Crown Holdings Inc (CCK) 2002 Q2 法說會逐字稿

All participants will be on a listen-only mode until today's question and answer session. Please be advised that the conference is being recorded. I would now like to introduce your first speaker, Mr. Alan Rutherford, Vice Chairman, Executive Vice President, and Chief Financial Officer. Sir, you may begin.

Thank you and good morning, everybody. This is Alan Rutherford and I'm Executive Vice President, Chief Financial Officer of Crown Cork & Seal. With me on the call are John Conway, Chairman and Chief Executive Officer, and Tim Donahue, Senior Vice President of Finance.

Let me point out that on this call, as in the news release, we will be making a number of forward-looking statements. Actual results could vary materially from such statements. Additional information concerning factors that could cause actual results to vary is contained in the SEC filings, including comments in the section called management discussion and analysis of financial condition and results of operations in our Form 10-K for 2001 and in subsequent filings.

I will comment on some issues and then John Conway will make some comments and then we'll open up the call to questions. With regard to the debt equity swaps, two additional comments: due to the Company's tax position in the USA, all interest savings from these swaps directly impact the net income of the Company. As stated, this will be 2 cents accretive in 2002 and 3 cents accretive in a full year. In the remaining 2 quarters o2 2002, the impact will be 4 cents dilutive in the 3rd quarter and 6 cents accretive in the fourth.

Included in the $271 million worth of bonds retired to date s $138 million of the September 2002 notes. We were again impacted by the devaluation in Argentina. However, since the end of June, the currency seems to be somewhat less volatile, and we hope that this [INAUDIBLE] well for the future.

The Company expects to close the African divestitures in the 3rd quarter. All is settled except one competition authority clearance which is required. We are still on track to generate cash reduce debt. Net cash produced by operating activities year-to-date June was $8 million compared to $245 million used in the same period last year. A $253 million improvement.

With regards to Comstar, as we mentioned in our earnings release, Crown's wholly owned subsidiary, Comstar International, has filed a registration statement with the FCC relating to a proposed initial public offering of common stock and seniors subordinated notes. Because FCC the rules strictly regulate communications on publicity after registration statement has been filed, well will not be discussing the IPO nor 2nd quarter performance during this call.

Please note that the registration statement relating to the securities being offered by Comstar has not yet become effective, and these securities may not be sold or may offers to buy be accepted prior to the time the registration statement becomes effective. This communication does not constitute enough to sale or solicitation of an offer to buy any security, nor shall there be any sale of any security in any jurisdiction in which such offers, solicitations, or sales would be unlawful.

We still believe that the net income from continuous operations for the full year 2002 will be around the midpoint of the range of 40 to 50 cents as we indicated in the last call on the 1st quarter results. With that, I'll hand it over to John who will give you some additional comments.

Thank you, Alan. Obviously, we had a very solid quarter and we're very pleased with the results. We're on or ahead of the plan in virtually everyone and each of our three divisions.

Pricing environment continues to be good. We continue with productivity improvement and cost reductions. They are all proceeding in accordance with our plan. And our new product introductions continue to be rolled out in multiple business lines. Mentioning only a few: super-ended beverage cans, our [INAUDIBLE] full pull out food, and the ideal closer and others.

Cash generation from operations, as Alan mentioned, has been excellent. Working capital continues to be very tightly controlled and reduced relative to prior periods. Capital expenditures being very carefully targeted towards clear, winning opportunities. Either growth opportunities such as our new beverage can plant in Seville, Spain, we're very certain ensure cost reduction opportunities.

Our balance sheet is clearly improving. All of our critical ratios are significantly better than 12 months ago. All in all, our strategic commitments to international markets and the technology leadership are proving to be very important for the Company. And we're very pleased to be positioned as we are.

So a lot has been going on as you can tell from the release and Alan's brief comments, and we're very very happy with the situation as it is today as we speak to you. Alan?

Thanks, very much, John. And with that, operator, we'd like to open up the call to questions, please.

Thank you, sir. At this time, if you do have a question, please press star one on your touchtone phone. You will be announced prior to asking your question. Once again, to ask a question, please press star one on your touchtone phone. Our first question comes from Dan [Kershaba]. Sir, you may ask your question, and please state your company name.

Hi. Deutche Bank. Good morning, guys.

Good morning, Dan.

Alan, can you give us the revenue by major geographic region in the quarter?

I'm not sure if we have that. Do we have that?

Yes, we have that.

We can get it. Dan, in the Americas, $866 million. European, 838. And Asia was $85 million.

Great. Another question, if I could. Alan or Tim, what the asbestos claims look like -- were the claims down in the quarter? Settlement cost - that kind of thing; you gave us a little bit of -- you gave us some color on that after the 1st quarter. Could you update us on how that looked in the second quarter?

Yeah. I think as far as the payments, we're on track for the number we sort of expected in the year, which is around 110. Of which about 65 will be prior year settlements. As far as cases filed are concerned, we're currently running at a lower rate than last year. Approximately 20%. And the settlements amounts are slightly lower, as well. As I said on the call last time, we're obviously happy with the trend. And we'll be even happier if we see it continue throughout the rest of the year.

Alan, have you been able to integrate at all so far the Pennsylvania ruling which limits your liability?

Yeah.

Dan, we are looking at that as we speak. Our attorneys are working on exactly that proposition, and we're very hopeful that we going to be able to do that.

Okay. Great. One last question, if I could. I think most people would agree that fixing the balance sheet is a good thing and it's a top priority. How do you find the balance between giving up future earnings leverage by issuing more shares and improving the balance sheet? And I guess the real question here kind of just straight on is, do you intend to do any more debt or equity swaps, and if so, can you give it just a little bit of an order of magnitude?

The first thing we look at is improving the balance sheet. I think that -- you had a number of questions there. But to answer the last question, we will obviously continue, as John has mentioned, to continue to try to strengthen the balance sheet. One way may be these swaps. But given the current market conditions, we're going to be very careful what we do with our equity, and in terms of the bond trading values, we're going to -- you know, we will seek to enter into the transaction, perhaps, that are favorable to the Company. But we're not going to do anything that's not favorable to the Company. I think that, as Alan mentioned, the transactions to date have will be accretive to earnings given our tax position in the U.S. And where we can continue to strengthen the balance sheet from a number of different factors, whether they be divestitures and/or swaps improving the equity of the Company. If it is accretive in the short-term and the medium term to the shareholder, then we'll look to strengthen the balance sheet in that regard. But we're not going to do anything, Dan, that the short-term action that would have a detrimental effect longer term on the shareholder, if that's really your question.

Okay, guys. No. Thanks. We'll pass it on to somebody else. Thank you.

Okay, next question, please.

George [Stafos], you may ask your question and please state your company name.

Solomon Smith Barney. Hey, guys. Good morning. Question just maybe piggybacking on Dan's last question. Do you have any view on what accretion or dilution you'll get from the currently engaged exchanges for we'll need for '03? I realize that, to some degree, depends on your earnings [INAUDIBLE] for next year. Do you have a comment on that?

Unless I misunderstood it, George, I think I've already said it would be 3 cents a accretive next year.

Okay. I missed your -- Now on margin, Q2 versus Q2, if you could give us how much of that came from pricing and how much came from manufacturing, rough order of magnitude?

Dan, or George, rather -- John Conway -- we don't have that at hand. But it was a mix of the two, as you would imagine. I think, suffice it to say, the price increases, as we said in the past, have been successful. At the same time, we've been driving cost down, and so it's a mix of the two. We just don't have that detail here.

How about on volumes? Normally you give a little bit more detail on volume. Do you have any of that right now?

We really don't. We've said to you in the past, we've just become so much more focused on profitability and cash flow, and quite frankly, we want to get away from talking about thousands of cans and tens of bottle caps and so forth, and that's really not our focus. The volumes, generally speaking, have been reasonably strong. The markets that we're participating in, virtually all of them, are up in varying degrees.

Fair enough, John. Do you have a fix on what the raw material passthrough was Q2 versus Q2?

Raw material prices and [pep resin] and aluminum quarter to quarter in North America, I know, were down between 10 and 13%. Polypropylene was off a little bit quarter to quarter. So I think we mentioned that raw material prices had a downward effect on reported sales, and that's about right in terms of what I just told you.

Okay. So, John, just to be clear, your raw material cost of Q2 versus Q2 of '01 is down between 10-13%.

That's right. Okay.

A couple last questions, then I'll turn it over to the other guys. In terms of looking at the 830 or so of revenue -- excuse me, 870 of revenues in the Americas, what was the comparable number last year in the Americas?

$982 million.

Okay. So there were no -- fair enough -- there were no changed in terms of how your allocated versus last year's quarter, so --

No. But that was obviously the divestiture of the pumps business and -- from [Rizden], which is the US business. We divested a small business in Columbia, and there were some other small structural changes like that, George, and then obviously the currency situation in Latin America in the southern cone has had some dampening effect on reported revenues, as well.

Okay. Fair enough. Let's see. Alan, you had mentioned $200 million did you take out of the September '02 bonds?

$138 million.

Okay. Okay, guys. That's it for now. Thanks.

Next question, please.

[Ganchum Pujabi], you may ask your question. Please state your company name.

Hi, good morning. Lehman Brothers.

Good morning.

Can you guys -- last quarter you had a pretty strong strong quarter in terms of beverage cans in Europe. I was just wondering, is that trend continuing for this quarter?

Yes, it is. We had another strong quarter. Volumes are quite strong, particularly strong in the Iberian Peninsula.

And is the pricing in good shape, too? Are you able to increase pricing that particular product line in Europe?

Yes, we have. And pricing has not been up quite as much as North America, but it wasn't as depressed, but pricing has improved.

Okay. And one final question: How far along are you guys in terms of realizing the full cost savings from your productivity initiatives?

It's an on-going and it's never going to continue. So we anticipate that we'll continue with cost reductions into next year, as well. But we're on plan, as I said to you. Everything that we had hoped we would achieve throughout the first six months of the year from a cost reduction, productivity improvement, in fact, we're achieving.

Okay and what about the free cash flow guidance for this year?

We're still on the same number. $250 million.

$250 million.

Yep.

Thank you very much.

Next question, please.

Eric [INAUDIBLE], you may ask your question. Please state your company name.

Midwest Research. A couple of things. First of all, in Europe, you talked about good bev can units yet your margins were down. Can you help us to under what's moving around in there?

Probably the biggest thing -- we think -- we're quite confident one time event that's occurred is that the Spanish market, as you know, is one where we've been over sold for the last several years. That explains, in large part, why we're building a plant in Seville in Spain. We've been importing cans in the past, and this year as well, from other parts of Europe. This year we've been so over sold that we've been buying a significant number of cans from our competition. So we're reporting sales with literally no margin, and that really is the biggest part of the slight decline in margins in the European business.

Second question: in terms of debt that is due, can you just review what the maturity schedule is over the next 12 or 15 months?

There is a term loan that is due in August, Eric, t which currently sits at $125 million. The balance of the September '02 notes is now $212 million. And there is $200 million face value of April '03 notes that's come due, as well. Hello?

Next question, please.

Would you like to move on to the next question, sir?

Yes, I think so.

Actually, I did have one question.

I'm sorry. Go ahead.

In terms of what that debt structure looks like with Comstar IPO'd. Can you talk about what portion of this goes along with that or is affected by that?

Clearly, if you assume a successful completion of Comstar --we won't talk about Comstar on the call, but clearly there will be a portion of those proceeds that come to the company from the successful IPO would be dedicated to back debt, first the term loan and then the revolving credit facility, and then there will be proceeds that come to the company which will be available for paying off public notes or any other corporate activity that the company would engage in.

Great. Thank you.

You're welcome.

Next question, please.

Jaqueline Bolin, you may ask your question. Please state your company name.

Hi. Yes. Jackie Bolin. I wanted to ask just following up on the debt maturities. The swap that you're going to be doing in the next few quarters, are you still -- or in the next few months, are you still targeting the September '02, or are you moving to the April '03?

I think that we didn't say that we were going continue to do these, Jackie. I think what we tried to -- in answering Dan's question, we said that we would continue to look at the economics behind the such transactions or proposals that are made to the company, given the trading value of the company stock and the bond prices. Clearly we're not going to comment -- we don't have a plan for this. This is something that these are proposals that are sent to the company by various holders that we have to take on and evaluate individually each time. I don't think that it would be appropriate for me to say that we're going to target anything or that we have a particular number that we're aiming for. I think that there really is no answer to that question.

Okay. Can you talk about some of these steel pricing tariffs and how it's affecting your pricing going forward?

Jackie, I assume you're referring to the duties imposed in the United States and we've we haven't been affected yet and we anticipate that the steel industrial perhaps will want to do some things with regard to tin plate pricing for 2003, but it hasn't happened yet and it would be premature for us to speculate by the.

Okay. Have you had conversations with customers in terms of quoting those prices through on top of your pricing initiative so far?

We have talked about the general situation with the steel industry, the difficulties that they have had and the solutions that they have tried to put in place, one of which has been duties, and the potential for increased tin plate prices and consequently increased food can and aerosol and so forth for next year. But we haven't been more specific because we don't have specific information.

And on the Americas you mentioned -- you said that it was 870 versus 982. If I take down the $33 million from operations, can you help me get to the organic growth for the Americas?

I suppose, the biggest, Tim mentioned a series of factors, and we don't have it all rolled up, but the South American currency is weaker, the Columbian food can business [INAUDIBLE] -- okay, you mentioned the sale of the fragrance pumps. I think we've told you in the past that there was a little bit of volume erosion associated with the beverage can price increase that we didn't regard it as serious and it was well within what we'd anticipated. So the combination of all of that, but we just don't have the detail here.

Okay and as far as currency in the quarter with the U.S. dollar, can you kind of go into a little more detail in how that affected the numbers? How that affected your numbers?

As we said in the press release, Jackie, it's had very little effect on this particular quarter. As you can see, we use average rate on the income and we ended up at about .89, so far it'll effect -- if the Euro stays at one, obviously that exchange rate will slowly grow as we go through the rest of the year and will begin to have some impact. Obviously the big impact would come next year if we do start off the year at one Euro to the dollar then we'll see a full year impact next year.

Thanks. Thanks very much.

You're welcome. Next question, please.

Sandy Burns, you may ask your question. Please state your company name.

Hi. Just wondering for some of the segments that you mention in the press release, we're seeing some volume weakness in the 2nd quarter. Can you maybe comment how those segments have picked up going into the 3rd quarter, particularly with the summer selling season in full swing and the weather particularly hot?

We have not seen any particular volume weakness in any of our segments. I suppose the only one that we've seen a little bit of weakness is in food cans in North America as a consequence of a relatively cool and wet 2nd quarter in the Midwest. And so we're anticipating food can shipments will pick up in the 3rd quarter as the weather improves and so forth, but there's been -- really volumes have been pretty solid in all of our product lines.

Okay. And even for those that have been doing well, do you see immediate better than normal pick up in 3Q with the summer the way it is so far?

I think it's too soon -- it's frankly too soon to say. We had a strong beverage can quarter in the 2nd quarter, and in July it started well but I think it's too soon to speculate about the quarter.

Okay. Fair enough. And just last question: if you could revise to use just your revolver outstandings and availabilities at the end of the quarter?

Liquidity was around $55 million million, which is around 300 of cash and about 220, 250 on the revolver.

And to you have the outstandings or what the LCs were to pack into the outstandings?

Well that's after the LC's, which were about $100 million, so if you want it before then, you would have to add that.

Thank you.

You're welcome.

Chuck Peterson, you may ask your question. Please state your company name.

Good morning, guys. Just wanted to touch back on the debt for equity swaps. You said that about 138 of the September '02 paper was taken out.

Correct.

And that was as of the end of June; correct?

It's as if now.

Okay, and I apologize if I missed this earlier, but can you tell me what else you're working on to date to get to -- I think the 2 -- what was it, 271 I think was given as --

The 271 is complete, Chuck, so there is nothing else that we're working on now.

Okay.

That's completed as of today or yesterday.

What else did you take out to get up to that?

I think there were a series of issues that we -- as you know we have 11 note issuances, so we have a pretty nice basket of issuances to choose from, and as I said earlier, when the economics are right and the bond trading prices are attractive, and the discount is attractive, we will look at any transactions that are brought to us. But just to comment on each individual one, probably not appropriate to do so, so we won't, but it will spread among all of the issues that we do have outstanding.

Okay. And could you refresh my memory as to how you define free cash flow for guidance 250 for the year?

Cash flow from operations less capital expenditures. Cash flow from operations included within that would be asbestos, payment , the pension contributions - so if you follow a cash flow statement that you would see from any publically reported company it would be the cash from operations minus the Cap-X is how we describe free cash flow.

Okay. And what was the cash out the door asbestos during the quarter?

During the quarter, it was about -- in the quarter --it would be $60 million, of which 40 was prior year settlements.

Okay. And then just one more thing. I was hoping you could provide the individual line items of working capital balances at the end of June. Pretty much looking for the inventory receivables and account payable and accrued liabilities.

I don't have them here at the moment, but obviously they will be in the queue.

Okay. That's all I have.

Thank you. Next question, please.

Brian Wilson, you may ask your question. Please state your company name.

Merrill Lynch. Are you still looking at doing under $100 million in Cap-X for the year?

Doing right around $100 million. I mean, we won't be much over it. We'll be right about $100 million.

Great. Thank you.

Thanks. Next question, please.

[INAUDIBLE], you may ask your question. Please state your company name.

Banc of America. Good morning, gentlemen. I was wondering if you could walk me through the debt balance. I noticed in the report out this morning that total debt at quarter end was $4.9 billion and that you estimated to have about $4 billion drawn at year-end. I'm just trying to reconcile to that, and as I go through it taking the $4.9 billion and then I take 61 out of notes that were retired post quarter, and that gets me to $4.8 billion. There's a term $125 million term loan. $212 million of of the '02s. $4.5 billion. Seems there's an additional 500 in there that I'm missing.

Well, as you'll see in the news release, it's the proceeds from the IPO Comstock.

Okay. And those proceeds, it's my understanding that the equity portion which is about $140 million will go to the term loan, and how is the rest of proceeds from the term loan and the senior note divided?

It depends, yes at the moment, what would happen is the proceeds from Comstar, if the term loan is still there when it's closed, will go first to the term loan and then the balance that's left, it will go $100 million to payoff the $2.5 million revolver and then the balance would be split 50/50 to pay off the revolver and the company would keep the balance.

Fantastic.

It will be used, obviously, to pay down the debt one way or the other.

Right. That would put you in a excellent position at year end where you probably be levered on LPM EBITDA based about 2.5 times. Do you have any, or have you entertained the thought of redoing the bank facility at that juncture?

It's fair to say that we're aware of the number that you just mentioned. We believe we have some alternatives, which we're exploring at the moment.

Okay. Congratulations on a good quarter and good luck.

Thank you. Next question, please.

George [INAUDIBLE], you may ask your question.

Hey, guys. A few follow ups. I'll make it quick. John, I was trying to do some rough math on the pass through. Would you say that cost you about 4% on the top line, quarter over quarter?

It might have. Remember, of course, some of the price increases offset some of the raw material decreases. But yes.

Fair enough. Next question. In terms of Europe, did the fact that you're buying cans satisfy your overflow position actually cost you any dollars or was it a pure margin compression factor?

No, it's purely margin -- a relative margin performance issue.

Okay. Are there any other factors that you need to work through for '03 that'll improve the performance in Europe versus '02 then? Your relatively flat year on year.

'03, now?

Well, '02 versus '02 in the quarter, you're relatively flat in dollar terms. So, you know, prices haven't gone up. You're doing a little bit better in volume there. What else could make for even better profit dollar performance in '03 versus '02?

Obviously productivity improvements and cost savings which we'll continue to do. The other is -- I think we've talked with you in the past about price increases announced and so forth need to be put in effect in a staggered fashion and the consequence of not everyone is on annual contracts that are up at the end of December. So we anticipate margins should improve as a consequence of that. So I'd say it's's generally growing volume and reducing costs and further price increases and implementation more broadly of price increases already announced.

Alan, can you just give me again the accretion you expect from the swaps, both in the quarters and the year? I might have missed something --

As we said, George, for the year over all it's going to be two cents. And in the next quarter, the 3rd quarter, it will in fact be dilutive 4 cents, and then accretive 6 in the fourth. And next year we think it will be accretive 3 cents.

Last question: Any sort of view on the seasonality of EBITDA in the second half versus the first half? Looking back over time, the numbers tend to be pretty comparable. This year you seem to have more wind at your back vis a vis currency and pricing. Can you give us in guidance, really, on what you're looking for for EBITDA for the year?

I think what is going to happen here a little bit, George, is that in the 3rd quarter and going into the fourth we're going to start to get some pick up from the currency situation. Given that the Euro or the dollar stays where it is at the moment, so I think we'll begin to see some pick up from that. But I would think, you know, you know this business pretty well. I think the 3rd quarter should be relatively good vis a vis to EBITDA, especially if the food pack picks up as well.

Historically it tends to be pretty flat versus in Q2.

And then as you know, also, sometimes the 3rd quarter runs into the fourth with the pack in October. Whether that is going to happen, as John said it was a bit slow so it could happen as well.

Good luck in the quarter.

Thanks.

One more question if there is one, operator.

Thank you, sir. Our next question comes from Tim Burns. You may ask your question, sir. Please state your company name.

Good morning, guys.

Mr. Burns, how are you?

Very good. I had a question, I guess, generally speaking, in addition to pulling in some of the contracts that were not included in the original price increase as they kind of annualize their old contract coming into the price increase, we'll probably have another round of price increases next year, generally, but I guess what I'm wondering, John, are there any business units poised for any significant turn arounds or improvements that might help you get to where you need to get to?

I think, actually all of businesses are performing reasonably well this year. If I had to single one out that we know needs to be improved, in fact we made some management changes recently, it would be what we described as the specialty packaging business in Europe, which is a combination of industrial containers - paint cans and so forth, and specialty tins. It's a reasonably large business for us -- about $320 million in sales, and we're anticipating performance next year should be significantly improved versus this year. Otherwise just essentially across the board we're looking for continued margin improvement as a consequence of attention to price and costs.

The relative improvement, how big are we talking? Are we talking tens of twenty millions of dollars or that type of improvement?

It's too soon to say, Tim, really. We're here at midyear, basically, and it's early for us to say.

And could you comment -- I mean, the European food can business is obviously a big monster business for you. Could you provide some general comments on how you feel that's going? Are the competitive issues still there? Is there more smartly managed pricing? Any general comments there, because that's a big business unit for you?

We're very, very pleased with the European food business. We're committed to it. We view it as a growth opportunity for us. And margins in virtually every product category and every geographic region are better this year than last. The whole tone of the industry is different. There has been a sea of change, it seems to us, in the way that that segment is being managed by the industry, generally, not just by Crown. And we're very, very pleased. Among other things you will have noted in these currency realignments is that the pound has been losing value versus the Euro, which is very positive for us in terms of price pressures that we've been under in the UK.. So we think that's very positive, and in general, we're just very happy with the food can business in Europe this year.

That sound good. We need that with one to provide some window to sales. Okay, guys. Thanks very much. Good quarter.

Thanks, Tim. That concludes our 2nd quarter conference call and we thank you all very much for showing an interest in the company. Thank you.