Crown Holdings Inc (CCK) 2005 Q1 法說會逐字稿

Welcome to Crown Holdings' first-quarter 2005 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, Executive Vice President and Chief Financial Officer. Mr. Rutherford, you may begin.

Thank you. Good morning to everyone. This is Alan Rutherford and 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, Finance. Let me point out that on this call, as in the new 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 Form 10-K for 2004, and in subsequent filings.

In view of Regulation G adopted by the SEC, we do not intend to provide non-GAAP financial measures of performance or liquidity beyond those already contained in the Company's earnings release. I will comment on the results and Tim Donahue will update you on foreign exchange, pension costs and taxes, after which John Conway will discuss the quarter before opening the call to questions. We had a satisfactory first-quarter giving a good start to the year. Revenues improved 5%, and segment income improved by 19% over prior year with each division reflecting slightly different market characteristics. The Americas Division revenue increased 5% over prior year. Volumes reflected some buy-ahead from prior year, but otherwise we are as expected. All operations in the division continued to run efficiently, and that along with ongoing cost reduction programs contributed to the segment income improvement. Included in the segment increment improvement was lower pension and depreciation expense of 4 million in the quarter.

In the European Division revenues increased 3% and segment income was flat. In the steel based product lines, which is over 50% of the European revenues in the quarter, the necessary selling price increases were established for the year. There was some buy-ahead impact from prior year. The division was negatively impacted by the run-up in resin pricing which affected margins in plastic products in the quarter. We expect this situation to correct going forward by either lower resin costs or offsetting price increases.

The Asia Division revenues increased 25% reflecting pass-throughs of raw material, increases and volume increases over prior year. The added volume and continued cost reduction and planned efficiency improvement programs initiated in prior year, helped to improve the results year-on-year. The first-quarter working capital increase did, as expected, reflect the impact of raw material cost increases. Liquidity, however, was still good at quarter end with 600 million of availability. We've reaffirm our free cash flow guidance for the full year of at least $200 million. I will now hand the call to Tim Donahue for some comments.

Thank you, Alan, and good morning to everyone. As Alan noted, I will briefly cover some non-operational items. As published in the year end Form 10-K, we currently forecast pension expense to be $100 million for the year. Previously on our fourth-quarter 2004 call we had estimated 110 million for 2005. The reduction in expense was the result of final asset valuations in Europe. On the translation of our dollar debt in Europe, we had an unrealized loss in the quarter of $31 million, as the dollar strengthened to 1.29 from 1.35 at year end. It should be noted that since the debt was issued in February of '03 at a rate of 1.07 to the euro, our cumulative unrealized gains to date is now $268 million. Generally speaking, these gains will only be realized when the debt is retired or converted from U.S. dollars to local currency.

Our tax rate for the first quarter was 0%, in large part due to the unrealized foreign exchange loss. Excluding the foreign exchange loss and the gain on sale of assets, our tax rate in the quarter would have been 45%. This rate is well below the Q1 2004 rate, and while it is higher than the statutory rates in the jurisdictions in which we operate, it is much closer to those statutory rates. As we have mentioned to you before, the tax rates in quarters one and four are higher than quarters two and three due to the seasonality of our business. The reduction in rate from quarter one '04 is primarily due to increased segment income in the United States. For the full year of '05, we currently expect that our adjusted tax rate will be approximately 38 to 43%.

I will now hand the call over to John Conway.

Thank you, Tim. Clearly we had an excellent start to the year, and a very good first-quarter. We are particularly pleased that the Crown world class performance operating system is continuing to produce good results and productivity gains, material efficiencies, cost controls and very effective application of capital expenditure, all of which are falling through to the bottom line. Also our broad range of packaging products is helping to support earnings growth. As Alan mentioned, the first-quarter reflects the adjustment by Crown and the industry to the recent substantial raw material price increases. For example, in our case there were some fourth-quarter '04 buy-aheads by our customers particularly in some of our steel packaging products. And the sharp resin price run-up compressed profits, but this is not unusual. By that I mean that our plastic closure businesses tend to experience price increase lags as resins run-up and the reverse when resin prices begin to decline. Overall, however, we have very effectively pass-through raw material price increases.

Once again our performance was very strong in those geographic markets which have rapidly expanded economies. This can be seen very clearly in the Asia Division's results, however, other areas also performed well such as the Middle East, North Africa and South America. We are always very careful about generalizing about the full year based upon the first-quarter, which as you know is a seasonally small quarter for Crown. Various factors do affect the second and third-quarters such as the weather in North America and Western Europe, the quality of the planting season, the nature of the harvest of seasonal crops and so on. Nonetheless we think we are off to a very good start and subject to the reservations we have just mentioned, we feel quite confident about the year.

With that, we would like to open it up for your questions.

(OPERATOR INSTRUCTIONS) Chris Manuel of KeyBank Capital Markets.

A couple of questions for you. First of all, when I look at your margins by segment, in Asia the margins were at the lowest levels they have been in the last eight quarters. Was there anything unusual there that contributed to a lower margin level or anything that would prohibit them from going back up?

Chris, I think the first thing you need to realize is that we show you rounded numbers, rounded to the millions. So what you are not seeing is that 14 might be a 13.7, things like that. I don't think there is any reflection of decreasing margins, it's just the result of rounding.

The next thing I want to ask you about was the share repurchase program. I saw in the 10-K you had put in place a program to buy back up to 50 million a year. When does that kick in or have you started that or what are your thoughts there?

It's actually 50 million over the two years, '05 and 06. And the answer to the second part of the question is, yes, we have bought back 500,000 shares so far.

The resin costs you mentioned in Europe, that is something you anticipate -- I'm gathering from John's thoughts that you anticipate reversing itself out of and getting that back?

Yes, already in the month of April we have seen some downtrend in the price per pound. So it has already beginning to happen from what we can see.

I will jump back into the queue, thank you.

Next question please.

Ghansham Panjabi from Lehman Brothers.

This is a follow-up to the last question. What was the resin impact during the quarter, I guess on a year-over-year basis.

I don't think we have it that precisely. But broadly speaking, and I think Alan mentioned this, was that the impact was more in Europe than anyplace else simply because the plastic closure business is larger there, but it was quite noticeable.

But resin prices increased throughout 2004, right? Why is this an issue now?

Yes, to some degree what we are talking about is a quarter-to-quarter comparison. That is really the explanation.

Substantial.

As you know, I mean -- with our -- we always have a lag when resin runs up. Even where we have contractual pass throughs, we inevitably have a lag and so that is what we are seeing in the quarter-to-quarter comparison.

Just in terms of volumes across the major businesses, starting with European food cans, ballpark numbers?

Reasonably strong. If we factor in the buy-aheads in the fourth-quarter, I would say generally speaking steel packaging was pretty level quarter-to-quarter, and globally beverage cans were up about 3%. Globally we did quite well. In North America or at least in the United States, we were about in line with what we understand the CMI numbers are going to be which was off a little bit, but in the first-quarter didn't concern us very much.

And North American food cans is roughly flat too?

After you take into account the buy-ahead, that is right.

What would you estimate the buy-ahead impact was?

I'm not sure. Tim may have --.

Altogether in the U.S. it was around, overall, about 2% of the sales, and in Europe about the same.

Just one final question. What drove the swing in the other line item on the cash flow statement?

It's working capital, Ghansham. Obviously as I said it tended to build up purely because of the raw material pricing, etc.

Great, thanks.

Amanda Tepper of J.P. Morgan.

Good morning. First, if we could talk about your Americas' margin. They were much better than we have been looking for. And I'm wondering, you talked about Latin America, was that a big contributor? Did you do something on the cost? Or just generally could you comment, as we look at that, do you think those types of margins on the normal seasonal swing are sustainable this year?

In terms of -- no, it wasn't really Latin America although Latin America performed well, Amanda. Basically all the businesses converted better. It was just a whole series of things, better operating efficiencies, lower spoilage, the consequence of the capital that we have been through. So it was just a wide range of (technical difficulty) those kinds of operating gains in the U.S., we think they're going to be reflected more in the resin issue.

I understand the resin impact being temporary, and of course if that happened in the U.S. (technical difficulty) upside to U.S. margin (technical difficulty) I would have thought profits would be up on a dollar basis over time as you catch up on (technical difficulty).

We think we're going to see obviously (technical difficulty) referring (technical difficulty) coming through in the second (technical difficulty). When you factor in a couple of things in the steel packaging business, buy-aheads in the fourth-quarter '04, a seasonally very low first-quarter, a number of customers who are able to defer steel can purchases certainly in the food side in the first-quarter. There may have been some of that as we did some arm wrestling about (technical difficulty) this. So we are not alarmed by it and we're still quite confident about what we (technical difficulty).

Can you comment on (technical difficulty) payments were in the quarter and what your outlook is for the year?

In the quarter we paid $2 million cash. I think at the moment we're not really changing our outlook of the 40 for the year, Amanda. I think we would like to see another quarter to go through. But I think we are prepared to say that it will not be more than 40 million, that's almost for sure. That is our feeling. But we would like to see another quarter before we change that number.

Care to comment on the latest legislation pending?

You probably know as much as we. I mean Senator Specter has now circulated a draft of a proposed bill, and there has been a tremendous amount of work done by him and a number of other senators on the so-called Fair Act. So I would say, probably just from what we're reading and hearing, (technical difficulty) somewhat better than what we had thought and judge that (technical difficulty)

Finally, could you comment on whether we might see any (technical difficulty) financing out of you at some point this year?

Obviously we are considering the options that are available to us, Amanda. We haven't yet finally made up our mind what we are going to do, but we are certainly in discussions regarding that.

Thank you.

George Staphos of Banc of America Securities.

Good morning. I wanted to go first through the revenue line again. What do you think the foreign exchange was in the quarter? In my rough math, guessing here, maybe about $50 million?

You are a little high. It's about 45 --.

Including foreign exchange sales were up just over 2% in the quarter.

If I put together some of the comments off of the other questions, global beverage was up 3%, if I heard you, and steel was maybe down 2% which was due to the prebuy. Would you agree with that? Was therefore your overall volume in the quarter about flat?

Without -- including the prebuy it was firm to flat.

(technical difficulty) was up what, up 2% year-on-year? And do you think that will expand over the course of the year?

The pricing sounds about right, George. But I think what we had said earlier is we expect the impact of pricing to begin to come through in a much more noticeable way in the second and third quarters. Volumes are so low, as I said earlier, and you know the business, with the prebuy, with some seasonal people deferring purchases and so forth, (technical difficulty) the first-quarter just didn't reflect a lot of the pricing.

That makes sense. You can't get the price increase implemented on what's not yet moving to the customer. I mean, as you work through the prebuy do you think pricing could be more in the range of 4 to 5% globally? Obviously very versatile, it is very customer-focused from a geographic standpoint.

We are across so many businesses that it is somewhat hard to generalize. But what we've been saying about the extent of price increases as a range is still applicable. That is to say, we've been covering the raw material increases in North America and Europe we think very effectively. Of course, that translates to increases quite a bit higher than the 5% you mentioned.

Fair enough. The last question and then I will turn it over. Working capital or the other line in cash from operations, directionally wasn't what you expected, maybe a little bit higher than we would have expected. Anything going on there that we should be cognizant of because volumes were flat. Was it all raw material cost increase being built into inventory?

George, I think there are two answers. I think part of it is raw material price increases being built into the cost of the inventory coupled with, as you remember, we had a very strong fourth quarter last year in which we brought working capital down. The rebuild of the inventory in Q1 obviously impacts the amount of cash we use, as well as allowing the plants to absorb more fixed costs and run more effectively or efficiently in the quarter.

John, first quarter again, we shouldn't really take the whole year in from three months in a seasonally weak period. Nonetheless beverage can volumes were off a little bit. What are you customers saying about the rest of the year? Are they getting more optimistic? Do they have any marketing programs that will hopefully get the growth rate even a little bit higher?

On the beverage side, George?

Yes, and particularly CSD (ph) is what I'm thinking.

I think our customers are reasonably confident. There seems to be a lot of good energy down in Atlanta, for example. So we think with some reasonable weather here in North America and a couple of sunny weekends we should be just fine on the beverage side from a volume perspective.

Great. Have a good quarter.

Dan Koshaba of Capital Partners.

Good morning, guys. Alan or John, I know a lot of the pricing kind of folds into the revenue stream throughout the first-quarter. That is to say I guess that, you don't simply raise selling prices and then January 1, your prices are up. Some of that pricing gets implemented in March, right? Some of it in April, and so on and so forth. If that is correct, how much of the pricing initiatives that you have put in place for 2005 actually hit in the first-quarter? In other words, was it 50% or 60%? What does it look like and when did the rest of the pricing kind of roll into the revenue stream?

You're right John. The first quarter obviously is, as John said, it is a time of discussion, etc. with customers, some of whom were taking cans, some held back a bit, etc., etc. What we think we have probably seen, less than 50% of it in the first-quarter and we've got more to come in the second and third.

That is great.

(multiple speakers) It's across all products, obviously, we talk about all metal products (multiple speakers) to answer your question (multiple speakers).

(multiple speakers). Based on the 50%, let's say, that you put through, you put that through in most of your segments. And so the pricing that is going to be put through, let's say, maybe was put through in March, maybe it's put through in April, is going into segments where -- is it fair to say you have already been relatively successful at implementing pricing?

Dan, I think generally speaking, are we confident about the price increases for steel packaging? We are very confident.

That is great. One last question. The U.S. was up much sharper than we thought, profits were -- very, very profitable. Is that generally the pricing initiatives? What else is affecting that level of increase?

It was really a combination. First of all, the metal packaging businesses ran very, very efficiently. For some of the reasons that Tim mentioned, a little bit of an inventory build which very positively affected prices. But truly plant efficiencies were excellent; spoilage was low. We have been doing a variety of things to reduce our costs and that came through very, very effectively. Generally it wasn't one thing, it was just very widespread, what I would call operational excellence, virtually no product claims. I mean service and delivery was excellent. We just had an outstanding operating quarter in the metal businesses, combined with the fact that the plastic closure businesses are a much smaller proportion of North America and Americas Division sales than they are in Europe. Those two things working together, produced the excellent results.

Thanks a lot.

Bruce Klein of CSFB.

Hi, guys. Just on the steel pass through issue, I know you have talked about it, you feel comfortable or confident, as you would say, about it. Is it fair to say -- I suspect you're not over-recovering what the hike was, firstly. And secondly, how are the competitors in your view reacting in terms of pass-through? Are they being equal to where you are at or anyone giving you a lot of push back, or discounting to their customers? Are you seeing any of that out there?

No, essentially not. Our impression is that our competitors have been faced with the same price increases that we have been faced with. Our impression is that the global steel industry has been pretty consistent in terms of purpose and objective with regard to their price increases. And so we are not seeing a lot of movement of volumes. And it looks to us like everybody is in the same situation, recovering the price increases, not excessively recovering, recovering the price increases. So we are pretty satisfied with what we are seeing.

You don't see really any margin hit at all you are saying, from this 10 or 20% type of tin hikes?

No, we don't think there is going to be any adverse margin impact on Crown.

Aerosol volumes, how are they in the U.S. trending these days?

Again, the first-quarter is a fairly low quarter for us and same thing as with food. There was a fair bit of buy-ahead in the first quarter. So volumes were a little off in North America year-on-year, quarter-to-quarter. But when you take into account the buy-aheads, we think it was pretty stable and normal.

Is there anything -- I don't remember, is there anything in the -- if there were to be any sort of surcharge on tin hikes or steel this year, during the year? Is there anything, any mechanism in your contracts that allows any surcharges, or no?

I think we've attempted to provide for that. I think though that the supply chain has become somewhat accustomed to it. I don't think we have quite the same issues that we had last year although we were very successful last year. At the moment we don't anticipate surcharges, but it is a possibility. We know that some of the steel companies have talked about it, but we don't anticipate it at this point.

I'm not sure, it that were to occur on the --.

We would take the same position we took last year, that extraordinary surcharges caused by supply, demand and balances would require us to pass along any surcharges that we received.

Lastly just on the -- did I hear -- I guess the spring selling season is most key for you guys. Did you hint earlier that so far, so good, so far, what you are seeing? We're sort of midway through April plus.

Demands look normal to us. Our business, as we've described is so much before -- the North American market is quite mature in terms of units. So is Western, Northwestern Europe. Those characteristics seem about the same to us. Demand doesn't seem -- seems firm and normal. And then the emerging markets, the South America, Middle East, North Africa, Eastern Europe, Asia, look very, very strong.

I think, Tim, you said the pension expense goes down. I think you said 10 million. Does it change the cash at all, or no?

No.

Thanks a lot, guys.

Anat Aron (ph) of Barclays Capital.

Do have available the FX impact on the topline in each of your divisions please?

Yes, we do. It is about $10 million in the Americas, about $30 million in Europe and one or two in Asia.

Right, so actually if you look at net of FX, sales in Europe were slightly down? Is that correct?

Essentially flat.

Flat.

Yes.

So I guess there is a mixed effect of volume down and price increases. Is the volume down? You mentioned that adjusted to the prebuying, it was flat. Is that only in the steel -- in the products where there should have been prebuying only in the steel products where the prices were increased. What about volumes in the rest of it? Is there any additional volume effect there?

The beverage volumes in Europe was slightly -- it was slightly up, not a lot. And so basically it was -- and then the balance. So basically it was the steel packaging that was off.

Right. Just in terms of the -- you were previously asked about debt refinancing. In previous calls you had a fairly negative view on the premium you would have to pay if you wanted to tender for the -- to sell the 11 bonds ahead of call date in 2007. From your previous comment on discussions about debt refinancing, should I understand that you are becoming more positive regarding that premium?

Obviously the premium is what it is. And it's really still the same problem as we had in the first-quarter; is it something that we want to do considering the premium. Really the answer is, we are looking into all of the possibilities that we have. And we have to get over the hurdle of being prepared to deal with the premium in order to get the other benefits that may accrue from doing it. It's a convoluted answer to your question, I realized that. But really the answer is we are still looking into it.

We wouldn't say that we view the premium as being negative, it is just a fact that needs to be taken into consideration.

The balance between your euro debt and dollar debt, I believe it still doesn't match exactly your assets. Is that -- will you be more inclined to refinance dollar denominated debt?

Well, again, we could do that. We could do dollars and swap the euros, of course. Or we could go in the euro market, just as we did last August. But I would agree with you that we have a dollar, a net dollar exposure in Europe at this time.

Thank you very much.

(OPERATOR INSTRUCTIONS). Christopher Miller of J.P. Morgan.

Most of my questions have been answered. But just a quick follow-up on asbestos. On your current view of the legislation, does it look like it's going to be proposed, an estimate of the impact on your liability or on your annual cash payments if this goes through in its current form?

We are really not sure yet. There is still apparently a lot of discussion going on with regard to how the fund is going to be funded. And so we are really not sure how that is going to turn out.

Thanks so much, and also appreciate the cash flow in the press release this morning.

Chris Manuel of KeyBank Capital Markets.

Good morning again. Just two quick follow-ups. First of all, do you have the FX impact to segment income?

It was just under 4 million in the quarter.

Previously you had given guidance that you thought operating income or segment income would be up 10%, including the impact of pension. Would it be safe to assume that you're not going to have the extra 10 million of pension expense plus the good performance, up roughly 19% first-quarter, that that number should be rather conservative?

You could be right, Chris. We are not going to change it at the moment. We would like to see the second quarter in. It is true that obviously the 10 million was there before. So that is a little add-on to the 10% we were talking about. But we are going to see the second quarter before we revise that projection.

Thank you.

Justin Maurer of Lord Abbett.

First on the prebuy, do you get -- is it just a timing issue that you see customers taking product at certain points in time, so that is how you measure the change?

Exactly right. We try to compare units fourth quarter to first-quarter, first-quarter to first-quarter, and make an estimate of the extent to which we think it occurred.

Secondly, on the resin increase you talked about, do you guys have less or same control over that relative to other raw materials in terms of pass-through, if for in fact to Alan's point, the prices don't come down you look to pass-through. Is it as easy or more difficult relative to the other stuff?

I think it is very similar; it is very similar. It is just that resin just traditionally tends to move more sharply and unexpectedly. And at least in our experience, and we think we are correct in this, it is very hard to hedge or anticipate. There isn't a market in which resin is traded in such a way that we can cover the exposure. We just have to respond with price and this phenomenon -- we have been through this before within the last five years and we are through it again. But as Alan said, it looks like resin now is trending down, so we are looking forward to seeing a pickup as we move ahead.

When you say trending down though, is it down relative to where you thought it was going to be or is it still up a little bit?

It is down relative to where it was, but that is the important thing for us.

Just wondering, relative to -- you've been obviously discussing the pass-throughs and the price increases for some time in the Other Material. Just wondering if there is going to be some kind of lag effect potentially in resins. If you guys need to do that, is it going to take maybe a quarter to get those through or are the customers becoming aware of that?

I think Alan's point was, if resin were to continue to trend downward then hopefully what we are going to see is price will lag on the downside and that has traditionally been the model. And so we would hope to see some pickup.

Thanks, good luck.

(OPERATOR INSTRUCTIONS). Andrew Gehmat (ph) of Artemis.

Good morning. Two quick questions with respect to North America, and I apologize if these have been asked already. I got on the call a little late. The upside in North America relative to expectations, either yours or the Streets, was that food or beverage or everything?

It was everything as we explained earlier. Virtually every business with a little bit of margin and profit compression in the plastic closure businesses, but they are much smaller as a proportion of sales in the Americas Division than in Europe.

Okay, then I wanted to ask a question on the beverage business, because now we have seen Pepsi bottling had a very good quarter, basically flattish volumes, two-thirds price and one-third mix to get to the price increases they had. Coke, I haven't gone through the numbers but it is roughly the same. Pepsi itself had a pretty good North American numbers. So my question with respect to the North American bev can business, is it much better than people think or is it just coming off of very bad comps last year? Do you know what I mean?

Actually the comps last year were bad in the sense, yes, it was a very strong quarter in the first quarter '04. And we think the industry units were maybe off in the aggregate around a percent or something, and that's about where we were. It looks to us like it's going to be a pretty solid situation this year.

When Pepsi bottling talks about one-third mix affecting their overall pricing -- in other words, one-third mix, two-thirds real price. That is really a mix into higher profit cans.

For example, probably higher profit (indiscernible) as well, but yes. We think a move by all of them into energy drinks, health drinks, functional drinks, that kind of thing.

I see. And the other thing that you are seeing in their numbers is the effect of Costco, and basically the nonsupermarket channels as well as the private-label? Is that what is also affecting your North American figures, and how long do you think that continues for?

You're beyond our level of expertise. I'm not really sure what the channel distribution is that our customers are showing in their first quarter numbers.

What about private-label?

Private-label continues to do pretty well. And again, private-label is influenced, we think, by the concentration of the grocery retail chains and so on. We think it is going to continue. But it's not -- from a trend perspective it hasn't been markedly different in the first quarter.

One last question on North America. In some of the trade rags it was highly published that one of the can sheet makers-wise was going to press for higher conversion pricing. Whether or not they are successful, it's wait and see. But what is the push to get higher pricing and how much can you push back?

Some of our can sheet suppliers are indicating in the press and otherwise that they have had some fairly sharp cost run-ups of their own and they need some relief. We're always happy to discuss with them what we can do to help them out, but it's got to be in the context of a result that is not disadvantageous to Crown. So those conversations are ongoing. We don't think they are going to have an adverse impact on Crown. You never know, but we don't think so.

Right, but contractually they can't pass it through, it has to be negotiated?

We never discuss our contracts that we have what our suppliers, because among other things we have confidentiality provisions. But we think we are adequately protected.

Thanks very much for your comments and congratulations.

Bernard Solomon (ph), a private investor.

Good morning. Thank you for your fine stewardship this past quarter. Keeping in mind that Senator Specter's legislation is not finalized yet, is it management's view that any federal legislation would favorably assist a debt refinancing?

Yes. I think basically the answer is if there was a Fair Act, an equivalent put through, obviously that would bring some finality from our point of view, which in our view would help us with both Moody's and S&P. We can't be sure of that but we think it is probably on balance, a positive.

Thank you.

And that concludes Crown Holdings' first quarter conference call. We thank you for participating.