Crown Holdings Inc (CCK) 2011 Q2 法說會逐字稿

Good morning, and welcome to the Crown Holdings second-quarter 2011 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. Timothy Donahue, Executive Vice President and Chief Financial Officer. Mr. Donahue, you may begin.

Thank you, Shirley. Good morning to everybody. Welcome to Crown Holdings second-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 of Finance.

Before we begin, I would 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 Condition and Results of Operations in Form 10-K for 2010 and in subsequent filings.

A reconciliation of generally accepted accounting principles to non-GAAP earnings can be found in our earnings release. If you do not already have the earnings release, it is available on the Company's website at www.crowncork.com. You will also find a reconciliation from net income to EBITDA, credit ratio computations, and supplemental cash flow data on the Company's website. I'll first review the quarter and update guidance, and then pass it on to John for his comments.

Comparable diluted earnings per share were $0.84 versus $0.67 in last year's second quarter. For the 6 months, comparable diluted EPS was $1.32 compared to $0.97 last year. As was the case in the first quarter, the operations are performing well, and demand for our products remains strong. Despite volatility in many foreign currencies against the US dollar, currency translation had a positive impact in the quarter, and if current rates hold, will continue to be positive over the balance of the year. Net sales in the quarter improved 13% over the prior year due to global unit volume growth, the pass through of higher raw material costs, and $119 million of currency translation.

Global beverage volumes were up 3.5% in the quarter, while our 3-piece steel businesses, that is food cans, metal vacuum closures, and aerosol cans, also saw aggregate volumes up over the prior year. Segment income at $271 million improved 12.9% over the prior year, and as a percentage to net sales was level to last year at 11.9%. The denominator effect of passing through higher steel and aluminum costs, while not affecting absolute margins, does have an impact on percentage margins, a little bit more than 0.5% in the quarter.

America's beverage revenue increased 8% in the quarter due mainly to the pass through of higher aluminum costs and $8 million of currency translation. Segment income was up 5% in the quarter, reflecting positive mix, and improvements to ongoing productivity at our new Ponta Grossa plant. Volume in the segment was up 0.5%, reflecting double-digit gains in Brazil, offset by a small decline in the much larger North American market. Our new plant in Ponta Grossa, Brazil, which began commercial production in January on line 1, and in April on line 2, is running well and ahead of its learning curve. The second line in Estancia, Brazil, commenced commercial production in late June.

In North America, volume was down 2% in the quarter, and is down 1% for the 6 months, significantly better than the industry as a whole, reflecting our well-balanced customer portfolio. After a weak April, demand in the quarter was very firm in May and June, with stronger volumes than the prior year. We are seeing more customer promotions, and remain very positive on the outlook over the balance of the year. Second-quarter revenues in our North American food business were essentially flat, reflecting the pass through of higher steel costs, which offset a very small decline in unit sales. Segment income increased $5 million over the prior year to $38 million, reflecting the benefits associated with the closure of Canadian plants last year, and the positive mix effect of increased vacuum closure sales.

Reported European beverage revenues were up 14% compared to 2010, due to $28 million from positive currency translation, 5% sales unit volume increases, and the pass through of higher aluminum and steel prices. The segment's income was down $5 million from the prior year. And while improved from the first quarter, still reflects the [Botroby] UK conversion and start up in Slovakia. In our European food business, revenues increased $88 million or 21%, primarily due to $52 million in foreign currency translation, and the pass through of higher steel costs, which offset a modest 2% volume decline associated with a since-settled fishermen strike in Morocco, and political turmoil in the Ivory Coast.

Specialty packaging had another good quarter, with revenues up 23% mainly due to $13 million of currency translation and the pass through of higher steel costs. Segment income improved over the prior-year second quarter with equal contributions coming from increased volumes, improved product mix, cost reduction, and currency translation.

Our non-reportable businesses had another strong quarter with revenues up 19% over the prior year. Currency translation improved reported net sales by $16 million, as most Asian currencies continue to strengthen against the US dollar. Global aerosol volumes were up 2.5% in the quarter, and beverage can volumes in Asia were up more than 10%. As we discussed with you in April, demand remains very strong throughout Asia, and we look forward to much-needed capacity coming online later this year and next.

Turning to our capacity expansion program. We commercialized 4 more beverage can lines in the second quarter, including a new plant in Hangzhou, China. From the start of the program in late 2009, we have now commercialized 5.6 billion of annualized capacity. As the plants continue to move up their learning curves, productivity will improve with effective capacity output and revenues increasing. We have now completed one-half of the capacity increase of 11 billion beverage cans that we outlined for you in detail back in February. We remain on schedule and budget, and are very excited about the opportunities to continue to help our customers build their brands in these exciting and growing markets.

Late in the fourth quarter we expect to commercialize both the second line in Cambodia, and our new plant in Putian, Fujian Province, China. In 2012, we will complete new plants in Belem, Brazil; Osmaniye, Turkey; and in Geelong and Heshan, China. In 2012, we will also expand capacity in both Ho Chi Minh City and Hanoi, Vietnam.

Interest expense in the quarter was $15 million higher than last year, and for the 6 months is up $24 million, reflecting higher debt and higher average borrowing rates. During the quarter, we raised $600 million in term loans and used the proceeds to retire our 2011 and 2012 maturities, as well as for general corporate purposes. We have a very flexible capital structure with no significant long-term debt maturities until the year 2016. Net leverage at June 30 was 3 times compared to 2.6 times at June 30 last year, and 2.5 times at December 31, 2010. The modest increase in leverage from last June is due to $460 million of share repurchases, including $200 million in the second quarter this year.

Additionally, we have also spent $175 million since last June to increase our ownership position in certain of our joint venture companies, and you can see the related reduction in non-controlling interest on the income statement. As we have described before, we remain comfortable with net leverage in the 2 to 3 times range, and we would expect that net leverage at the end of 2011 to be similar to year-end 2010 levels.

Corporate costs were down in the quarter as a result of lower pension expense and lower stock-based compensation expense. Stock-compensation expense is lower this year than last through 6 months, and in 2010 was recorded more evenly across the first and second quarters, while this year it was largely already recorded in the first quarter. Free cash flow for the 6 months is below the same period last year, and reflects higher capital spending and higher working capital. Trade working capital is up $250 million on last year, reflecting higher accounts receivable, a result of revenue growth and the raw material inflation impact on both receivables and seasonal inventories. We still project free cash flow to be at least $400 million for the year.

We have had a good start to the year in the first half, and demand remains strong throughout our businesses. At current exchange rates, we still project 2011 comparable earnings per diluted share to be in the range of $2.70 to $2.90 per share, and for the third quarter of 2011 to be between $0.95 per share and $1.05 per share.

With that, I will turn it over to John.

Thank you, Tim, and good morning. As Tim pointed out, we have had a very strong second quarter, as we had expected. Sales revenues were up, and demand continues to be, generally speaking, quite strong. Our operations performed exceptionally well. The steps we have taken over the past several years to improve efficiencies, drive down spoilage, and carefully restructure our manufacturing platform continue to produce great outcomes.

Demand for our metal packaging products was solid in North America and Europe, and in line with our expectations. Emerging market demand was also very good, and in the case of Asia, extremely strong. As we enter the third quarter, demand in July supports our view that the third quarter should be very successful as well.

Our capital program, which as many of you know is ambitious as we address excellent emerging market opportunities, continues to go very well. All of our projects are on schedule and within budget. The combination of the successful execution of our capital projects, combined with the continuing strong demand from our customers in our emerging markets businesses, still supports the proposition that we will be realizing in the quarters and years ahead significant sales and income contributions from our capital projects activity.

Tim updated you on the deployment of some of our free cash flow to share buybacks. This continues to be a critical part of our efforts to create shareholder value, and return to our shareholders cash not actively invested in the business. We believe the year will be a very successful one for our Company, and we fully expect that our success in 2011 will carry on into the future.

With that, Shirley, I think we are ready to take questions.

Thank you. We will now begin the question and answer session. (Operator Instructions) Our first question comes from George Staphos with Merrill Lynch. You may ask your question.

Good morning. I guess the first question I had, if we consider the capacity that is yet to come on in emerging markets relative to that which has already come on and been commercialized, should the profitability be comparable, greater, or less from a mix standpoint, -- well, not product-wise, but geographically speaking than what you have seen thus far? How would you try to size it?

I'm not sure I will answer your question directly. Demand in the emerging markets continues to be very strong. Pricing we think is very firm. As the newly commercialized plants come up the learning curve, obviously, our costs decline.

In that respect, we think margins should be very good. We are not seeing any place a decline in pricing and consequently margins associated with capacity running ahead of demand. Either ours or our competitors. So, we feel pretty positive about the new capacity that is going to be coming on.

Thanks. I probably could of asked the question a little bit more simply. If you look at the products that are going to come on, should their margins be fairly comparable to that which you have put in? Obviously, you're not going to get into the details. That's all I was getting at.

Yes, exactly.

Okay. If you mentioned it, I missed it. Was there much effect from Slovakia 1 and Botroby in 2Q, if there was and you could comment, how would you again size it for us in the quarter?

We haven't characterized it by quantity, but there was a drag in the second quarter, and we discussed that I think in April. Declining, but still a drag. The Slovakian plant now with 2 high-speed lines is coming up learning curve, but it has been something of a drag. And the Botroby transformation, if you will, where we changed can sizes, left steel and went to aluminum in our big beverage can plant in the UK also continued to have a drag, but we anticipate that that is going to decline dramatically to almost nothing in the third quarter.

Okay. Two last ones. I will ask them in sequence and then turn it over. One, Belem, do you have assigned contract in hand? And then in terms of capital allocation, would it be fair to say given the way you see the world developing in the next year or 2 that the capital allocation priority will be more towards value return, or how would you have us think about value return verses debt pay down, versus investment? Thank you.

We do have a long-term contract with a major brewer in Belem and we are very pleased with it. It provides the foundation for the factory, and we are continuing with it.

On capital allocation, George, obviously, it is a function of opportunities. As John said in his prepared remarks, I think we were still optimistic and fairly excited about many of these new markets or growing markets that we are going to continue to have opportunities. Albeit, maybe not at a level that we have experienced over the last 18 months.

In the absence of opportunities in the future and as cash flow is intended to improve, obviously, the allocation of free cash flow would be more towards returning to shareholders than paying down debt. As we said in the prepared remarks, we are comfortable in the 2 to 3 times range. There is no magic to whether you are at 2.1 or 2.7, but we will evaluate the opportunities as they arise in the future.

Thank you.

You're welcome.

Your next question comes from Mark Wilde with Deutsche Bank. You may ask your question.

Good morning. Tim, is it possible to kind of size those issues that you mentioned that hit the European food business in the quarter?

Yes, Mark. John Conway. The decline, we talked about a 2% decline in unit volumes in Europe. It was entirely Africa and 2 countries. Morocco and the Ivory Coast. We described what happened in Morocco as a strike, that wasn't quite what happened. The government came out with new regulations regarding the Moroccan fisheries. The fishing industry didn't like it. They went on a boycott. It lasted right until the end of June. They are just now beginning to fish again. So, that pretty much covers the situation. And to a degree, Ivory Coast was down because of political difficulties.

Just order of magnitude, John, is it possible to get a sense for how big a financial impact those 2 events were?

I don't know. We are scrambling here. I don't know that we have a breakdown on that.

Yes, 2% volume in the quarter. I don't know the total number of cans in Africa that was down was about 50 million cans. The -- that was over down in the division as well. The impact on the profitability is a few million dollars.

Okay. All right. Can you also talk about the volume trends that you are seeing in the Middle East and North Africa? I guess we are all trying to still figure out whether all of this political disruption in the Middle East, how that might be affecting business there.

Our beverage business, and I think that's what you're referring to --

Yes, it is.

Units was down 2% year-on-year in the quarter. To me that was a very good outcome considering that we, and our customers, some of our customers who shipped filled goods and we who ship empty cans have had great difficulty shipping into Syria. We have had customers who cannot ship filled product into Yemen and so forth. 2% down we think was very good.

All right. John, just moving to a different issue. There has been some talk about some kind of a beverage excise tax going in, in Brazil. Can you give us any color on that and how that might affect your business?

Well, at least a tax I think you may be referring it is a beer tax and excise tax for revenue purposes. It has been implemented. We think it is not very significant in amount, so it may have caused some slowing in growth in Brazil. The Brazil volume was still up. We think first half of the year about 6% or 7%, Tim?

Industry.

For the industry we were up more than that. We think Brazil volumes are still going to be very good, but the growth may be a little bit slower this year as the consumers get used to the tax.

Okay. And could you also just kind of update us on what you are seeing in terms of competitive behavior in Brazil? There had been some concern earlier this year about one of your competitors trimming price.

I think it seems that, that is over. Frankly, the effect seems to be limited to the competitor. So, pricing, generally, in Brazil was quite firm.

Okay. That's good to hear. I will pass it on. Thanks.

Our next question comes from Tim Thein with Citigroup.

Thank you. Congrats on another solid quarter. I just wanted to drill in a little bit on looking at the organic and segment operating profits and just exing out corporate, year-on-year up $10 million on, call it, $150 million in sales. Within the major buckets of that, I imagine the startup costs probably were a decent drag in the quarter. But, it sounds like volumes as you went across the regions were strong. I am particularly interested in terms of what impact you had in the quarter at a price cost ex-metal and whether that was a positive or negative in the quarter. If you are willing to get into that level of detail.

Yes. Certainly, as you know, we have pass through arrangements in essentially all contracts globally for steel and aluminum. As we've described before, we do have mechanisms to allow us to, on an annual basis, if not more often, adjust selling prices to recover non-metal costs in most cases.

I would prefer to stay away from too much dialogue around this for obvious reasons. You described the increase in revenues excluding FX. If you also exclude the impact of passing through raw materials then the increase in segment income, ex-corporate and ex-foreign exchange just on the volume is actually a little bit better than you have described. I prefer not to get too much into price costs for obvious reasons.

Okay. Fair enough. Separately, Tim, just on the working capital issue, it looks like -- you mentioned that the seasonal increase in inventory, and I understand given the higher metal costs, but were you holding more steel in anticipation of a mid-year adjustment on the steel side? In that case, if that does come through, could we potentially see a benefit in the third quarter?

No, as we described for you, this was the case we had last year in both North America and Europe as well. There is no mid-year increase in North America this year. There is in Europe.

As we described at the end of last year, the steel companies are pretty active in ensuring that we don't try to defeat their pricing increase aspirations. They monitor what we do buy. I would say that we don't have any extra levels of inventory on hand in Europe that we ordinarily would not have at this point in the year.

The only thing I will say is that last year there were some steel shortages throughout Europe. We didn't have any that impacted our businesses, but steel levels were probably artificially low last year at June.

As opposed to a buy ahead, I would call it a recovery to normal stock levels ahead of the season. You should not expect any metal gains in the third quarter. And just to be very clear, we had no metal gains throughout the entire company in the second quarter.

Great. Thanks a lot.

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

Thank you, and good morning. I will excuse my voice up front. I wanted to ask if I could -- how should we think about the utilization rate of the capacity you've started? So, you are halfway through with the 11 billion cans of start up. If we think about that, what is the utilization rate of that capacity and where do you think that might be 12 months from now?

Well -- and I am trying to characterize a lot of different projects in a lot of different countries, but as we have been coming up the learning curve and some of these, as you know, some of these factories and lines, as Tim mentioned, a number of them started either first, second quarter of this year. So, capacity utilization on the new line year-to-date is probably less than 50%.

But, we are over sale approval of what we could make.

But he is talking about utilization rate of, I think -- how many are we making? We are coming up learning curve, so we are producing at less than 50%, for example, in the plants in China and in Brazil. In 12 months time, we will be through the learning curve. We should be -- we think we are going to be a utilization rate of available capacity, if you will, more than 90% around the world. We are sold out. In fact, in most of our markets, somewhat over sold.

Okay. That's helpful. Tim, maybe on capital spending. Do you have an update on CapEx guidance? As we look forward and you get through this capacity build out, given your new footprint, what do you think is a good number for maintenance CapEx going forward?

Well, why don't we stay with $425 million for capital this year. I don't think maintenance capital, if you will -- we described for you in detail back in February. Maintenance capital for us, which is non-capacity additions, safety and environmental, stuff like that. I think we described for you at about $50 million. I don't think we see that number increasing materially after the capital build program we have here. As you know, we expense most maintenance, Pete.

And just lastly, I was surprised given the working capital drag in the first half, the negative free cash in the first half, that you maintained your free cash flow guidance. I'm just curious if you can elaborate on working capital for the second half and how do the start ups affect your working capital requirements?

Yes. Keep in mind, the working capital is up $250 million. If you looked at the balance sheet, trade working capital is $250 million at the end of June compared to last year. Revenues are up $280 million.

So, inside that, you've obviously got currency and the pass-through of higher raw materials. You also have higher raw materials, steel and aluminum, on the seasonal inventory level which sits here at June 30.

We are not overly alarmed, we are not alarmed at about the working capital level. We happen to be in a business where fortunately we have growing demand for our products and we have to be prepared to meet that demand. Raw materials, as you know, have gone up, so the balances reflect that. In our view, that should be liquidated as we come through the back half of the year. I don't think we are overly concerned about the free cash flow target.

And recognizing you don't want to be too specific, can you share with us within your $400 million of free cash flow guidance, there's got to be an assumption in there of working capital. How much of a benefit do you expect it to be the second half of the year?

That I don't have. I think we did characterize for you earlier this year that we felt working capital would be a use of cash this year as opposed to a source last year, roughly what, Tom, $40 million or $50 million we said use of cash this year. For the full year.

On a full-year basis.

Yes.

Okay. Congratulations, guys. Thanks.

Our next question comes from Phil Gresh with JPMC. You may ask your question.

Good morning. Last quarter you talked about some price compression in northern Europe. I just want to get an update there if that is pretty much status quo and needs to flow through the rest of the year, or has anything changed around those dynamics?

No, pricing is very stable in Europe, so nothing new to report and we think that little episode is over.

Okay. And then on European specialty, you continue to show some nice margin improvement there. Can you talk about what you're doing specifically there and what kind of runway you think you have left? Can this be a double-digit margin business, or do you think market dynamics would need to change there for something like that to happen?

Well, what is really happening is demand is reasonably good for all of our products and specialty combined with the fact that we have been improving plant efficiencies operations for the last several years. So, what you're seeing is a combination of the 2, stable demand and improving plant operations. Hard to say where we think margins are going to ultimately go in this business, but I think -- we think there is a reasonably good chance they will continue to trend upward. There is room for more consolidation and steel packaging in Europe generally, so, we think we may be the beneficiaries of some of that also, either directly or indirectly as some of our competitors consolidate.

Okay. Thanks.

Our next question comes from Ghansham Panjabi with Robert W Baird.

Hi, guys. Good morning. Going into 2011, I think in North America the industry already had a decent amount of oral capacity, maybe not with you guys, but certainly with some of your competitors. The first half volume run rate for the industry points towards an incremental exasperation of that capacity situation.

It seems like your customers across the board are ramping up prices and that probably will weigh on volumes near term. What do you foresee in terms of capacity rationalization in North America, John? How does Crown intend to participate in that?

A little hard to say. I think you need to ask some others about that. We are well over 90% utilized in North America, and over the past number of years we have closed a fair bit of capacity ourselves, as have some others. Part of the question is how is the second half of the year going to finish.

Our volumes in beverage in North America were picking up through the quarter. We started July, in our case, very strongly. Now, we have a very good customer mix on the non-alcoholic beverage side. It is a good mix of branded and other. And our beer customers are doing very well.

So, our plans are that we need all of our capacity for the foreseeable future. Virtually all of our business is under long-term contract. So, to me, prediction about what might happen with regard to capacity being shut down, I think that is your question, is really going to turn on the second half of the year. As we picked up in the second quarter, we think we may be flat in North America year-on-year, unlike the industry through the first half, but we think the whole industry is going to pick up as well. Too soon to say. Crown doesn't have any plans to take out capacity.

Got it. And just switching to Brazil. One of your big CSD customers reported and the CO was pointing towards volumes up 1%. And he referred to constrained consumption as the government there has tried to contain inflation. Realizing beer is a bigger source of growth for you down there, have you seen any comparable trends there that give you some pause in Brazil?

No. Growth was still very strong in Brazil in the first half and in the second quarter. Not as strong as last year, but still pretty strong. And you are absolutely right. Beer has been a combination of demand growth across the board and package mix change, so we think that is going to continue.

We think the Brazilian market generally is going to continue to be very strong. Perhaps not as strong as it has been, but all the capacity that we are putting on and we see our competitors putting on, we think is going to be utilized as we had planned it would be.

And one final one for Tim if I could. Just a quick clarification. The change in restricted cash on the cash flow statement there?

It just had to do with the required accounting for the bond redemption that was made on July 11. So, the bonds are now retired and the restricted cash goes away. You will see the debt and the restricted cash come down in full in the third quarter.

Got it. Thank you so much.

Our next question comes from Philip Ng with Jefferies.

I just had a quick question on the non-referral side. You've seen pretty good strength. I would imagine most of that coming from Asia bev. What was going on with the margins? It's down a little bit, is that a function of higher start up costs or raws?

It is more a function of the pass-through of higher aluminum costs. It is the dominator effect I talked to in the prepared remarks. In total for the Company in the second quarter, as I said, if you backed out the pass through impact or the denominator impact, our margins were up -- they were not flat to last year, they were up a little more than 0.5% over last year from 11.9% to above 12.4%. You will see that throughout all of the segments, both tin plate and aluminum. Obviously, if you follow the LME, it is up sharply over this time last year even where customers have elected to hedge. It is more the denominator effect of passing through raw material price increases on a 1-for-1 basis.

Okay. That's very helpful. Now that you got a good chunk of your capacity online and ready for 2011, should we expect margins to improve a little bit in the back half as you get off the learning curve?

Yes, they may and we think they will. Now, don't discount seasonality as we get into the fourth quarter, but we would expect as we come up learning curve and unit costs go down, that should occur.

Okay. And just lastly, out of Europe bev, it sounds like pricing has actually held up pretty well since Q1, and demand seems to be reasonably strong. Should we expect pricing to improve a bit in 2012 and margins to return back to a more normalized level?

It's a little early for us to say -- in fact, quite early. I think we are going to have to get into the fall and see how the market looks at that time.

Okay. Thanks guys.

Our next question comes from Alton Stump with Longbow Research.

Good morning. I think most of what I had has been asked already. With the Middle East, obviously, both bev cans and food cans, any color on if you think those issues might get better in the back half, or is there still a fair amount of demand uncertainty in the next few quarters?

We think food demand in Africa, and that's Morocco and Ivory Coast we mentioned, will pick up. They already are picking up. We think they will continue to pick up.

As the Middle East beverage, it is anybody's guess. A lot of political issues and so forth. On the other hand, oil price is extremely strong. There is a lot of cash. We are just going to have to wait and see.

As I said, we were really pleased that volumes were only down 2%. We think that is quite favorable. We will just keep our fingers crossed on the general political situation.

Thanks.

Thank you. Our next question comes from Alex Ovshey with Goldman Sachs.

Good morning. A couple questions. First, can you just remind us what assumptions you have made in the lower end of your EPS guidance of 270 versus the higher end of 290?

I don't think we gave you any assumptions before that we are going to remind you of. We gave you a fairly wide range because a lot of things can happen in the year including currency, which as you know, the rates have been extremely volatile. There is a fair amount of uncertainty regarding both the United States and European debt issues. So, one of the issues for a continuing wide range with still only a half a year to go would be currency.

I think, as John pointed out, demand still remains very firm. We have less concern on the demand side. I think pricing, obviously, is set for the year. And on the upper end, obviously, we have made assumptions as to the amount of shares we would buy back. And you have seen we have already bought back a fair amount of shares already.

That's helpful. Can you talk about where steel template prices settled out for the back half in Europe and how that may impact the European food can business in the second half?

We -- in mid-year price increases in Europe were between 8% and 9%, and we are passing those through. We think we are going to be quite successful in that. We don't think the result in food can price increases are going to have an adverse affect on demand, so we feel pretty confident about profitability. Margins, as Tim said, may come down a tiny bit just because of the effect of the increase in the steel on a percentage basis. In absolute terms, we have been successful in passing it through.

Okay. My last question is, is your China business short cans now, if so, are you shipping cans from other parts of the world, and what parts if the business is short?

Well, we can sell every can we can make in China, as we said earlier. You can see some of our customers had extremely good second quarters in China. We have been helping out from Southeast Asia into China. This year we don't anticipate needing to do that next year.

Great. Thank you very much.

Our next question comes from Chris Manuel with KeyBanc Capital Markets. You may ask your question.

Good morning, gentlemen. Just a couple questions for you. First, John, in the press release, you talk about some new growth opportunities looking ahead that continue to arise. Are there any specific geographies or places that you are looking at, either from a present utilization rate or such that you think could be right for more capital and expansion going forward?

Well, it's a little early this year to talk about specific things, and next year they might be additional. Basically, we are referencing the fact that we and our customers in the emerging markets or growth markets, as some people are now calling them, we still see good demand growth, and we are going off a bigger and bigger base.

So, we think that is going to continue. We think it's positive for us. The emerging markets that we're present in, we have very good positions. We think just continuing to grow those markets is going to result in a lot of good opportunities that we can capitalize on.

Okay. And just to be clear, this would be above and beyond you're talking about what you've already got announced with the expansion plans, right?

It could be, depending on how promising it all turns out to be.

Okay. That's helpful. Just a couple modeling questions for Tim. Interest rate the rest of the year. Are we at a reasonable run rate here and D&A as well?

Yes. D&A is going to start to trend up a bit as we move the projects from in progress to being capitalized. We will then begin depreciating the projects. So, we will start to see depreciation move up. Don't forget the currency impact on both depreciation and interest. The Euro is much stronger at the period end rate of June than it was last year. So, it's going to -- if we hold these rates, it's going to have a much bigger impact in Q3.

Interest expense running a little heavy through the first 6 months, but as we described, owing largely to the share repurchases which were more front end loaded this year than last. I don't know if you want to double the interest expense, but it will be a little bit below doubling the number through 6 months, and depreciation should start to trend up.

Okay. That's helpful and the last component, Tim, I wanted to ask about was a follow up on Peter's question earlier about the free cash flow guidance. Looking at -- where are the big swing factors as we work through the back half of the year? Obviously, I know earnings are up some or nicely when you look at '11 versus '10, but you are a pretty good chunk behind where you were last year with free cash flow. You have indicated working capital will be a use of cash in '11 versus '10. Capital will be a chunk higher versus '11 versus '10. Where are the big swing factors?

Well, listen. At least $400 million free cash flow guidance that we provided in both February and April included higher capital spending this year than last. It included working capital being a use of cash as opposed to a source because we understood both tin plate and aluminum price increases year-over-year.

We are roughly $250 million behind at June from June of last year, and as I described for everybody, it all sits in working capital, and it owes to higher receivables, a result of higher revenues through 6 months. The raw material inflation on both, not only receivables but also the seasonal inventory.

So, if you are having some doubts as to whether or not you think we can execute, you have to realize we are in a seasonal business and we are going to run ahead and have inventories and receivables in June ahead of the season. We believe demand is still very strong, and we are going to sell those inventories and we are going to collect those receivables in Q4 as we do every year.

That's the business we are in. We convert. Not only do we convert metal, but we convert inventory and receivable to cash collections in the fourth quarter.

I appreciate that. And I am just thinking of it as at year end you are anticipating it would still be a use. Therefore, you are going to make up your difference and some extra as you get through 4Q.

Well, no. In the original guidance it was always anticipated from our end that it would be a use this year because of the growth in the business globally, as well as higher raw material costs offset by higher earnings, obviously, right?

That's the other plug there. Thank you. Good luck.

Thank you. Our final question today comes from Chip Dillon with Vertical Research Partners.

Yes, good morning. Just 1 quick 1. On the specialty packaging, I don't think you told us the breakdown of the revenue increase from currency and price change. It would seem like, just backing into it, the currency impact was about $15 million. Does that make sense?

I think we said the currency impact on European spec pack was $13 million. Volume was up a couple million and the balance was a pass-through of raw material price.

Got you. And then just make sure we understand you on the future CapEx, if we sort of leave out what future growth opportunities might come down the pike say for 2013, 2014, it's hard for me to imagine that you would actually have your CapEx be in that $50 million or $70 million range.

There must be some other bucket that you normally have for projects. Maybe it is to lower costs or increase throughput. In other words, if you leave out major growth in those years, would you still expect it to be over $100 million, your CapEx?

We described -- the answer to the question was what is your maintenance capital, and we described that at $50 million. The non-emerging market spending that we have had consistently over the last 5 or 6 years that I can remember, has been roughly $100 million to $105 million.

We would describe that to you as the $50 million non-growth projects as well as another $50 million of growth projects for whether it is increased throughput or new projects for easy open ends, whether they be full pull out steel ends or peel, seam and food, specialty can sizes in beverage, whether they be 8-ounce, 10-ounce, 16-ounce in Europe and North America. So, I think you are right. You are just forgetting the other 50 that we already spent in the developed markets.

Got you. Okay. And then just lastly, quickly, any thoughts versus the weighting of returning cash via dividend versus buyback? I don't know if there is questioning whether there is any change in how you might -- have you thought about initiating a small dividend or not?

Well, we think about it constantly and talk with the board about it. And consider the relevant merits of dividends versus share buybacks. We still like the flexibility that the maximum share buybacks give us, so for the time being we plan to continue with returning cash to the shareholders through share buybacks and not instituting a dividend.

Got you. Thanks very much.

Chip, thank you.

At this time I will turn the call back over to the speakers.

Thank you very much, Shirley. That concludes the call today. We will ask you to note that the third quarter 2011 conference call is scheduled for Wednesday, October 19 at 9.00 Eastern time. We want to thank all of you for listening and look forward to speaking with you again in October. Bye now.

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