Crown Holdings Inc (CCK) 2008 Q1 法說會逐字稿

Good morning and welcome to the Crown Holdings first quarter 2008 earnings conference call. Your line has been placed on listen-only mode until the question-and-answer session. Please be advised this conference is being recorded. I would now like to turn the call over to Mr. Alan Rutherford, 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 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 filings, including comments in the section called Management Discussion and Analysis of Financial Conditions and Results of Operations in Form 10-K for 2007 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, interest and foreign exchange after which John Conway will discuss the quarter and outlook for the coming year before opening the call to questions.

Total Company revenues grew 8.8% in the quarter over prior year, reflecting strong volumes in beverage accounts worldwide and foreign exchange movement. Segment income at $154 million grew 28% over prior year as a result of improved margins in most segments of the business. Americas Beverage revenues increased 6.1% over prior year to $417 million and segment income improved 13.5% to $42 million. Volumes overall increased 1.3% with Latin American volumes improving 11% and North America, U.S. and Canada, approximately 1%. This additional volume along with strong end including super end sales contributed to the improved segment income in the quarter.

European Beverage (inaudible) revenues were 23.8% higher at $348 million and segment income improved 70% to $51 million or 14.7% of sales.

Volumes increased 15.4% with the Middle East volumes improving by 38% against a relatively weak comparison in prior year, due to a cold January/February 2007.

The segment income improvement reflects the increased volumes referred to above and improved efficiencies in operations.

Food North America revenues at $185 million were lower by 3% year on year after softer volumes while segment income improved 10% to $11 million on improved operational efficiencies. Food Europe saw revenues grow 9.4% at $488 million and segment income by 8% to $41 million. Volumes overall were softer by 5%, reflecting strong sales in Central and Eastern Europe and weaker sales volumes in Western Europe. The pass-through of raw material cost and selling price and foreign exchange contributed to the improved income.

Specialty Packaging revenues were 8% higher, largely reflecting foreign exchange while segment income was flat in what is the slowest quarter of the year in this segment of the business.

Non-reportable revenues grew 5% to $320 million while segment income improved 21% to $41 million. Asia-Pacific recorded increased segment income on stronger volumes in beverage and improved contractural cost pass-through agreements in 2008. Aerosol results worldwide also contributed to the segment income improvement over prior year.

With regard to the Company's guidance for 2008, we stated in January that we expected segment income would increase by approximately 16% in 2008 over 2007 to around $750 million. Based upon current knowledge and current exchange rates, we now expect segment income to grow in the range of 16 to 20% in 2008 over 2007 or around $750 million to $780 million. We still project free cash flow in the range of $330 million to $370 million but after capital expenditures of $170 million. Not the $160 million previously projected but $10 million higher to reflect the foreign exchange impact and also after $20 million of one-time cash settlements in '08.

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

Thank you, Alan, and good morning to everyone. As can be seen in the earnings release currency translation had an impact throughout the income statement. Sales were 74% of which were generated outside of the United States benefited from $119 million in currency translation. Of our non U.S. sales 30% are denominated in euros, 10% in sterling and five are posted in Canadian dollars each representing the same amount as in the first quarter 2007. The remaining 29% of our non U.S. sales are spread among the balance of countries we operate in.

We also highlighted for you the $4 million impact the currency translation had on our net interest expense in the quarter. This is the result of approximately 50% of our net debt being denominated in euros. Previously we had guided you towards net interest expense of $285 million. We now project $295 million, the $10 million increase solely the result of currency.

The effective tax rate in the first quarter was 35.3% compared to 37.5% in last year's first quarter. We still project an overall tax rate of 29% for the year. As we discussed on the February call, the second and third quarters will have a lower rate than 29% and the fourth quarter, similar to the first quarter, will have a higher rate than 29%.

With that I will turn it over to John.

Thank you, Tim, and good morning. As Alan and Tim reviewed with you Crown had a great strong start to the year.

As we told you in January in characterizing 2007 performance in the fourth quarter of 2007 we believed that then the strong performance we saw in 2007 would carry over into 2008. Clearly that has occurred.

I will not go into a lot of detail about the quarter because Tim and Alan have already given you quite a bit of information. However, we thought it would be well if I were to simply summarize the quarter for you.

First volume was largely as we expected. Beverage volume overall was very strong, particularly in our emerging markets businesses which are now growing to be quite substantial.

Food and Aerosol unit volumes were off somewhat versus 2007 but the first quarter is a seasonally very light quarter and we have no reason to believe that 2008 volumes will not perform in a normal manner, which will involve some growth year on year. So we think volumes across all of our businesses will be solid and positive for the full year.

We have largely settled 2008 pricing. Very little remains to be done. We believe that visibility for price cost for the year is reasonably clear and we feel very good about what we have been able to achieve on the price front. Costs are well contained and we anticipate that we will improve our cost base through productivity improvements over the course of the year, as we have been doing for the past several years. These improvements are reflected in margin gains in the first quarter and we anticipate these gains will be sustained through the full year.

I believe that all of you know that we have two major capital projects underway this year. Both involve beverage cans.

The first is our new can plant in the northeast of Brazil and the second is the doubling of capacity in Seville, Spain through the addition of a new high-speed beverage can line. Both of those projects are on budget and within schedule for commercial production at the end of 2008.

All in all, as I said earlier, we had a very good start to the year and we believe that solid and stable performance will continue.

With that, Operator, I think we are ready to throw the call open to questions.

(OPERATOR INSTRUCTIONS) George Staphos of Banc of America Securities.

Good quarter. Congratulations. I guess, to start, you have a rough ridge of aggregate revenue, i.e., volume, pricing. Obviously you gave us the effects already.

Yes. George, I think if I was to characterize the revenues, you see the effects, the balance would largely be the result of pass-through of largely price. There was some volume impact but a handful of volume in the balance being priced.

Realizing that it is seasonally very slow period especially for food cans, especially in Europe, and the numbers on a percentage basis move around quite a bit, what were the reasons why -- if there are any fundamental ones -- were volumes being off in either the U.S. or Europe in food cans?

There were no fundamental reasons at all. In food, generally speaking, we had a little bit of the tailing off after the Easter weekend in late March. April has picked back up again. So as you said the volumes are very low in the quarter. We are talking about small volumes creating a [parent] a 5% -- a unit volume decline, but very very small volumes. So we don't read anything into it. Everything we are hearing about the potential food packs and plantings and weather and so forth is quite positive.

So we don't think -- we are not at all concerned by it.

Okay. You understand the question behind the question. Obviously, in European Food it's been [up] last few years so wanted to see if there is anything that we need to be concerned with.

Any change in terms of how you expect to use cash flow this year? Obviously you kept your guidance there. It's still the 1/3 debt, 2/3 equity buyback or characterizing how you would.

As always, George, we're a user of cash in the first half of the year, as you know. After that we [haven't] finally decided, I think we obviously have the Board's agreement to buy back shares, which you know. And I think also we are watching with interest what's going on in the financial markets because we generally think that good liquidity is probably an excellent thing to have at this point in time. But it is not really a decision we have to make until we get further through the year.

Now working capital seemed like it was up a fair amount this quarter. Certainly your free cash flow was down a lot year on year again. First quarter is your cash burning time of year. I am assuming a lot of that was FX and a lot of that might have been some buying materials for your customers. Or could you provide color?

It's the same as FX, George, as you say, about $30 [odd] million or $40 million in working capital. There was also the fact that we did last year earn a bonus which, of course, we pay in the first quarter of '08. If you recall we did not have that position in '07 coming out of '06. That was also a use of cash and, also, I think you'll see that securitization was lower which meant of course that we were using cash, it was not a source of cash.

This accounted altogether for about 130 and the rest of it is just more volume, higher pricing, higher raw material costs, etc. (inaudible) come back.

Last question and I will turn it over. Realizing that Spain has been sold out, obviously from a macro standpoint there have been signs of Spain is weakening giving somewhat. Do you have any concerns at all that Seville will be coming up this next (inaudible) at a time when demand may be softening a bit. And if that is the case what you do with that capacity? Thanks.

No, I think the -- as you know, George, the Spanish market has been in supply deficit for the last number of years. We think that will continue notwithstanding the slowing of the Spanish economy. Now it is true that cans that have been coming in from other parts of Europe and even in our case we have been bringing cans in, in small quantities, from the Middle East.

We won't be doing that anymore, but our view is that the overall European, Eastern and Western European markets, North Africa, the Middle East, we don't anticipate any problem selling the capacity.

Richard Skidmore of Goldman Sachs.

Just two questions. First, can you just talk more specifically about the opportunities in Europe as it relates to your growth over the next couple of years? And what, if any, of your new capacity in the Middle East is not fully ramped up and what sort of volume is there left out of the Middle East? Then I have got a second question.

Well, we've spoken before, our European beverage can capacity is largely in Western and southern Europe and of course, Spain and Mediterranean have been growing nicely and that's been to our benefit. We have not been participating in any significant way in the Eastern European beverage can market and we have been looking at that and considering some opportunities. We think that could be a good opportunity for us and we think we could do it in a way that doesn't disrupt price and allows us to begin to participate in that quite dynamic market.

As far as the Middle East is concerned, all of our capacity in the Middle East is now being fully utilized. Now some of it is still, in a relative sense, new so we know we can improve output simply through efficiency gains, driving down spoilage and so forth and we plan to do that.

So we will get a gain this year as a consequence of that, but all of the capacity that we have installed over the last five years is running at a fully commercial way but could run a little bit better. We know that and we anticipate that it will.

Then just second topic question. What opportunities do you see in the beverage can business specifically in North America and Europe, to be more aggressive on the can price given perhaps some relative pricing that you are seeing in some of the other substrates, like glass and plastic?

We are well aware of the increased costs in pricing for plastic containers and glass. And so we think that, combined with the cost pressures that the beverage can makers, all of us are under in North America, makes it inevitable that we need to push price in North American beverage can business. And we have been doing that. Traditionally we have done it over the last six or seven years and we plan to continue to it that.

We are acutely aware that the producer price index is up quite a bit. The first three months of the year we are running at an annual rate of something like close to 9% for '08. If that were to continue into '09, that's a pretty sharp increase in our conversion costs. Now we don't exactly match up against PPI, but it is close enough so that we understand the necessity to increase prices and we are planning to do that. We have begun to talk to our beverage can customers, pointing out to them what's happening with inflation and PPI, and the necessity that our conversion costs -- notwithstanding what happens with the underlying aluminum, but our conversion costs -- inevitably are going up in price and we will have to go up.

And then, John, is there room to move more aggressively than just the PPI or it is it just to really offset the inflation that you are seeing?

I think there is room but you have to keep in mind, we have got about 20, 21% of the market share in the U.S. and Canada and so we are not going to drive this little Crown (inaudible) do it. It can be done, but the industry leaders are going to have to take a role here.

Ghansham Panjabi of Wachovia Securities.

You know, your operating margins in North -- in European Bev are above '01 or, sorry, '05 levels and I think it's free close to a record. Was there anything that was unusually strong in the first quarter? And I guess my question is should we expect that sort of year-over-year improvement to continue throughout the rest of the year assuming volumes stay at reasonable levels?

I don't know unusual, George. I mean, two or three good things happen. Volume was strong across the entire beverage sector for us, extraordinarily so in the Middle East. So that's pretty obvious. Price has recovered and the extent that we had some tail ends of some bad deals that didn't provide for full cost pass-throughs, we've worked our way out of all of those. Capacity is tight right across the regions so that helps us a little bit.

We had a reasonably -- we made a reasonably significant management change there last year and improved our operating management in Europe, we think significantly. Put a couple of real good can makers in charge of the business both in the general management of the business and the head of operations of the business and they have already begun to have a positive impact. Our plants are running better.

So all of those things have benefited us and made the difference in terms of the margin improvement that you are seeing.

John, just one more question if I could. As the industry tries to think about pricing for '09, '010 and beyond in North America, particularly. How do you feel about the supply demand balance at this point? Is it -- given the weakness we are seeing in CSEs in North America, is it fair to expect some capacity closures in this market as an industry?

I don't really know. I mean the first quarter, some of the first quarter C&I numbers show a slight decline quarter to quarter in units, but I think it is too soon to say what the outcome is going to be. It seems to me operating rates for the industry as a whole for the full year are going to be well in excess of 90% again as they have been from last number of years.

Now there may be some producers who are going to need to do something on the capacity front. If you will recall I think in 2006 first quarter or so, roughly, we shut a plant in Texas which took a big chunk of capacity out for us and that was a two to three line plant, so -- and moved it overseas.

So we're pretty good balance. It could be there are some regional pockets and some other pockets that some of our competitors might want to be considering, but we're not.

Claudia Hueston of JPMorgan.

Just a couple of questions. Wonder if you could just comment on the steel price environment and how you feel your position just given the escalation in prices we are seeing there?

We've taken the position and view for the past couple of years that just as in aluminum we cannot take on commodity risks in aluminum. We can't take on commodity risks in steel either. So virtually all of our contracts, if they are multi-year and if they're not, if it is a year-to-year negotiation, we have been insisting with our customers that we would have to pass through steel in a timely manner.

We have been able to do that and feel real good about how it's gone, frankly, in North America and in Europe this year. You are seeing it in the margins even though the volumes are somewhat lighter in our traditional food steel can products and we don't anticipate that that is going to change. There's been a little talk in North America, perhaps, that some of the steel makers want to do something about flat rolled products generally in North America. We do not think that is going to have an impact on tinplate that we use, and so we feel pretty confident that we will be able to continue to maintain margins and continue to push price through to the extent that the steel industry does the same to us.

Thanks. Then I was just wondering if you could talk a little bit about the specialty packaging business which seemed to -- it is hard to tell if it's a weak quarter, but I guess you know you've been working to improve that business a little bit just how those efforts are going?

Yes. Actually we view the first quarter somewhat positively. We didn't go backwards. You can't go forward until you stop going backwards so we think we stabilized the business and we've got some good plans that I mentioned on the previous call. We have got a new management team in place in Europe and they seem to be full of enthusiasm and, I think, confidence that they are going to be able to improve the situation.

Alan and I are going over in two weeks for one of the express purposes to visit and inspect (inaudible) plants and understand the progress we are making. So we are still pretty confident. We think we are going to turn that into a pretty good business.

Finally we've heard a little bit from some CSD producers about shifting market shares in the last couple of months. Are you seeing any impact from changing customer share at all in North America?

Do you mean among our customers?

Yes.

There's a little movement. I mean some of the things that have been happening we had anticipated last year. So as Alan mentioned, actually our unit volume is up a little big in the first quarter year on year, but it is true that the customer mix for us has changed a little bit. But nothing that is dramatic adverse for us.

Chris Manuel. KeyBanc.

Good morning and congratulations on a terrific quarter. Couple questions for you. First, I'm going to follow up on what Claudia asked. If tinplate -- I know it was up sharply here to begin the year, but we've heard from a few folks that there may be another similar size increase on tap for midyear similar to what we saw, I think, back in '04.

If that were to materialize, do your contracts enable you to go back in and essentially reraise or recover if there is another midyear hike?

We prefer to focus on the likelihood that there is going to be an increase. We are pretty convinced there won't be because our contractual positions, we think, are very, very solid. Now if something totally unexpected were to occur that we don't think is going to happen, then our position isn't going to change from the position that we've been in for the last five years or so which is, Crown cannot carry the volatility of commodity price risks and it will have to be passed through the supply chain.

Very good. That's -- I think you guys in a similar situation in '04 did the exact same thing. I just wanted to make sure that your resolve hasn't changed and it doesn't sound like it has.

No, no. We would do the same thing again.

Okay. When we look at -- just, if you can just remind us, coming into 2008 from 2007, in your release you talked about some additional lines in Asia-Pacific. How many extra units approximately do you anticipate having '08 versus '07 on the bev can side?

We just do not have that data handy. We talked about this before. The great thing now about our business is that our so-called emerging markets business is not confined to a country or a region. It's all over the world now. We are all through the Mediterranean, southern Europe, North Africa, all over the Middle East and the same thing is true of China and Asia and South America and Mexico and Columbia, etc.

So we've got a great opportunity and we are able to incrementally increase capacity in many, many places as markets grow. But I don't think we have that kind of data at hand.

All right. That's helpful, but if I were to look at your improvement in Asia-Pacific or your, I guess, other reportable segments but in the bev can piece there, how much were volumes up in the first quarter year-over-year? I guess what I'm trying to do is --.

Unit volume growth in Asia was just about 7% in the quarter.

That helps. What I'm trying to do is to seminate is how much was an improvement with some of the contracts where you needed some work in China and how much was due to the extra volume you talked about with Vietnam and Cambodia. So that comes to about 7%.

Yes. Beverage, just to give you -- Asia beverage unit volume was up in the quarter just a little, 7%, Europe, 15.5 and the Americas, 1.3. So we had good growth pretty much every place.

And with European Food, the dialogue you mentioned earlier suggests to me that you are still anticipating full year volumes and European Food will recover from what was bad weather in '07 and '06. So volumes probably similar to something in '05 levels. Is that fair?

Yes it is.

Alton Stump. Longbow Research.

Just had a quick question. Could you give me the ballpark range of what Europe volume growth was actually up in bev cans. Of course you mentioned the 38% number for Middle East.

Europe, the [comment]. Yes. Alan has that number.

Yes, approximately 6%.

Looking ahead to the rest of the year, obviously we have the Europe Cup Games coming up and some pretty easy weather comps at least in western Europe later on in the summer. Any sort of idea or projection as to what that total market could grow in 2008 in Europe?

We still think the range is 5 to 10 to 12%. 5 in Western Europe and 10 to 12 in Eastern Europe and Southern Europe. So we think it should be good, substantial positive growth in Europe for the year.

Christopher Chun at Deutsche Bank.

I wanted to follow up on your guidance about how much segment EBIT would be up in '08 on a year-over-year basis. I think you mentioned you are waiting for a 16 to 20% growth.

In '08 over '07. Yes.

Right and that's certainly very solid, but it actually strikes me as somewhat conservative, given what happened in 1Q, when you were up around 30%. Can you talk a little bit about what factors that occurred in 1Q you are not necessarily counting on for the rest of the year?

First of all, it is the first quarter of the year and as I mentioned, in beverage cans in Europe, we had a big pickup in the Middle East. I think I also reminded everybody that, last year in the Middle East, we did not have a good first quarter due to pretty bad weather out there. So I think we had a big increase first.

I'm not sure if we are going to go on having such a substantial increase as we get into the second and third. We still think we'll have one, but I'm not sure -- we're not sure if it is going to be at the same rate. So we think projecting 16 to 20% over a year when we did almost 13 is still pretty good.

When we see the second quarter we will have a much better feel about where we are going to be for the whole year.

Right and then is the FX gain, does sustainability of the FX gains one of the issues as well? If the U.S. dollar weakened throughout the course of '07, would it be unreasonable to look for the same kinds of FX gains absent further weakening in the U.S. dollar throughout '08?

I don't think so because we -- on the income statement we work on an average, and so as we go through the year we have a, for instance, on the euro, an average rate. We are now in April and we are running at an average of about a little over 150. As you know today the euro is at 159. I think it is likely to that as we go through the year, we are at least going to maintain where we are and if as you suggest the dollar was to strengthen or the euro weaken towards the end of the year, it has obviously less impact because we are only picking up one month of that weakness as we get to September, October and November.

So I think we are on track to be at least where we are now for the exchange and could be better.

Right. I guess what I'm asking is if interest rates or exchange rates don't change from current levels, can we expect the same kinds of FX gains for the rest of the year that we had in the first quarter?

Certainly last year, the rates in Q1 of '07, the dollar was stronger in Q1 of '07 and it was in cues to three and four so as we go through the year if the euro stays where it is today as Alan mentioned, our average will tend to trade up towards the spot rate today from the current average we have. But the average throughout last year also traded up. So I think we will have certainly gains in foreign exchange throughout the year if the rates stay up where they are today, but those gains might be a bit smaller on the revenue line than they were in Q1.

Right. That's what I was asking. Thanks. And, finally, if I may, can you talk a little bit about the impact of changing your inventory accounting policy from LIFO to FIFO?

It has essentially no impact because everything -- all the historical numbers have been restated to conform to FIFO. But if you wanted -- I will tell you that in Q1 of '07 before the change was made we had a $2 million for LIFO, but that is not in the numbers any longer. So everything has been restated. So there should be no impact.

George Staphos. Banc of America Securities.

Figured I would come back one more time. First off, you mentioned that liquidity is a good thing to have in this kind of environment. Obviously your balance sheet has improved markedly over the years and you've got very strong free cash flow.

Is there -- would you say the bias holding foreign exchange constant would you say the bias is to the downside or upside on your CapEx over the rest of the year [and] any other uses of cash? In other words are you looking right now, are there some things that have been on the drawing board that maybe you might pull in just based on the environment?

As to CapEx plans, the answer is no. We plan to stick to the guidance that Alan gave you earlier which is CapEx modified only by FX impact. So we don't plan to change what we consider to be our CapEx discipline over the balance of the year. The projects and opportunities that we are thinking of, we plan to do in such a way that we'll, they will continue to adhere to that.

Now that times are good and we're doing a little bit better, cash flows are stronger, we are not going back to the bad old days. We understand how important it is that we spend every capital dollar very, very carefully and we get a lot of return for every dollar that we put in. We also understand that reasonably large projects take time to get a payback and so we are going to be very careful about that. And we are not going to change CapEx discipline.

Alan will answer the other part of the question.

You know, George, I mean we are on $170 million as John just said. The [10] increase is purely to reflect foreign exchange and that is what we are going to stick with.

I guess maybe to ask another question hypothetically, realizing that it is hard to project how the year will go on and you need to give yourself a little bit of cushion against it, if you found later in the year that you had an extra $25 million that you didn't at this juncture expect to have, where do you think it would be more likely applied? Debt paydown or stock buyback or reserve for the time being, if you could comment?

The thing is, at the moment, I think probably that 25 we would pay down our debt as things stand at the moment in the financial markets generally.

That's fine. Switching gears to cans, maybe, to close up. Custom cans, can you give us a bit of color in terms of how the progression has been? Just in general we've gotten signs, both from the companies and from our channel checks and from the analysts, the other analysts here at B of A that there's a migration, it would seem, of the consumer dollar to being at home and buying product to consume at home as a way -- as opposed to away from home.

And my guess is -- well, I will leave it to you. Do you see that and how has that played out in your business thus far this year? If you have seen it.

Yes. Custom cans in North America have increased again for us in the first quarter as a proportion of mix. I think we are up closing in on something like 13% of our mix. So that is up -- .

From 11.

Yes. From about 11, so that is a pretty good increase for us in the first quarter and, otherwise, I mean we have an expectation of what you're saying is going to be true and is perhaps proving to be true, but we don't yet know with hard data that in fact people staying home and consuming food cans, beverage cans etc. In fact we are having a positive impact. I would think so, but we don't have any hard data yet to support that.

That concludes Crown Holdings' first quarter conference call. We thank you for your interest in our Company.