Crown Holdings Inc (CCK) 2003 Q4 法說會逐字稿

Welcome to the Crown Holdings full year 2003 conference call. (OPERATOR INSTRUCTIONS). Please be advised this conference call 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. Mr. Rutherford, you may begin.

Thank you, very much, and good morning, everybody, and welcome to our conference call for the fourth quarter and the year 2003. With me on the call today is 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 informational 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 Form 10-K for 2002 and in subsequent filings. In view of the 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 issues, and then Tim Donahue will talk about the tender offer we launched today. John Conway will then discuss the year before opening the call to questions.

With regard to asbestos, we are still awaiting a decision of the Pennsylvania Supreme Court. The general tort reform legislation passed and signed into law in Texas in June of '03 includes a provision that limits asbestos-related liability of companies such as Crown's wholly-owned subsidiary, Crown Cork & Seal. The Company has been filing motions to dismiss in Texas and has obtained several favorable rulings to date. The Company continues to support Senate initiatives in seeking a comprehensive solution to the asbestos problem, impacting many corporations with the fairness in Asbestos Revolution Act. The year-end 2002, the Company had 59,000 open cases, excluding the Maritime cases. While at the end of 2003, the open cases are 75,000, reflecting accelerated filings in Mississippi at the beginning of the year and reduced filings in other states, along with some impact from Pennsylvania law, Texas law and the Fair Bill. Our average settlement per case for the year was $1,792, the same as 2002, which was 1,793. However, excluding prior-year agreements in both years, the average settlement declined from 1,426 in 2002 to 989 in 2003. We have reserved, as required, at the bottom end of our range of estimated liability, 239 million. The projected target end of our range continues to decline, having been 580 million in 2001, 502 million in 2002, and projected 406 at the end of 2003. We paid 69 million in 2003, including 41 million in prior-year settlements. With more than 65 percent of the Company's revenues in currencies other than the U.S. dollar and over 50 percent of the Company debt in U.S. dollars in Europe, the continuing weakening of the U.S. dollar results in improved consolidated revenues and incoming cash flows. The Company's liquidity position at year-end was excellent, with liquidity in excess of $860 million. We have today launched a tender offer for most of the outstanding December '04 and '05 notes, which Tim Donahue will discuss in a moment.

We were very pleased with our total cash generation in 2003, which exceeded 500 million after capital expenditure. And following $68 million of asbestos payments and 120 million of cash into our pension plan, left the Company with $314 million to delever the Company in the year. Our average -- the year-end debt, net debt, was almost 3.5 billion. Our policy will be to continue delevering the Company during 2004. We currently expect to generate free cash flow of at least 200 million during the year to further reduce the debt. We currently plan capital expenditures of 145 million in 2004 and expect interest expense at the current rate and in the current currency environment to be approximately 335 million in the full year. With that, I will turn the call over to Tim to say a few words about the tender offer.

Thank you, Alan, and good morning to everybody. As noted in earnings release and as more fully described in a release issued yesterday, the Company has today (indiscernible) concurrent cash tender offers for two unsecured notes series, as follows. First, the Company has offered to purchase any and all of the outstanding $60.6 million of 8 and three eight percent notes that are due January 15, 2005 at the purchase price of 104.5. And second, we have offered to purchase up to EUR86 million or 80 percent of the outstanding EUR107.3 of 6 percent notes due December 6, 2004 at a purchase price of 103. The tender will expire on March 5, 2004, unless extended. For further information regarding the tenders, noteholders may refer to the release issued yesterday, which is on the Company's web site at www.CrownCorp.com. In the press release, noteholders will find the contact information (indiscernible) agent and depository in order to receive a copy of the offer to purchase. With that, I will turn it over to John Conway. Thank you.

Thanks, and good morning. A pleasure to be here with all of you. I thought I would just say a few things and characterize our view, management's view, of the Company's performance in 2003 versus 2002. and then we will throw it opened to questions.

First of all, we think we had a very good year from an operating standpoint. Operating performance as measured by segment income or gross margin performance after stripping out divested operations and pension expense, or changes in pension expense, was very positive for the Company as a whole. As Alan said to you, we had a great year in terms of free cash generation. I am sure there are going to be some questions about the nature of it, is it sustainable, do we think it's sustainable? The answer is yes, we do. And we will talk more about that over the course of the call. Economic profit, which as all of you know who have been on these calls in the past, is the measure that we are now using. But to be sure that we have management and shareholders properly aligned and we are improving return on invested capital -- improved for every division, Europe, the Americas and Asia year-on-year '03 versus '02.

Getting into some nonoperational issues, asbestos is a bad problem. We know that, but it's a problem that is lessening for our company. I think you can see from the numbers regarding claims paid that the numbers are trending down and our forecasts about what would happen with this problem are essentially correct. In addition, we continue to have good success being proactive with regard to the problem. In particular, a case in point is the Texas legislation and the positive impact that it's having on this problem for us. Finally, I want to remind you that the capital structure from our standpoint is solid. Our February refinancing, of course, we were delighted with. And I think you can tell from Tim's comments, that we are now in a position to start to do some things proactively to further improve the cost of funds and our capital structure generally. So with that, I thought we would throw it open to questions.

May we have the first question, please?

(OPERATOR INSTRUCTIONS). Amanda Tepper, J. P. Morgan.

Let's see, trying to understand the margins. You say they are up on a year-over-year basis. If we could talk about your major divisions in the quarter, and help me understand, if the margins were up on a year-over-year basis, how they were? And two charges I want to see where you took them, if any -- one is the restructuring charge, where in the segments are they? The second is the currency impact. Where does that flow through your statement income?

If we look at the Americas division for the quarter, obviously, we reported segment income of 4.3 percent versus 4.7 percent last year. As John described for you, as we look at the improving performance of the operations, we would like to get down to the plant level and take away this pension income, which is not indicative of plant performance. So if you do back out pension, year-over-year, I think the improvement in operating income as a percent, or segment income as a percentage of net sales, is 7.3 versus 6.9 in the quarter. As we look at the --

Let's stop there, that is all in the Americas, right?

That is all in the Americas division, yes. If we look at the European division, we reported $31 million of segment income in both quarters, the fourth quarter of '03 and '02, which is 3.7 percent of net sales this year and 4.1 to last year's net sales in the quarter. And again, the swing in pension income expense, if you extrapolate that out, last year's segment income in the quarter would be 38 million or 4.5 percent of net sales versus 18 million in the fourth quarter of '02 or 2.4 percent of net sales. So again, reflecting not only John's comments in the news relates, but also John's earlier comments that from an operating standpoint, we feel like we are on track with earnings improvement at the plant level and the operating level.

And is the restructuring charge in any of those numbers you just discussed?

Yes, it is. So the restructuring is included in segment income.

Is it mostly in Europe?

Yes. But in front of me, I don't have the amount in Europe versus the amount in the Americas, nor do I have the comparative for last year. But the restructuring is in segment income.

What about currency, the currency impact?

The currency impact that we show you, the translation of the net U.S. dollar-denominated debt in Europe is not included in segment income.

Okay. But the fact that you had a lot more revenues because of currency, that does flow through to segment income, right?

You obviously -- the revenues were up this year some 500 million in total for the Corporation because of the translation of foreign currencies into the dollar. Segment income, obviously, is related to that as well, that's right.

Right. So could you talk in the European segment, do you have a sense of in the quarter, how much of that -- does that benefit margins at all? Or does it just flow through and make overall operating income dollars --?

(indiscernible) segment income dollars, but not margin (inaudible) the same percentage.

So that margin improvement is real operating margin improvement?

Yes.

One last question, can you tell me who are these people you're laying off, what is the intent? Is there more to come? Is this because somehow there are volumes falling off? And are there going to be plant closures to follow? Or have you come up with some new way of manufacturing that you can take people out?

(Indiscernible) in a moment. Let me try to put the restructuring into context and remind the audience and you of a couple of things. First of all, we have 28,000 employees in approximately 190 plants. So to me, it's inevitably that we are going to be restructuring, changing, doing things. And the rule that we have set for ourselves is we will not do any restructurings unless they pay back within one year. So these restructurings we are describing, we think, are very income positive and they will improve our return on invested capital. Having said that, Alan will give you a little feel for what it is.

Primarily, the majority of (indiscernible) in Europe, and it is changes that we have made in various plants and operations, where we have been changing the manufacturing, merging some of the plants together, etc., etc. Obviously as John just said, 500 people out of 28,000 is not so much. In Europe -- and I'm sure you know about the European operations as well as we do -- it's very difficult to do this without having some charge of some description. And so it's really for us, a relatively minor amount. And our belief is the majority of our major restructurings are well behind us.

Sandy Burns (ph), Deutsche Bank.

I'm wondering if you could talk a little bit in terms of what you're looking at in terms of pricing trends in some of your major businesses, especially if you could focus on besides bev. cans, the European food can business and the aerosol business?

Okay. Bev. cans for the year, we are in largely -- North America -- we are essentially in a situation for -- where price changes are governed by contract at this point. So we will be -- we will have some margin improvement as a consequence of contract. But principally, we will be looking at immediate cost pass-throughs, reflecting aluminum cost increases that we have incurred. And also, labor and other cost increases. So we think we may see some margin improvement year-on-year, but it's going to be fundamentally a function of improved operations and not as a consequence of price, in beverage in North America. Food, in Europe, we are leading food cans price increases in Europe. We anticipate that we will at least cover cost increases. We hope that we will improve on that. We have the last two years. We think we will again for '04, although it's a little bit early to tell. I think the last category was aerosols, was it?

Correct.

We have been participating in what appears to be an industry round of price increases for aerosols. Okay, we are through the first month of the year and it would appear that we are getting reasonably good price increases in North America. We are attempting to the same thing in Europe. The European market is somewhat more fragmented than the U.S. But the U.S. so far, in its early days, we appear to be doing reasonably well.

The aerosol -- is that price increase above any cost issues that you're facing on the raw materials side?

We think so. We think there could be some margin improvement in aerosols. But again, it's really too soon to say. We have a lot of aerosol customers on contract, and the contracts expire at various points in time over the course of the year.

Looking at the cost side of the business, what should we expect in terms of the pension numbers on the income statement versus the expected cash outlay for '04?

On the income statement side, we believe the charge may go up marginally really because the discount rate, as you would probably expect, has come down, with the lower interest rates that we have seen in '03. So there may be a small uptick; I am talking about probably 10 million or something for the whole year. As far as the contribution goes, we really are still awaiting what the contribution discount rate will be. As you know, there is a lot of discussion going on. And we believe that probably, we hope, this week if not next week, we will hear that the cash requirements will be somewhat lower than we currently expect. So we are waiting until we get that number.

Would you also anticipate any nonmandatory payments in pension like you did in '03?

No, I think in '03, we are basically going to pay into the fund what we are required to pay in. As you said, last year, we did pay in and it was not mandatory. But also the assets of the fund had a much better year last year. So we believe we will just pay in what we are required to do, once we know what that is -- in '04.

Daniel Koshaba, KSA Capital Partners.

John, can you comment a little bit about the North American market? If you look at operating profit, if I have this correct, it looks like EBIT in North America was a couple of million dollars below a year ago. Was that primarily a drop in food can operating profit, or was that beverage and aerosol being relatively flat? What does the composition of that operating profit look like?

If you strip out pension, divested operations and then look at margins, our margins were overall -- but the relative disappointment for us were food cans prices; and we made mention of that in the release. Margins may have been somewhat flat, Dan. Tim's over here -- we are always doing 55 calculations as a consequence of pensions and divested operations so forth. The biggest disappointment, year-on-year, would have been food. And as I said, we think that is being rectified as we speak. We have had pretty good success so far. And we think the announced price increases will stick. So that should get us back to a much more acceptable way the return of the food business in North America.

I don't know if Tim or Alan if you want give a stab to this question that is kind of related -- if you look at the pension impact in the United States on operating margins, is there an additional headwind in your mind in '04 or is that kind of flattish?

What I just said to the previous question to Sandy was that with the fall in the discount rate, I think we are going to have a little additional charge here, which I said was probably going to be 10 or 14 million, I am not sure yet exactly, but something like that, due primarily to discount rate going down further. And as I said, counted in that was the fact that the assets did improve in '03. But I think we are talking about 10 or $12 million perhaps.

Is that for the entire company?

That is for the entire company, yes.

So maybe five or six would be North America?

Five or six could be in North America.

Last question is kind of unrelated to the fundamentals. Given that this is an election year, should we, or have you, kind of shelved the idea that there might be some kind of national legislation to deal with asbestos? What are your sources and legal counsel telling you?

Well, we are being told that at a minimum, the Republican leadership in the Senate wants to introduce the bill to the full Senate and force a vote. Beyond that, Dan, we really could not forecast, things as they were. All the logic and sense of the situation would argue that a national bill is required and would be the right thing to do for the victim, and would be the right thing to do for the industry, it's pro-growth, pro jobs. It would attack what I would argue is kind of rampant corruption in North America. But the politics of it -- we are not politicians; it's hard for us to predict. But at a minimum, we are hoping and we believe that there will be a vote on the issue. And we're still very hopeful that we're going to find 60 sensible people who do the right thing.

That might be hard to find in Congress. But anyway, enough. Thank you.

George Staphos, Banc of America Securities.

The first question, as far as margins go on go-forward basis, if you are largely done with the intensive restructuring of the Company that you have gone through the past several years, barring price, what are going to be the other levers that you have at your disposal for improving margins in your larger businesses, beverage cans and food cans, on both sides of the pond? Then I have two other questions.

Largely, in our case, George, going forward, it's going to be continued operational improvement. We think that there is still more to be done. We think we have made tremendous strides, in terms of achieving a higher level of operational excellence than we have had in the past. And we anticipate we are going to be able to continue to do that.

I realize you couldn't given it for the entirety company. Do you have any anecdotes or base studies that you could show an example for one quarter --?

For us, for example, beverage can efficiencies in North America and Europe were improved year-on-year. Spoilage was down. I am not going to tell you how much, but we're continuing the positive moves. We are taking a hard look at manning across the Company. We've got a feeling we can make some progress there that if we apply a little more rigorously, some of these lean manufacturing principles, that we can take labor content out. So those are just several examples.

The next, of course, is just assuming steady-state for operations and no growth in any market, that is not the case, as you know, because Europe continues to grow, for example, in beverage cans and we have been a good beneficiary of that as a consequence of where we are located. I will remind you, we're not in Germany. We're still continuing to grow nicely in beverage cans in Asia, the Middle East, South America. But take that out, we are putting a lot of emphasis and continue to do so on new product development. We've been delighted with the reception that we've gotten in the super end. We've done remarkably well with a major brewer with our shaped can technology. We are now doing the same with aerosols. We are going to continue to bring to bear what we think is the industry's leading research and development capability on the product and the process side.

What do you think manufacturing cost inflation is going to be in the next three years?

The next three years?

Take an intermediate point in time, not necessarily for '04.

Including raw materials?

Forget raw materials, just your cost of manufacturing, labor, etc.?

I think if we said roughly, labor costs going up 1.5 to 2 percent, offset by productivity gains and then throw in, let's say, nonprimary, nonmetal resin costs, I don't know. I think our objective would be to try to hold things flat.

Two last questions, one, realizing that your customers this time of year are always going to be optimistic because it is in their best interests, what are your beverage customers talking about in terms of marketing plans for 2004?

Oh, they vary so much. We are kind of wandering around. If we think about the world, I can tell you, Asia is still very, very, bullish. The South Americas, I think, in general believe '04 is going to be better than '03, certainly in Brazil. I personally think the North American market is going to be pretty bland, again I guess personally reflecting my belief about how the economy is headed and what that is going to mean in terms of personal spending and ultimately, employment. The European situation, I think we are going to have continued good growth in Europe. So I think generally, our customers are reflecting that. I don't -- generally speaking -- I don't see any erosion of any significant in soft drinks as a consequence of PET (ph), that's going to offset growth. I think we continue to have a little concern about the impact on glass in the beer industry in North America in the package mix, which, as you know, is a function of fashion. But nonetheless, fashion is what it is. So that's a concern. But otherwise, we think volumes are going to be reasonably good for '04.

Bruce Klein, Credit Suisse First Boston.

A couple questions, just on -- in terms of European food cans, did I hear, the hike, your hope is going to be more than the ten play (ph) hike? Is that what I thought I heard?

That's correct.

And the with regard to the tender, can you just tell us how that's being funded and how much of the cash on the balance sheet is escrowed cash? And lastly, the free cash flow, I am wondering how much working capital change benefited the full year? I don't think we have balance sheet -- how much debt helped? And were there any other items that benefited the free cash flow figure other than just regular operating cash flow after interest and CAPEX?

By the end of the year, the cash, of course, there is no escrowed amounts because we paid everything out of escrow to buy out the previous bonds. So there is nothing there. Obviously, with the tender offer we've just made, we are going to utilize the free cash flow that we have to do that. What was the other part of your question?

Working capital benefit --

We had a very good year, obviously, in working capital. We did exceedingly well on receivables. For the coming year, you know we believe we can still do something on receivables, perhaps not quite as good as we did in '03; and that's why I just said that our free cash flow in '04 would be at least 200 million, setting the bar a little lower here to reflect the fact that we have done a real excellent job on working capital in '02 and '03 now.

How much did it help in '03?

The working capital was a substantial amount. I think we took almost 100 million out.

The one thing, I think, just to add to what Alan said, we have been tracking for the last several years, our working capital usage, very, very carefully. We have talked in the past about management incentives, from a quantitative standpoint, being based on free cash produced. So we track working capital on a monthly basis, and have a constant running average. So we know that we're running the company with significantly less working capital than we have in the past. And we know that the gains that we have been making are sustainable. We also know that we are not doing heroic things in the fourth quarter to try to dress these numbers up. So we are confident we are going to continue to run the company with less working capital, significantly, than we were two years ago or even in '03.

Was '04 supposed to be a use or a source of cash for working capital?

Really a source, I said probably 10 or 20 million.

Lastly, just on the beverage cans in North America, contracts are kind of being set. Did I hear you correctly that you are trying to -- or the attempt, the initiative is to try to get the price up? And have you affected a price hike to more than recover the raw materials?

What I tried to say was that most of our business for '04 is covered by longer-term contracts. So we are basically -- we are going to be passing through all cost increases as they occur. That's essentially what we will be doing. And if we have margin improvement, and we think they will, it will as a consequence of more efficient operations.

Last was just -- I don't know if we touched on U.S. aerosol cans, thoughts for '04?

We mentioned it earlier. And there have been price increases announced by Crown and the industry for aerosols for '04. To date, we have been reasonably successful. And we feel that a reasonably significant price increase will go in for aerosols for '04. It's going to be spread over the course of the year, based upon when contracts come up for renewal but. So far, we are pleased with what we are seeing.

(OPERATOR INSTRUCTIONS). Amanda Tepper, J. P. Morgan.

A couple of follow-ups, on the tender that you are launching, is that just cash on the balance sheet intended to be used? Or will you be borrowing under bank lines?

The cash is (indiscernible). So to the extent we have cash on the balance sheet at the end of the year, we may not have borrowed any revolver money. So it's (indiscernible).

I'm sorry, it's balance sheet.

Yes.

Okay. And then, on the working capital, and you are saying you did a good job on receivables. Do you give days sales outstanding?

We have not given that, no.

Okay. But presumably that's coming down?

Yes. Each year, we improve it. As John said, we measure the working capital on average throughout the year, which means we are benefiting from that as well.

Was part of it from inventories also?

Yes, a small amount, about $30 million.

I think our point is that we did not drastically curtail operations the latter part of November/December. So to us, it was kind of normal good manufacturing practices at this point, that is to say, run to firm forecast. But we are not running an inventory. And we have saying this for the last couple of years.

Could you comment -- and if you said it before and I missed it, I apologize -- but U.S. beverage can volume trends in the fourth quarter and going into this year, were you up? Because I have gotten a number of questions on this. And what are you anticipating in '04?

We were up for the fourth quarter and our customer base had a pretty good fourth quarter. And we were up, I would say, ahead of the industry -- and I would say, certainly, because our customer base did reasonably well in the fourth quarter. Trends, as I said, and this is just our opinion, we feel that soft drink volumes should be up, clearly, for the year, '04 versus '03. That's our forecast. And beer, we are not very exposed to the beer industry. And so we just can't hazard a guess as to what's going to happen with beer cans in 2004.

Anot (ph) Aaron (ph) of Barclay Capital.

Just a few more items. On the foreign exchange impact, the press release said that there is 132 million impact for the company, of which 108 is in Europe. Can you tell us how the (indiscernible) splits between the Americas and Asia, please?

I think you misunderstood the press release. What we said -- in the quarter, we had a gain of 90 million, or 62 million net of tax, which was all related to the translation of net U.S. dollar debt in Europe. And then for the year, the gain was $201 million on this dollar denominated debt in Europe, or 143 million after tax. The difference between the dollar debt in Europe and the overall foreign exchange for the year basis, transactional in nature as it relates to us purchasing commodities and other currencies other than the local currency.

Sorry, I guess my question was not clear. I was talking about the FX impact on sales. It said 132 overall. And then when you described the divisions, you mentioned 108 in European sales, so the balance?

I'm sorry. In the Americas, it would have been about 20 million, and Asia was the balance.

Also, a few cash flow items. Can you please tell us what was the interest -- cash paid interest in the quarter and cash paid tax? Is that possible to disclose?

I am not sure I have that here. I don't have it here. You will have to follow up. I just don't have it here.

Gordon Kerr (ph), Citigroup.

I just wanted to ask you why it was that you tendered for only 80 percent of the European notes?

Obviously, we are using the cash and we are moving into a period of the year when we have more cash requirements, January, February, March. We wanted to be sure that we only tendered for and bought back that portion of the bonds that we knew we could adequately finance at this time. Certainly, a question of cash available and making sure that we have a sufficient cushion.

Thank you, very much. That concludes the call, and we thank you all for participating.