Crown Holdings Inc (CCK) 2004 Q1 法說會逐字稿

Good morning and welcome to the Packaging teleconference. Following today’s presentation, there will be a formal question and answer session. At that time, instructions will be given should anyone wish to ask a question. Until that time, all lines will remain in a listen-only fashion. At the request of Crown Holdings, today’s conference is being recorded for replay purposes. Should you object, you may disconnect at this time. I would now like to turn the meeting over to today’s host, EVP and CFO, Mr. Alan Rutherford. Sir, you may begin.

Thank you very much, and good morning, everybody. This is Alan Rutherford, and I am EVP and CFO of Crown Holdings. With me on the call are John Conway, who is Chairman and CEO of Crown Holdings; and Timothy Donahue, SVP, 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 Conditions and Results of Operations” in Form 10K for 2003 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 issues and then John Conway will discuss the quarter before opening up the call to questions. We had a good first quarter, giving the company an excellent start to the year in terms of revenues and segment income. As you can see, all divisions contributed to the improvement in segment income in the quarter, which overall improved by 35 percent. Our tender offer for part of the outstanding ’04 and ’05 notes was successfully completed in March, using free cash flow generated in 2003.

At the end of March, moving into the season, our borrowings increased over December, 2003, but is still below the March 2003 levels. And on working capital, we were better than planned in the first quarter. At the end of the quarter, our liquidity position was good, with over $500m of availability. For the year 2004, we currently plan capital expenditures of $145m and expect net interest expense in the current rate and currency environment to be approximately $335m.

Our current view is that segment income for the year 2004 compared to 2003 and including the negative impact of $10m additional pension expense for the year 2004 will be higher by around 20 percent. We intend to continue our policy of delevering, and in this regard, we will generate at least $200m of available funds to pay down debt during the year. It is not our intention to give any further guidance at this time.

Finally, we are pleased to report to you that after the filing of our most recent proxy, the Institutional Shareholder Service, ISS, has noted that our corporate governance rating has outperformed more than 96 percent of the companies in the Russell 3000. I will now hand the call over to John Conway for his comments.

Thank you, Alan, and good morning. It is a pleasure to be with you. Clearly, we are off to a good start to the year and we are pleased with the first quarter results. As all of you know, the first quarter is traditionally a low volume quarter in our business, so we need to be careful not to read too much into the first quarter numbers. Nonetheless, sales were solid, our plants are running very efficiently and our costs are well-contained. Price initiatives so far are developing essentially in accordance with our plans for the year.

In the new product area, new product rollouts are also going very well. Super End continues to gain increasing acceptance. This new and improved beverage add will hit the mark of 25b units sold, in fact that occurred in March of this year by Crown, with an additional 8b units sold by our licensees as of March of this year. Clearly, a great success.

Our easy-open end technology for food products continues to be very well-accepted in the marketplace. Our new Peel Scene food can end is enjoying significant success in Europe, as is our new generation of full pull-out steel food ends which we refer to as our [EULA-3] technology.

Finally, we’ve had a tremendous reception in the North American market to our ideal closure. This is a composite vacuum closure for plastic and glass containers, comprised of both metal and plastic.

As Alan mentioned, cash usage is being tightly controlled, and working capital continues to show improvement. Our balance sheet is strengthening and liquidity availability is strong. Our emerging markets businesses, whether in the Middle East, South America or Asia continue to perform well. All in all, a good solid start as I said earlier, and we look forward to continuing excellent execution in all of these areas over the balance of the year.

And with that, operator, we will open the call up to questions, please.

Thank you. At this time we will begin the question and answer portion of the call. (Operator instructions) Your first question comes from Ghansham Panjabi, Lehman Brothers.

Hi guys, how are you doing?

Good, how are you?

Great, thanks. Can you give us some color on volumes by business unit across the major geographies, please?

The hard volumes, unit volumes were up well in virtually every product category. I think the best way to characterize it would be to say we were up in line with the markets. You may have seen the Can Manufacturers Institute’s numbers for beverage containers, I think were released yesterday, and good solid quarter, year on year, of improvement. We are up essentially in line with those units. The same is true in Europe and Asia, so it looks like as a general proposition our markets are doing well and we are performing essentially in line with them.

Okay, and can you just talk about the pricing initiatives too? I guess I am more interested in food cans in Europe.

Food cans, European price initiatives are going well, margins have improved for us in our food can business in Europe year on year, and it reflects our ability to more than regain cost increases in Europe, so that’s solid. And the same I would say is true in the U.S., but as you know, the U.S. food can business is well under 5 percent of our sales, so not nearly as important for us as the European food can business.

Right. And how are you offsetting steel surcharges in that business?

Well, we are in discussion with some of our good steel suppliers about their concerns about their costs, and we are going to continue those discussions. I don’t think we ought to comment more than that in the event that steel surcharges are imposed, we plan to pass them along to our customers, but that is the situation as of today.

Okay. And Alan, just in terms of the pension bill being tossed around in Congress, can you talk about – can you just give us the framework of how it would affect you guys as discount rate changes?

Well with the pension funding that went through, Ghansham, obviously that means that we are going to be contributing less cash than we expected, which we’d already factored in to our projection of 200.

All right, great. Thank you so much.

Thank you. Next call, please.

Our next question comes from Amanda Tepper of J.P. Morgan.

Good morning.

Good morning.

Good morning, Amanda.

First, just in the divisions, could you give us a sense, or better yet the actual details, on the currency impact versus the organic growth on the revenue line?

On the revenue line, yes. The overall currency impact on the segment income line was $7m, $5m of which was in Europe and $2m in the Americas. Sorry – revenue or segment?

Both, why not?

And on the revenue line it was $137m, being the total impact of which $118m approximately was in Europe and about $18m in the Americas.

Terrific. The free cash flow, you are now giving some guidance on the segment income line a bit higher than what we are forecasting, and I am wondering why your free cash flow then isn’t going up. Because it looks like – why you wouldn’t be raising your guidance for free cash flow, because you are sticking with your previous guidance on capex and interest expense, so is something happening on the working capital line, or is it just that you are trying to be a little conservative in where you are setting the bar? But it seems to me like things are trending well.

Well I think, you know, yes. As I said, we are at least $200m and for all the reasons that you said, it may be possible that it is a bit better than that, but I think we would rather get another quarter or two behind us and really be sure that’s where we’re heading.

How is working capital looking for the year? Do you think you’ll end up getting another decent amount of source of cash this year? Maybe not as much as past years, but some?

Yes, I think that as I just said a few moments ago, in the first quarter we are certainly better than planned –

But was that –

-- the right direction to once again get some cash flow out of our working capital.

Okay. Can you comment at all on any debt refinancing that you might do at some point this year, perhaps to address the book currency gains that you are currently looking at?

Well, you know, we are looking at that. We have a number of suggestions that we are considering, but just so that you understand, even if we were to do this, it is not really an impact on cash, it simply would enable us perhaps to put a slight hedge in place against our current dollar debt in Europe.

Okay.

But we’re looking at it, and you know, we are working with the banks. We have some proposals which we are considering.

Okay, and then just one more. On U.S. beverage can volumes that you guys were alluding to a minute ago being up so nicely, and you were saying you were up in line with everyone else, I’d be interested in your thoughts on where do you think these extra volumes are coming from, because it seems like a lot of people are surprised on the upside. Do you think this is restocking, is it sustainable?

Amanda, we don’t know. What we do know is that there was some concern on our part that perhaps there had been a buy ahead of some sort in advance of aluminum cost pass-through on April 1, but April so far is going essentially in accordance with our plan, and going reasonably well. So at the moment we would be speculating, but what we would be speculating is that perhaps the general economic conditions and what you’ve been reading, we’ve all been reading about retail spending, seem to be impacting both soft drinks and beer.

Okay, terrific. Thank you very much.

Thank you. Next question, please.

Your next question comes from Dan Koshaba from KSA Capital Partners.

Good morning, guys.

Good morning, Dan.

Good quarter. Are you guys roughly like the industry in you are up for beverage cans about half steel, half aluminum?

Yes.

You are, okay. Now, steel prices are up, aluminum prices are up I believe as well. What does the pricing look like in European beverage cans in the first quarter, and what do you kind of anticipate for the rest of the year?

Well pricing is somewhat stronger. We’ve been successful, Dan, in protecting all of our margins in beverage cans in Europe. We have not seen the kind of what you might describe as ultra-aggressive efforts by the steel industry in Europe of the type we’ve seen in North America.

Right. But on balance, it sounds like your raw material costs might be up a little bit in Europe. Is that accurate?

That’s correct.

Okay. It looks like from the results that you’ve been able to offset that with pricing. Is that what you’re saying, John?

Yes we are, we have.

Now if we can move to the U.S. market which is 99 or 100 percent aluminum in the beverage can market, here again aluminum prices have moved higher, you guys have an automatic pass-through, I believe, in April and October.

That’s correct.

Did beverage can prices move higher in April?

Yes they did. I mean, the market took the increase and as I mentioned earlier, volumes continue to be pretty solid in April, so we’re feeling positive about the situation at this point, although you know as well as we it is only the first quarter and that is a seasonally low quarter for us.

But the customers, they are taking the price increase, at least as of April?

That’s correct.

And then last question, in the old days and I think the business still works this way, don’t the can makers kind of get credit, John, for some of the scrap produced when you are making beverage cans, and therefore scrap prices tend to be somewhat of a portion of the profit equation in the beverage can market? Is that still true?

Well, I mean there is a scrap component, as you know, both for steel cans and aluminum cans. It is true we’ve been helped somewhat by that, although less so in aluminum because the move up in aluminum tends to offset the scrap improvement.

All right, good. So it sounds like fundamentals globally in beverage cans is not bad.

Yes, I think that’s a fair characterization.

Last question for Alan or Tim, I guess I have two questions real quickly. Interest expense was $90m in the quarter, yet it is going to come in around $335m or so I believe for the year. In the second quarter, does that mean interest expense falls to what? $84m, $83m? What do you think the number might be there?

Well it is obviously going to decline, one of the reasons being, of course, that we bought back the bonds that I referred to, and also because our cash flow will help us not to use certain parts of our financing as we go through the year. So in the second quarter I think we will see a number with an eight in front, probably $85m, $86m, something like that.

And then it should go up, according to your estimates, it should move that lower in the third and fourth quarter.

Correct.

All right. And Alan, what do you think the tax rate might be in the second quarter?

I’ll let Tim answer that.

Well Dan, as you know, the first quarter is typically the lowest quarter for the business. After consolidating in the stronger second and third quarters, we would expect our tax rate for the full year to be in the 45 to 50 percent range.

Okay, so that means then in the second and third quarter your tax rate will be lower than that, right? Because the first quarter was very high, obviously.

Well it is very high on a – it just comes down to math. It is very high on some very low numbers, so as you consolidate in bigger numbers it doesn’t have to be that much lower to come back to that range, right?

Right. Okay guys, I think I have it. Thank you very much.

Thank you. Next question, please.

Our next question comes from George Staples of Banc of America Securities.

Hi guys, good morning.

Hi George.

How’s it going?

Good.

Good quarter. When you look at your volumes versus a year ago, obviously last year’s first quarter was impacted a lot by the weather and you have easy comparisons. Would you say that your Americas volumes and averages are comparable to where they might have been in the first quarter of 2002?

George, we haven’t had a chance, really, to look back to 2002 so I really don’t know yet whether that is the case or not.

Okay. When we look at the change in margin that has occurred in the Americas segment over the last couple of years, if you adjust for pension while you are up quite a bit from last year, you are still down a little bit versus 2002. Would most of that be pension and costs, so on an adjusted basis you’d be up versus ’02 at this juncture?

George, I think most of that is pension.

Okay, but you are not sure whether you would be up at this juncture or not Tim, right?

You are drawing a comparison back to ’02, as John just said, we haven’t looked back against ’02, but I would suspect we are approaching that number.

Okay. The only reason to look back is again, just because of how slow the year was early in the year for everybody last year. Just some last questions here. When you look at the improvement in European profitability, you gave us the impact from currency, which is helpful. How much of the remaining differential in terms of segment EBIT came from pricing relative to volume relative to operating efficiency? And perhaps you mentioned this and I missed it, but do you have an aggregate volume number, Q1 versus Q1 for Europe.

We don’t have a – there are so many products, George, we don’t have a number for Europe and in any event, if we had an aggregate number it wouldn’t be meaningful. But the profit improvement is pretty much across the board. Volume has been relatively strong in the quarter. We’ve run very, very efficiently, efficiency rates are up, spoilage is down, so we are seeing the results of a lot of good, solid application by our manufacturing operations, management. Not just true in Europe, but around the world as our world class performance program continues to take hold. And then the pricing initiatives, as we’ve said earlier, have been largely successful and as we’d anticipated they would be. So I would say it is across the board, pretty much, improvement in the European business.

John, two last questions. You said your pricing initiatives have been largely successful. That doesn’t mean that there isn’t anything that hasn’t gone quite as well as you would like, right? On whole, pricing has been pretty much where you’d expect it across your various products?

Yes, I have not had any real disappointments in any of the product lines. In our industry, anyway, the mood of the market seems to have changed where we can show justification and necessity, we have some price power.

Okay. And last question, operating rates in North American beverage can. I realize there is quite a bit of seasonality to the number, but what do you anticipate your operating rate change might be, or what do you think the industry might look like on a change basis versus a year ago? Up a couple points?

It’s hard for me to speculate on the quarter. I think it would be fair to say, if we continue to sell at the current rate, that is to say the rate you could project from the first quarter, operating rates are going to be up versus last year for us and for the industry. I can even foresee a little tightness in the second and third quarters.

Put the customers on allocation, that’s all, John.

There you go.

Thanks very much.

Thank you.

Next question, please.

Our next question comes from Bruce Kline of CSFB.

Good morning.

Good morning.

I was wondering just on aerosol, if you could tell me what is going on in terms of volume and pricing in both the U.S. and Europe, and then secondly on the steel surcharge, how much did tin plate increase, roughly and kind of when did you get that, and when is it effective?

Tin plate is frankly, it is confidential as to us and our suppliers and not something that we do disclose. I think I discussed earlier that there have been some discussions with some of our suppliers about some of their concerns, and I think we would like to leave it at that at this point. In terms of aerosol, the business is essentially up a little bit in terms of units, not a lot but a little bit in our markets. It had a nice pickup in March so we’re hoping we see the beginning of a more positive trend. January and February were a little soft.

Is this in U.S. or Europe?

Principally in the U.S., but Europe to a degree as well.

Lastly just on the asbestos topic, has there been much change in the trends you’ve seen in the quarter? There’s been increased activity this month in Congress, was there any increase in filings or anything to note there?

No, not really. If anything the trend in the first quarter has been lower filings than we had last year.

Okay, thanks guys.

Thank you. Next question, please.

Our next question comes from Christopher Miller of J.P. Morgan.

Good morning.

Good morning.

Two quick questions on the potential re-denomination of debt, is there any thought to using the intention of keeping it at the same level in the capital structure, or is that still being discussed?

We haven’t made any decisions, we’re still talking, really.

Also in terms of equity claw backs on your high yield bonds, is that something that you are considering? Any color you can give us on that?

No, I don’t think we’re going to be doing that. No.

You don’t expect to.

No.

Thank you very much.

Next question, please.

Our next question comes from Chris Manuel of Key Bank.

Good afternoon, or good morning, gentlemen.

Good morning.

Two quick questions. One was SG&A, looking at it year-over-year it was up pretty sharply on a dollar basis, and up somewhat on a sales basis. Can you talk about what’s going on there?

Well in dollar terms, as you indicated, we had foreign exchange impact around $7m. Then we had a bit of a fluctuation which you can have quarter on quarter in percentage terms. Obviously the SG&A tends to be fixed whereas the sales fluctuate, but in principle, if you take out foreign exchange we are more or less flat.

The other question I had was, can you give us what capex was in the quarter?

It was $38m.

Thank you very much.

Next question, please.

Our next question comes from Larry Peck of Copper Beach Capital.

Hi, I just wanted to ask about the revenue line again. In this quarter, was there any real impact of price increases, or is that more what we are going to see later on in the year?

There has been some impact in Europe, in virtually all of the product lines; in the United States in food and aerosols, but certainly in North America virtually none in beverage cans because of the April 1 reset.

So we will see more of an impact later as the year goes on?

Yes.

Okay, thank you.

Next question, please.

Our next question comes from Edmond Griffin from Blackrot Capital.

Good morning.

Good morning.

Two quick questions, most have been answered. I missed the Can Manufacturing Association release that you alluded to that had the volumes. So could you just help me quantify the volumes by region?

Well I don’t have it by region but I will read to you what I’m looking at here, and you can get it from CMA in Washington. For the quarter, ’04 versus ’03, beer cans, alcoholic beverage cans in units were up 1.1 percent and non-alcoholic beverage cans in units increased by 6 percent. Weighted average increased units in the United States, 4.4 percent. So that is what I was referring to.

Okay. And then just cash from operations in the quarter?

We haven’t published it yet. As you know, we’re a user of cash for a couple of quarters as we build working capital, and I think as Alan alluded to earlier, we are essentially in line with the target to achieve some working capital reduction this year and really very close to last year’s numbers in the first quarter.

Okay, great. Thank you.

Thank you. Next question please.

(Operator instructions) Our next question comes from Stuart Hosanski from Vanguard.

Hi, my question has been asked and answered. Thank you.

Thank you very much. Any further questions?

Our next question comes from Walter Branson.

Thank you, Regiment Capital.

Good morning.

Good morning. Just back to the steel cost increase for a second, do your contracts – and I guess I am asking this question separately with respect to both the Americas and Europe, do your contracts provide for automatic pass-through of steel cost increases or steel surcharges, or do you need to negotiate that.

Generally speaking, our sales contracts do provide for pass-through and so we are reasonably confident that in the event that they occur that we are going to be able to cover them.

That would apply to both Europe and the Americas?

Yes.

Thank you.

You’re welcome. Next question, please.

At this time we show no further questions.

Okay, well in that case I think we will conclude the call. We would like to thank everyone for participating this morning. Thank you.

Thank you for participating in today’s teleconference and have a nice day.