Crown Holdings Inc (CCK) 2007 Q1 法說會逐字稿

Good morning and welcome to Crown Holdings' first-quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS). Please be advised that this conference is being recorded. I would like to turn the call over to Mr. Alan Rutherford, Executive Vice President and Chief Financial Officer. Mr. Rutherford, you may begin.

Thank you and good morning to everybody. With me on the call this morning are John Conway, Chairman and Chief Executive Officer, and Tim Donahue, Senior Vice President, Finance.

Let me point out 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 Discussion and Analysis," the financial condition and results of operations in Form 10-K for 2006, and in subsequent filings.

In view of Regulation G, 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 comment on the results; Tim Donahue will then comment on tax and two accounting changes in the quarter, after which, John will discuss the quarter and outlook for the coming year before opening the call to questions.

Total Company revenues grew 12.4% in the quarter, reflecting stronger volumes worldwide, higher raw material costs passed through in pricing and foreign exchange. Segment income at $118 million in the quarter grew 12.4% over prior year. Excluding a prior-year restatement for the adoption of AUG AIR-1, segment income would have improved 15.7%.

Americas' beverage revenue was 13% higher than prior year at $393 million, and segment income improved 32% to $37 million, a 130 basis point increase in margin to sales. Volumes in the Americas improved approximately 4% in comparison to a weaker volume quarter in 2006 for the Company.

European beverage revenues were 18.1% higher than prior year, at $281 million, and segment income improved 20% to $30 million. Volumes improved in total over 3% on prior year. And while the Middle East had a slow volume start in January and February due to unseasonably cold weather, March recorded a notable volume improvement. Generally, throughout beverage Europe, volumes were strong and pricing firm.

Food North America revenues grew 2% year-on-year, and segment income improved 25% to $10 million on increased volumes and better operation -- operating efficiencies and product mix.

Food Europe saw revenues grow to $446 million with volumes up 1.5% on a particularly robust business in North Africa. Segment income declined $4 million to $38 million as this quarter does not totally reflect the impact of selling price increases required to pass through increased current material costs. Also, we're in the process of moving our closure operations in Spain to a new state-of-the-art facility, which impacted total overhead recovery in the quarter.

Specialty packaging revenues improved 20%, reflecting increased volume in industrial and paint business, and foreign exchange impact. However, segment income was $1 million lower than prior year, primarily due to negative product mix in the quarter.

Non-reportable revenues grew 17% and segment income, 9.7% on improved volumes in both the aerosol businesses and Asia-Pacific product lines.

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

Good morning to everyone. As described in the earnings release, the Company adopted AUG AIR-1 retrospectively on January 1st, 2007. We were required to adopt the guidance, and as permitted we now expense major maintenance costs as incurred as opposed to the previous policy of accruing for these costs in advance. There was no effect on the 2006 financial statements other than a reclassification which moved $3 million of expense from the first quarter to the fourth quarter of '06, thereby increasing the first quarter of 2006's segment income.

We also adopted FIN 48, Accounting for Uncertainty in Income Taxes, as of January 1st. The provisions of this interpretation of FASB 109 require us to measure the likelihood of our various tax positions surviving on audit. We operate in over 40 countries with open audit cycles dating back as far as six years, so any one annual issue is generally not significant for us.

In the first quarter and as noted in the release, we required a $1 million tax expense for FIN 48.

The tax rate in the first quarter was 39%, higher than our 2000 annual expected rate of 26%. This was due to the inability to record tax benefits in certain jurisdictions in the first quarter. As Q1 is usually our seasonally smallest quarter, the impact of interest expense, among others, has a greater impact on pretax income than in the balance of the year when operating income rates increase. We still project an overall effective tax rate of 26% for the year.

I will now hand the call to John.

As Alan and Tim made very clear, we're off to a strong start to the year. The various initiatives that we have had underway over the past fifteen months continue to show very good success. Demand and volumes are strong in virtually all of our product lines. We have had good results in achieving necessary price increases, particularly those associated with significant increases in commodity prices.

Our factories around the world are running well, with productivity up and capacity utilization improved. And finally, the many significant capital projects undertaken over the course of 2006 and the first quarter of 2007 have been accomplished on schedule and within budget.

As a result, our earlier expectation that 2007 would be a solid year has been borne out with the results of the first quarter. And as we see things now, we believe that performance should continue to be quite positive.

In the past, as many of you on this call know, when we've had difficulties, particularly operating difficulties, we've been graphically frank about describing what they were and what programs we planned to undertake to correct them. In this case we're very pleased to say that the first quarter, we think, was an outstanding operating quarter, and the quality of the results are exemplary, we believe, in virtually every respect. So we're very, very pleased about the quarter and what it tells us about operating performance for the balance of the year.

With that, operator, I think we're ready to open the call to questions.

(OPERATOR INSTRUCTIONS). George Staphos.

Good morning. A couple of things. Number one, can you just reiterate, if you would, your guidance on free cash flow and EBIT growth for the year, just to get that out of the way, if there's been any changes.

No, there's been no change, George. And the guidance we gave was that based on knowledge and exchange rates, we expect segment income to grow 12.5% in '07 over '06. And this would be approximately $650 million. We expect free cash flow will be in the range 330 to 370 million, which is after capital expenditure, which will be in the range of 140 to 150. Tax rate, we project to be over the whole year approximately 26%.

And we might as well get it out of the way as well. Asbestos, any changes in the trend line, any color around that?

No. In fact in the first quarter, we had 1000 claims compared to 1500 in the similar quarter last year.

Okay, terrific. On corporate expense, should we continue with this run rate into the rest of the year? Perhaps you've commented on this in the past, and I forget, or will you see some seasonal drop-off over the next couple of quarters?

I think what you see there is two things. First of all, we believe we're going to have an excellent year and drive economic profit and cash flow and therefore, we will be accruing somewhat more than we did last year for incentive (multiple speakers) segments. And then secondly, of course, there's the impact of the dollar at the moment, which is relatively weak compared to our business in the rest of the world. As you know, 70% of our business is in currencies other than the dollar. So to answer your question, I think you're going to see a higher run rate on SG&A costs running through the year, and I would think in the range of about 90 per quarter.

Okay. I'll turn it over.

Ghansham Panjabi, Wachovia.

Good morning, everyone. John, could you give us some more color on what's affecting profitability in European food cans? Is there any sort of mix issue that pressured margins? And how should we model margin improvement going forward, given your price increase initiatives?

I think Alan touched on the issues. One is, as we've discussed in the past, in our food business, price increases go into effect with our various customers at their annual increase dates, which typically range between the 1st of January until the end of June. So we always have a little bit of lag in the first quarter in terms of recovering increased costs, particularly in this case steel costs. So there's nothing unusual about what's occurred. We anticipated it, and we still feel very good about the food business in Europe generally. The units are strong. We're seeing nothing that would argue that we're not going to have a good year in the food business.

And then Alan mentioned also something that we don't want to overdo it, but it is true. We're in the process of moving our closure business, metal vacuum closure business, in Saville into a new plant, a new state-of-the-art plant. So in the quarter, we effectively operated two closure plants in Spain, two overheads, and so forth, and so that was a little bit of a drag as well. Because as you know, metal vacuum closures are included in our food segment. So we feel pretty good about the food business. We think we're going to do fine with it for the year.

For European beverage cans, is there a spillover effect in 2Q and 3Q from your pricing initiatives earlier in the year?

I think what's noteworthy about the European beverage can business is that generally speaking, we've had very, very good success in passing through increased commodity prices, whether they're aluminum or steel. And the volumes have been small, and we are running pretty well. And that's true throughout the region, with one exception, and Alan touched on that as well.

We had a soft January and February in the Middle East. It was cold, it was rainy, believe it or not, and the volumes were less than we had thought. Now the good news is that March bounced back very strongly; April looks even stronger. And so what was really going on in the beverage business was a lack of overhead absorption. And our Middle Eastern beverage business, we think, has corrected itself. And we should be looking forward to some really solid quarters as we continue.

Okay, looking forward to it. Thanks.

Timothy Thein, Citigroup.

Good morning. I just had a question on the improvement seen in the nonreportable segment. Can you give any color in terms of what is directionally, whether that was split equally versus aerosol versus Asia-Pac? And I know there are some other smaller businesses in there. But what the trends were in those two businesses? And then if there was any help -- I don't think you had any startups in either Cambodia or in Vietnam in the quarter, but --?

Just, I'll in a moment tell you. The only thing that is a little bit of a drag is the second line -- we doubled the size of our plant in Ho Chi Minh City in Vietnam, and it is still coming up the learning curve. So that's a little bit of a drag.

But the reason for the improvement is twofold. The aerosol business did quite well, both in units and price around the world in the quarter. And in addition we had a particularly strong volume and income performance in our Southeast Asian beverage business. We did pretty well in China as well, but I would say those are the two. The aerosol business did quite well and the Southeast Asian beverage business did also very well.

Lastly, there's been some talk recently about two of your larger beverage can customers caught, and Cadbury potentially linking up. While I know it's just speculation at this point, have you thought at all about what the potential ramifications could be on pricing and/or profitability going forward, should these two link up? Because, I think combined, that would be over 10% of your exposure, if I'm -- or maybe you can correct me on that, but --?

Well, if -- we have not thought a lot about it. I don't think there would be anything adverse about price or volume. If anything, arguably, it might be a little positive if the combined two were more effective and efficient, but it's not clear to me that that's the case. So I don't see anything adverse about a combination.

If the two were to combine, they would then be on the order of about 35% or so of our Americas beverage can business, which I don't think is inordinate; would still leave us with an exposure to a single customer that I think is probably less than our competitor. So we're not alarmed by the prospect, and we will just wait and see.

Okay, great, thanks.

Mark Wilde, Deutsche Bank.

Good morning. I wonder if it's possible with the European businesses, both food and beverage and specialty to just break out for us the different components, volume, price, FX?

Of segment income improvement?

I was actually just looking initially for a sales growth. The beverage sales were up about 18%. I just wondered if we could get a handle on how much of that is price, how much foreign exchange, how much is volume.

What we could do is give you a sense of units, but I don't have [these -- a] balance. Alan, I guess maybe -- Alan could just run through the units and give you a sense of that.

That would be great.

Well, I think as I said on the call, the beverage unit -- volumes in Europe were up 3% over last year, and food was up about 1.5%, 2%.

I think the other thing to remember about Europe is obviously currency-wise, there is a differential because of the dollar, which impacted the sales to the tune of about $60 million.

If I could, just one other question, Alan. The margin compression that we saw in that nonreportable segment, which was down about 80 basis points, can you give us a little color on what might have been going on there?

Yes. We were 11.9 last year and 11.1 this. I think some of it, it is basically, we're on a year-on-year comparison. So I think some of it is probably China, because first quarter last year we were just, obviously, moving into the year, and we had some impact of higher aluminum costs, which are now coming and have not been fully recovered. And then also there's a little bit of startup cost in Ho Chi Minh. And also we're currently busy building a plant in Cambodia, which has a little bit of expense attached to it at the moment as well.

And then finally, if I could, just -- you were up I think in European beverage margins I think about 20 basis points year-on-year. Do you think we will see more year-on-year improvement as we move into the second and third quarters?

Yes, I think the answer to that is yes, because as John pointed out, some of the drag in the first quarter was the unseasonal weather in the Middle East, and we certainly saw an improvement in the month of March. And as he indicated, we believe that that's going to carry on into the second and third quarter.

Very good, that's helpful. Thanks.

Claudia Shank, J.P. Morgan.

Thank you very much. I just had two questions. One, I just wanted to look at the Americas bev can business. The margins I thought were pretty good. And just wondered sort of was that sort of volume and price related, or was it more mix related? I don't know if you could comment a little bit on the specialty can business.

It was all of that. Volume, obviously up; Alan mentioned that earlier. Capacity utilization, better. We had much better visibility coming into 2007 as to who our customers were going to be, ship-to locations, labels, etc. So we were able to run the factories much more efficiently. If you will recall last year we were scrambling to try to recover lost market share and volume with a particular customer, so we have overcome all of that. Mix is a little better, because specialty can volume has continued to increase. And pricing, we were able to achieve all of the pricing which we had planned, which in our case is largely now contractual pass-throughs, but at least we were able to do that. So everything, frankly, about the Americas beverage business has been much improved year-on-year. We've made and sold more super ends; that's our lightweight patented end, as you know, so that's helped as well.

Great, that's helpful. And then if we could just look at working capital, which was a little bit higher last quarter, in the fourth quarter, than you'd expected I think because of some inventory issues on the food can side in Europe. And then if I look, your cash flow from operations was down year-over-year in the first quarter despite the better operating results. So is working capital still not sort of as improved as you've liked, or would like to target here, and is there some opportunity for that over the course of this year?

Well, obviously we're in the first quarter, and one of the things on the comparison to last year is what's happened with pricing, number one, and what's happened with the aluminum, and the caps coming off here in the United States, which has driven up inventory and to some extent receivables.

As far as inventories are concerned, we're more or less equal to last year when I'm looking at the numbers. And all the increase is in receivables, which I think is what you would expect because obviously we're selling more volume at better prices, and it's obviously reflected at this time of the year in the working capital. And so it is all working capital that we're going to collect back as we go through the year, obviously.

Thanks very much.

Richard Skidmore, Goldman Sachs.

Just two questions. First, in Europe, are all your customers now on the new pricing pass through, or the hedging contracts that you have?

That's correct. All of the beverage customers.

Second question, with the higher prices for cans, both in the Americas and Europe, are you seeing any change to your customers' order patterns? And how do you think about volumes with the higher price of cans to your customers? Or how are they thinking about changing that going forward?

We're not seeing any change to the patterns, and we're not seeing any change to regional and country growth expectations. And if you will recall, when we've talked about this with you last year, anticipating what might happen, we told you we doubted there would be changes because, in those markets where last year we were passing through the aluminum increases as they occurred -- and there were quite a few markets of that type -- we weren't seeing any change in cans as a proportion of package mix and utilization and so forth. And of course, PET, the principal competing material, is also going up.

So we haven't seen anything adverse. It's early in the year, but we're through the first quarter, and markets for us for beverage cans globally look very healthy and strong.

And then one additional question, just on the Vietnam line ramp up. Should we expect to have some additional drag in the second quarter? And how should we think about the volumes coming on there?

There may be a little bit. We started that plant I believe it was in November, December. We usually think we go through about a six-month learning curve, and so there may be a little bit of a drag. But it should not be very much in the second quarter. We are expecting a pretty strong quarter in Southeast Asia.

Thank you.

Chris Manuel, KeyBanc Capital Markets.

Good morning. A couple questions for you. First, John, could you give us an update as to -- you have a -- I think I ask you this question about every quarter. You have a significant amount of capacity coming online. Can you give us an update when you're scheduled to come on throughout the year, and sort of timing? And volume amounts?

Really, the capacity that we have been adding over the past two years was all online as of the end of December, with the exception of this plant in Cambodia, which is not due to begin production until the third quarter of this year. So we're in a little bit of a learning curve phase in Dubai, a little bit in Jeddah, and quite a bit more in Vietnam, as I just mentioned. But the capacity is all installed; it all came in essentially on schedule, on budget. The lines are running well. We're not having any problems that we wouldn't -- we didn't anticipate and we don't ordinarily have. So the capacity addition I think is essentially complete, with the exception of Cambodia.

So the volumes related to that should begin to meaningfully hit your numbers here this quarter, next quarter, through the rest of the year. Does that make sense?

Sure.

Other couple questions I had were -- could you give us some sort of a sense as to what you would anticipate that drag or the hit was as you -- for two items. One, as you move the closures plant. And then two, what the, maybe the year-over-year delta was for, I think you indicated incentive comp was one of the issues. Just so we can understand a little bit better what some of the delta was in your numbers year-over-year.

On the question of the closures, to be honest I don't have an accurate number. Obviously, what's happening is we're currently running two plants; we're moving out of the old one into the new one. And we have double, if you like, overhead costs until we finally move from one to the other. So it's certainly in the $1 million range, or around that number; perhaps it's a bit more. It's a question of how long it takes us to move from one facility to the other.

Okay, and that's anticipated to be done this quarter? Or will that linger through second quarter as well, or --?

Be done in the second quarter. And on your other question, obviously, we're doing much better, as I said earlier. I think in this quarter we probably provided about another 5 or 6 million for incentive comp compared to the same quarter last year.

That helps. Last question is, have there been any issues -- one of the areas that some of your competitors have been complaining about is aerosol cans here in North America. Have you saw any issues here with getting the price increases that you had put out?

There are always a few little issues. We've got a lot of aerosol customers, and -- but generally speaking, we've been very successful with price increases in aerosols. And some of the confusion and irrational pricing that we witnessed in the second and third quarters of last year, that seems to have died down. So we have been doing pretty well. We didn't really participate in that, but we watched it. And from what we're hearing, our price increases in aerosol are going well and the market generally is behaving as you would expect it to in the face of increased raw material costs and general increases in operating costs.

Very good. Last question I had was share repurchases in the quarter. Can you give us what you actually did?

Zero.

Thank you very much, gentlemen.

(OPERATOR INSTRUCTIONS). Joe Stivaletti, Goldman Sachs.

Most of it has been answered. I just wondered if there was anything going on on the M&A front in terms of anything, anything you're looking to divest. I realize you've done probably most of that or any (technical difficulty) you might be looking to possibly acquire --?

No. We have nothing currently going on in M&A of any description.

Okay, thanks.

George Staphos, Banc of America Securities.

Two to conclude. First off, one of the suppliers in the market has been hit by a strike. Have you seen any marginal benefit from this, or have any of the beverage customers in the market perhaps come to you, perhaps looking for cans. I don't know if you could comment on it, but I was curious. And then I had a second question.

George, I don't think we've seen anything yet that -- incremental sales. So we don't attribute any incremental sales in the first quarter or into April with the strike that you're referring to.

Would you even be in a position to supply if it looks like a pretty solid year?

It would be very difficult for us at this point. We are essentially sold out April through the end of the year at this point. You know the business, and so had we anticipated this, etc., perhaps we would have built in the first quarter, but we did not.

And the other, of course, is some of our customers, and our customer mix, as you know, is not involved very much in this strike, are very concerned that we're going to support them adequately in the event that they decide to promote and push cans more heavily than they might otherwise have done. And, obviously, our first loyalty has to be to our strategically aligned customers. So we've reassured them all that we will do everything we can to take care of their needs over the balance of the year.

I guess the other question I had, longer-term, Crown has almost gotten back, or perhaps has completely gotten back to the Crown of the '70s and '80s, where it was [free orders] and a cloud of dust, but a lot of cash flow, and use of that cash flow to grow the earnings either through share repurchase or debt pay down. At one point, in the early '90s, the Company wound up taking that cash and doing more elegant things, more ambitious things with it.

What do you see for the Company in the next few years? I'm not sure you can even replicate that strategy if you wanted to. So where does Crown go in the next few years, given the cash, given the balance sheet and given what looks to be a relatively consolidated metal packaging market?

George, I'd argue that the Company is so much different from the Company in the '70s and '80s for so many reasons. First of all, our product lines are much broader than they were back in that era.

I don't disagree with that.

Secondly, our productivity, quality, service is so much better. What we set out to do here as a management team five, six, seven years ago was to try to achieve what we thought was the best performance in every measurable way in the metal packaging business. And we think we've closed in on that pretty well. We're never going to say we're the best, but we're prepared to say we're as good as anybody, and we're getting better all the time. So that's a big positive. And it's a big positive in the markets that are mature. We can continue to squeeze more, we think, in terms of performance out of the mature markets.

But the huge benefit that we have, that I think no one else has, and we're just acutely aware of it, we're solidly well-positioned in all those markets where everybody wants to be. We don't need to go and find our way in China; we're there. We don't need to go and figure out how we can establish a presence in the economies of Southeast Asia that are growing 10% to 20% a year; we're there. We don't need to get on an airplane, go over and fly to Dubai and marvel about what's been going on in eastern Saudi Arabia, Dubai, throughout the whole Persian/Arab Gulf; we're there. We're now in North Africa in a big way, both in food cans and in beverage cans. We're in the, we think, the select, choice markets of South America and properly so.

We're out of all those problem markets that we used to be in that were periodic heartaches for us. So I think our position in the so-called emerging markets, where there is dynamic growth, is more than able to occupy growth aspirations and so forth for us in the years ahead. Believe me, I couldn't be happier with our position. I think Alan and Tim feel exactly the same way.

Good luck. We will continue this dialogue, and we will see you next quarter.

Aaron Cowen, Karsch Capital.

Question. When you just did your budgets, where did you have the euro? And help us understand the impact of where we would be today, potentially on the business, how are things for that?

Obviously, we were running at a euro of about 1.28 when we set up the budgets. As things are at the moment, certainly if it continues through the rest of this year at 1.35 and the pound at 2, it's obviously going to be a pickup for us as we go ahead.

And to give you some idea from 1.28 to even 1.30 is worth about 5 million, and obviously going from 1.30 to 1.35 is worth an additional amount all the way down the income statement. And obviously you're going to see it reflected in the revenue line if it stays the way it is and the gross profit. And also as I indicated a moment ago, it will also have some impact on SG&A costs, etc., all the way down. But overall, it should be a positive for us.

But that's the net number you said going from 1.28 to 1.30 would be 2 million?

Well 1.28 to 1.30 is worth about 5 million. If you go from 1.30 to 1.35, and the pound is probably worth more than that. In fact, I know it is.

Alan, one other question. On the share repurchases, you guys had done some kind of creative structure last year. Can you just remind us what that was and sort of how you would be thinking about your share repurchase targets for the year?

Well what we did last year was what's called an accelerated share purchase program, where we in fact elected to buy back $100 million of stock. And this was handled through a particular bank. And the plus to us for that is that they delivered all the shares to us about six or eight weeks after the beginning of the operation, which was about 5 million shares and continued to be out in the market for themselves, buying up the difference, i.e. they really bought part of it and they borrowed the rest and eventually had to give back the borrowed shares. So from our point of view it was a nice, neat way to do it.

Obviously, the bank covered all the necessary requirements as to when you can and cannot purchase. And it also meant that we had the delivery of the shares pretty quickly, which reduced our outstanding. So we thought we were reasonably happy with what happened last year. We thought it was a good way to do it.

Will you consider something like that again this year probably?

(multiple speakers) going to consider such an arrangement again, yes.

Andrew Feinman, Iridian.

So the segment income in the quarter would've been up 15.7% without the AUG AIR-1. So that means, I think -- does that mean that in the fourth quarter, you're going to be helped by as much as you were hurt in the first quarter?

Absolutely correct.

Okay. And the incentive compensation, the SG&A was up $14 million, so you've already given us that the incentive compensation was 5 or $6 million of that. Can you tell me how much was foreign currency?

Probably more or less the balance of it, Andy, because the exchange rates in the first quarter of last year were particularly favored. So I'm thinking 5 or $6 million, perhaps.

Okay. Five or six. And the same question, the interest was up by $9 million, so some of that was rates, and some of that was currency. Can you possibly tell me the breakdown?

Right. Interest was approximately $6 million. Interest rates -- in other words, (multiple speakers) about 100 basis point increase between the first quarter of this year and the first quarter of last. And on the euro I think it was about 150. So that cost us about $6 million. And then foreign exchange was obviously the difference, about $3 million.

Okay. Thank you.

[Jean Lynn], [Tiachris].

Are there any more, or are we finished?

I believe that would be the last question; they're not responding.

Thank you very much. That concludes Crown Holdings first-quarter conference call. We thank you for your interest in our Company. Thank you.