Crown Holdings Inc (CCK) 2011 Q1 法說會逐字稿

Good morning and welcome to the Crown Holdings' first quarter earnings conference call. Your lines have been placed on a 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. Timothy Donahue, Executive Vice President and Chief Financial Officer. Mr. Donahue, you may begin.

Shirley, thank you very much. Good morning, everybody. Welcome to Crown Holdings' first quarter 2011 conference call. With me on the call today are John Conway, our Chairman and Chief Executive Officer, and Tom Kelly, Senior Vice President, Finance.

Before we begin, I'd like to point out that on this call, as in the Earnings 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 the Press Release and in our SEC filings, including comments in the section titled Management's Discussion and Analysis of Financial Conditions and Results of Operations in Form 10-K for 2010 and in subsequent filings.

A reconciliation of Generally Accepted Accounting Principals to non-Generally Accepted Accounting Principals earnings can be found in our Earnings Release. If you do not already have the Earnings Release, it is available on the Company's web site at crowncorp.com. You will also find a reconciliation from net income to EBITDA, credit ratio computations and supplemental cash flow data on the Company's web site.

I'll first review the quarter, update our 2011 guidance, and then hand the call over to John for his comments.

We've had a good start to the year. Certainly ahead of our expectations. Comparable diluted earnings per share were $0.48 versus $0.30 in last year's first quarter. Most operations performed very well in the quarter due to strong volume growth, cost reductions and increased production levels. Currency had little to no impact year-over-year, but at current rates should help over the balance of the year.

Also, as shown in yesterday's Earnings Release, our effective tax rate from on-going operations was lower than planned and this is mainly due to the relocation of our European headquarters.

Net sales in the quarter improved 5.9% over the prior year due to global unit volume growth and the pass-through of higher raw material costs. Global Beverage continued to grow with first quarter volumes up 6% after 9% growth in 2010. Importantly, food can sales in Europe continued their recovery from the 2009 recession with more than 3% growth in the first quarter. This comes after 3% growth in 2010 and 12% growth in the fourth quarter of 2010, which included some pre-volume. All in all, demand remains very strong for our products.

Americas Beverage revenue increased 6.7% over the prior year. Volume growth in North America was up one half of 1%, reflecting full utilization of our annual production capacity in this region and double-digit growth in Brazil. The volume growth in Brazil came from our new Ponta Grossa plant, which began commercial shipments in January. While early in its learning curve, the plant is running very well, and demand in the local market continues to be strong.

Earlier this month, the second beverage can line began commercial production in Pont Grossa, and we remain on schedule for June production in the second can line in the Estancia plant.

Revenues in our North American food business were down slightly to the prior year, as the pass-through of higher tinplate costs and increased shipments of metal vacuum closures were offset by mid-single digit volume declines in food cans.

Segment income at $28 million in the quarter was well ahead of last year's total $16 million, reflecting the positive mix effect of increased vacuum closure sales, higher unit production and some price adjustments.

Food can production in the first quart was 27% higher than the fourth quarter. For those of you who were on our year-end earnings call, you may recall that we had lower production levels in the fourth quarter of 2010. A result of our planned efforts to lower year-end inventory levels. And also our inability to get some quantities of steel, as the steel industry was quite strict on pre-buy ahead of their planned January 1, 2011, price increase.

Among a number of factors, the recovery of, or increases in, our production levels in the first quarter compared to the fourth quarter of last year led to the increase in segment income of $12 million, which coincidentally was the fourth quarter 2010 segment income shortfall.

Reported European Beverage sales were up 8.3% compared to 2010 due to an 8% increase in volumes. Increased sales volumes were noted throughout all regions of the business. The segment's income was down $7 million in the first quarter compared to 2010, reflecting price compression in western Europe and lower activity in our [Bosch] UK plant, which completed 2 major conversion programs during the quarter.

The plant converted its last steel line to aluminum and also converted a 33 centilitre line to 25 centilitre cans.

The second beverage can line in our Slovakian plant began commercial production earlier this month and is running well.

In our European Food business, revenues improved by 4.5%, due mainly to 3% volume gains as some fillers looking to be rebuild their inventories of finished goods from low year-end 2010 levels.

Segment income as a percentage of net sales in 2011 at 12.3% compares favorably to the 9.9% in last year's first quarter, reflecting the benefit of improved volumes, ongoing cost reductions and some price improvement in the business. Specialty packaging revenues increased over the prior year due to improved promotional tin volumes and the pass-through of higher tinplate costs.

Segment income benefited from positive product mix, that is higher promotional volumes and better cost performance as we increase decorative printing activity ahead of peak season needs.

Our non-reportable businesses had another strong quarter with beverage can volumes in Asia up double digits. Beverage can demand in Asia continues to be very strong, and we have much needed capacity coming on line later this year and next throughout southeast Asia and China. Asian sales which were approximately $700 million in 2010 should approach $900 million in 2011.

I won't review each of our capital projects in detail as we did on our last call, but I will summarize annualized capacity installations as follows -- total capacity additions expected from our growth program are approximately 11.5 billion beverage cans, of which 4.1 billion is now complete and in commercial production. Another 1.5 billion will be commercialized by the end of June and a further 1.4 billion in the fourth quarter. The balance, or 4.5 billion, will be completed in early to mid-2012.

We are well under way as our construction and installation teams continue to complete their work and hand over the plants to local manufacturing in a timely and organized manner. Our effective capacity is growing with output continuing to increase as each plant moves up its learning curve.

The effective tax rate from ongoing operations was 26.1% in the first quarter and for the full year is now projected to be 26% to 27%. This is below our prior guidance of 29% and reflects the benefits associated with the Company's European headquarters move to Switzerland.

Minority interests were in line with the prior year and should remain so throughout the year, reflecting our efforts last year to acquire interests in several ventures, including China.

It is early in the year, but we are off to a good start. Additionally, considering the decrease in our effective tax rate, the Company's estimate for 2011 earnings per diluted share from ongoing operations is now projected to be in the range of $2.70 to $2.90 per share, and for the second quarter of 2011 is projected to be between $0.75 and $0.85 per share. Free cash flow after capital expenditures of $425 million is projected to be at least $400 million.

And with that I'll turn it over to John.

Thank you, Tim, and good morning. As Tim has pointed out, we've had a very good start to the year. Demand continues to be strong. Unit sales were good in our various product lines, and we believe that the strong demand that we are seeing, particularly in beverage cans in Europe and the emerging markets, will continue.

Our factories ran well and improving productivity, efficiency and lower spoilage have all made their planned contribution to improve segment income.

Our numerous growth projects are also going well. We are on or ahead of schedule on all of them. And all will make significant contributions over the next 2 years. I will not go through the projects in detail, however, thought it would be well to mention one in particular. As you know, we announced in October, 2010, that we would build a new beverage can plant in the north of Brazil. This is a region where we are not now present and where we did a lot of market analysis before we decided to proceed. Project, a one-line beverage can plant capable of producing 1 billion cans per year, is now under construction. We will be in production January, 2012.

We have customer commitments for this volume, and we are very confident that the capacity of the plant is fully sold out. Given our past track record in Brazil, we have no doubt that we will move quickly to full production after the start of the commercial production in January.

Generally speaking, the Brazil market continues to be very strong. Our sales were up 15% in the first quarter 2011 versus 2010, and the overall beverage can market is also up double digits in the first quarter versus first quarter 2010. All of the indications from our customers, including their own capacity expansion plans, support the capacity additions by Crown and other can makers. So we are very confident of our investments in Brazil and of the overall strength of the Brazilian market.

As we mentioned in our Earnings Release, we have moved our European headquarters to Switzerland, effective January 1, 2011. This was quite an undertaking, but it went smoothly and on schedule. The benefits from a more central location, a very efficient country from which to operate and excellent living arrangements for our senior managers are already evident. As you know, we are a very diverse Company and employ many different nationalities throughout the world. An additional benefit of Switzerland is that it is so accommodating to non-nationals of that country and we are very pleased with the outcome of this decision.

In summary, the first quarter was a very strong start to the year for us. Our plans remain intact and our strategy unchanged. And we continue to be very confident in the results that will be produced. And with that, Shirley, we're ready to take questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

One moment for our first question. Your first question comes from Tim Thein with Citigroup.

Thank you. Good morning. Congrats on good results.

Tim, two questions for you, if I may. First, on the European Beverage can segment. Can you quantify what the cost impact was from the UK plant issue that you cited? Is it possible to put any numbers on that?

I don't have it, but certainly any time there's disruption in the plant, there's impact. But I don't have that.

The pricing pressure that you called out, was that specific in any -- was that in Continental Europe or did that spread to the Mid-east operations?

Yes, Tim, John Conway, here. It's western Europe, essentially. No, it's not a Middle East issue. It doesn't tend to be a Mediterranean issue, but it's a western European issue.

Okay. Then, on the steel-based businesses, will you -- presumably there was, and correct me if I'm wrong, some inventory gains in these numbers. Will you reclassify some of these numbers, similar to what you did in 2009? Stripping out a benefit if there was one as you go forward?

I don't know if we're going to reclassify, or strip out, as you say. Certainly we had some net repricing impact. Not a lot. We didn't have a lot of steel as we came into the year in the United States business and -- but, obviously, you'd never have no steel. So there was an impact. I think if you want me to quantify the impact from -- the net impact from repricing in both of our US and European Food businesses, about a third of the improvement year-over-year in each quarter was due to the net impact of repricing.

Okay. All right, great. Thanks a lot, guys.

Thank you.

Our next question comes from George Staphos with Bank of America Merrill Lynch. You may ask your question.

Hi, guys. Good morning. First question I had, could you provide a bit more clarity on what, if anything, triggered the price compression in western Europe? Or, is it just a function of more general levels of competition? Was there any kind of firefight or was it just where the market level is right now?

No, George. I don't think there was any specific major problem. The market continues to grow, as you know. We've been growing 5% to 7%, as the market has the last several years. We have a new competitor, but we've had him for quite some time. And I think that capacity growth and volume growth are just not totally in sync, and they usually aren't. So we're not unduly alarmed by it, but it's a fact of life in Europe.

Okay. John, would it be possible to comment at all where your utilization rates are in Europe if you run where you expect to run this year, or how that would compare with 2010, if you could remind us?

Yes. We're sold out in Europe, so we're running as fast as we can, and we have no excess capacity.

Okay. Related area -- minority interest, you said, was stable because over the course of last year, as you'd mentioned previously, you were buying out as much as you could, if you would, on your minority positions or your minority stakeholders' position. Were there any of the segments or businesses that still have minority positions that were actually down year-on-year in profits or in volumes?

No. The increase in profits in those joint ventures where we have minority interests is offset by the lower overall percentage of minority interests due to the repurchases we made last year.

Okay. Thanks for that, Tim. The last question I had and I'll turn it over, corporate expense was a bit higher than we were modeling. That's neither here nor there, but if you were going to provide some guidance on the rest of the year, should this new run rate remain over the course of the year? Or, would you expect it to change much from the $60 million in 1Q?

Yes. I think, excluding the one-time non-operational benefit we had last year, Q1 corporate costs were right in line with Q1 corporate costs last year.

As we look throughout the rest of the year, I would expect that will be in total for the year, I think our model would probably be about $15 million to $20 million lower in corporate costs, and that reflects the improvement in the pension expense that we talked about on the last call.

The first quarter -- we have some charges we took in the first quarter. As you're well aware, the stocks had a very nice run here in the first quarter, which does have some impact on cost, obviously, as we have to record certain effects for some of the benefit plans due to that stock loss. But, throughout the rest of the year, George, over next three quarters, we should see a reduction in total of about $15 million to $20 million, owing mainly to the pension.

Okay. That's what I remembered, Tim. I appreciate it. Thanks and good luck in the quarter.

Thank you.

Thank you. Our next question comes from Alton Stump with Rainbow Research (sic). You may ask your question.

Thank you. With the pricing issue in Europe, is there any opportunity to potentially improve pricing over the course of the year in western Europe? Or, are we pretty much locked in now for the full year?

No, I think prices for the year are set.

Okay. In terms of the Middle East market, obviously that had a pretty good recovery last quarter. Could you give us details, sorry if I missed it, as to whether or not that continued to recover in the first quarter?

Yes, it did. I don't have -- we don't look at the business Europe versus the Middle East. We have one big business. But overall volumes and beverage can volumes and our European beverage business were up 8% and I would say the Middle East they're up -- just eye balling Saudi, Jordan, Dubai, Tunisia, they're right around that number, about 8% in total. So, the Middle East was quite strong again.

Okay. Great. That's all I have. Thanks, guys.

Thank you.

Our next question comes from Chip Dillon of Credit Suisse. You may ask your question.

Good morning. When I look at the new range for the year, and it's great to see it up, it looks like the tax rate just alone would probably explain it all. You do have currency helping you. So I'm wondering if there's some other area that might not be as strong as you thought it would be. I know you mentioned there were some challenges. But as you look at -- there were some offsets. I mean, obviously, you have food cans in Europe doing well. So, are there any operations that are looking not quite as strong as you thought they would three months ago?

No. I think we're pretty much on plan, if not ahead of plan. The only thing I would say, Chip, is that you might be right and our revised guidance is all explained by the lower tax rate. But it is early in the year, and we do expect to benefit from currency. But, again, it's only the middle of April and a lot of things can happen. You're going to get to talk to us a few more times this year. So, we'll re-evaluate it as we go through the year.

Totally understand. The second thing is, it's interesting the way the very large capital program, or capacity expansion program, is unfolding, and it's interesting that a year from now that last $4.5 billion can piece will be almost ready for starting up. Any thoughts as to how you may change your way of -- I guess the degree to what you plan to grow organically beyond that point? Is there a thought maybe that you'll recalibrate the cash to other areas, or should we expect this rate of growth beyond mid-2012?

I think it's a little early for us to say. It's true that our capital expansion program this year is the highest, I think, in the last decade for this Company. But all of the opportunities we're pursuing were driven by real market requirements. So we're going to keep looking, as we have been, in the countries where we're present, because they're all very good growth markets. If we don't see the same quality of promising projects, we'll pull the Cap Ex number down. On the other hand, we're working off a bigger base, and some economies that have been growing 5% to 10% a year, and we think they're going to continue to grow 5% to 10%. I think it's a little premature, as Tim said earlier, as we get into the third quarter of this year, we'll have a lot more visibility on that.

Okay. And then just the last question. I know part of the expansion involves, I believe, some speed ups in Vietnam. Are those proceeding as you planned, or is there any thought to either deferring some of those?

No, they're proceeding as planned. There's been nothing that's happened with any sort of competitive activity that's changed our view, but this market of 90 million people is continuing to grow at a very rapid rate, and we should continue to support it.

Terrific. Thanks very much.

Thank you.

Thank you. Our next question comes from Mark Wilde with Deutsche Bank. You may ask your question.

Good morning. Tim, just to be clear on the minority interests, when you said it'd be pretty much comparable to last year, is that for the full year? Or, should we assume that the level of minority interest that we saw in the first quarter kind of carries through the other three quarters?

I think -- well, it'll certainly increase in each quarter, but it'll be as it did last year. I think what I was trying to say was that it would be comparable in total to last year and comparable by quarter for each last year quarter. It may be plus one or minus one or plus two or minus two, but it's going to be in the ballpark, right, each quarter and for the year.

Alright. Second question I had, with the Brazilian market going from a supply short situation last year, where we had a lot of imports, to what looks like a more balanced situation with some of the new capacity, including yours, coming online. Does that have any effect on margins in that market?

Well, it's an interesting question. Not clear to us that it will, even if there is some price compression -- and there hasn't been much, have I to say -- but even if there is, power plants are growing significantly lowering costs as we run better, expand and so forth. So, we think we can pretty much maintain margins where they are.

Okay. And Tim, can you update us on thoughts on share repurchase activity through the balance of the year?

Sure. We, as we said in February, Mark, we basically said that all of our free cash flow, net free cash flow, we would use to repurchase shares this year. I think we're still committed to do that. We just completed the prior accelerated program. I think it completed last Friday, so we're free to enter into another program at any time we want. Obviously, we're in the earnings period, so we do need to season the earnings for a few days. We'll have a look at it over the next few days and decide when and how much we want to do shortly.

Okay. Then the last question. John, I wondered, as we think about Crown's global footprint, if you could give us thoughts on, say, south Asia markets that you're not real large in now, maybe India, Malaysia, Indonesian all countries with big population bases and growing income levels?

Yes, I'll be happy to. At least -- why don't I comment on the three countries you just mentioned. First, we are in Malaysia, and it's part of our -- an integral part of our southeast Asian business, which we run as an integrated whole. So we are in Malaysia. Indonesia we look at all of the time. We used to be in Indonesia. As a matter of fact had a Crown business, a bottle cap business there, which we closed several years ago. It's an interesting market, but we don't have any immediate plans for Indonesia.

India we follow very, very closely. In fact, we sell into India out of Dubai and we have for 15 years. We know the market very well. A number of our senior managers in the Middle East are Indian. So we know the market, we're following it closely, but again, no immediate plans. But we're very aware of its potential.

How big is that market right now? Do you have any general idea?

That's a good question. We're a little unsure. We think the market probably is less than 1 billion cans shared by two can makers. And frankly not very happily, from what we can tell.

Okay. Very good. Thanks, guys.

Thank you.

Thank you. Your next question comes from Ghansham Panjabi with Robert W. Baird. You may ask your question.

John, I can't remember the last time you called out metal vacuum closures in the volumes as a positive variance in the Press Release. Can you give us some color behind the strong quarter there, and remind us what the comparisons from a year ago were? And, was there any noticeable shift in market share?

There really wasn't, Ghansham. What it reflected, and Tim will follow up in a moment, we don't talk a lot about metal vacuum closures. But we put a lot of attention into invention -- innovation in that area. And so we have a composite closure, plastic metal that we call the Ideal Closure that's been extremely successful in North America and continues to be. It's helped us tremendously in terms of mix change and margin improvement.

In Europe, we're really proud of something we're just rolling out now that we call our new Orbit Closure, which is a two-piece metal closure, significantly easier to open than a traditional one-piece metal vacuum closure. Early days, but good traction with it. So, it's really a product mix margin improvement as a result of innovation. So that's why I think Tim wanted to comment on --.

Tim, you might want to add to that.

The only thing would I say, John's dealt with the positive mix issue. We had been experiencing positive volume growth in the business over the last several years. So nothing other than it's starting to have an impact at this point that's noticeable.

Okay. Then switching to Brazil. I think you mentioned before that you expect 7.5 billion cans of capacity by the end of '12 to reflect all of the additions that you have on track between now and then. Can you remind us on the contract duration of those up to the 7.5 billion units, just sort of generalizing? The reason I ask is I think the biggest player in that country cut prices to secure a long-term contract there.

Yes. Our contracts in Brazil are typically of three to five years duration, and that continues to be the case, and that's where we think we'll be with, for example, the new plant up in the north of Brazil as well.

Just to clarify, you have not seen any sort of price compression in Brazil?

Well, we're familiar with the activities of the competitor that you mentioned. So, over time it's going to have an impact on the overall market. But, as I said earlier, our costs are dropping as we add more capacity to each plant run better. So our plan is to maintain margin even if we're forced to do something on the price side as a consequence of what might be going on.

Okay. Thank you so much.

Thank you.

Thank you. Our next question comes from Rich Skidmore with Goldman Sachs. You may ask your question.

Just two questions. First, Tim, on the leverage, can you just talk about how you see leverage progressing as you go forward? Sounds like all your free cash flow is for buybacks. But as you think about leverage, are you where you want to be, or are you going to bring that down or take it up more meaningfully?

I think we discussed this on a prior call, and I think what we said was that if all we did was use our free cash flow to buy back shares and basically kept the debt the same in absolute terms, then our leverage would decline to 2.2, 2.25 times from what was just below 2.6 times at the end of 2010. That's not to say that that's what's going to happen at the end of the day. Perhaps we'll have an opportunity to make a small bolt-on acquisition. We'll have the opportunity to buy back some more shares. I think a lot of things could happen.

I'd prefer not to be so rigorous in my response to that other than to say I think we're extremely comfortable with where our leverage is. For the last ten years, we've obviously been deleveraging. Having said that, we've ran the Company with a whole lot more leverage than we were comfortable with. But, knowing we were able to do that at very high levels gives us a lot of confidence, especially given the free cash flow that we're going to have that we can continue to run this Company in the two to three times range and not be so prescriptive as to exactly where in that range.

Second question, with regards to the new can capacity that you're building, how should we think about the ramp up of that capacity? You said there would be 1.5 billion by the end of June. How should we be thinking? Does that come up the curve with 50% productivity in the first quarter to 100% by the second quarter? Just maybe some color around how that ramps up.

Yes. A typical learning curve for us would start in the first month at about 35% of capacity and run up to 90% plus by the end of the first year.

Thank you very much.

Yes.

Thank you. Our next question comes from Peter Ruschmeier with Barclays Capital. You may ask your question.

Good morning. Congratulations on the quarter. Most of my questions are answered, but I wanted to ask your outlook in the food business for potential for inventory holding gains. It sounds like you weren't able to build much inventory. So does that suggest that you don't expect much in the way of inventory holding gains as we go through the year? Or, any color you can offer?

What we described earlier as relates to material holding gains that we would have recorded or realized in Q1 will be all that we realize as we sit here today with current steel prices. And, as you know, we're on fixed prices in North America for the year. There is a possibility for prices to reset on July 1 in Europe. So we'll have to take it from there once we get to the third quarter.

Okay. And a cash flow question. Working capital has always historically been a big use of cash in the first quarter, as it was this year. Just want to make sure I understand the numbers correct. Your $400 million of free cash flow guidance for the year I believe implies $820 million of free cash flow between 2Q and 4Q, is that correct?

Yes. And so, you will notice that obviously the debt is up in Q1 and working capital is up in Q1, but reflecting three things really. Obviously, the growth in the business. Number two, raw material price increases. Number three, and we've talked about this before, where the business is growing; specifically Brazil and southeast Asia, which have seasons which are somewhat opposite to the northern hemisphere businesses that we have, requiring more working capital, more sales, more receivables in the fourth and first quarter than traditionally we've been used to. So, we will use a little more working capital than historically in Q1, but we fully expect, as we said earlier, to generate at least $400 million for the year in total.

Okay. Just lastly, maybe on the Mid-east, I think you mentioned volumes up in the range of 8%, so it doesn't look like there's anything to complain about there. But can you comment on the outlook on the Mid-east and how you think about mitigating risk, given the turmoil in the region?

Yes, at the moment, Pete, as Tim said, the first quarter was pretty good, and the signs are that the Gulf, Saudi, Iraq, Jordan should continue to be good, demand seems to be strong. We are affected somewhat by what goes on in Syria/Lebanon. That is one of our markets. So that's a little concern for us. Tunisia seems to be going okay. We do sell into Egypt, although it's going all right. So, we think the Middle East market's going to be all right, but there are little pockets of concern.

Okay. But really, John, it sounds like no strategic change there, in terms of wanting to put more capital there or less capital. It sounds like you're kind of status quo, is that fair in the Mid-east?

Yes, that's fair. In terms of aspirations, at some point, we'd love to find a way into Iraq, but it's just not feasible now.

Okay. Thanks very much.

Thank you.

Our next question comes from Al Kabili with Macquarie. You may ask your question.

Hi. Good morning. Thanks. Question for John on Europe Beverage. It sounds like volume-wise you're up 8%, which is at least higher than the end markets are, but then you had price cost compression as well. So I was hoping maybe you can reconcile the two for us above market growth relative to some of the price cost compression you saw.

Well, I think when you look at our situation, the Slovakian plant made a significant contribution in eastern Europe. We were not previously in eastern Europe. The eastern European market is coming back from a pretty low point in 2009. So that's been helpful to us, and the markets where we've seen price compression that hasn't been helpful is, as I mentioned earlier, western Europe, which basically starts Germany west.

And the UK, in our case UK, France, Benelux and Iberian peninsula. That's where there's been some capacity added, not by us but by some competitors in the past several years, and maybe the capacity's a little out of line with the growth in those regions. So that's the -- kind of very roughly, kind of crudely describes what appears to be going on.

Okay, thanks. That's helpful. Just also, Tim, on North America Food, if you could maybe just help us parse through. I think you mentioned a third of the improvement would be of steel related. But with volumes down mid-single digits, can you help us with what the other drivers were of that nice improvement and the operating profit in North America Food?

Sure. Volumes in cans were down about 6%, but volume in closures was up 8%. Product mix -- closures obviously yield a better profit margin than a can. And the big item was productivity. So, as I said, our production in the first quarter was 27% higher than it was in the fourth quarter, so cost absorption was much better in Q1 than it was in Q4, and it was much better this year in Q1 than it was in Q1 last year, because of the low levels that we came into the year with.

Okay. And obviously, that production level isn't sustainable. Is there a way to think about through fixed cost absorption and how much temporary benefit you would have got in the first quarter from sort of temporary high production levels?

Yes. I think that we have our inventories back where we want them. That is to say that the lack of absorption that we experienced in Q4 we made up for in Q1. And as I said, if you add the two quarters together, they're right on -- the shortfall in Q4 is made up by the gain in Q1. So they're right on top of each other. I would say that -- to specifically answer your question, as I said, we've got inventory levels back to where we want them and we should look more comparable as we go through the next three quarters in the business.

Okay. Thank you. And final question is maybe specialty can trends, if you could give us some comments on what you're seeing there in North America and Europe, and how you feel you are at capacity-wise on that front? Thanks.

Yes. The specialty can market for us is principally Europe. It's just been improving year on year for the last -- Oh, specialty beverage cans is the question? They continue to grow from a mixed perspective. You saw that in Europe that we've converted a what over there could to be a standard beverage can, 33 centiliter and 25 centiliter in the UK, and they continue to grow in the mix and margins continue to be better, in some cases a little bit harder to make and certainly not as much capacity for them. So that continues to grow, mix continues to change beneficially.

Okay. Are you going to run into capacity constraints over the near term? Where you would have to add capital there, or are you still good on that front for a little bit with productivity?

I think we're okay. We look at it constantly and other sizes. We're not the only ones. All of us are doing this as our customers change their marketing requirements. But, for the moment, we're okay.

Okay. Great. Thank you.

Thank you.

Thank you. Our next question comes from Philip Ng with Jefferies. You may ask your question.

Good morning. Just had a quick question. Your profit margins in America [as in non-reportable] were both up nicely. But, as we head into 2Q and possibly 3Q you're going to have a lot of new capacity come online in Brazil and China. Will the incremental start-up costs weigh on margins, on a year-over-year basis?

I don't think we expect incremental start-up costs to weigh on margins. I think, obviously, as we get into the second and third quarter, Brazil enters their winter period, right?

Okay.

So that's obviously in our plan, and you should keep that in mind, that their summer and winter is reversed from ours. But, obviously, when we get to Q4, we expect not only the market to then pick up, as it always does seasonally, but our lines will be three to six to nine months into production. We expect the lines to be running extremely well, so we expect to benefit greatly by the time we get to Q4 as our production meets the seasonal needs.

Then in Asia, things are going great. The comment I made was that we have much needed capacity coming online over the next 12 months, and that really is the case. We cannot make enough cans right now. So we have a lot of activity under way. The Asian team -- John and I were out there recently -- the Asian team is extremely excited about the future, so --

I think, Phil, the -- I mentioned the learning curve earlier, but we've had the same concerns that you're voicing, and what we've been seeing, particularly in Brazil and in Asia, is demand pull has been so strong --

Okay.

That it's been a real benefit for the plants. Qualifications tend to be short, the customers want the cans, the customers work with us on label changes and try to minimize them so they can get more cans. So we've had a real pleasant experience so far. We think it's going to carry on for the next several years.

Okay. And the last question, on the food can side, you saw a pretty nice lift from the margin standpoint during Q1. Part of that is good productivity, and some of that's inventory holding gains. Should we still expect normal seasonal lifts in Q2 and Q3 as we head into peak season for both North American and Europe on the food can side?

We expect -- where we're at today right now with Food Europe, volume outlook looks extremely encouraging. So we'll expect not only the normal seasonal lift as we go throughout the year in Europe, but we do expect some incremental volume gains as the market continues to recover from the recession a couple of years ago.

In North America as I said to a prior question, we've got our inventory levels back to where they belong. So we wouldn't expect any material activity or productivity gains as we experienced in Q1. And, obviously, we wouldn't expect the repricing. We would expect the next three quarters to be a bit more comparable to the prior year.

Okay. All right. Thank you.

Thank you.

Thank you. We have time for one final question, and that comes from Chris Manuel with KeyBanc Capital Markets. You may ask your question.

The best for last, Chris

I snuck in under the wire. Thanks for taking my question. Most of my questions have been answered, but a couple kind of tie-up questions. One is, what is the FX assumption you are using in your new guidance?

The new guidance that we've given you incorporates a Euro somewhere between 135 and 140. Keep in mind, we have a fair amount of Euro debt so the --

Yes.

The improvement in the Euro doesn't always help earnings per share as much as you think. Where we do get a fair amount of lift is with the Canadian dollar and UK Sterling, and neither one of those have moved a whole lot from two months ago. They've moved a lot from the end of the year, but not from two months ago. So we'll see where currency takes us. It's clearly at a Euro of 143. We do expect some incremental benefit. As I said, it's early in the year. Let's see how it goes and talk to you again in July.

That's helpful. Two other questions. I know you talked a bit about some of the pricing issues in Europe, but I think I know the answer to this, but I'd like you to give your view of it. What gives you confidence that some of the pricing compression that you're seeing in western Europe doesn't become more infectious and lead to eastern Europe or lead to South America or other regions of the world?

Well, first of all, let's talk about Europe. It's always good to be in a market where volume is growing, demand is growing. That's what's happening in Europe for a variety of reasons. So demand increasing tends to satisfy everybody's aspirations over time. The other is, just always keep in mind, particularly in Europe and all of the other places, cost basis are not that much different from one competitor to another.

Yes.

So those two things, increasing demand and we don't have some sort of tremendous distortion in cost per thousand among competitors, leads me to the conclusion that Europe's going to turn out fine. Albeit, we're in a little bit of a rocky patch today.

In terms of the rest of the world, I think what you're going to -- what we see is very competitive pricing. There always has been very competitive pricing. Brazil pricing is very competitive, always has been. China is very competitive, southeast Asia and so on. Yet our costs are very, very low. So, I don't think there's a lot of room for bad things to happen with regard to margins in those regions. Then when you throw in the fact that the volume growth has been so strong, we think there's enough for everybody.

Okay. Would it be fair to think about it and say, the difference between maybe a Brazil or a North America, some of these regions, are that your contracts in Europe are shorter? So, as you're suggesting is in a growing market, a year, worst case two years out, this corrects itself, or can correct itself sooner than a year out? How long do you think there could be this pressure, maybe is the way I should ask the question?

Chris, I really couldn't say. I think we'll go certainly this year as I said. We're not going to be able to do much with price this year, and we'll see where we are at the end of the year.

Okay. Last question for you, Tim, is as we look at -- I appreciate that in your Press Release you talked about the relocating the headquarters, wouldn't have a cash impact of taxes this year. But, as you move forward, in out years, will there be a point where the cash tax rate will come down a bit in Europe, and how should we think about that?

I think that you should expect that over time, cash taxes paid in Europe, or the reduction of cash taxes paid in Europe, will mirror the lower accounting tax rate, yes.

That's helpful. Thank you, gentlemen.

Thanks, Chris. Thank you very much.

Shirley, I think that was the last call. Thank you very much. That concludes the call today. We do ask you to note that our second quarter 2011 call will be scheduled for Wednesday, July 20, at 9.00 in the morning Eastern time. We want to thank all of you for listening and look forward to speaking with you again in July. Thank you.

Thank you. This does conclude today's conference. We thank you for today's participation. At this time, you may disconnect your lines.