Crown Holdings Inc (CCK) 2003 Q3 法說會逐字稿

Good morning and welcome to the Crown Holdings third-quarter 2003 earnings conference call. Your lines have been placed on a listen-only mode until the question-and-answer session. Please be advised that 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 and I'm Executive Vice President and Chief Financial Officer of Crown Holdings. With me on this call are John Conway, Chairman and Chief Executive Officer, and Timothy 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 and our SEC filings, including comments in the section called "Managements Discussion And Analysis of Financial Conditions 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 contained in the Company's earnings release.

I will briefly comment on some issues and then John Conway will make some comments and we will then open the call up to questions.

Let me begin with asbestos and give you an update. We're 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. The Company filed a motion to dismiss cases in Houston and obtained a favorable ruling.

The Company strongly supports the Senate initiative in seeking a comprehensive solution to asbestos problems impacting many corporations with the Fairness in Asbestos Resolution Act. At the end of 2002, the Company had 59,000 opened cases, excluding Maritime, while at the end of September '03, the opened cases are 78,000, 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.

Our average settlements per case increased to $2,112 in the nine months of 2003 from 1,444 in the same period last year, reflecting more prior year settlements in the quarter. Excluding prior year settlements in both years, the average settlement declined from 1,426 in '02 to $1,099 in 2003. By the end of September, we had paid 53 million, including 33 million of prior year settlements. We have not changed our earlier projection of 70 to 75 million of this year, including 40 million of prior year settlements.

Following our debt restructuring in the first quarter, we have bought back or retired 123 million of our 2003 bonds, leaving a balance of 145 million in our restricted cash account at September 30, 2003. The Company's liquidity position is good with liquidity in excess of 650 million at September 30th, which does not include the balance in the escrow account of 145 million.

We continue to work on achieving total benefits from the debt restructuring, which includes maximizing tax deductibility in foreign jurisdictions on which we're making good progress.

Of the Company's total revenues, 65 percent are in currencies other than the U.S. dollar, mainly in Europe and Canada, and over 50 percent of the Company's gross debt of 4.2 billion is in U.S. dollars in Europe.

In the current 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. Also, our current view is that segment income for the year 2003, compared to 2002 with 2002 adjusted for the vestiges of 45 million and using a euro of 1.112, which is our average for the nine months of this year, will be comparable. However, this includes 72 million of additional pension expense in 2003. We do not intend to give any other guiDaniel ce for this year at this time.

With that, I'll turn the call over to John Conway, who will give you some comments on the Company's results.

Thank you, Alan. We had, in our view, another very solid operating quarter and we're really very pleased with the operating results. As you can see, net sales from current operations were up 9.2 percent, and we had solid improvement in both gross profit and segment income quarter-to-quarter for continuing operations.

The volumes for the quarter for us were again very strong. Our worldwide beverage can volume was up 8 percent over last year's third quarter. Our international beverage can growth was very notable in Europe, the Middle East and throughout Asia. The U.S. operations were up as well in beverage cans.

Although there's been a delayed pack food can pack in the United States and the Greek peach crop apparently again failed, food can volumes globally were essentially flat year-on-year, quarter-to-quarter. We had very nice improvements in volumes in plastic closures, up 7 percent globally -- and this covers both our beverage closures and our specialty closures business. Our aerosol business in unit volumes was up 1.5 percent. So all in all, we think an excellent quarter from a unit volume standpoint and sales standpoint.

Operationally, we are continuing to improve the performance of our operations, as shown by our 6.2 percent growth in gross profit and more importantly, from a plant-performance perspective, a 13.3 percent improvement in gross profit before nonoperational pension expense.

We continue to tightly control all expenditures and working capital levels, the result of which is another quarter in which we have again reduced our debt levels. So we think we are essentially on plan with what we have laid out actually several years ago at this point.

As Alan described, our outlook for the remainder of the year is that in this year of 2003, we will achieve comparable segment income to the prior year, even considering an increase of approximately $70 million in nonoperational pension expense. Our focus will continue to be to leverage and improve our attractive portfolio of businesses and technology, improving operational performance and continuing to drive down debt levels.

With that, we will open the line to your questions.

At this time, we are ready to begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Daniel Koshaba of Deutsche Bank.

Volumes were, I think, kind of surprisingly good, especially on beverage can side -- up 8 percent, especially since the summer domestically perhaps wasn't the best in terms of weather. How much of that is your affiliation really with Cott (ph), which I believe has been gaining tremendous share as a result of their relationship with Wal-Mart? Is the growth coming because of the customer base, or was there something in the industry that drove volume?

I think, Daniel , in our case, we can't really single out one customer, you know. On the beverage side, we're not very leveraged to beer. That's taken into account, and at the moment, our principle customers -- and strategically, as we look into the future, our principle customers are Coca-Cola, (indiscernible), Dr. Pepper, and 7 UP, all of whom are doing quite well in North America.

Then the other point, of course, is that our assets are principally located in the Southeast and Southwest and by design. So, the adverse weather circumstances of the Northeast and Upper Midwest did not affect us as they may have affected some others.

So we were up substantially, I mean, almost 5 percent, right around 5 percent unit volume quarter-to-quarter in the U.S. market only.

John, another subject -- could you talk a little bit about what you're thinking is in terms of 2004 pressing initiatives, you know, in beverage cans, in food cans and in aerosol cans? Have you started discussions with your customers? Where's the opportunity for pricing? What are you guys really thinking in that respect?

Well, we continue to believe -- and we mentioned in the press release -- that we improved prices in a number of our segments, and one of the principle ones is food cans in North America, and we've made no secret of that. We have begun discussing with our customers the absolute necessity of price increases at long last of some significance in this category. We are waiting a little bit to get a little more clarity with regard to where steel prices go, but we are convinced they are going up. We cannot absorb increased steel prices, so we have begun the process and fully intend to implement reasonably significant price increases, and we simply have to do it. We feel that our situation is not dissimilar to that of our competitors, so we're hopeful that our leadership is going to work in this area, but time will tell.

Beverage cans -- again, we've seen no increases now for all of '03. We did not increase prices from '02 to '03, and then we (indiscernible) some increases, but there we think we've done some of the heavy lifting a couple of years ago, and we're going to be supportive, but we are following.

Aerosol -- we will find out. We've a competitor who has announced adding capacitors in the Midwest, not a very sensible thing to do in a market that's not growing, so there may be some turbulence in aerosols. But fortunately, it's a small segment of our business in the United States and we will just see where that one heads.

How would you describe the supply/demand kind of fundamental dynamics in your European do business, John, as you look at that? Perhaps where 2003 has shaken out versus 2002, and what the next twelve months kind of look like?

Well, you know, for us -- and it varies by producer , but just take beverage first. For us and generally, we think supply/demand is in pretty good balance with the exception of Germany. As you know, Daniel , we have no operations in Germany and we were selling a relatively small number of cans from one of our French plants into the German market, so we've not been affected by the German problem in Europe in 2003. We anticipate that there seems to be a lot of constructive thinking now going on about the German (indiscernible) and an expectation that there's going to be a reasonably early solution. So, we are hopeful of that. So I think the supply/demand situation in beverage in Europe is in pretty good shape with the assumption, of course, that the German problem gets solved or doesn't spillover into any of the other markets.

Food is unchanged. Food capacity utilization is relatively high and has been. We are anticipating we will be increasing prices in food cans in Europe, as we have in the last couple of years. Aerosol is about the same, the same story, so we think we are in reasonably good shape in Europe in terms of an opportunity to cover costs and improve margin through price.

Gansham Panjabi of Lehman Brothers.

Good morning. I was wondering if you could clarify a comment on segment income being comparable to last year. Last year, you came in at about 481 million of operating income. Is that what you're expecting this year too? That includes Constar.

That includes Constar, so obviously, we're going to be less than that. (indiscernible).

What's the clean number?

I don't have it in front of me here, John. I think it's $417. I think, if you go back to the prospectus that was dated September 8th, the final prospectus on the high yield Notes, I think you'll see $417 was the pro forma segment income number of the last.

So, you are saying that is going to be comparable with this year then, right?

Yes. we had a couple of things last year in the $417. For instance, we had a provision for a supplier in Europe which we had to make -- (Multiple Speakers) -- other items which we believe will not happen this year but basically, we're going to be comparable, yes. (multiple speakers).

What drove the strong growth in the closures business? I mean, up 7 percent -- that is pretty good growth. Where did the growth come from?

Pretty much every place, as has been the case for the last number of years. Then, in the case of Europe, it has been as a consequence of the deposit law, the adverse effect on beverage cans in Germany, the positive impact on PET bottles and glass, and we have a very strong closure business in Germany, so those are the reasons.

You mentioned food can volumes were flat worldwide. What about the difference between here in the U.S. and in Europe?

About the same actually. It's about the same, flat on both sides of the Atlantic.

Gansham Panjabi Price in the U.S.?

So far this year? Prices have been essentially flat. The may have turned out to have been a little bit down on average, as we've gotten into the year. It's no further erosion as a consequence of any actions recently, but the consequence of what happened over the course of the winter -- probably down a little bit.

Just one last question -- based on what you guys know at this time, what should we model for pension expense next year? You're coming in at 125 this year. Is it going to be flat?

From a cast point of view at the moment, we're working on the same number from a cash point of view, which is what you're talking about, the 125, right?

Right. Thank you. Good luck in the quarter.

George Staphos of Banc of America Securities.

Good morning. Digging into the Americas margins a little bit, I think you've already given the answer to the question, but in terms of looking at the decline of profitability year-on-year, if I did the math right, adjusting for pension and the like, is most of that food can pricing, or what's behind that?

It's mostly food can pricing.

Okay, so rough numbers -- that would suggest that market prices are down 3 or 4 percent this year?

That could be about right. You know, we've had about -- this is about the third year of -- notwithstanding valiant effort -- about the third year of margin decline in food cans, but obviously, our plan, George, as you know, is we're going to turn this thing around this fall. From what we've seen so far, we've begun discussing the matter with our customers. I think it's apparent to them that what's going on just can't last and so we are solidly behind turning it around, and we will.

To the extent that you may or may not give this information at this time, is your sense that your customers are hearing similar commentary from other suppliers or can makers (indiscernible) of the cans and food market?

George, it's so hard for us to know, but to the extent that we've had some customers volunteering to buy significant additional quantities from us for next year, we assume that others may be giving the same message, but that's the only way I would know.

I got you. In terms of the closure of volume increments, how much of that did, in fact, come from deposit law? (multiple speakers).

I really don't have the numbers here. I know we've had unit volume growth virtually every place, but I don't have a breakout Europe/Germany versus Europe generally.

That's fair. Two quick ones -- piggybacking on Daniel 's question, utilization rates in Europe you said in food cans were high, but you didn't comment on what those rates are. Realizing that food can utilization rates aren't exactly the same as beverage can utilization rates, what are you running at?

George, it's always such a complicated question. We have two-piece cans versus three-piece cans. Two-piece cans utilization is quite high. Three-piece nominally isn't so high, but nobody would call later in the European markets to increase capacity through calling back high-priced labor that you can't get enough. So, to me, at any rate, we are up 85-93 percent -- oversold in the second and third quarters, undersold in the first and fourth, but capacity utilization is pretty good.

Are you running between 85 and, say, 93 in your food can business in Europe?

As we would define it. By that, I mean without using the labor that we have on hand, not going to seven days when we don't need, not going to three shifts when we don't need to, and not calling back the labor that we would need to do that.

Last question -- just can you give us a little bit of color, and perhaps you've given it in the past and I'd missed it, but on the write-off (indiscernible) lay-off on the salary/employment?

Well, the salary is just, frankly, just our continuing quest here in the North American market to drive out costs, and we just keep chipping away at it and the consequence, of course, is greater productivity -- part of the notion of continuously improving our costs and efficiencies and so forth.

Where were the positions typically? Was it in any one area?

No, spread right through the North American operations, headquarters right down through the plants.

In terms of the write-offs, it's pretty self-explanatory. The only thing we didn't mention is that included there is a final, irrevocable shot of our Lakeville beverage can plant, something that we had mothballed for a period of time and we finally just taken it out of outservice entirely (sic).

Amanda Tepper (ph) of J.P. Morgan.

Thanks for all the information. I think there's a few questions left for me to ask. On your operating margins, which -- is that where you'd like it to be? Do you see upside over time just from pricing, or are there other things you're doing on the cost side? Did currencies hurt you there?

Well, first of all, currencies (inaudible) did not help us when you talk about margin -- (multiple speakers) -- margin percentages, obviously. I think, generally in Europe, you know, obviously we would like to see some improvement. As John has just referred to, there are certainly things we believe we can do in pricing, as he was just talking about on food cans and various other products over there. So, we would certainly like to see some improvement in Europe over and above what we currently have this year, and an improvement in margins in real terms and not just impacted by currency.

That was my next question. Back on the food can pricing, you say the steel price is moving up and over time and you're not going to be able or willing to eat that, which certainly makes sense. When you're looking to get pricing, I assume, though, that you're looking not to just offset further increases in steel prices, but actually to get margins well above where they've been. Is that the intent?

That's exactly right. As we've begun discussing with our customers the necessity of significant price increases in North America, we made it very clear that we're going to have a little greater clarity on our needs as steel unfolds, but the increases we are going to be looking for are trying to put a reasonable return back into our investment in the food can business, so it's going to be quite a bit higher than any steel price increases.

Would you be looking to try to change the structure of how pricing is set so that it's more of a pass-through on steel?

Theoretically, it's been a pass-through on steel for the last five years -- (multiple speakers) -- hasn't really happened, but absolutely. I mean, our view is we have got to pass our costs through and we've got to restore margin. We have business here that (indiscernible) pretty decent business four or five years ago, and through a combination of factors, it's just become a less than desirable business and we need to restore the margins.

Lastly, you mentioned early on your proprietary can-shaping technology. Is there anything new or different or any new contracts that are coming in based on new things that you're doing there that you could share with us or that might be in the pipeline that we could look forward to?

The latest thing we've done, and it's kind of small in terms of overall sales, but it's utilizing our can shaping technology still, we think, very advantageously -- is the new shape container that we've done for WD-40 in the aerosol area. It's a wonderful container if you haven't seen it, and interestingly enough, WD-40, for example, estimates that in their category, they've got 50 percent of the Chinese market now. Interestingly enough, they estimate that counterfeiters of the WD-40 product have 25 percent of the market, so they've gone to a shape container, which we are manufacturing for them, that they think is going to solve their counterfeiting problem in China. Additionally, it just gives them a significant market lift, so it's a great application of can-shaping to that category, and it follows on the great success that we've had with beverage and beer cans.

(OPERATOR INSTRUCTIONS). Kevin Cohen (ph) of Credit Suisse First Boston.

Good morning. Just a real quick question on asbestos reform at the federal level -- we've seen a lot of articles on it. I'm just wondering what the Company's latest thinking is on that.

Our thinking is, and you've seen it in the newspapers, that Senator Frist's involvement now, along with Senator Hatch and a number of the key Democrats, has been critically important. We think the insurance industry has come around to a very sensible and solid proposal, and we read about that I think today in the Journal.

The various manufacturers and other defenDaniel ts I think see the absolute necessity for some sort of sanity to result from the current situation and so I think there's an awful lot of energy and goodwill and constructive thinking. Even labor I think understands that the proposal in this Fair Act for the Senate will result in a significant net improvement for all injured claimants, which is to say the trial attorneys are going to stop skimming 50 percent of everything recovered so that they can buy baseball teams, and injured claimants are really going to be able to recover something significant. So, it's a wonderful opportunity and it's the chance of a lifetime in our view, and we're solidly behind something. We think that the Republicans and Democrats are as well.

Do you think there is better chance than a 50 percent it would pass, either this year or next?

I don't know. I can't handicap the U.S. Congress and the Senate, but I think there's a good chance it will pass. Whether it's better than 50-50 I just couldn't speculate.

One last question -- for 2004 do you see the Company's outlays below those of '03 still?

Are you talking about asbestos?

Yes.

I would say, flat to slightly down from the projected 70 to 75. We may be ten lower than that.

Remember, our issue is always that we have prior years' settlements that we pay in subsequent years, so I think our view is that we're going to see a decline in current year settlements, if you will, for '04, a slow decline or maybe even a little better than that, but prior years' settlements payment kind of keep us at about the same level. But as you know, we think we're going to be at $70 million or a little less this year versus I think 114, Alan, was it?

114 last year, 70 this year.

Our situation is improving but obviously, we would love to see the kind of certainty that the Fair Act down in -- before the Senate (indiscernible).

Daniel Koshaba of Deutsche Bank.

Just real quickly, what was the capital expenditures (sic) in the quarter and can you give us the year-to-date number, if you have -- (Multiple Speakers)?

(Multiple Speakers) -- 82 million.

I guess I can figure it out, but if you have it on you, what was CapEx for the quarter, Alan?

Twenty-eight in the quarter, eighty-two in nine months.

In terms of 2004, where do you think that number might fall?

We think, for next year, we're somewhere in the region of 130, 135 million, thereabouts.

Just lastly, as you look at inventory levels of cans, especially, let's say, in the United States, you know -- where are they? I mean, are they in good shape? Do you anticipate having to take any downtime? One could argue that volumes might be a little bit better than maybe you thought they would be. What do your inventories look like?

Year-on-year, they are excellent. I don't have the U.S. numbers in front of me, but they're down versus prior year. Working capital is down versus prior year, and significantly. So, we're doing a great job, we think, of controlling working capital.

Are they down versus prior year, taking into consideration Constar -- excluding Constar?

Yes.

Oh, absolutely.

In terms of operations, I mean, we're not going to run cans into inventory for any purpose of all. As you know, Daniel , we are running for cash principally. So, we have already put in place an operating program for the fourth quarter that accommodates itself to the actual cans demanded, and so we're going to be reducing operations in the fourth quarter. We will never again run cans into the warehouse, hoping that our sales organization can find a way to sell them in the next year.

Thank you.

We will take one more question, if there is one.

Okay, thank you very much for participating in our call this morning. Thank you.

Good-bye.