Crown Holdings Inc (CCK) 2002 Q3 法說會逐字稿

Good morning and welcome to the Crown Cork & Seal third quarter 2002 results conference call. Your lines will be on listen-only mode until today's question-and-answer session. Please be advised that the conference is being recorded. I would like to introduce your first speaker, Mr. Alan Rutherford, Vice Chairman, Executive Vice President and Chief Financial Officer.

Thank you very much. Good morning. This is Alan Rutherford. I am Executive Vice President and Chief Financial Officer of Crown Cork & Seal. With me 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 release, we will be making a number of forward-looking statements. Actual results could differ materially from such statements. Additional information concerning factors that could cause actual results to vary is contained in our SEC filings, including comments in the section called Management Discussion and Analysis of Financial Condition and Results of Operations in our teen-K filings for 2001 and subsequent filings.

I will briefly comment on three issues and then John Conway will make comments and we will open up to questions. During the quarter, the company did close divestiture of the African operations which we talked about on the last call. In the quarter, the company was impacted by evaluations in Latin America. We consider this non-cash transition effect to be non-operational. The company announced early this morning that its wholly subsidiary Constar International has filed amended registration statement with the SEC regarding proposed initial public offering. Crown expects selling efforts will commence next week and the offering is expected to close in the fourth quarter of 2002. Proceeds from the Constar offering will be used to repay a portion of Crown's outstanding indebtedness.

Please refer to the press release for further important information. In view of the SEC restrictions, we will not make further comment regarding the offering during this call, nor will we discuss third quarter performance of Constar. Please note that the registration statement relating to the securities being offered by Constar has not yet becomes effective and these securities may not be sold or offers to buy be accepted prior to the time the registration statement becomes effective. This communication is not constitute an offer to sell or solicitation of an offer to buy any security nor shall there be sale of securities in any jurisdiction of which such offer, solicitation or sale would be unlawful. With that, over to John Conway, who will make a few comments and then we will open up to questions. Thank you.

Thank you, Alan. Good morning. It is a genuine pleasure to be here with all of you this morning. As Alan has pointed out, we had an excellent third quarter and we are very, very pleased to see the company's performance developing as we had said that it would and to see that we are meeting our expectations for improving performance and meeting the expectations that we have been communicating to our shareholders and other interested constituents. We have essentially said it in our press release, so I won't repeat the content of that, but I would like to reemphasize that the company's progress, the tremendous contribution by the entire Crown team, and the characteristics of the markets that we're participating in were very, very satisfying in the quarter and year-to-date.

If you will allow me, I would also like to take time to add a plug for R&D activities which we have spoken of a great deal over the past 18 months. You will be interested to know that we are just crossing the threshold of 10 billion super-ends made and sold globally. If you will recall, this is our revolutionary new end technology for beverage cans to reduce metal content by 10%, environmentally friendly, as a consequence. Better functionally in a variety of ways than the old technology. We are proud of this. We are proud of the contribution made by our scientists, engineers and operations people, together with the sales and marketing functions that supported this technology development.

We are also proud of the fact our can shaping technology continues to lead our industry. You may be aware we are operating a super high speed can shaping line in England for a leading local brewer, which is significant for us and confirms in our view, the emphasis we continue to place on technological excellence. I could go on about other developments, both new product and new process, but they have been adequately covered by various news releases we have made over the past year and-a-half to keep you all informed. That is really all I have to say, except to repeat all and all, a great quarter for the company that gives us tremendous confidence and we believe validates the plans and execution of the plans we have had in place for the past 18 months. Alan.

With that, we will ask you to open up the call to questions.

We are ready to begin the question-and-answer session. If you would like to ask a question, please press * 1. You will be announced prior to asking the question. To withdraw, press * 2. Once again, if you would like to ask a question, press * 1. Our first question comes from Dan Koshaba (ph). You may ask your question.

Dan Koshaba (ph): Good morning, guys. Question for you, when you look at improvement in the U.S. and in Europe and Asia, can you talk about the various factors contributing to the improvement and try to proportionally outline them? For instance, how much is pricing helping versus for instance, just better plant floor execution versus lower cost kind of thing?

Dan, we can't allocate. We don't have that at hand. But, I think as we said in the release, or implied at least, virtually everything was better. Performance was better, productivity was better. Assets employed were obviously down as a consequence of the tremendous working capital emphasis we placed over the quarter. Pricing has held for us. It has been stable. Margins are better as a consequence. It is just a broad range of improvements that are the result of a lot of different things coming together as we had hoped they would.

Dan Koshaba (ph): John, one thing you did when you took over, you changed the reporting format a little bit internally, I believe, so that the sales force was once again, focused on certain products, not all metal products. For instance, beverage cans versus food cans. Correct me if I am wrong, more of a PNL type focus. If that is correct, are you seeing benefit from that? How is that helping this year's results, if at all?

You are right. We did that, particularly in North America, where we had metal products managed under a single operations management sales manufacturing and finance. We broke that apart into beverage, food aerosol and closures. We felt we needed to do it. Our customers wanted the specialized attention that would result. We needed to improve performance, operationally and from a sales and marketing perspective. I think productivity improvements in North America are directly related to it. Most importantly, for those who really tracked what happened, Crown did lead the price increases in those product segments. There is no doubt about that. We were successful in doing so. We could not have done it had we not had the organizational focus and absolutely intimate involvement with the process that we had as a consequence of the organizational chain. It seemed to work to our benefit.

Dan Koshaba (ph): Okay. I will probably come back later.

Next question.

Next question from Ganchum Pujabi (ph).

Ganchum Pujabi (ph): Good morning. This is Ganchum Pujabi. Given how strong '02 has been from operational standpoint, what is going to be the key driver for '03?

To some extent, we will get carry over from the actions we have taken this year, both on the pricing front and we think also on the total efficiencies that are in the plans. Obviously we also believe as we go through next year, we are going to see somewhat lower interest costs, as we are at the moment, which I think is going to help, also. And at the same time, of course, we believe that there are certain areas of the world where it is possible that we will see further improvements in pricing next year, as we go into next year. We really set the stage for that in the current year. So, really, sort of the same as this year, to some extent, with some being carry-over and some being new initiatives.

Ganchum Pujabi (ph): Could that mean better pricing for European beverage cans?

I am not sure if I would specifically say that. There are some product lines in Europe where we may see better pricing. I am not sure beverage cans would be the one I would select at the moment. Could be little bit.

Ganchum Pujabi (ph): Looking at debt to equity swap, during the third quarter you did 9 million shares at roughly $62 million, lower average price than you have done so far in this year. Can you help us reconcile the difference?

This was really just the end of the total program that we had. As you would remember, when we started the program, I think our stock was $10 or $11. It was running through and just happened to end at the beginning of the third quarter. It was just the averaging out effect of doing that. Also, some of the bonds which we were buying exchanging at that time, pricing was tightening up, which obviously meant that any gain we had was somewhat restricted.

Ganchum Pujabi (ph): Okay. Great. I will get back in the queue.

Thank you. Our next question comes from George Staphos (ph). You may ask your question.

Geaorge Staphos(ph): Thanks. Good morning, guys. Congratulations on the margin and the quarter. Guys, I was hoping you could help with the rough math here. My calculation, seems like raw material pass-through was $50 or $60 million. Would you disagree with that third quarter versus third quarter?

Well, we could get into a discussion over it, George. Obviously, it is a difficult one. We have things going on in the United States on aluminum pricing. It is a fixed amount. So, I can't really confirm whether that is right or wrong. We could talk about it later and see if we could arrive at a number.

Geaorge Staphos(ph): OK. Would it be a rough approximation or good approximation that raw material pass through and selling price increases offset one another, equally in the quarter?

I think that is fair, George. There are a lot of moving parts, varieties of resins and metals. That would be fair.

Geaorge Staphos(ph): OK. Can you provide segment revenues at this present time or do you need to tabulate that?

Tim, I will give you that. Thank you, George.

In third quarter, America's division had net sales of 862 million. Europe was 944. And Asia was 86.

Geaorge Staphos(ph): Okay. Two last questions and I will get back in the queue. Can you - I guess just nit picky, what happened with DNA in the quarter to trend it up $6 million? Can you update us on asbestos? Thanks.

On the depreciation and amortization, one is the...

Strength of the currency year over year. Assets are overseas, a large portion, the currency both in Europe and the pound sterling were stronger. That is going to yield higher revenue results and higher cost results going down the income statement. Okay.

S&A, as well?

Geaorge Staphos(ph): You could go into that, as well.

That was the point on the Constar fees, which we wrote off in the quarter.

Geaorge Staphos(ph): Okay. I will come back to that later on. On asbestos, can you update the claims settle [SKP-D] cash outlay for the year?

I can do that. Year-to-date, September to September, cases filed are down approximately 46%. Cases settled are up 24%. The average settlement is down about 25%. Total payments to date of $78 million, of which 43 relates to settlements from prior year agreements.

Geaorge Staphos(ph): Fair enough. Seems like you are trending below the 110 for the year?

We may. I wouldn't change it at the moment. I will be in the range 100 to 110, something like that.

Geaorge Staphos(ph): Thanks.

Our next question comes from Chris Reading (ph). Ask your question.

Chris Reading (ph): Good morning. Congratulations on the call. Simple questions. Can you give us the capex numbers, cash interest, cash tax, working capital usage?

Start with capex, in the third quarter, we spent 25 million. Year-to-date number is 81 million, which is trending in line with early estimates we made of $100 million to $110 million for the year.

Chris Reading (ph): Still in line for fourth quarter, roughly?

I don't think there is a reason to change the earlier estimate.

Chris Reading (ph): Cash interest and taxes and working capital?

I will pass on cash interest and taxes. I don't have that here. I think we will have that in the 10-Q. You can tell the results from the debt pay-down were good. With respect to working capital, we took about - little bit more than $50 million out of working capital in the quarter. The year-to-date consumption within working capital is roughly $150 million, which is down almost 50% from the nine month period last year, which was roughly or close to $300 million.

Chris Reading (ph): Will we be getting the source of cash in the fourth quarter from working capital like last year?

Absolutely. As you understand our business, last year was significant because we entered a program where we put great emphasis on it. We put, again, great emphasis on it this year. Before that, if you went back several years, you would always see that we generally consumed money in the first few quarters. The fourth quarter is the source, where when it pours back in.

Chris Reading (ph): One last thing, obviously I saw the amended S-1. The proceeds CCK will get, 240 plus from equity, 150 from term and 200 from senior notes. Has the use of those funds been allocated yet? I know there's a breakdown as far as the bank agreement, have things been identified or changed?

Obviously as you indicate, there is an agreement. Those funds will be allocated as per the agreement.

Chris Reading (ph): OK. And one other thing. On the agreement, there is that free cash flow test for the repayment of April bonds. My calculation would indicate you can make that payment as things stand now.

The answer is we currently have and will have the appropriate liquidity to meet that requirement when it comes due. Regardless of the aforementioned IPO.

Chris Reading (ph): Fantastic. That is what I was thinking. Thanks for your help.

Thank you. Our next question comes from Jackie Bowen (ph). You may ask your question.

Jackie Bowen (ph): Hi. I was wondering if you could tell me - you mentioned in the press release, you had volumes up in some products and down in others. Can you go through where you are seeing strength?

Jackie (ph), I don't have the units at hand for the various product lines, but I think what I can say is that the unit volumes are essentially almost exactly in line with the plans that we had and the expectations that we had for the year for the company. In terms of what I can easily do is characterize the markets. That would be that the North America market for all of the metal packages, I am talking about markets are stable to slightly improving. Plastic packaging in North America has been up and in Asia and Europe, the markets, broadly speaking, are up in varying degrees in virtually every product line. So, to me, what we are seeing here is great benefit of being in the businesses that we are in, very stable, non-cyclical and generally speaking, stable to growing in virtually every market.

Jackie Bowen (ph): Great. Some of the harvesting, weather has been tricky this year. How is the harvesting playing out with food? How are you seeing that? Silgen (ph) came out and brought the numbers down.

As I recall, they say their food can situation was essentially in line with what we had been anticipating. That is basically ours, the fact that the Midwest was soft. But, not a lot. Fish cans were a little bit soft. In Europe, we've had basically a very, very good year, a little weakness in a couple of the very seasonal products, but nothing that we would say is out of the ordinary or that we shouldn't anticipate as we go year-over-year.

Jackie Bowen (ph): Great. Thank you very much.

Next question.

Next question from Dan Koshaba (ph). You may ask your next question.

Dan Koshaba (ph): It looks like at the conclusion of the Constar deal just from that alone should end at about 3 billion, 850, is that about right?

3-9, something around that.

Dan Koshaba (ph): How much free cash flow can you apply to repayment next year?

Probably around 250.

Dan Koshaba (ph): Okay. And what is - let me just, fine. What is capex going to come in at for all of '02 - capital expenditures for '02?

Around 100 million 105, perhaps.

Dan Koshaba (ph): Where do you think that will go in '03?

We are still working on the plan for next year, Dan. We have to decide where we will be next year.

Dan Koshaba (ph): Right. But, do you see significant decline or increase?

I would say significant, no. But, some small increase.

Dan Koshaba (ph): And on the 10 billion units of the super ends you are down selling globally, that is a great research and development accomplishment, obviously. I think that is great. But, is that yet resolved into any improvement in the profitability of the beverage can business, either through lower cost or some other benefit that accrues to you?

Sure, Dan, a variety of things. First of all, we have a better end from a material cost standpoint is 10% lower cost than our competitors. So, right there, we think we have significant ongoing advantage. The other is that the customers who have seen it and used it love it. We are developing awful lot of interest in it. So, it has been a great development. It has taken us awhile, as it always does to present something as new and different as it is. It has been a wonderful development for us.

Dan Koshaba (ph): John, are you in discussions or considered licensing the technology to the other beverage can makers?

We are. We're frankly, rethinking our strategy. Several years ago we would have been quite open to licensing. Two or three years on, we've commercialized it and been through the pain associated with that process and tweaking and modifications and new patent applications and so forth that resulted from the process. So, we're rethinking that. We may conclude this is something we will keep for ourselves and differentiate ourselves from our competitors with it, just as we did with can shaping technology.

Dan Koshaba (ph): Good enough. Thanks.

Thank you. Our next question comes from Ganchum Pujabi (ph).

Ganchum Pujabi (ph): Hi, again. Regarding your earlier comment about April '03 bonds and you said you had adequate liquidity to make it. Are you going to do this without OK from the banks?

We are going to follow the agreement which we believe we have, which allows us to pay with cash flow we are generating.

Ganchum Pujabi (ph): The 250 for free cash flow for '03, is that after asbestos payments?

Yes.

Ganchum Pujabi (ph): Thank you very much.

Thank you. Our next question comes from George Staphos (ph). You may ask your question.

George Staphos (ph): Hi, guys. Last quick ones. Can you remind us how the divestiture impact in the quarter breaks down geographically? Would you split it 50/50? Looks like EBITDA for the year is trending right toward $900 million, including the negative and non-cash effect of (ph) pension. Can you comment on that.

Divestitures, you're talking about?

George Staphos (ph): The 55.

I see. Do we have it per region? Just a minute.

Exact numbers, 32 million in Europe and 23 million in the Americas.

George Staphos (ph): Okay. Thanks, Tim.

George Staphos (ph): Other question was EBITDA looks like it is trending toward $900 million. Obviously, with the pension adjusted a little more than that. Can you confirm, deny, raise?

We believe we are on track for that target that we set earlier in the year.

George Staphos (ph): What was the target? Could you remind us?

Target was not in EBITDA terms, but guidance of 45 cents from net income from continuous operations.

George Staphos (ph): That is fine. Thanks. Good luck in the quarter.

One more question.

Back to today's speakers for closing remarks.

That concludes the Crown Cork & Seal conference call. We thank you for participating. Thank you very much.