Crown Holdings Inc (CCK) 2005 Q2 法說會逐字稿

Good morning and welcome to Crown Holdings second 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 very much and good morning to everyone. This is Alan Rutherford. I am chief financial officer of Crown Holdings. With me on this call are John Conway, chairman and chief executive officer and Tim Donahue, senior vice president of finance.

Let me point out that on this call, as in the news release, we will be making a number of forward-looking statements. Actual results could vary materially from such statements. Additional information concerning factors that could cause actual results to vary is contained in our SEC filing including comments in the section called "Management 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, 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 then Tim Donahue will update you on foreign exchange and tax, after which John Conway will discuss the quarter before we open up the call to questions.

In the quarter, revenues grew 9.9%; in segment income 10.1%; in the quarter resulting in a 13.4% improvement for the six months. In the Americas Division, revenues were up 8% in the quarter reflecting firm volumes overall and the pass through of raw material costs in pricing. The Division continued to run efficiently and managed working capital effectively to maximize free cash flow. European Division revenues increased 10.1% in the quarter reflecting stronger volumes and the recovery of higher material costs in pricing. As we expected, resin pricing was less of an issue in the second quarter than the first as the market [audio break] the cost and closure volumes were strong. The Asia Division revenues increased 22% reflecting strong volume improvement and the necessary material cost pass throughs.

Segment income continued to improve, up 7% in the quarter resulting in 13% of sales in the six months. During the quarter, cash payments for asbestos totaled $8 million bringing the six-month total to $10 million. In June of '05, Governor Bush of Florida signed into law a state asbestos merger acquisition statute that effectively extinguishes the company's liability in Florida as it has done in Texas, Mississippi, Ohio, and Pennsylvania. Of the company's outstanding claims at the end of June, over 70% are now in such jurisdictions. We now believe our total asbestos payments for 2005 will not exceed $30 million, some $10 million less than our prior projection.

To meet customer demand in the Middle East, we have decided, with our partners, to further increase capacity. As a result we now expect capital expenditures for the year to be approximately $160 million. Liquidity for the company continues to be excellent and at quarter-end exceeds $600 million of availability.

I will now hand the call over to Tim for his comments.

Thank you, Alan, and good morning to everyone. I'll take a few moments to review taxes and foreign exchange, and then I'll turn the call over to John Conway.

Our tax rate, as reported for the six months to June was 22% compared to 44% for the first half of 2004 reflecting improving profitability and our ability to utilize net operating loss carryforwards in certain jurisdictions. Excluding the adjustments noted in the news release, the adjusted tax rate for the six months was 27% compared to 41% in 2004. Again, the reduction in our tax rate for the prior year is primarily the result of improved profitability, notably in the United States. For the full year of 2005, we currently expect that our adjusted tax rate will be approximately 35% to 40%.

As for foreign exchange, there are two issues we wish to clarify -- the income statement is translated at the average rate and built up throughout the year. For the full year of 2004, the average income statement rate was $1.245 US to the euro, and the December 31st spot rate closed about $1.35. June 30, 2005, our average is $1.285 compared to $1.228 for the June 2004 six-month period. At June 30, the spot rate was $1.21. If the dollar-euro relationship stays at the current rate, which is around $1.20 until year-end, we expect our average rate for 2005 to end around $1.24 or $1.25, which is in line with the 2004 rate. But to summarize, if the current rate of $1.20 holds throughout the balance of the year, then compared to 2004, we do not expect any foreign exchange impact on operations.

The balance sheet at each quarter reporting date is translated at the spot rate. On the translation of our dollar debt in Europe, we had an unrealized loss of $65 million in the quarter, as the dollar strengthened to $1.21 from above $1.29 at March 31st. Year-to-date, the currency adjustment is $96 million, which references more than an 11% movement in the dollar from the beginning of the year. However, it should be noted that since the debt was issued in February 2003 at a rate of $1.07 to the euro, our accumulative unrealized gain is still $200 million. Additionally, and as noted in the news release, the strength of the U.S. dollar against the euro has had the effect of reducing our reported dollar debt by $116 million from the beginning of the year. Including the $460 million euro note issued in 2004, our euro-denominated debt is approximately $1 billion, or €850 million. John?

Thank you, Tim. Obviously, we're very pleased with the quarter, and it reflects continuing improvement in operating performance and profitability. Unit volumes were strong globally with certain markets showing very robust growth. Our businesses in North America and Europe performed well. Price realization continues to be good, unit volumes are in line with the general industry markets, and our plants ran exceptionally well.

Our businesses in Asia, the Middle East, and Latin America did an outstanding job. Unit volumes were very strong, and demand continues to reflect strong economic growth and escalating local consumption. In many of these markets we are sold out and adding capacity as rapidly as possible. We believe this new capacity will be fully utilized, and paybacks and returns look very attractive and secure.

Productivity in all of our operations continues to improve, and economic profit was up for the quarter and six months. All in all, we are very satisfied with what we have accomplished so far, and our prospects look quite good. But we can always do better, and we intend to do so.

With that, I'll turn it back to Alan, and we'll open it up to questions.

Operator, if we could have the first question, please.

[OPERATOR INSTRUCTIONS] George Staphos, you may ask your question and please state your company name.

Banc of America Securities. I guess a couple of quickies -- can you give us some aggregate feel for what your volume was across the business? Obviously, a tough question to answer across the geographies -- the product line. Or maybe a different take, can you let us know what the price pass through was on raw material in the revenue line? I have some follow-on as well.

Well, George, maybe just a broad overview for the quarter for the company -- unit volumes -- all units -- keeping in mind all these products we had across the company for the quarter, '05 versus '04, up a little over 3%; and about 1% in the Americas; 2% in Europe; about 16% to 17% in Asia.

Now, of course, within that, Europe, for example, growth in Southern Europe, the Middle East, was somewhat more. Asia was pretty uniform. And in the product categories, in the aggregate, beverage was up around the world between 3% and 4%; plastic closures were up between 3% and 4%; food was off a little bit, about 4%; aerosols off a little bit, about 5%; principally in the U.S. and Canada; metal closures up between 5% and 6%. So generally speaking, we're pretty pleased with the way the volumes are proving up here. Food volumes were quite strong for us in June, a little soft in April/May, so we're thinking that food is picking up nicely, particularly in North America and Western Europe.

Okay, I guess two other questions, and I'll turn it over -- could you update us at all on what your guidance is for free cash flow and segment income -- if you had mentioned it, I missed it. And also, with the SG&A increase in the quarter, at least versus our model, more affects you than anything else?

On the first question, George, free cash flow, you know, we're obviously going to stick to our $200 million. As we've said before, we used the words very consciously at least, and we're obviously going to try to do better than that. At the moment, we're going to stick to our $200 million target.

What was your second question? I heard the third one.

Well, the segment income -- are we still looking at 10%, as I recall, growth?

Yes, we're going to stick to 10. I mean, obviously, we had 10 in this particular quarter. We're running at 13.4% for the year. As you know, we started off with, I think, a 19%. As you know, the third quarter is, if anything, a little stronger than the second, and I think we'll be very pleased if we do 10% in that quarter also.

The question of SG&A costs, on the six-month numbers, I can tell you that the main items are foreign exchange accounts were about $5 million. Last year we had a credit of $3 million, which came out of one of our operations, which we don't have this year so, obviously, that's not a repeat. And then compensation, we have something on cost of living, which is coming through which about $2.5 million, and the balance of about $4 million is primarily provisions for our management incentive plan. We are doing very, very well this year. Our incentive plan is based on cash flow and economic profit. Cash flow is doing well, so we think we're going to exceed the target and so I'm giving you a hint on the 200, I guess.

And then on the economic profit, as John said, six months this year compared to six months the last year, our invested capital is down by $200 million, and, in fact, our economic profit is double this year what it was last year at this time. So we're doing very well, and we think we're going to continue in that vein as we go through the rest of the year. So, obviously, we've had to provide a bit more for that.

Alan, the management incentive again -- what was that, did you say?

Sorry?

The management incentive -- what was that again -- in the SG&A in the six months.

That was about $4 million.

Amanda Tepper, you may ask your question and please state your company name.

I'm with J.P. Morgan, good morning. First one, on cash flows, having a little bit of a hard time reconciling -- what's the right operating cash flow number and free cash flow number if we exclude your receivables sale in the quarter?

Amanda, I think we gave that to you in the release, so above the table of net cash, we tell you $86 million of net cash from operating, and if you back out the capex, it's 35, you get $51 million of free cash flow in the quarter.

I just wanted to make sure those were the right numbers, okay. And then on your capacity buildout, with the extra $15 million now in your capex budget for now until the end of the year, what exactly are you building? It sounds like this is a joint venture or something with a partner. When will it come online? Do you have a full contract for the capacity once it does come online?

The noteworthy items for this year, at the moment, are principally in the Middle East, Amanda. We are doubling the size of our can body plant in Dubai, which is a business that we consolidate, and we are -- and that capacity will be online second quarter next year, and we are adding an end facility in Dubai also, and that's the principal capex that we are referencing here with regard to consolidated ventures.

Now, you also know that we're building a new can plan in Tunisia not reflected in the $160 million, but it is a capacity addition at this point, not reflected. It is a capacity addition. We have announced an increase. We're adding another can line in Jeddah in Saudi Arabia, and that should be onscreen second quarter, third quarter, next year as well -- not consolidated and not reflected in the 160, but it reflects the very strong demand that we have in the region, and we are probably going to be speeding up our can plant in the eastern part of the country in Al Khobar as well.

So those are the things that we know for sure, and then we have some other opportunities in the region, which we haven't yet reached a firm decision on but, again, we feel we are going to need to do to continue to service the markets as our customers tell us they need to be serviced over the next three to five years.

You have contracts for all this capacity once it comes online?

We have contracts now for most of it, and we anticipate that we will have contracts for 80% to 90% of it before we're through. As you know, we are the predominant can supplier in the region. Generally speaking, we are oversold, and so what we're doing, of course, is speaking with our customers, determining which ones view us as a strategic supplier, because in an oversold position, we can't satisfy everyone's requirements, so we're going to tend to favor those who want to sign long-term contracts with us.

And these are all bev cans, right?

They're all beverage cans.

Okay, and then in the U.S., for the full-year tax rate, that's assuming you're still accessing the NOLs all year?

To the extent we access NOLs or not access NOLs, you know, 35% to 40% is the consolidated rate that we're assuming. So there's obviously a little room in that number depending upon the tax position in the U.S.

So if you access NOLs, it could be lower -- that's really my question.

Yes.

Chris Manuel, you may ask your question and please state your company name.

Chris Manuel, KeyBank Capital Markets. A couple of questions for you -- first of all, last quarter you talked about the resin issue, and you mentioned it in your remarks. Is it safe to assume that you've fully recovered, or is there any more you have yet to recover there through the rest of the year?

I think we have a bit more to go. We had to be frank about it, but as we said in the first quarter, it had much more of an impact. We can certainly see less of it now, and I think probably as we go through the rest of the year, we'll recover some more of it.

Okay, and, Alan, you mentioned that free cash flow was looking good per the management incentive comp piece. Is that dependent upon -- does free cash flow need to exceed -- meet or exceed -- last year's number for that to kick in? Or is it just based on a plus $200 million number?

Well, it needs to exceed the amount that we have planned in the budget and, of course, it rolls into our economic profit plan.

Right, okay.

So, Chris, the point is economic profit must exceed prior-year -- free cash has to exceed budget.

Okay, very good. And then the last question I wanted to ask you -- as far as debt refinancing -- can you walk us through what your thought process is there? You know, maybe potential thoughts as to timing? How you're thinking about that right now?

I think our thoughts at the moment are that we're still in discussions. I think, if anything, the market is probably better from our point of view than it was some months ago. The bank market certainly is much better, from what we've seen and what we could obtain, and I think the high-yield market is pretty good, as well. So as we are now, in July, we're probably thinking to ourselves that we'll let August go by, at least, for obvious reasons. We've been advised that we have no risk in this; that the markets will probably still be as good as we get into September/October time. So we feel pretty good about it, and we think there is certainly some upside for the company, going forward, in this area.

Okay, actually, one last question for you -- on share repurchase, did you do any in the quarter?

Yes, 350,000 shares.

I think we've now purchased, what, 850 all together?

850.

850.

Ghansham Panjabi, you may ask your question and please state your company name.

Wachovia Securities. John, your comments on the softness in the food can business -- is this a function of pre-buy or just weak underlying demand?

I'm not sure. It's, first of all, not a lot of units for us, certainly, in the Americas in the quarter. It could be still a function of a little pre-buy. One of our theories is that it's a function of our customers being much more careful about their working capital than perhaps they have been in the past because of the very substantial price increases. So, as I said, June was pretty strong in Europe and North America. We think the third quarter should be pretty good, so we're not alarmed by it, but we are off a little bit year-on-year.

And the bulk of the price increases in Europe from late last year and early this year -- is that going to flow through in the third quarter?

Well, they've already begun to flow through in the second, but you'll continue to see them in the third.

So we should see incremental margin expansion then?

Well, we hope so. I mean, you know, the attention -- it's always been really to pass through the price increases equivalent to cost increases and try to hold onto productive efficiency gains, and we think we should be able to do that.

And just real quick on the outlook for steel prices?

Steel pricing is still very firm in the tin plate products area. So generally speaking, that's the case globally.

Okay, and just one last question -- you know, turning to the operating margins in Asia being much slower than last year and sales growth being very strong, could you just sort of walk us through the disconnect between the two?

Well, two things have happened. The first is, the markets there, particularly China, are quite dynamic, but there is a lot of growth. So there has been a little margin compression as a consequence of that, if you will. The other is, of course, the rapid runup in raw material prices, where the convention of fully hedging that we have in North America is not the case in Asia. So it's true, there has been some margin decline, but the margins we've used are very, very high. On the other hand, there's been tremendous unit volume and sales growth, so we're just very bullish on the region and feel great about our prospects, and we can live with margins at this level, and we think we're in great shape, Ghansham.

Dan Khoshaba, you may ask your question and please state your company name.

KSA Capital Partners. John, could you talk a little bit about the type of growth that you add in some of the emerging markets for beverage cans in the quarter, and then what you expect those businesses to grow at -- what rate -- over the next -- the remainder of the year and then next year as well?

Well, by way of example, beverage can sales in the quarter in Asia were up 17%, and we had really good growth throughout our region, which is China and Southeast Asia. It's hard for me to predict the future, obviously, I mean, things are going very well in virtually every market. Our customers seem to be very happy with what's happening. The middle class is growing, disposable income seems to becoming more and more available to everyone, and I can go on and on. It's a little hard to predict we're going to have these kinds of growth rates, Dan, going forward, but we do think the growth rates in Asia are going to continue to be quite good. That is one of the regions that we're going to study very closely over the next couple of months in terms of capacity additions that we know are needed. We've been making capacity additions incrementally all over the region, but it looks like we're going to have to do something that may be more significant than that.

The Middle East -- quarter-to-quarter, I think, is up about 25%, and it's just a whole combination of things. I mean -- $60 oil prices, tremendous investment in the region throughout the region; growth of every type. Alan and I were just out in the region last week, and, again, we've been out to the Middle East three or four times this year, and it looks great. You may have seen the article yesterday in -- I think it was The Journal or The FT -- it was The FT -- about share prices, stock exchange activity, throughout the region, and it pretty much reflects what our customers are telling us and our partners are telling us, and what you see on the ground. So it looks to me like that can continue for quite some time. They've come off a -- not the last couple of years, but the prior 10, pretty disappointing economic performance and there looks like a real resurgence of growth -- so -- those two markets, in particular, doing very, very well.

Thanks -- just to switch gears real quickly -- my guess is, John, that pricing, on average, was a bit higher in the second quarter than the first quarter, just given the timing of some of the price increases that you guys put through in your various markets. Is pricing pretty much done for the year, or are there contracts where pricing in the third quarter might be a tad higher?

No, I think pricing is pretty much done, Dan.

Okay, and in terms of passing through the higher resin costs and various energy costs that you were attempting to do in the second quarter, how has that played itself out?

Well, as I said, Dan, answering Chris Manuel, we've obviously got some of it back in the second and, as I said, I think we've got a little bit more to go as we go through the third quarter.

Bruce Klein, you may ask your question and please state your company name.

Good morning, it's Kevin Cohen for Bruce. I know it's a small segment for you guys, but on the aerosol front, if you can just comment a little bit on the volume trends there -- if you had any market share losses or if it was just that the market, in general, was down? A little color would be helpful.

The aerosol units were up in Europe and in Asia year-on-year, and our view is that we basically -- tiny little business in Asia is a little soft out here -- we're basically maintaining share. The units for us were off a little bit -- well -- off in the quarter in the Americas. We think it's a combination of things. We have a couple of big strategic customers, and I'm not going to talk about who they are, but one of them was a little bit light in the quarter versus plan, and I think we may have lost some share year-on-year. Again, these are not big numbers, because the aerosol business isn't a big unit-volume business, but I think we lost a little bit of share.

Are you seeing any price-cutting in that market, or are prices stable there?

Prices are now stable. I think there was a little bit of aggressive behavior in the first quarter, but it seems to be over.

And then on the beverage and food can front, if you can just give us a little color how your volumes compare to the industry since the 2Q CMI data is not out yet?

We believe our volumes in North America and Western Europe are pretty much essentially in line with the industry trends in the U.S. We think we're essentially in line with the CMI data.

Christopher Miller, you may ask your question and please state your company name.

J.P. Morgan. I just wanted to follow-up on an earlier question about the debt refinancing. It wasn't clear to me -- you were talking about September/October timeframe -- was that a definitive that you plan on refinancing the balance sheet or are you just waiting for that timeframe to reevaluate the possibility.

No, it wasn't a definitive, it was purely and simply that obviously we're into July heading towards August. As you know, it's a tough month to take such action. It is possible, but it's not the best month to be doing anything. And so therefore our thoughts were that we'd be thinking, as we get into the fall, whether we actually proceed and do anything or not, but we have not made up our mind, no.

Okay, and then also to follow-up on that point as well -- as you look at it in terms of ability to pay a dividend on your stock based on your indentures, how much of a basket do you currently have to pay stock dividends, and do you agree with the interpretation that all three of the secured tranches of bonds have to come out in order for you to freely pay dividends on your stock?

I don't think I agree with that. Obviously, there are hard baskets in all three secure classes of the bonds. There is a different hard-basket level in the first lien bond than the second and third, but there is a typical high-yield test, which is 50% of net income, which as long as you meet the test, there is no restriction on what they term restricted payments -- buying back stock, paying dividends, et cetera.

And based on your calculations today, where does that basket stand for you?

I don't have in front of me right now, but I don't agree that we need to take all three issues out, though. That's the answer.

The second and third liens?

Obviously, if we're going to contemplate a debt re-fi, we'd have to look at the more expensive debt that we have, but, as Alan said, we haven't decided on anything yet.

Okay, and then, also, there have been some published reports regarding a possible asset sale for your business. Any comments or should we be thinking about possible asset sales for you over the course of the next year?

No, we have no comment on rumors in the marketplace regarding that.

Any -- outside of those rumors, any thoughts on asset sales?

No, none at all.

Andrew Gehmat, you may ask your question and please state your company name.

The company name is Artemis Advisors. Congratulations, gentlemen, on a very good quarter. Three quick questions -- working capital looked pretty good, especially given the raw materials. Could you just comment on that and how much of the 200 -- so if you start with -- first is on working capital, and the second is if your target is $200 million of free cash flow, and you've already gotten 50 of the -- actually, a little less because of the first quarter -- but how much of that 200 is going to come from the working capital coming back to you in the second half of the year? Do you know what I mean?

Yes. First of all, on working capital, we obviously have not changed our policy at all, and that is that we have a tight control on working capital -- all of our divisions do. We do not let the inventories run up. It's even more important now with higher cost pricing of raw materials, which is a policy we have adopted some years ago, and we've stuck to. So that obviously has the effect of driving down the working capital in all stages.

We had thought, for the whole year, in the $200 million, at least, estimate, that we would have some add to the working capital, because of the raw materials. In other words, we thought it would be a use of working capital and not a source, as it was in '04. I guess we're still of that opinion, but our people in the past have done an excellent job, and it would not surprise me if that use of working capital is either lower than we anticipated to reach the 200 or is eliminated completely. I can't really tell you where we're going to get to until we get to the year-end. So obviously the 200 million did anticipate a source -- a use of capital -- of working capital -- at the year-end, and as I've just said, it could be at somewhat lower ultimately or it could be zero, we just don't know.

I've got to imagine what you've confirmed, it's impressive, I have to say, and you clearly must be ahead of plan, thus far.

Well, you know, everyone is motivated in that direction, that's for sure.

Like everyone else, I'm sure, we were highly conscious of the potential impact on working capital and use of cash as a consequence of raw material price run-up. So a lot of effort was put in by all of the operations around the world to do everything possible to minimize or eliminate the impact. We've done a little better than we thought we were going to do but, as Alan said, we'll see how the year turns out.

And then with respect to the volume and price, Tim, if I go back to your comments on June year-over-year euro dollar rates, that's an increase of 4.5% or so. If I take the 10% sales growth, deduct the 4.5, you're around 5.5% price and volume. How much is volume, how much is price?

I think, excluding foreign exchange, sales were up 6.6% in the quarter and 4.5% for the year. I think John mentioned volume overall was up about 3%.

So it's FS. And you might have said the same thing on the Americas, and I missed it -- the 8% -- how does that break down between volume and price?

Well, excluding foreign exchange, it's about -- it's up about 5.5%, and I think John said volume was 1% in North America.

Okay, and then with your comments on pricing having caught up -- does that mean, going forward, you see the sales growth being driven mostly by small volume increases, or do you see further price increases, looking out?

Well, if you mean quarter-to-quarter, the third --

No, year-over-year.

You're going to see continued sales growth, third quarter '05 versus third quarter '04, reflecting both the unit volume growth we've discussed and the price increases that reflect recovery of raw material increases.

Okay, and last question -- looking at your comments with respect to the growth in the emerging markets, do you see the Western oligopoly staying firm in those emerging markets, or do you see competitors creeping in and changing how you think about strategy?

Well, you know, it depends on the market, of course, but as I said earlier, the Asian market is pretty dynamic market. There's a lot of opportunity out there for a variety of companies, not just the big multinationals. I think it's going to be a somewhat dynamic market but should be marked by a great -- good growth. And they're not all the same. China is quite different, for example, than Southeast Asia.

Middle East -- we anticipate capacity is going to be attractive to the region beyond simply what we're doing. But, again, the growth is very good and, in both cases, Asia and the Middle East, we really feel we've got the superior position both by virtue of size and where we are and the nature of our plants and our cost base and our customer relationships. So we've gotten there as a consequence of a lot of years of very hard work, and we intend to stay in the position that we're in.

Any chance to buy in the minorities, or do you need minorities to do business in these countries?

Well, we like the partners that we have. They're not all the same partners we started with. Some of the partners who didn't want to stay with us, or we didn't want to stay with, we've taken out over the years. So we've got two principal partnerships, I think it's fair to say -- one in Asia and one in the Middle East. They're both excellent partners, they both make a great contribution, so we don't have any plans to buy them out. We're happy to have them with us, and they've helped us tremendously in the growth that we've experienced.

Timothy Burns, you may ask your question and please state your company name.

Cranial Capital. I had a question for you -- the metal closures figure you gave in the early-on unit volume, was that up 5% to 6%?

Yes.

Okay, and then, John, I had a question for you -- as far as the Middle East and the investment -- is this domestic consumption or is there some leaking over to the soldiers in Iraq?

I'm sure there is some leaking to the soldiers, but I think it's almost -- it's very, very largely -- first of all, all the markets are growing, not just Iraq, but our view and our customers tell us is that Iraq is growing rapidly. I mean, Iraq, 15 years ago, was an exceptionally large beverage market in the region. And it would appear that it's going to regain the status. It may well regain the status that it had previously. So it's a little bit of everything, but I don't think it's soldiers consuming it.

Okay, and cans are still too heavy to be made in lower-cost regions like the Middle East -- I think they were lower cost, it depends on what you're making -- and then shipped up into Central Europe or what have you. Does that work or is that a non-starter?

That doesn't work. You still can't ship air.

Okay, maybe you could get some of those -- you know, back end on some of those Lockheed Starlifters or whatever.

Possibly, but we don't think that's going to work. You've got to make them within a couple hundred miles, typically, of where you're going to fill them.

The aerosol business is interesting. I mean, we're seeing this impact extruded aluminum aerosol can find its way into a lot of specialty markets. I'm not sure if that's an issue for you guys. As we are seeing some of this, what might be called "trendy," you know, aluminum bottles -- are these taking some of your share? Are they of interest to you? Is it just too small to allocate any capital towards these markets? What are your thoughts, John?

We think that small-size containers for personal care could be interesting for us in aluminum, and it's something we're looking at carefully in Europe and in North America. There are some product compatibility advantages, there are, arguably, although we resist this -- there are, arguably, some marketers' preferences for certain types of, particularly ladies', personal care items in impact extruded aluminum, or whatever kind of aluminum. So we're looking at that very carefully now.

As far as the aluminum bottles for beverage, we think it's an interesting development. The apparent volumes don't interest us. If this is something that proves to have some real legs, over time, there's plenty of opportunity for us to come into it if it appears to be the kind of volume opportunity that our company can make good use of. But, at the moment, we would say we have no plans for aluminum beverage bottles in any market.

On the whole, if you look at the figures for some of your primarily European competitors -- the Impresses, the U.S. Cans of the world -- they have done dramatically better, I think, under the umbrella of your price and cost leadership. I assume this is a good thing, because better to have people happy to make money than trying to steal your profit. But can this go on for a while, do you think?

I don't know, Tim, you're as good a judge of that as I am. I mean, we know what unit volume growth is in North America and Western Europe. It's reflected in our numbers that we've spoken about. We know everybody's cost base and so do our competitors. And we think -- we know we're the largest steel buyer in the world, probably the largest lacquer inks, et cetera, buyer in the world. So we think our cost base is pretty good. So I think there's reason to believe that we can do well in these mature markets for a reasonably sustained period of time. But you always worry about the greater [inaudible], but I think we're in pretty good shape.

Last question -- not that you're in a mindset or mode of tucking in new acquisition that would add value, but you're clearly a major presence in the Middle East and Asia Pacific if not South America. Is it too early to think about those kinds of things? Is it just steady, nose-to-the-grindstone, focus on the balance sheet, or could aluminum containers for personal care show up in your portfolio at some point?

I think acquisitions -- it's very premature for us to be thinking about acquisitions. We think we have too many good organic growth opportunities, and if we were to think about a new product line, for example, aluminum, we wouldn't be thinking about entering by acquisition. We'd do it ourselves.

Andrew Shirley, you may ask your question and please state your company name.

Ivory Capital. You guys' operating margins have been improving fairly impressively over the last year or two but still seem low relative to some of your comps. I was wondering if you could provide any color on margin expansion opportunity or targets in the medium to longer term?

I'm glad you asked that question. There is no comparable can company to Crown. So we are amused when we read that our margins compare favorably or unfavorably to a competitor, because there is no competitor with our product mix, and there is no competitor with our geographic coverage. So we don't accept the proposition that on a regional basis or product basis our margins compare unfavorably to virtually anyone. So that's that part.

I'm sorry, what was the second part of your question?

Well, I think that generally answered it, but maybe notwithstanding that, whether you have any specific margin targets that might be ahead of where you currently are?

No, no, we don't believe in normalized margins. You know, we think the markets have so much to do with the margins and supply/demand moves constantly -- you know better than we do. And so margins regionally are different, by product line they're different, and they tend to change. Obviously, our objective is to improve them all the time if we possibly can, but we have no view on what normalized margins are for any product segment that we're in.

Okay, as a follow-up on the pension front -- even that you're a non-U.S. pension, seem overfunded in aggregate, and I know it might depend plan-by-plan, given that they're funded in aggregate. Is there any visibility into a production into employer contributions required there?

No, I don't think so. We do make certain contributions overseas, some of them in the UK. It is a specific amount. In Europe it is a pay-as-you-go scheme, as you know. Here in the U.S., we obviously are contributing and following the ARISA rules, as I think we've said often before. The plans themselves have done reasonably well from the point of view of asset growth. The discount rate is obviously an area that we'd like to see change, along with many other plans and outward, in the long term, probably reduce our contributions.

[OPERATOR INSTRUCTIONS] Amanda Tepper, you may ask your question and please state your company name.

Still with J.P. Morgan. European food cans and the pricing that you did there earlier this year -- when you said, in answer to an earlier question, that there is no more price. That does, though, still mean that the increase you put through earlier this year will continue to roll through all year as the contracts come up, isn't that right?

That's exactly right, Amanda.

So are we about halfway through that process that we should, if nothing else happens, continue to see margins get slightly better as that hits in that division for the rest of the year?

It's quite possible.

Okay, are we about halfway through -- is it sort of even over the course of the year, or are your contracts heavily front-end loaded?

The price increases are in effect.

I'm just saying when the contracts come up, in other words.

You'll see a third quarter where they should be fully in effect.

So by the third quarter all of your contracts should have been hit?

Yes.

Okay. And then you had a gain on asset sales in the quarter. What did you sell?

Primarily real estate, Amanda. You know, obviously, we have a lot of real estate around the world, and we have surplus real estate, and so from time to time we sell, and in this particular case, it was some real estate in the United States and also some real estate in the UK.

Or more specifically, Amanda, we sell all surplus real estate as rapidly as we can. And so you see it as we sell it. We're not sitting on anything, anticipating increased prices.

Right, people aren't buying the stock as a real estate play, I don't think.

No.

And then in the U.S., with volumes up 1% net, I'm trying to figure out what was up so well, because I do think that's better than the CMI data, and you said the food cans were weak, aerosol cans were weak. The logical conclusion would be that your bev cans are growing at better than market. Is there something else in there I'm missing?

No. Keep in mind, we're referring to the Americas Division, which is Canada through Argentina.

So it's Latin America?

So we did pretty well in beverage, for example, but we think in the U.S. we're about in line with the CLI numbers.

Chris Manuel from KeyBank Capital Markets.

One quick follow-up -- when you talked about free cash flow and some potential things that help free cash flow such as working capital potentially being not use of cash but maybe flat or a source as well as -- should I think about these items as potentially being additive to free cash flow, or in spite of these numbers, were you still shooting for the 200 number?

We are shooting for the 200 number, anticipating a use of working capital at the year-end compared to generating cash from that in '04. So we are expecting a use of capital on the working capital front due to the raw material pricing.

Right, so if raw material --

We may do a bit better.

You may do better in the asbestos and that source could enable you to do better.

On the other hand, we did reduce asbestos target but, on the other hand, we have increased our capital by $10 million or $15 million also.

We have a final question from Bruce Klein at Credit Suisse First Boston.

Just a quick follow-up -- it's Kevin Cohen again. If you could just review the debt amortization for 2H '05, '06, and '07, and then just accounts payable at quarter-end.

There is no notable debt maturity coming due in '05. In quarter four of '06, we have $165 million bond due, and in '07 there is no notable maturity as well. Payables at the end of June -- I don't have it in front of me. Of the $1,971,000,000 of other current liabilities in the balance sheet, the majority of that is payables and accrued liability, so it's probably a $1,900,000,000 of that number.

I am showing no questions at this time.

Okay, well, I think we'll conclude the call, and we thank everyone for participating in Crown Holdings second quarter conference call. Thank you.

Thank you, this concludes today's conference call. Thank you for your participation. You may disconnect at this time.