Crown Holdings Inc (CCK) 2003 Q2 法說會逐字稿

Welcome to the Crown Holdings second quarter 2003 earnings conference call. (CALLER INSTRUCTIONS) This conference is being recorded. I would now like to turn the call over to Mr. Alan Rutherford, Vice Chairman, Executive Vice President, and Chief Financial Officer.

Good morning. This is Alan Rutherford, I am Executive Vice President and Chief Financial Officer of Crown Holdings. With me on this 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 our SEC filings, including comments in the section called " Management's Discussion and Analysis of Financial Condition ," and results of operations in our form 10-K for 2002, and in subsequent filings. In view of new regulation G. adopted by the SEC, we do not intend to provide non-GAAP financial measures of performance on liquidity beyond those already contained in the Company's earnings release. I will briefly comment on some of the issues, then John Conway will make some comments, then we will open up the call to questions.

Following our debt restructuring in the first quarter, we have bought back or retired $116 million of our 2003 bonds, leaving a balance of 162 million in our restricted cash account at June 30th, 2003. The Company's liquidity position is good, as confirmed by Moody's, with liquidity escrow account of 162 million. We continue to work on achieving total benefits from the debt restructuring, which includes maximizing tax deductibility in foreign jurisdictions, which we are currently working to expedite. In the current economic environment, our policy will be to continue delevering the Company. We currently expect to have funds available to reduce debt by at least 200 million in 2003. Furthermore, our current view is that segment income for the year 2003 compared to 2002, and 2002 adjusted for divestitures using a euro of 1.105, which is our second quarter average, will be flat. However, this includes 67 million of additional pension expense in 2003. We do not intend to give any other guidance for this year at this time.

With regard to asbestos, we are still awaiting a decision of the Pennsylvania Supreme Court, and still anticipate a favorable ruling. The general tort reform legislation passed and signed into law in Texas in June of this year includes a provision that limits the asbestos related liabilities of companies such as Crown's wholly-owned subsidiary, Crown Cork & Seal. Our Texas lawyers are already integrating the legislation into our defense strategy. The Company supports Sen. Hatch's initiative in seeking a comprehensive solution to the asbestos problem impacting many corporations, with his Fairness in Asbestos Resolution Act. At the end of 2002, the Company had 59,000 open cases, excluding maritime cases; while at the end of June 2003, the open cases are 76,000, reflecting increased filings in Mississippi and reduced filings in other states, along with some impact from the Pennsylvania law, the Texas law, and the fair bill being introduced by Sen. Hatch. Our average settlements per case, however, decreased from 1750 in the first six months of 2002, to $1000 in the same period of this year, reflecting the lower settlements on increased claims in Mississippi. At the end of June, we have paid 30 million, including 20 million for prior year settlements, and we have not changed our earlier projection of 70 - 75 million for this year, including 40 million of prior year settlements. I will now pass the call over to John Conway for some comments.

Thank you. We had a solid second quarter taking into account operations as a whole. Net sales from continuing operations were up, and operational gross profit and segment income improved. Looking at each of the divisions, the European and Asian divisions continued to have strong performances. In particular, our beverage can business in Europe, notably northwest Europe, by which I mean United Kingdom, France and Benelux, is exceeding plan and prior year. Our China business has largely recovered from the SARS downturn and is performing well.

The Americas Division is doing relatively well, however performance in certain of the businesses has been somewhat disappointing. In particular, price initiatives in our US food can business were inadequate and negatively impacted our profit and margin performance in the second quarter. Although the US food can business is a relatively small part of the Company, only seven percent of our sales, we cannot continue to tolerate depressed margin performance and the resulting very poor return on our capital. We will be taking steps to dramatically improve product pricing.

Cash generations from all sources continues to be strong and ahead of plan. Capital expenditures are right on target and spending is being tightly controlled. Working capital is ahead of, that is less than, the 2003 plan. Economic profit, our measure of return on capital employed, is up versus prior year in almost every business. As Alan mentioned, we are firmly on track to deliver significant free cash to be used to further reduce the Company's debt. With that, we will go to your questions.

(CALLER INSTRUCTIONS) George DouglasStaphos, Banck of America Securities.

Could you go through roughly whether there was any benefit from pricing or raw material pass-through in the topline in the quarter, if you have that detail?

Yes, there was. If you don't mind, Tim can attempt to roughly quantify it for you.

If we look at the top line, in terms of the price cost squeeze, that is selling prices versus the cost that come in, we were up at the sales level in the entirety for the Company. Having said that, John did mention the fact that the margin returns in one of the businesses as he described were unacceptable. That does not mean that while pricing was up, that we fully recovered all the costs of the, pass-through. But pricing was up at the sales level.

I understand, I'm trying to back into what your volume was. But would you have gotten 10, $15 million of price or raw material pass-through in the quarter?

I would say, in that range, yes.

Related to food cans, there's been obviously a lot discussed over the last six months there. Do you get the sense that at least whatever skirmishing had been occurring is over, or does it continue?

I think it's largely over. It seems to us in the US market that having done a miserable job of trying to achieve price increases as an industry, the confusion and mismanagement of the initiatives is kind of steeped; and it looks to me as if pricing is beginning to firm. But as you know, it's really the Fall and early Winter season that sets the pricing for the food can business for the following year. But yes, I think the situation overall is improving somewhat, but it still leaves us with a situation that is totally unsatisfactory.

Can you get into the detail on how you plan to deal with that, either through mothballing or raising prices?

I can't yet. Our problem is not volume. And we don't think the industry problem is volume. Food can volume is essentially flat year-on-year to date, with the exception of pet food in a very special category. If you subtract that -- I think it's aluminum cat food, something like that. So units are solid. The problem is not units, and the problem is not the assets, in our view, deployed in the industry to manufacture the units. That's not the problem. As we look at the situation and what's happened to price costs over the last 5, 6, 7, 8 years, it's just atrocious. And I don't know, we had pretty good success a couple of years ago when we took an active part in leading price increases. We're going to take a look at attempting to do something constructive with price leadership in food cans for 2004.

Any chance in '04 for beverages at this time, or is it too early to call?

I'm sorry?

Any chance for beverages in '04, or is it too early to call?

I think there definitely is. There's very little price movement, and basically priced cost compression, I think, in -- generally speaking in beverage cans for '03. So I think there's a good opportunity for price increases in '04. I know that certain of our significant customers seem to feel the same way about their products, and we do too.

Daniel Koshaba (ph), Deutsche Bank. Securities, Inc.

I noticed that the SG&A on an apples-to-apples basis was up fairly sharply. I guess at about 81 million versus comparable about 69 million. excluding Constar (ph). What accounted for that in the quarter?

Basically, it reflects higher insurance costs and the impact of the foreign exchange. And as you can see in percentage terms of sales, the impact is enough to take up. 4 percent.

Will that continue if we look out the next couple of quarters, should (multiple speakers) come in at around that --

(multiple speakers) It depends. Because by September of last year, our average euro rate was .927. And it was beginning to track up a bit. So I think that impact would obviously lessen. I think on the insurance front, I think we have what we have for the year.

How does FX affect higher SG&A. Wasn't FX favorable in the quarter?

No, because it's an expense.

You had a foreign exchange gain on the revenue side, right?

Yes, obviously it broadens all the way down to the income statement, so it drives up the revenue, it drives up the costs, it drives all its way through.

I see, okay. So it was favorable at the top line, and it was a favorable net over your costs, but this is the effect of it.

This happens to be one cost that (multiple speakers) which indicates.

I'm with you. Another question, if you could just give us the comparable operating profit in the three big geographic regions, excluding Constar. I know Constar didn't have much, if anything, in Asia. But if you could do that so we could know what the year-over-year really looked like.

We have to be careful, we call it segment income here.

I'd like to have it the way it's actually reported, the Americas, Europe, and Asia, if we could.

(inaudible) We don't have it here.

You want it adjusted for divestitures?

Yes, (multiple speakers) most of it was in North America, but --

We don't have that one here with us. Adjusted for divestitures, no.

Let me see if there's anything else -- just a follow-up on the last question. The timing of the price increase initiatives in food cans. Given the fact that the strongest seasonal demand for food cans tends to be in late August, September, I guess, were you talking about pricing initiatives that would favorably impact this year, or are we talking about pricing initiatives for next year?

For next year. We think -- although we're doing things to set the stage, we think, for a better pricing environment for next year, we don't think there's much that we can do that's going to have an impact in 2003.

Just coming back on your question about the segmenting from adjusted for divestitures, I have the number here. The Asian number is -- for prior year is the same as reported, because there were no divestitures. In Europe, you can take about 5 million off of last year's number, and in the Americas you can take about 17 million off. (multiple speakers) 17 comes off the Americas, five comes off Europe. And that's -- that's gross profit.

That's just the gross profit level?

That's gross profit, sorry.

We can figure it out from there.

Gantrum PenjabiGhansham Punjabi (ph), Lehman Brothers.

Can you comment on what drove the upside in the Asian margin, it seems like a pretty big jump on a sequential basis and year-over-year. Can you give us some clarity on that.

I think -- it's a reflection of the maturity of the businesses. And if we were to go back and briefly recount what we've done in Asia, we expanded the Asian platform dramatically over the last ten years. And the plants are becoming obviously better utilized, and they're also becoming much more efficient. It's really an issue about utilization and efficiency.

Is it a dropoff in depreciation?

Not at all.

I think the other thing is that we've been able to achieve margin improvement in Asia, either as -- pretty consistently. Either as a consequence of upward price movement, or simply retaining cost reductions. And that is in addition to what Tim said. You're seeing that as well.

D&A is spot on to last year.

And also, what about the food can business in Europe? Can you comment on that in terms of volumes and pricing?

Tim has some -- he's got some detail on volumes.

In the quarter the volumes were down about 2 percent. Having said 2 percent, it sounds like a big number, but you're talking about a 3 billion unit quarter for us. So it's not as significant as 2 percent. It can fluctuate.

Pricing is generally up, and I think all in all we had reasonable success in improving pricing pretty much across the European food can business. And to Tim's point on volume, the only problem area I think that we have -- problem areas we've seen are relatively small in the context of the entire European food can business. The Greek peach crop is not doing particularly well. And the appreciation of the Hungarian currencies hurt us a little bit, with exports of filled food goods from Hungary into Russia. But those are pretty small things in the context of the overall business.

Alan, in terms of '04 for pension expense, can you comment on the delta, given what we know at this time?

Obviously, at this time we're still waiting for a very important number, which is what we're going to use for the discount rate. I think in general, our plan -- and I suspect along with many other peoples' -- is showing some improvement in the asset base for the first time. So that's a positive. But the real critical point is, where are we going to end up discount rate wise, and that's an important factor driving whatever the result will be in '04 from an income statement point of view.

And finally, on asbestos payments for '04, given what you know at this time?

For '04, we haven't really given any guidance on that. We don't foresee it being any higher than the number we have this year. Let's put it that way.

To add to the asbestos observations, as Alan said in his statements, we are supporters, very much so, of the legislation before the Senate. We think it's an equitable and fair resolution -- pro growth, pro jobs, fair to the claimants and on and on. But if, for some reason, it doesn't succeed, we see our asbestos situation as essentially unfolding as we described it in the last couple of years, which is to say payments declining with the passage of time, and with various individual states doing the right thing about the asbestos problem. And Texas is the one that's most recent.

But based on your current accrual on the balance sheet, you would have to actually increase that, based on that settlement?

No, I don't think so.

Kevin Cohen Bruce Klein (ph), Credit Suisse First Boston.

If you guys could comment on the summer beverage season, given that it's been kind of a wet, sloppy summer so far.

I think you're referring to the United States market --

Yes, the US market.

Tim has some specific data on that. We've actually had a pretty good quarter, but maybe Tim could give us --

If you remember from our first call, after starting out a little bit slow for some comparison reasons in January and February, we had a nice March. As John just said, the second quarter has been very strong. In the United States, we're up about 1.5 percent, and the preliminary data that we've seen from the CMI shows a decline of one percent. So we're actually doing considerably better than the markets. It'll have to do with the customers we supply and the regions of the country we supply. So while it has been wet in the Northeast, it hasn't been wet all over the country. We have a very strong presence in the Southeast and Southwest, and also the Midwest part of the United States.

How about pricing, how's that been trending?

Pricing has been not much movement year on year, as we've been saying all along. But not backing up either, I would say it's firm. And yet, a little bit of margin compression, because price is not recovering all the costs. So we think the stage is set for price increases in beverage cans for 2004.

A couple quick bookkeeping items; revolver, availability, and if there were any LCs outstanding.

As I said, the liquidities are in a good position. I think on the revolver we have about 280 million available. And LCs are running at around where they always do, around 100 million.

One last question, working capital directionally, 2Q versus 1Q. If you could give us a sense as to that.

It's generally -- as John said in his comments, we've had a pretty good quarter vis-à-vis working capital, etc. We've done better than we thought we would against our plan. So at the moment, we see it as a positive to the plan that we have for the year.

(CALLER INSTRUCTIONS) Christopher Miller Mueller (ph), J.P. Morgan.

A little more clarity on the beverage cans. Can you maybe break it down a little more, kind of soft drinks versus beer, both Europe and the US, and kind of the trends you're seeing there?

We have data on the US beer versus soft drinks, at least as reported by the can manufacturers. I don't know that we've got beer/soft drink data on Europe here today. (multiple speakers) Tim maybe can help you on the beer/soft drink --

I think that if you look at -- the CMI data we've seen is that for the quarter, beer cans were down about 2 percent, soft drink cans were down about .5 to .7 percent, for an overall reduction of 1.1 percent. We are largely a soft drink supplier, we do have a decent sized share of the beer can market, but we have a much bigger share of soft drinks that we do in beer. So some of our experience to the market is obviously weighted towards the better results in soft drinks than in beer.

Is your -- maybe on a general sense, that Europe is running about the same?

No, Europe actually -- if you take out Germany, which is a relatively large market, but a market that we're virtually not present in at all, is up reasonably nicely. Tim's got some data on that as well.

The overall European market was down about seven percent in the quarter. If you exclude Germany, the market was up three percent. The European market is better weighted in terms of mix between beer and soft drinks, it's roughly 50-50; whereas in the US we're one-third beer, two-thirds soft drinks. We had a very nice quarter, as John said earlier in his comments, in the northwest part of Europe, the UK, France and Benelux. For us, the UK business is nicely weighted towards the beer market.

As you know, in contrast, the United States at least through the first five months or so, the weather has been quite good in Europe. And particularly in the regions where we're strong.

A couple other quick ones. Anything from an asset sale perspective that you would anticipate the rest of this year?

No.

Lastly, I think a lot of investors ask questions about the impact of energy costs. And I think if I have the number right, energy only makes up somewhere -- maybe the low single digits in terms of your cost of goods sold. Is that correct? Can you talk about your energy costs a little?

John talked earlier -- somebody brought the question up about beverage pricing, and essentially what John was trying to say was the pricing was flat, but there was some price cost compression, and the compression comes from higher utility costs, natural gas. For us, our estimate is that it probably cost us two to three cents per share this year, and that would be split equally between the first and second quarter.

Last question, in terms of the restricted cash, would you expect that that would essentially be -- you'd be done with that, with the debt paydowns, with that (multiple speakers)

It is restricted to the retirement of the December 15th '03 notes. So by December 15th '03, that will all be expunged.

Mark Ryder (ph), Goldman Sachs.

On the US food can, one of your competitors announced a 5 percent price increase. Are you still expecting a price increase for the year, and is it just that it's not enough to cover the tin plate price increase?

I missed the second half. Are we expecting what?

Are you still expecting price increases for the year?

For this year we achieved some price increases, but they were very, very modest. Well under 2 percent. And they were totally inadequate to improve margins, and really not adequate to cover cost increases.

So net, what was your gross margin compression then -- or expected?

I don't have that handy. But trust me, there's been some compression. And I think we see it across the industry, and so I think it's fair to say that the efforts at 5 to 6 percent were a failure.

As far as European food can, you're saying that you were down 2 percent in the second quarter. Do you sort of have an outlook as to what that will be for the full year '03?

It's very premature. I could go through a long list of predictions about various crops in various countries. We don't see any reason to believe that it won't be a good year in food cans, but it's just too hard to predict at this point.

The segment income being flat, guidance at the higher euro level. So that sort of implies that you did bring down your estimate for operational improvement, is that right?

Not really. We kept it flat, and as I said, this is not including the pension impact of 67 million.

Lastly, on the free cash flow, the around 200 million that you expect to generate, more or less, that will be offset by the debt issuance costs, and the acquisition -- if you actually could talk a little bit about (multiple speakers)

Not really. With the target to generate at least 200 million of free cash flow, we see that as cash flow available to further delever the Company, to deal with some of the bonds that are going to be outstanding in '04.

If I was to take your net debt as of the beginning of the year, it should be 200 million less than at the end of the year?

Except that you would then, on the net debt, have to include the fact that we paid issuance fees, yes.

Daniel Koashaba (ph), Deutsche Bank Securities, Inc.

Kind of a philosophical question, I guess. In 2002, you were pretty successful in raising beverage can selling prices, partly because you adopted a strategy of basically saying -- the can prices are going up X, and X was a pretty large jump over the prior year. You led the price increase, and it kind of changed the game a little bit, and everybody followed along. When you look at food cans where you clearly need some pricing, are operating rates such, or the industry structure such, that you can go out with that same kind of strategy that significantly increases the profitability in the industry; and take the view that you're leading, and if you want to buy cans this is what you pay? What's the strategy to get -- to change the game a little bit and to get prices up, more than just a couple of percent?

We don't know yet, and we're studying that now. We're devoting a tremendous amount of time to it, and thinking about it. I would say, as you know better then I, industry structure in food cans is better than beverage cans. Your competitors. And performance is generally worse in the food can industry than it was in the beverage can industry, as bad as it was in the beverage can industry. On the other hand, certain categories of food cans, capacity utilization is very high. Others, it's not so high. So that compares a little bit differently to beverage. But I think the opportunity for significant price increases to arrest what has been a multiyear slide in margins and return on invested capital is clearly there.

Do you look at operating rates -- let's say main business is beverage cans, food cans, and aerosol cans. Have they held up at kind of 2002 levels, has been than any degradation, what's the state of the supply demand dynamics.

It's essentially the same. As we look at the data, other than one significant category of deterioration in which we don't participate, and frankly I think only one competitor does, so it's an isolated situation. The operating rates and unit sales and so forth are essentially the same year on year, and have been for a number of years.

Thanks.

That concludes Crown Holdings' second quarter conference call. We thank you for participating.

(CONFERENCE CALL CONCLUDED)