbers today but we’ll continue to monitor those markets very closely and watch and see what happens over the course of next 30 to 60 days.

Scott L. Gaffner - Barclays Capital, Research Division

Great. Good luck in the quarter.

Robert Lewis

Thanks.

Operator

Our next question comes from Mark Wilde (ph), Bank of Montreal.

Unidentified Analyst

Good morning.

Robert Lewis

Hi Mark.

Unidentified Analyst

Adam just go to back to the volumes in Europe, I think I heard you say you were up kind of mid teens like, I wonder if it's possible for you to give us some ballpark of how much of that was just a seasonal impact coming a little bit early this year? And how much of that is just sort of how much you’re underlying volume is growing? Is that possible to do?

Robert Lewis

This is Bob, I think most of it is the fact that you've got the seasonal gains coming in the quarter and the new plant - remember the new plants that we are bringing online are seasonal plants as well. So, the bulk of it is sitting right there a little bit of peaches, which is not in the new plants.

And then just having slightly better performance across the broader market in those new plant geographies. So, I would put a largely to the new plants.

Unidentified Analyst

And Bob just, do you have any sense of kind of what's your operating rate is across the European business right now?

Robert Lewis

Well, we don’t. The problem is that it’s all different specs for different customers et cetera. So, but it’s, - there’s certainly some element of capacity there but again it has to be very specialized for a very tight geographic region and a very specific hand.

Unidentified Analyst

Okay. Fair enough. Just one follow-on, you had a really nice margin quarter in plastics one of the better ones we have seen quite a well. I just wondered if you could give us a little better sense of when you think we could start to see some volume gains in that business? And what the sort of the upside might be in terms of margin potential in plastics?

Adam Greenlee

Sure Mark, its Adam. It's a great question. So, we have seen the EBITDA margins of that business getting closer to kind of what our expectations are and probably closer to an industry norm. So we're right around 13% in the quarter.

So there’s still work to do. That 13%, the improvement that has gotten to 13% really has been a really strong focus on the operations, a really strong focus on repositioning the customer portfolio that we’ve been talking so much about and now to your point, really the next step and it will take some time is to get the right kind of growth to put on the top line of that business and have that drop through at appropriate EBITDA margin level.

So, I think your question is that on -- we think we’re getting back to close to the industry norm and think that’ll continue to enhance that with improvement to the business and the customer portfolio going forward?

Anthony Allott

But the resume overly repetitive because you’re going to be ramping up new business and making all the investments around that in cases of growth, winding out some customer etcetera. It is going to be lumpy, it gives you in the word. So, everything Adam says is right but for us just to say, let’s just lock in this margin and assume that here and we go forward and then we get growth on top of it, it just won’t happen that way.

Unidentified Analyst

And is this a business you could see getting the 18%, 19%, 20% margin or is that too aggressive.

Anthony Allott

I think it’s probably too aggressive. Again as we grow the top line of this business we will be investing in production capacity etcetera and inherently those margins are going to be just a little bit tighter than maybe just to an existing equipment that would push you to those kind of margin levels.

Robert Lewis

And they’re going to be attractive investment opportunities below that number.

Unidentified Analyst

Yeah, okay. All right, sounds good. Good luck in the third quarter and beyond.

Anthony Allott

Thanks.

Operator

We’ll move next to Chip Dillon with Vertical Research Partners.

Chip Dillon - Vertical Research Partners

Hey yes and good morning.

Anthony Allott

Good morning, Chip.

Chip Dillon - Vertical Research Partners

Looking at the full year, because I know there’s lot of seasonal moving parts as we look at just the U.S. food can market where, I think that you indicated the volumes are down mid-single digit just in the U.S. what do you think that based on your fill for things that the full year U.S. food can volumes will look like compared to 2013?

Anthony Allott

Well, our view is definitely that, if we come back around positive. Now there’s going to be a bit of a -- because you’ll have the soup thing playing through a little bit, we’ve already talked about the pattern, the timing of that’s.

Yet some offset to that, but if the pack comes through the way we’re thinking, you’re going to get yourself back around to a modest positive kind of number.

Chip Dillon - Vertical Research Partners

Okay, that’s helpful. And again, with the improvement more weighted in the fourth quarter than the third?

Anthony Allott

That’s how we have it right now, yeah, it will swing around.

Chip Dillon - Vertical Research Partners

Okay. You mentioned in terms of your balance sheet, I mean obviously you’re still paying down or will be gradually paying down the Portola debt, so, I know it’s been about goodness, I guess it was early last year when you last did your meaningful share buyback.

If I hear you right, probably that is less of a likelihood this year, let’s assume you don’t make an acquisition clearly that would put it off the table. What earliest we would see another major buyback all things being equal likely be more something you think about late in 2015 or early 2016 just so that you get your balance sheet further delivered or am I not seeing that correctly?

Robert Lewis

No I think you probably have the idea that it’s not likely or not imminent in 2014 putting it off to 2016 might be a little bit longer view if your assumption is that an acquisition doesn’t get done.

But, I think there’s a lot of water under the bridge that can change that between now and 2016. So, like I said in previous calls we’re not so formulate that says if our leverage is X, we’re going to go buy back X number of shares it really is more about what our longer term view around the M&A environment is and that will ebb and flow as different properties come, but rest assured we’re focused on making sure we do the right thing for the shareholders and doing the right thing to put returns where they need to be.

Chip Dillon - Vertical Research Partners

Got you. And then the last thing, just looking at the balance sheet, I guess is there anything notable about this bond exchange offer, is there any, is it just to register the bond and I guess secondly, it would seem -- I guess it would seem like that you like your mix and fixed and floating, especially as you’re deleveraging a bit in here.

Obviously those priorities will change if there is an acquisition but anything we should, any opportunities you seen on the balance sheet that might further lower interest expenses, I know I am asking for a lot, because you’re done a great job already but how does that count to, how do you guys think about that?

Robert Lewis

To your first point there is absolutely nothing about the bond registration other than just the administrative process of doing that, so, just kind of due course there.

In terms of the balance sheet, we’re in pretty good shape, short of a use of proceeds, there’s no reason for us to necessarily be in the market. We’ve got our fixed floating kind of right where we want to be. We’re probably 55% fixed as we sit here in June.

And then obviously as we generate free cash flow and pay down the revolver in the back part of the year we'll be even that much more fixed as we come to yearend.

So, today feeling pretty good against what the otherwise capital structure could look like not that I am asking for interest rates to rise necessarily but we feel like we’ve done the good work to get our capital structure in good shape, give ourselves plenty of liquidity and be able to play where investment opportunities might present themselves.

Chip Dillon - Vertical Research Partners

Got you. Thank you.

Operator

Let's take our next question from Anthony Pettinari with Citi.

Anthony Pettinari - Citigroup Inc, Research Division

Good morning.

Anthony Allott

Hey, Anthony.

Anthony Pettinari - Citigroup Inc, Research Division

Many of my questions have been asked but I had a quick one on BPA, I think earlier this month there was a bill introduced in congress and regardless of the chances of it advancing I am curious as you engage customers in discussions maybe around Can Vision 2020, is BPA a big part of that conversation and if we see a move against BPA sooner rather than later is there a way to quantify the impact to the cost effectiveness of the can versus competing packages or how do you think about that?

Anthony Allott

That’s a good question, first of all you’re right that I don’t think there’s going to be any major legislative change coming right now and you’re well aware I am sure there’s been no science change, every international regulatory authority is saying that the level in cans is safe, but as we've said along that's only relevant if the consumer feels that way and that seems to be continually shifting.

I would say our customers think of it the exact same way probably so there it's more of question is this is hot topic for their customers and the end users, and in the press more it seems likes it’s a bigger topic, when it’s out of the press it’s a slightly less topic, but we are always working on it, working on new technologies and yes it is part of Can Vision 2020. There are elements of that that are impacted by future solutions that exclude BPA and so we look at all the time.

It’s a little hard because I don’t know what the final answer will be for customers, it’s a little hard to gauge for you what the impact of BPA is on the can. Initially it is meaningful. My own view is as the entire industry shifts and as we have time to drive down the cost of new solutions etcetera, I don’t think it’ll end up being meaningful but that’s not the immediate case and that’s why customers are trying to hold off if they can.

But so, yes its part of Can Vision 2020. I think it will continue to advance that we will move to solutions over time that don’t use BPA in the process and that ultimately that will not hurt the long term competitiveness with the camp.

Anthony Pettinari - Citigroup Inc, Research Division

Okay. That’s very helpful and just a follow up, I apologize if I missed this but was there a CapEx guidance for the full year and when you look at discretionary CapEx, what are the internal investments that are taking up the biggest chunk of discretionary CapEx among the three businesses.

Robert Lewis

We came into the year guiding CapEx to kind of be in the upper end of the range, I think the high end of our range is 160, there’s nothing about where we are right now that would cause me to come off of that guidance much. We may have some slop over just in terms of the timing of when projects get closed out. So that may have a little bit influence on what really runs through the financial statements by the end of the year.

But I think we’re kind of focused on the projects that we came into the year with. I think probably the biggest incremental is really just around Can Vision 2020 projects and then just if you look back over the last couple of years we were probably to the low end of that range. So some of it is just kind of ordinary catch up getting back to the average point, mid-point of the range. So, nothing – other thing Can Vision 2020 I think really out of the ordinary across the business.

Anthony Allott

The only other thing I would add to that is that as we get to the growth with tabloid and plastics then you’ll have investments that’ll be made around that and getting at some of the costs. So, I think the big line exactly what Bob just said, it’ll be around Can Vision 2020 and the can business the secondary smaller part will be, I think you’ll see some increase in plastics assuming we continue on this improvement path.

Anthony Pettinari - Citigroup Inc, Research Division

Okay, that’s helpful. I’ll turn it over.

Operator

And our next question will come from Alex Ovshey with Goldman Sachs.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Thanks. Good morning guys.

Anthony Allott

Hi Alex.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Couple of questions for you in North America food looking into 2015, do you expect any negative volume impact to the business from the start-up of the two competitor plans in the beginning part of 2015?

Anthony Allott

No.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Okay. And your food, can you talk about the price cost trend there in 2014 whether or not there’s any visibility for that change in 2015?

Anthony Allott

Yeah, there’s not a lot of visibility there yet, it’s not our expectation. So I think I was clear before, the 2014 really nothing much happened, you kind of whatever happened to steel is what happened in price more or less.

Right now, that would probably be our expectation but we really don’t had a lot of visibility yet to what the steel industry is going to finally tumble to on that outside, but I would say that if the tone of the market remains then I would certainly expect that you’d be able to pass through in those annual negotiations what you’re experiencing on steel at least.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

All right, that’s helpful Tony. And just last quick one, just in cap allocation task little differently, not many opportunity doesn’t present itself could we expect having search your buyback catalyst at some point before the year ends from you guys or is there some probability that if there is nominee the buyback potential doesn’t happen maybe falls into 2015?

Robert Lewis

Yeah, I think it’s largely going to be as I said continued upon what our outlook around M&A is in other projects internally as we look into 2015. Where we would expect to come out ex an acquisition is that we would still be in the range of the normal or preferred range of debt EBITDA. So, as I said before there’s no burning urgency for us to go get something done this year.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Okay, that's very helpful Bob. All right, thank you very much.

Robert Lewis

All right, thanks.

Operator

That would conclude our question-and-answer session today. I would like to turn the call back to Mr. Tony Allott for any additional or closing comments.

Anthony Allott

All right, thank you everyone. We appreciate your time today and we look forward to talking about our third quarter with you in October.

Operator

That will conclude today’s conference. Thank you all for your participation.

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