Crown Holdings Inc (CCK) 2008 Q2 法說會逐字稿

Good morning, everyone, and welcome to Crown Holdings' second-quarter 2008 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 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 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 Condition 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 or liquidity beyond those already contained in the Company's earnings release.

I will comment on the results. Tim Donahue will then comment on taxes and foreign exchange, after which John Conway will discuss the quarter and the outlook for the coming year before we open the call to questions.

Total Company revenues grew 10.4% in the quarter and 9.6% in the first half over prior year, reflecting strong volumes in Beverage Cans and firm volumes in Food, along with the pass-through of higher costs in selling prices and foreign exchange movement. Segment income at $247 million in the quarter and $401 million in the six months grew 28% over prior year, generally reflecting improved margins in most of the segments of the business.

Americas Beverage revenue at $501 million in the quarter was 3% higher than prior year, and for the six months, 4% higher at $918 million. Segment income improved marginally to $58 million in the quarter, and for the six months has recorded a 6% improvement over prior year to $100 million. Volumes in North America, that is, US and Canada, were flat in the quarter and six months compared to prior year, while volumes in Central and Latin America were softer in the quarter -- it is the winter season -- but flat year-on-year for six months.

Europe Beverage revenues at $476 million in the quarter and $824 million in the six months were 19% and 21% higher than prior year, respectively, on improved volumes, up 9% in the quarter and 11% year-to-date. The increased volume and improved operating efficiencies resulted in segment income in the quarter increasing 52% to $88 million and 58% to $139 million in the six months over the prior year.

North American Food revenues grew 4.8% to $220 million in the quarter and 1% to $405 million in the six months. Volumes for the business were soft, off 2%. However, pricing was firm and operating efficiencies good, resulting in flat segment income at the half-year point.

Food Europe reported a 19% increase in revenues in the quarter to $557 million, and 14% year-to-date to $1.045 billion. This reflected stronger volumes in the quarter, up 4%, and the pass-through of cost in selling price. Segment income at $61 million in the quarter improved 36% over prior year, and at $102 million is 23% higher in the six months, reflecting price and volume.

Specialty Packaging revenue of $125 million were 12% higher in the quarter, reflecting pass-through of raw material in price and foreign exchange impact. Segment income improved 22% in the quarter to $11 million, and 20% in the six months to $12 million, primarily as a result of better efficiencies and cost reductions in the operations.

Non-reportable revenues at $317 million grew 2% in the quarter and 4% in the six months to $637 million. Segment income at $46 million improved 48% in the quarter, 37% in the six months at $87 million, reflecting strong beverage can demand in Asia and improved results in aerosols worldwide.

With regard to the Company's guidance for 2008, we stated in April that we expected segment income would increase in the range of 16% to 20% in 2008 over 2007, or to around $750 million to $780 million. Based upon current knowledge and current exchange rates, we now expect segment income to grow in the range of 24% to 28% in 2008 over 2007, or to around $800 million to $820 million for the full year.

In April we projected free cash flow in the range of $330 million to $370 million after capital expenditures of $170 million. We now expect free cash flow to be in the range of $350 million to $390 million after capital expenditure of $185 million. The increase in capital expenditure reflects the foreign exchange impact on overseas investments and expected cash outlays for the recently announced beverage can line in Morocco, which, although a 2009 project will require certain down payments on equipment in late 2008.

With that, I'll turn the call over to Tim for his comments.

Thank you, Alan ,and good morning to everyone. I'll quickly discuss taxes and foreign exchange, and then I'm going to hand it over to John so that he can discuss the highlights of the quarter and the half-year.

As noted in the earnings release, our effective tax rate in the second quarter was 25% compared to 17% last year and 28% for the six months, which compares to 22% in the first half of 2007. As we have previously described for you, the increase is attributable to the reversal of the valuation allowance on our US deferred tax assets, which was recorded in the fourth quarter of 2007.

Obviously, the increased tax rate has had an impact on the percentage by which our earnings per share has improved compared to the prior year. For comparison purposes, if we were to apply the 2008 tax rate to the 2007 results, our 2008 earnings per share improved approximately 36% from 2007, comparable to the increase in segment income.

The translation of foreign currency amounts back to the US dollar, our reporting currency, continue to impact our income statement, balance sheet and cash flows. From a balance sheet perspective, the euro was 17% stronger against the dollar at June 30th, 2008, compared to the same period in '07. On the income statement, our average euro-to-dollar rate for the six months through June was 15% stronger than in the same period last year.

Within the earnings release we have detailed for you the foreign exchange impact on numerous income statement line items. However, as much of our cost base is in these same currencies, including debt and interest expense, taxes, et cetera, the foreign exchange impact on net income is less significant than at segment income. At net income, foreign exchange has benefited us by $4 million or $0.02 per diluted share in the second quarter and by $6 million or $0.04 per diluted share for the six months compared to the same 2007 periods.

With that, I'm going to turn it over to John.

Thank you, Tim, and good, morning. As Alan and Tim reviewed with you, Crown had another excellent quarter. All of the businesses performed well in their various markets, and the momentum for the balance of the year, we think, is very strong. Unit sales performance has been as we had generally expected, which is to say solid in the mature markets and very good in our emerging markets businesses. Price utilization has also been excellent, and we have successfully passed through cost increases, and in certain markets we have been able to the improve margins as a consequence of very strong supply-demand fundamentals.

Our major capital projects for 2008, which are a doubling of our Beverage Can capacity in Seville, Spain, and building a new beverage can plant in northeastern Brazil, remain on schedule and within budget. Both new facilities will begin production late this year. We have announced a new major capital project for 2009, which will be beverage cans for the Moroccan market, to be located in Casablanca. This is a market which we know very well and which we currently serve from our various Mediterranean Rim beverage can plants. This is a strong market which we anticipate will continue to grow in line with the region.

As we look ahead into 2009, we have begun to advise all of our customers, particularly those which use steel packaging, that prices will be going up sharply as a consequence of underlying raw material price increases. We have no reason to believe that we will not be successful in passing through these increased costs. Our overall strategy, which has been to be an excellent performer in rigid metal packaging in all of the categories in which we are present, continues to be, in our view, very sound, and we believe we are executing it in a highly effective manner. We will continue to maintain good profitability in mature markets through efficient price adjustments associated with cost changes and through productivity improvements. We believe that our emerging markets businesses will continue to grow, possibly at alternating rates but in a very positive manner, which will enable us to generate increasingly substantial sales and income in South America, Eastern Europe, the Middle East, North Africa, China and Southeast Asia.

In summary, our prospects for 2008 are excellent, and we intend to improve on them in 2009.

With that, operator, that concludes our prepared remarks, and we will open the session to questions, please.

(OPERATOR INSTRUCTIONS) Mr. Panjabi, Wachovia.

There's a lot of concern in the market that Europe is slowing significantly or, at the very least, expected to slow over the near-term. Can you, John, comment on what you're seeing in continental Europe excluding the Middle East and Africa? Is there any sort of change at the end of the quarter versus the beginning of the quarter in terms of trend, or are any of your customers in terms of sentiment pulling back in terms of new product introductions?

We have not seen slowing in the second quarter. The first half of the year in Western Europe was somewhat slower than last year, but our view is the trend has been reasonably stable. As we move into July, July looks pretty good so far. So, as I said earlier, we are very confident overall, and we are confident in particular about the businesses in Western Europe.

In terms of inflation, you obviously have a big presence in Vietnam, and you are growing that. Inflation is running 25% a year, apparently. Can you talk about how that's changing your business model and some of the challenges you're seeing in that market?

Well, you've picked one of the markets which does have significant inflation. It has not adversely affected consumption, and we largely price in dollars and buy our principal raw materials, aluminum, in dollars. So it has not adversely affected price, either, for us. So in the case of Vietnam, the Vietnamese authorities, as you know, are extremely concerned about it. They are taking measures to try to rein it in. A lot of it has to do with state-owned enterprises accessing capital that's too cheap and too readily available, and so we're counting on that correcting.

So no change in capital plans there, then?

No.

Chris Manuel, KeyBanc Capital Markets.

Good morning, gentlemen, and congratulations on an outstanding first half. A couple of questions for you. First is, when you look at your balance sheet, debt levels obviously are trickling up a little, but that's largely due to currency. At what sort of level are you comfortable with where the balance sheet is at?

Obviously, Chris, our plans at the moment are continue to delever the Company as we go along here. In the past, we've talked about trying to be below three times or 3.2 times levered. Obviously, what's happening to us now is that our EBITDA number is increasing along with the profits, of course, and at the same time we are continuing to pay down the debt. So really, we're still looking to be at three or around that number as a multiple.

And I think also, we think at the moment it's good to have liquidity. We still have a feeling that this is a market where liquidity is a good thing to have, and that's our view, that we should maintain as much liquidity as we can and keep the balance sheet and continue to delever it down to what I've just said.

The direction I'm going with this is, with the prospect of Anheuser-Busch being sold and, potentially, the metal container assets coming to market, the balance sheet may be a little beyond where you'd like it to be. But, would -- A, if that property comes to market, would that be something you'd be interested in? And, two, would your balance sheet preclude you from making an effort at that?

Chris, both Anheuser-Busch and InBev are great customers. We serve them both in various parts of the world, and so there has been some speculation as to what might happen in the future. But we think it's a little premature for us to begin to talk about what we might do if something happened and if something else happened. The very positive thing that we think, and I think you'll see it in the numbers and the results, is our plan is working for us. We are about the size we are in the mature markets, to a large degree, because that's the size we want to be, and we're applying our capital wherever we possibly can in the emerging markets, which where metal packaging and consumer metal packaging is where we think capital ought to go. So our plan is working great, and we're just going to defer the question of our interest to the future.

Then the last question I wanted to raise was, with the prospect of tinplate going up sharply next year, I know you mentioned you've already spoke to a number of your customers about it, at some point does tinplate continuing to go up or steel costs continuing to go up at the pace they do make some of the various products less competitive, whether it's a steel bev can versus the aluminum counterpart, whether it's the aerosol can, whether it's your -- whatever the product, do you begin to get nervous at some point or think about more conversions potentially from steel to aluminum, particularly in Europe?

No, we don't, because, although we are never happy to see any of the raw materials go up in price, in fact, steel has lagged aluminum. We think it has been lagging glass and petroleum-based resins. So we don't foresee that as a problem, and we think the market will take increases and we're going to have to pass them through. Our customers know that. We've been very, very clear about it. Recently, in the United States and Canada, we sent something in writing to all of our steel packaging customers telling them very precisely about what was going on and giving them very early warning about the size of the potential increases that will be effective 1 January, 2009. And we are not concerned about unit volume sales, not at this point.

Richard Skidmore, Goldman Sachs.

Could you talk about Europe, in the European Beverage Can business, where your margins were up, it looks like about 400 basis points year-over-year? Can you talk specifically about what is driving the margin improvement? I would have thought that margin would have been lower because of the raw materials prices going up.

Well, we had a variety of things happen, Richard. First of all, unit volume sales were up, so utilization was much better. Our factories ran much better. In the Middle East, for example, where, as you know, over the last five years we have added a lot of capacity, we continue to come up the learning curve in what are some now very substantial factories. So the more units, you drive down costs sharply. And we no longer have the drag of contracts that don't allow us to pass raw materials through promptly. So we've worked our way through all of those things, and we are just seeing the benefits for us, a great -- reasonably good, a great demand environment in certain areas, and the results of all the actions I just described.

Just with regards to the Seville plant, is that a third-quarter start-up or a fourth-quarter start-up?

No, it will be about November. So we'll be coming up a learning curve beginning mid-November or so.

Okay. Just clarifying the guidance that you mentioned of $800 million to $820 million of segment income, is that before the corporate line, or is that after the corporate -- ?

No, that's the total.

Claudia Hueston, JP Morgan.

I just wanted to ask about the non-reportable segment. Margins there were up very nicely versus recent trends and our expectations. I just wondered if you could talk about what drove that and maybe how we should think about those margins going forward.

Well, as Alan said in his comments, the two principal elements there, our Asian division and the aerosol business -- and Asia, was a story very much like Europe. Demand was strong for all of the products, beverage and food cans. We have a fairly large food can business in Thailand. And pricing was good; we passed through all costs. We didn't have the drag as we had in several prior years in China of prices that were -- where we were limited as to raw material price increase pass-throughs.

The capacity we've been adding in Cambodia and Vietnam we are utilizing more effectively. So it was just a lot of good things happening pretty much across the board. Aerosols also did a fair bit better quarter to quarter; we were pleased to see that. And that was also around the world, in North America, Europe and Thailand. So the two things were working in the same direction for us, Claudia, and that's what you saw.

That's really helpful, thank you. Just wondering, I might have missed it, and if I did, I apologize. Did you mention what the currency impact was in the European Beverage and European Food businesses, specifically?

Not specifically, no.

Tim Thein, Citi.

First question was on the -- maybe you could comment on what you're seeing coming back on the tinplate and the prospect for some significant price increases next year. Are you seeing any -- and some of the reports have noted that some of the buyers, which I imagine doesn't apply to you guys, but presumably the smaller buyers that have been put on allocation by some of the steel manufacturers. Are you seeing that? Maybe you can comment if you're seeing a difference in the discipline with regards to pricing in the market amongst your chiefly smaller competitors?

Well, as to our steel suppliers, they are being very, very scrupulous about honoring contracts but not doing one extra thing. And so we are tight on supply also, not as tight as the small guys are, who have tended to be buying spot, because we are contract buyers and we are contract buyers so that we're sure that we have adequate volumes to serve our customers and do what they have asked us to do over the course of a full year.

But yes, the steel industry, as the tinplate products, because that's our exposure, is highly disciplined. And we do not anticipate there's going to be a buy ahead by can companies this year, as there has been in the past. That is to say, we are going to have to have a big increase effective January 1, 2009. We're not going to be able to drag it into the year, and we are telling everybody that's what's going to happen.

Okay. And back to, Alan, to follow up on what you said earlier, with regards to the cash flow deployment, have you changed your tune at all in terms of the ratios there for --?

Not a lot. We had been talking about being down to 3.23. I think it's pretty evident that our EBITDA is going to exceed $1 billion and that the debt, net debt, is going to probably be down below 3, so we're obviously going to be -- by the year end, we're going to be on that number, if not better. I think that's the way we are heading now at the moment.

Alton Stump, Longbow Research.

Good job on the quarter, just two quick questions. First off, with the steel plate increase, I know that there's some rumors out there from a couple of the suppliers that that might actually be a midyear calendar year '08 increase. I assume, with your comments, that that's probably not going to happen, that we will not see that go through until the first of next calendar year.

Well, all of the steel companies are vociferous in explaining to us and, I suppose, to others, the terrible cost pressures they are under that they didn't anticipate and how badly they need increases. And we understand their plight, but our position is that we've made commitments, they've made commitments. We expect everybody to stick to them, at least to the end of the year. And so far, that appears to be the position that they are prepared to take with us.

Now, we are contract buyers. We are not spot buyers. Spot buyers are in a totally different position. Their prices are going up dramatically, and our smaller competitors, we see it in what's going on in the marketplace, which, of course, gives us a lot of confidence that we're going to be able to pass through any steel price increases for 2009.

Okay, great, and then just one other question. Looking at the bev can businesses in Europe, obviously there's some pretty easy weather comps year-over-year coming up in Q3. If you can maybe just, I think, put a bit of color on that, whether you think we could see volumes get a bit better even in the third quarter just because of those comps versus 2Q?

You're talking about weather for beverage, Alton?

Yes, in Europe.

On Food -- for Beverage?

You know, Alton, I can't -- I honestly, I can't remember that specifically all the circumstances of beverage in the third quarter last year, but we expect a very strong third quarter in beverage, and we hope -- we expect it will be much like the second quarter.

Mark Wilde, Deutsche Bank.

Is it possible, within the European Beverage Can business, to break out that 9% volume gain? I think you mentioned that you were up about 25% in Middle East. Could you give us some color on what went on volume-wise in the other markets?

I don't know that we've got -- we don't have it broken out here, but I think I can tell you that our view is that the European market, and this is fairly good basis on trade association data, is up high single digits. And it's a combination of Western Europe somewhat less, Eastern Europe somewhat more. But the market is still very strong in Europe, not as strong from a growth perspective as it was last year, but we're saying high single digits. And we think the year is going to finish high single digits for Europe as a whole.

Is it possible going forward that you might be able to give us some more regional breakout to really understand Middle East versus Europe versus Asia?

Well, we'll take a look at it. We end up with an awful lot of data and puts and takes and all the rest, and some time by country it's not even terribly meaningful. But we'd be happy to take a look at it.

We report the way that we manage the business, and this is how we manage the business in Europe. It's European Beverage, it includes Middle East, and that's out we report it.

It just seems like that Middle Eastern business is growing so much for you guys.

Yes.

The last question is -- are freight costs an issue, and how do you pass those through, Alan?

Well, why don't I (multiple speakers) at that, if you don't mind. Freight costs vary by product category and by country. By that, I mean whose responsibility freight costs are. In some cases we have exports pricing, in some cases we have delivered. And in all of our contracts and all of our proposals, we -- particularly where it's delivered pricing, we attempt to and we make proposals and we are basically -- we are largely successful in getting prices that reflect anticipated freight changes.

Now, in the current environment, diesel, for example, has gotten everyone's attention, where diesel has gone up so sharply. We are taking a look at whether we might need to change some of the ways that we price products in 2009. That is to say, we are considering but we don't know what we are going to do. We are considering perhaps treating the diesel component of freight much as we treat aluminum and steel, which is, say, pass it through as it occurs or something like that.

This year we've been okay with diesel. Diesel is up, but we've been able to deal with it. You can see it in the margins, obviously. But as we look ahead, we are reflecting on how we might go about improving that.

George Staphos, Banc of America.

Let's get back to steel for a minute, and obviously there are a lot of questions on it. Isn't the real issue here just clarity? If your suppliers want to raise pricing 10%, then they just let you know as soon as possible, and that number is the number, or if it's 50% they let you know as soon as possible and that number is the number. And then the suppliers of packaging can get out and do what they need to do. Would you agree, disagree or offer some comments on that?

George, there's one obvious thing. Once you know what it is, you know what you've got to do. But knowing what do have to do and doing it are two different things. We think, and you can see it in our numbers and you've been able to see it over the past couple of years, we think we have been highly effective, very disciplined in passing through raw material price increases wherever it is in the world. And we've taken a view that we have to maintain improved margins. We've got to improve the returns on invested capital, we've got to be able to justify the capital that we're investing.

So execution is key here. And now, you look around here, and you look around over the next several weeks, and you are going to see, execution is not so easy, George. It's not simply knowing it what is, it's then getting it done. So, yes, the sooner we know, the sooner we can get working on getting it done. But believe me, getting it done is not a small issue. We are going to get it done, and we'll see how everybody else does.

I'm not trying to minimize it on your side, but I understand that. Will the terms of pricing simply change from your understanding? In other words, whatever the price increase will be, that will be the increase for the year? Or, could that change in 2009 or in the future?

Oh, it's going to depend upon -- in the case of steel, it's going to depend upon how the steel industry chooses to price and we're hopeful that there will be one price increase for the year. But the steel companies have their own views on that. Some of them want two or more, some of them want quarterly, and so that debate is still ongoing.

Okay, fair enough. When we look at the bridge in revenues, and I realize there's some things you might not necessarily want to get into. Would it be fair to say that volume in total across all your product lines was up something around 3%?

In the quarter?

Yes. And if that's too hard to get to, we can do it off-line.

It's awfully hard because we always throw bottle caps in here and so, call us later; we'll let you know.

Apples and oranges here.

Okay, fair enough. We shouldn't forget the bottle caps. In terms of how we grow next year, how you grow next year, you obviously -- you've had a terrific, so far, first six months. It looks like this year will be very good, given your guidance, and you are to be congratulated for that. Where do you expect these sources of growth, either from a process, strategic or a regional standpoint, to come in 2009?

Well, I assume you mean segment income growth, and then what flows from that.

Yes.

Well, we think everything it's going to be up. We think everything is going to be up. We think -- as I said earlier, we think the emerging markets volumes are going to continue to be good. We think the mature markets are going to continue to be stable. We think the industry structure permits us to pass price -- cost through and price, effectively. We think that some of our returns we are still not happy with in some of the businesses. There's still ground to be made up and things that were lost over the last five years as a consequence of some things that we and others did that were nonsensical. So our plan, as I said in our comments, is we are counting on 2009 to be up across the board, and I really think it will be.

John, two last questions, then I'll turn it over. One, where are you still less happy with the returns and where you hope to focus on a going forward basis? And then more shorter term, your year-on-year margin comparisons that have been brought up in the Q&A earlier and European beverage have been very, very strong. Is there are reason to expect why you can't keep that margin variance over the balance of the year in European beverage cans? Thanks, and good luck in the quarter.

Well, as to beverage, no, there's no reason to expect that we are not going to maintain margins. I think demand is really quite strong, and so we should be fine there.

As to the product lines, you could do better. They could all do better, George, they really can. But some of the ones that should be better are pretty obvious to us. North American Beverage should do better. We think it can, and food around the world can do better and aerosols around the world. And spec pack. And we've been improving them. We've said we are going to improve them. So we think they all can improve and will improve.

Gentlemen, that was our last question. I'll turn the conference back over to Mr. Rutherford.

Thank you. Well, that concludes Crown's second-quarter conference call, and we thank you for your interest in our Company. Thank you.

That does conclude today's conference call. We thank you all for participating. You may now disconnect and have a great day.