Crown Holdings Inc (CCK) 2014 Q2 法說會逐字稿

Good morning and welcome to Crown Holdings second-quarter 2014 earnings conference call. (Operator Instructions). Please be advised that this conference is being recorded.

I would now like to turn the call over to Mr. John Conway, Chairman of the Board and Chief Executive Officer. Sir, you may begin.

Thank you, Shirley, and good morning to everyone. With me on the call are Tim Donahue, President and Chief Operating Officer, and Tom Kelly, Senior Vice President and Chief Financial Officer. I will make some brief introductory comments regarding the Company's performance in the first quarter and then turn it over to Tom Kelly, who will take you through the numbers and give you some additional detail. Tim Donahue will review carefully the performance of the various businesses and discuss our views about how the business is developing for the year.

Let me remind you 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, the Financial Condition and Results of Operations in Form 10-K for 2013 and its subsequent filings.

The Company had another solid quarter, and demand for our products around the world was quite strong. In our beverage can segments, global beverage unit sales were up 3%. Sales of food cans globally increased 17%. Finally, our metal vacuum closure business had a particularly good quarter, and unit volumes sales increased 8%.

During the quarter, we completed and began commercial production at another beverage can plant. This one is in Teresina, Brazil, which is in north central Brazil, and is our fifth factory in that country. The plant is a can body plant capable of making multiple can sizes and extends our Brazil geographic coverage. The startup has gone smoothly, and demand in Brazil clearly supports our continued expansion of capacity there.

Within the context of global growth and unit volume sales increases, it is noteworthy to mention certain markets that did particularly well. In beverage, Brazil and Colombia grew strongly in the quarter, and Tim will talk about this more in a moment. Likewise, Asian demand was very strong, and our sales were up sharply quarter to quarter.

Finally, in Europe, Crown's beverage cans sales increased as did demand, but our Middle East beverage can business, although it did well in the quarter, weakened in June. We're concerned about Middle East demand for the balance of the year because, as you know, there are three conflicts ongoing now in the region, and they are adversely affecting all economic activity, including Crown sales of beverage cans.

Food sales globally were very solid, as I mentioned. The integration of the food can company, Mivisa, which closed on April 23, has gone very well. This new addition to our European food can platform has proven to be as excellent in all respects as we had projected.

So in sum, we had a strong quarter, and we feel very good about what we have achieved year to date. Nonetheless, there are clearly concerns as we look out over the balance of the year.

With that, I will turn it over to Tom.

Thank you, John, and good morning.

Diluted earnings per share for the second quarter were $0.76 versus $0.93 in 2013. Diluted earnings per share on a comparable basis were $1.01 compared to $0.96 in 2013.

Net sales for the second quarter were up 7% due to increased global beverage can volumes and contribution from Mivisa since the close of the acquisition in April.

Segment income for the quarter of $285 million includes the Mivisa operations on a normalized basis before the purchase accounting charge related to the sale of acquired inventory.

Segment income of $485 million on a year-to-date basis includes $6 million of negative year-on-year impact from increased aluminum premiums in Europe. Assuming that aluminum premiums remain at their current levels for the rest of the year, we currently estimate the 2014 full-year impact of the higher premiums to be approximately $20 million compared to 2013. Using that same premium assumption, we currently project third-quarter comparable diluted earnings per share of between $1.15 and $1.25 per share. We currently estimate our full-year comparable diluted earnings per share to be between $3.20 and $3.35. These projections assume no share repurchases and an effective tax rate of 26%.

We expect full-year free cash flow of approximately $500 million with capital expenditures of approximately $320 million.

Tim will now take you through the operations.

Thanks, Tom, and good morning to everyone.

As both John and Tom discussed, we have had a solid first half. Demand for global beverage can units increased 3% in the second quarter and were up 4% in the six months through June 30.

Global food can unit demand was up 17% in the quarter, reflecting the Mivisa acquisition. Excluding the impact of the acquisition and required divestitures, global food units were up 3.5%.

In Americas beverage, volumes were flat in the quarter as strong double-digit volume growth in Brazil and Colombia was offset by a 3% decline in North America. Segment profits were impacted by lower North American production levels in the quarter, increasing unit production costs across the system.

As John discussed, we commenced commercial shipments from our new plant in Teresina in the north central of Brazil during the quarter.

For the first six months, the Brazilian can market recorded 19% unit volume growth due in part to strong World Cup sales activity.

With the can now holding 45% of the package mix for beer and special cans making up about 35% of total overall can requirements, the outlook remains very positive for beverage cans in Brazil. Anticipating your questions, demand did soften in June compared to the prior year, but July will be up against last year, and we expect the upcoming summer selling season to be strong.

Unit volume sales were flat across our European beverage segment as strong performances in the UK and Turkey were offset by the impact on our Middle Eastern businesses from the ongoing conflicts in the region. The beverage team continues to perform well as increases in efficiency and productivity drive results.

European food volumes increased 21%, not only for the 68 days of Mivisa sales included in the quarter, but also from strong shipments from our factories in France and Germany. Without the Mivisa acquisition and required divestitures, our unit sales were up about 1.5% in the quarter. However, just a bit of caution as this is not a perfect comparison as we have already begun the integration of our production requirements across the plants, and this comparison will become increasingly meaningless going forward.

More importantly, our new combined food business is strong, low cost and well-positioned to deliver high-quality products and service to customers and growth in revenue as an income to the Company. While it is still early in the third quarter, we are hopeful for a relatively strong harvest this year with tomatoes, beans, corns and peas all looking very good.

Sales unit volumes in Asia-Pacific beverage cans were up double digits with particularly strong performances in Cambodia, Malaysia, Thailand, and Vietnam. Nonreportables -- that is aerosol cans, specialty packaging and tooling and equipment -- were down in the quarter, mainly due to the timing of equipment shipments, which should be recaptured in the back half of the year, and unfavorable mix in aerosols.

And with that, I am going to turn it back over to John.

Thanks, Tim. Shirley, I think we are ready for questions.

(Operator Instructions). Tyler Langton, JPMorgan.

Can you provide just any color in terms of what Mivisa contributed in the quarter? And then I don't know if you have any updates in terms of the depreciation you expect from it going forward.

Tyler, Mivisa contributed about $0.05 in the quarter. That is after interest and tax. Our full-year depreciation with Mivisa should be at about $195 million.

Got you. And then just with I know you said with Brazil, we saw some strengthening recently, but do you have a sense and I guess in the second half, what volumes could look like in the country?

I think the first half up about 19%, and I think the back half of the year we are thinking mid-single to high-single digits for the market.

Got you. Okay. All right. Thanks a lot.

Chip Dillon, Vertical Research Partners.

Maybe I was just a little bit hot on my estimate, but it looks like the interest expense is coming in lower than we thought. Where should that be when we factor in a full quarter of Mivisa going forward, and should that be around $70 million a quarter? Would that be a good place to start?

Chip, the Mivisa interest is coming through at about 2%. It is all floating-rate debt, so you are probably a little bit high there. For the year, we're going to come in, I think, mid-[250s].

Got you, mid-[250s]. And when you look at the CapEx for the Company, I believe this might be a little -- I don't know if you were guiding as high as $320 million. Maybe that was in your range. But could you talk a little bit about some of the projects? I know maybe last year you were thinking of another can plant and maybe you are actually working on one and you can't tell us or maybe these are other items. But could you talk a little bit about that and where you think CapEx goes directionally in 2015 given that it is less than six months away?

I think just dealing with 2014 to start, obviously, Teresina began production this year with much of the capital being spent this year in addition to last year.

There are several projects that we have ongoing in Europe right now to put sleek can capability, specialty can capability into a number of factories, and obviously there's always ongoing efficiency and productivity improvement programs. And then there are other projects, obviously, that we are studying that we are not yet ready to discuss.

As we look ahead to next year, I think given the size of the organization, $9 billion to $9.5 billion in revenues, it is not unlikely that a number of at least $300 million, roughly 3% of sales, is not an unreasonable number to expect in capital.

Got you. And one quick follow-up. On the food can side, you certainly seem encouraged with how that market is faring this year domestically. And last year there was concern about some shift in a competitor that had grown mostly at another company's expense, but a little bit of yours. Could you just update us on your contract situation there, and do you expect that to remain in terms of your volume is pretty stable at least or your share to stay pretty stable in the next year or two?

I think in North American food, I think that is the reference. Generally speaking, we think our volumes are quite stable, and they are stable as a consequence of a lot of good work by the commercial team responsible for the food business.

As you know, I think you are making reference to a particular customer, and that customer's volume, we will not have it next year, at least not a lot of it. But fortunately, we are a relatively small proportion of the customer, but that will adversely affect us next year from a volume perspective.

And no further major contracts coming up in the next year or so.

No. I think as we said on some of the previous calls, we did a lot of good work we think to secure volume for the next number of years.

Thank you.

Adam Josephson, KeyBanc.

What on Mivisa, what actions are you taking with the business now that you own it, and are your cost savings expectations any different than they were when you announced the deal?

Well, first of all, we generally and organizationally have decided that the Mivisa management team, which we feel is excellent, will have responsibility now going forward for our food business in Iberia, Africa, and all of our export business, which is quite substantial. Easy ONs principally, full pull-out ends for food.

And so in effect, we will have four operating units, business units in Europe beverage, aerosol spec pack and two food units. So that is going great. The plants have been reallocated. Responsibilities and people have been reassigned to the extent that we needed to, and that's going very, very smoothly.

Beyond that, obviously, we are taking a look at our factories across Europe, food can plants and determining which are better situated in terms of the specs they produce and where they are located vis-a-vis the customers, and we have begun doing some reallocation of business among them all.

So I would say the whole process is going very well. We were very pleased with the performance of Mivisa for the two months and the few days that we owned it. We have owned it so far at least through the end of June, and the whole process I think is just going as well as we could possibly have hoped.

Thanks, John. Just one more on the European food can market. Do you expect competitive dynamics to change in light of your recent consolidation of the industry?

Well, that remains to be seen. But obviously, we felt we needed to be a lot stronger in Iberia than we were. We felt that we needed to lower overall cost dramatically, and we have. Perhaps those things are going to contribute to greater stability in the future, but time will tell.

Thanks a lot, John. Appreciate it.

Phil Ng, Jefferies.

Obviously strong start to this first-half guidance. You guys bumped the lower end, but generally speaking still seemed pretty conservative. Is that mostly driven by your concerns around the Middle East, higher metal premium? Just wanted some color around that front.

I think -- and Tom and Tim can pitch in on this as well -- we mentioned the three factors that we are watching closely. The Middle East situation, and that concerns us. Our businesses there have been remarkably resilient through a lot of upsets, but we seem to have -- it is more pronounced today, these conflicts, than they have been in the past. So that is a concern.

Tom mentioned the premiums, and that is a concern. And then Tim, of course, I think alluded to the fact that or said that we are being very cautious about production in beverage in North America. We don't want to carry excess working capital. We are not going to run units into the warehouse to make earnings, so we're being somewhat cautious there.

So I think those would be the three things. But I don't know. Tim and Tom might want to supplement that.

I think John has touched on the three major issues of concern as it relates to the outlook.

And on the premiums, Phil, again, that was assuming the numbers stay where they are today, the premium number. If it goes up, obviously that is worse for us, and if it goes down, we can do better.

Got you. Can you handicap what you are thinking about for Middle East in the back half in terms of volumes? Can you remind us how much it represents for Europe? I think it's a little over a third, but I just want to make sure that is the case.

35%, 40%.

Yes, it is about 35% of division unit sales, plus or minus. Yes, I don't have -- to give you an estimate for the back half of the year.

I think it would be fair to say no better than flat.

Yes.

And honestly, we are going week by week, month by month.

Okay. That is helpful.

And then longer term, when you think about Europe food, you guys have done a good job taking capacity out, and I think one of your competitors is looking to take some supply out as well, where are we stacking up from an operating standpoint, and demand seems to have firmed up a bit here? Just wanted to get your thoughts on the pricing heading into 2015.

Well, I think utilization for everybody is going to be going up. It's a pretty complex question, as you know. You had two-piece cans, D&I, DRD, three-piece. And so that's a little bit harder. But generally speaking, capacity utilization is improving across the board, and that should be positive.

Okay. Thanks, guys. Good luck in the quarter.

Alex Ovshey, Goldman Sachs.

Were there any cost saving synergies that you guys were able to achieve from Mivisa as you've owned it for a little over two months, and what is the expectation for cost saving synergies through the back half of the year?

Well, I think we are certainly well underway in terms of the integration of moving production from Mivisa plants to Crown plants or Crown plants to Mivisa plants where it is appropriate across customer locations and specifications. A little early to quantify that only having the business for two months.

And I think we have given you previous synergy estimates of roughly $35 million, I think. At this point, we will stay with that on a full-year basis, and we will update in the future as we get into it a little bit heavier.

Got you. And on that $35 million, the way you guys are thinking about it, does most of that come in 2015, or do you expect to see some of that in --?

We will get most of it in 2015, but the balance we will achieve in 2016.

Got it. And then in North American bev, I think your volumes have been running down 2% to 3% over the last year or so, and you talked about scaling back production. Is there an opportunity perhaps to rationalize the footprint in North America bev and potentially be able to drive margin through that process?

I think for the quarter we were down a little more than the market. It's just customer mix, and sometimes it is luck of the draw how your customer is doing in a particular quarter. So I don't think anything alarming. It's just what it was.

Hard for us to do a lot on rationalization in North America given where we are geographically and what our needs are geographically.

And then the other thing you need to remember -- and this is not just true for us but for the industry -- to the extent that our customers trend toward specialty cans, non-12-ounce, basically, that in itself reduces excess capacity just because what is associated with changeovers and all the rest. So we don't have any plans for rationalizations in North America. Actually, the reverse. We're going to do things to drive down costs and perhaps some things to increase specialty can capability.

That is helpful, John. And just last question, on the Europe Bev segment, even though you've obviously had a very meaningful headwind from the premiums, operating earnings in that segment are up it seems like about $13 million in the first half. In terms of thinking about the second half, I realize that the premiums are still a headwind, but is the expectation that you can continue to grow earnings in European beverage in the back half of 2014 as you have achieved in the first half of this year?

I think what you have seen the back half of last year and the first half of this year is an extreme focus on cost and productivity and improvements in the manufacturing platform. Demand has been very firm, as well, in northwest Europe.

As Tom mentioned, though, he gave you a number for premiums, and much of that will happen -- two-thirds of that premium number that Tom quoted on an annual basis will occur in the second half of the year. So that will flatten out perhaps some of the earnings profile in beverage in the second half versus the first half.

Got you. That's helpful. I will turn it over. Thank you.

Ghansham Panjabi, Baird.

On the Middle East business, how much of a deceleration did you see in June? John, you mentioned that the region has been full of conflict in the past, so really what is different now?

And also how does the profitability in Middle East beverage comparison historically to the Continental European business?

Well, the Middle Eastern business is somewhat more profitable, but we saw a slowdown both in Jordan and Saudi Arabia. And, of course, the countries immediately adjacent to the ones that are engaged in conflicts, among others.

So that -- and it was a June event. We did fine until June, and June sales fell off.

Now some of our other businesses in the region had a pretty strong quarter. And if they continue to, that will be helpful, but we can't count on that. So that is what we are referring to.

And how much was June down?

Oh, I don't have it in front of me, but it was meaningful. 5% to 10%.

The quarter was off --

Just June.

Yes. The quarter was off about 2.5% to 3%, but June was certainly, as John said, much where the big decline occurred.

Yes, in those countries.

Okay. And then in European beverage can volumes -- I am sorry if I missed this -- but what were volumes for the quarter?

We were up -- in Continental Europe, if that's how you want to describe it, we were up about 2%.

Okay. And in terms of the nonreportable drop in profitability, I think you called out unfavorable mix in aerosols I remember correctly. Can you just give us some more color on that? It seems to be quite a bit of drop in profitability.

So you have tooling -- you have the timing of equipment shipments, which is the biggest piece. That accounts for a little bit more than a half of the drop. And then you have some 1%s and 2%s across the two aerosol businesses and a little bit of promotional specialty packaging in Europe. So but in aerosols generally shave gel was down in both the United States and Europe, and we are strong in shave gels.

Shaving is overrated.

And finally, Tom, just one question for you in terms of Mivisa earnings contribution as it relates to your new guidance for the year, how much do you estimate from Mivisa? Thanks.

All I can say right now, I don't have it in front of me, but it is in the full-year numbers, and I think in the past we have given out most of the components of that. The missing piece was depreciation, and again for the full year, total Company, we think depreciation will be about $195 million.

Okay. Thanks so much.

George Staphos, Bank of America Merrill Lynch.

Most of my questions have been asked already and answered to some degree. I guess my question to start would be this, and it is one we have come back to periodically over the last number of quarters.

Crown has done a good job growing its network and footprint over the last number of years. You have now added Mivisa, which you seem to be very pleased with.

As we look out to 2015 and 2016 and given the fact that as the Company has grown, one could argue perhaps it has gotten a bit more complex. You are larger in Asia. You can't necessarily control events in Asia. The Middle East, while it's been a great market for you, again, you can't control when conflicts arise, and that is impairing your profitability.

What would be wrong with a concept of maybe slowing down investment from here for the next couple of years and really trying to further ratchet yield and efficiencies and return on capital out of this business that you have built with great effort over the last number of years?

Well, George, I think implicit in your question is that the proportion of effort that we might put into expansion is going to be similar to what we've done in the past.

I think what Tim has pointed out is that as the Company has gotten so much larger, you could argue our capital expenditures really have not expanded proportionately. We have been reining things back compared to what we were doing.

The next thing I think that you are assuming is that the CapEx is sufficiently large so that startup costs and things of that sort tend to be an inordinate drain and potentially adversely affect other operations in any particular region, which we don't think is the case.

So to answer your question, nothing would be wrong with what you described, except to the extent that we missed some really good opportunities in pursuing it.

So we are constantly aware of trying to make a balance between continuing to grow sensibly and how that might be slowing or adversely affecting earnings growth. And we don't think it really is. And the projects that we are pursuing are well above cost of capital. And at this point, they are virtually all very natural extensions of where we are geographically. We're not engaging in any far-flung adventures in terms of new regions, new countries with which we're not quite familiar.

So we are pretty comfortable with the balance, and we take your point, however. If we thought that we were tipping too much in an excessively pro-growth mode, we would do something about it. But we don't think we are there.

All right. I appreciate the thoughts on that, John. If you had to forecast, and I recognize this might be a dangerous question to ask on a conference call when you are not in a position to guide on 2015 yet, but is there a spread that you have in mind that your return on capital might further exceed its cost of capital over the next couple of years? What would that figure be?

In other words, what could you give us to be able to gauge your progress on improving return given all of these good initiatives that you have underway?

George, I don't know. We will take that question on board and think about it and give Tom Kelly or me or Tim a call over the next number of weeks.

Okay. Will do.

Switching gears, on specialty cans broadly and then within North America, would you say that your philosophy on the product and its role in the package mix has changed, or do you like it equivalently, or do you like it even more than perhaps you might have thought or viewed it several years ago?

No, I wouldn't. We have been doing specialty cans for 30 years. The trend in the Middle East actually began in the 80s, the famous Japanese can, 2.02 diameter, what the industry often calls a slim can, not a sleek, a slim can, of various typically 250 ml, 275 ml, that kind of thing, 285 ml. So we have been doing that for 40 years -- 35, 40 years. And we have seen that in Asia, the same kind of thing; throughout the Middle East. Europe, as you know, is at various can sizes.

However, the US market it's been relatively recent in our view. I know there's been a lot of talk about it, but as a proportion, the package mix has been relatively small. And, of course, our situation has been that we have been essentially sold out here for the last number of years, principally on 12-ounce and 16-ounce. So we don't have excess capacity that is easily converted, and we have been reluctant in a market that has been flat at best to put a lot of money into different sizes.

Now, as our customers become more and more -- if they do become more and more convinced that they want to try different formats, we're going to have to follow them. So in North America, we're taking, I think, a renewed look at the issue. But our philosophy globally hasn't changed at all. With whatever our customers want, that is what we're going to do, and we've had a lot of success with non in the case of internationally, typically non-33 centiliter and here non-354 milliliter, if you want to say non-12 ounce.

John, go ahead. I'm sorry.

No, no, that's it.

Two questions, one are follow-on to that and then one just on the Middle East.

By definition, the custom can is custom. So the products have a unique size, and therefore, to the extent that there's demand for a size that you have got the ability to produce for, that's a good thing. But to the extent that you might put in a line where demand might periodically ebb and flow, you might have excess capacity of a very unique product line. So how do you prevent against that? How do you build flexibility into your specialty and custom lines? That would be question one.

Question two, can you just give us what effect do you think you have built in for the Middle East in your overall guidance, and could you remind us how many cans roughly are we speaking about in the Middle East right now as you are counting? Thank you, guys. I will turn it over.

I will let Tim reflect on the Middle East question, and I'll -- the previous one.

As to specialty cans, many, perhaps most of the recent investments we have made internationally are factories and production lines capable of producing multiple sizes. We've spent a lot of time and effort on this in various respects. First of all, to make sure the equipment is flexible and to make sure that we are able to change lines relatively quickly, both diameter and height, and that is true in virtually every new line that we have put in the last probably five years.

The consequence of that, George, is capital costs are somewhat higher than they might otherwise be, so we are very careful about it.

Here in North America we do not intend to add any capacity on speculation about specialty can. We are working on the assumption that the market is what it is, and this is going to be a substitution process. So what we need to do if we want to pursue more specialty cans as we have in the past, we need to make our existing lines more flexible. We do not intend to add capacity.

And Tim will talk to the Middle East questions.

So, on the Middle East, without getting too specific, I would say that the guidance that Tom gave you earlier reflects anywhere from $0.02 to $0.04 of conservativism or concerned built in for the Middle East, and you are talking about a market on an annual basis for Crown of roughly 7 billion units.

Okay. I would have guessed 6 billion. Thanks, Tim. Good luck in the quarter.

Debbie Jones, Deutsche Bank.

I'd like to go back to just Brazil really briefly. Can you remind me what the capacity target is for Teresina and quantify the impact of the ramp-up costs for the full year?

The capacity across multiple sizes, and we will have the ability to make five to six sizes in the plant, but the rated capacity is 1 billion units, and I do not have in front of me the impact of startup in the quarter nor do I have it for the balance of the year. So you will have to come back to us on that.

No problem. And I'm just wondering you might not have this in front of you either, but the pack mix shift that we have seen so far, I think the expectation was to see a continued shift toward cans versus glass in 2014. I'm just wondering if that materialized, and if so, if you expect that to reverse in 2015.

We don't expect it to reverse. It's interesting. I know on the April call we had the experience in the month of March, for example, cans were -- just the month alone of March, cans were actually greater than glass. But on a year-to-date basis, can mix for beer is at 45%, which is up about 2.5 percentage points from last year, and I do not believe that we expect that to reverse. I think that the can is growing in popularity among the fillers and for good reason.

Okay. And then just quickly go back to the Middle East, I was just wondering if there are any US government restrictions that are placed on you in that region that maybe your local competitors don't have that might be impacting you.

And then secondly, can you just remind me how the premium works in that region and whether or not you are able to pass that on to your customers?

There are restrictions in the Middle East on certain countries that we don't sell into directly, but that isn't the factor that we are describing. We are talking about just an inability simply because of conflict. So that is what we are referring to.

I'm sorry, what was the other part of your question?

I couldn't remember what the aluminum premium situation was in the Middle East and whether or not that is a pass-through to your customers.

Generally speaking, in the Middle East, we passed the premium through. It's more on an annual basis, not a formula basis, but the consequence is the same. We have a little bit of the premium issue in the Middle East, but nothing like in Europe where the convention is simply it's not included in the formula and the can maker bares it out.

Why that is the case, we have to go back in history. It makes no sense, but it is what it is for the time being.

Okay. Thank you very much.

Scott Gaffner, Barclays.

Just wanted to go back to George's questions for a minute on specialty cans. Just wondering, has there been any shifts in the profitability on specialty cans in North America, and maybe that is part of the reluctance to invest more money in excess, additional capacity there?

No, we don't think so. I mean it is still somewhat more difficult. You still need to do something about size changes, et cetera, and specialty continues to be quite popular. So that aspect of the opportunity has not changed.

So you haven't seen -- the profitability has not come down in North America yet?

No.

Okay. And then I think in your prepared remarks, correct me if I'm wrong, but I thought I heard you say you had increased per unit costs in the Americas in the quarter. Is that correct? Can you just explain that little bit further for me, please?

Production levels were down about 9% in North America, so lower units produced, higher cost per unit.

Okay. So that's all about inventory management headed into --

Inventory management and the fact that we have been down 2.5% to 3% for the first six months. And, as John said, we're not going to run cans and inventory just to make an earnings number. Our production plans are going to take into account the market that we see and our projection for what may happen in the market.

Right. But it looks like if I look at the CSD shipments from CMI, it looks like the numbers have actually gotten -- even though they are down year over year -- progressively better in the second quarter versus the first quarter. Is there something --?

For the industry at large, the second quarter was something of an improvements, but we are not prepared to bet that that trend is going to continue. We hope so, and it may not continue for our customer assortments.

Okay. And then just lastly on European food, I think you mentioned some positive trends within certain product categories. Just wondering overall what are you seeing as far as the underlying consumer demand for food cans in Europe. I think if I recall from our prior conversations, the food can was more of a premium product in Europe. Are you seeing underlying demand come back at all, or is it more around just a quality harvest?

No, I think underlying demand has been strong as well. I think Tim mentioned from what we can judge our, let's call it, legacy business, an imperfect comparison, but nonetheless, was up about 1.5%, which is a positive trend in the quarter, and we think the industry generally has been up somewhat. So we think the overall trend had been down for a while and now finally up. We think that's a good outcome.

Thanks a lot. I appreciate it.

Chris Manuel, Wells Fargo.

Three different questions. I will try to go through them fast. But first, with respect to Mivisa, I think, John, maybe some things have changed a touch, but Tim, you alluded to in the call how this is already being integrated and put into and then later discussed how you have shifted some businesses around.

Initially I recall back on the -- John, when you did the call announcing the deal, you indicated the business was going to stay on its own separate, that it was running extraordinary well. You didn't want to make any adjustments to it.

So maybe could you help us a bit with it sounds like you found some opportunities to move some of your own business and shuffle some leadership and some different things around to improve mix and improve shipping and that kind of stuff. Can you maybe give us a sense of -- you had $1.7 billion-ish business. I think you acquired something in the neighborhood of $750 million in revenue. How does the two pieces split today as it might be run, if you can do that, and what is the margin opportunity or what is the overall utilization rate as we looked at it to get a sense as to where you are and where you might go?

Yes, in terms of organization, just to give you a sense, Chris, we did say we are going to keep the Mivisa management intact, and we have. And what I was referring to, however, was we took a look at the whole situation, and we basically reassigned, if you will, eight factories in Portugal and Africa to the Mivisa management team. Geographically it made a lot of sense. So our Portuguese plant, the Mivisa management team has picked up, and we have seven factories throughout Europe -- Africa, rather, several of them quite small, but nonetheless, they have become the responsibility of Mivisa. They had African activities, and we thought that was the best thing to do.

However, the Hungarian plant, the Eastern European plant that Mivisa had, has been reassigned to our European food can management team. So that is what I was referencing. We think that the outcome has been great so far. It is going to be great going forward.

As to margin proceeding, obviously, we think the aggregate margin is going to improve as we make better use of the Mivisa asset, and we just rationalize what we're doing in terms of shipping and specs and all the things Tim and I have talked about earlier. But we haven't quantified it.

Okay. And then did you touch on utilization? I know you have done a couple of rounds of restructuring in your legacy European food business to get it back presumably to the upper 90s. Where are you at today as you or do you have a sense of where you are today as you look at the whole two pieces of the business now or the European food business?

There hasn't been a major change in utilization as we speak, but we expect over the next two and a half years because we think these synergy savings are going to carry over into 2016, clearly we will be taking a look at further opportunities for rationalizations and, consequently, utilization improvements.

Okay. Thank you.

And then the second topic was with respect to China, and there's been some discussion of one of your competitors adding some capacity in [Walin], I believe, one of the regions there in China. Any thoughts as to how the markets sits today, our utilization rates or I should say capacity and supply/demand balance getting better? What do you think the outlook is there for the next -- opportunities for price as we head into 2015 to begin to see improvement, or is it going to be another maybe tough year?

I think -- we think the market in the quarter was up mid single digits. It slowed from the first quarter, but the second quarter tends to be our lowest quarter in China. It has been historically the lowest quarter. So we don't read too much into that. Utilization is still in the mid-80s, low 80s, and it hasn't changed very much. The market has been growing relatively rapidly, but there has been capacity added as you said.

We do not foresee pricing improving in China next year. We expect it will be about the same as it was this year.

Okay. And then the last question is -- and Debbie started down this path, in some regions of the world, aluminum premiums and things are -- in North America you get your customers to basically buy the metal, and you almost total it. Parts of the Middle East or other parts of the world, it gets passed through on an annual basis or different elements. What prohibits such a change in recapturing what you have lost in other parts of Europe or other regions of the world? I recognize Europe number two, number three player when you look at Continental Europe, and you probably need the leaders to lead in that respect. But what prohibits that from occurring in your view?

We have about 18% of the beverage can market in Europe. You are talking to the wrong guys.

Fair enough. Good luck.

Anthony Pettinari, Citi.

Just a quick follow-up on Latin America. Can you remind us how long it will take Teresina to reach full operating rates for that 1 billion units?

Nine to 12 months.

Nine to 12 months. And can you give us some color on operating rates for bev cans in North America and then in Latin America?

Latin America, well above 90%, 95% to 98%. In North America, low to mid-90%s.

Okay. That's helpful. And then just maybe one final one. I think in the beginning of your prepared remarks, you referenced strength in vacuum closures, and I was wondering if you could give some color on what is driving fast and what the volume growth was year over year?

The volume was strong pretty much across the board. And frankly, we didn't spend time thinking, but typically, as you know, what that means is metal vacuum closures for relatively high-value juices and food and baby food and so forth. And typically it is a sign of consumer spending improving and people spending a little more money. But we have not done a lot of analysis. We just know we had a strong quarter on both sides of the Atlantic in the metal vacuum closure business.

Okay. That is helpful. I will turn it over.

Al Kabili, Macquarie.

I just wanted to start off on Europe food, and I know you mentioned the organic volume growth in this segment. I'm wondering if you can talk a little bit about the earnings growth organically, legacy Crown versus legacy Mivisa, how they did from an earnings perspective year on year in the second quarter?

I think Tom has given you the Mivisa numbers, and I think you can see the Mivisa number in the release as it relates to the inventory adjustment. The balance will be legacy Crown, but as we cautioned you, be a little careful because we have started to integrate so we are moving business around. And I think we want to very soon stop talking Mivisa versus Crown, us versus them. We're all the same Crown Cork & Seal here. But I would say that in the legacy Crown, if you wanted me to guess, segment income up $5 million to $10 million, and the balance would be Mivisa as Tom -- I think Mivisa is probably $15 million in the quarter, I think is what we had.

Yes, and I understand that, Tim. I guess I didn't have the prior quarter's Mivisa. I have an estimate for the annual earnings from Mivisa, but we didn't have the split on the quarter. So that is what I was trying to help. And if you have a comparable number for Mivisa historically in the third quarter, just to help fine-tune the model, that would be really helpful.

I don't have that.

Okay. All right. We will follow up with you or Tom after.

And then Europe, I wanted to touch on a earlier question on Europe beverage. I believe it was Alex. So, with the metal premium headwind, earnings were EBIT -- operating profit was up $5 million year on year with flat volume and that metal premium. And so that implies a really healthy amount of productivity savings. Is there anything unusual in the second quarter related to that to drive that strong performance, and can we expect that kind of level of productivity in the back half? I know metal premiums are going up, but that's pretty healthy productivity.

I think what Tim referred to, in fact, is what occurred. The plants ran exceptionally well in Europe, and we have put a tremendous amount of emphasis on cost reductions: improving efficiencies, reducing spoilage, reducing downtime associated with size changes, and all the rest. And we have had a tremendous amount of success.

We are not going to be able to continue to improve productivity and consequently drive down costs at the same rates. So no, you shouldn't anticipate that.

But we did. We had a very, very good operating performance in the quarter, and it was a consequence of a lot of planning and a lot of hard work.

All right. Thank you. And then final question is I know you talked about the political situation in the Middle East, and I was wondering what you are seeing. And it sounds like you saw some pretty good volume in Thailand, but I'm just wondering if you can give us an update on what you are seeing in the political situation there and any risk related to that in the back half? Thanks.

If you recall, last year there was certainly some turmoil around the elections in Cambodia. That seems to have passed. We had a very strong quarter and year to date, and the outlook for the balance of the year is quite good in Cambodia.

And in Thailand, there has been almost no impact. And, in fact, since the military has somewhat taken over in Thailand, things have stabilized, and we are back to a very strong consumer economy in Thailand that we have been accustomed to. So nothing to report there other than all systems go.

Okay. Great. All right. Thanks. Good luck the rest of the year.

Mark Wilde, Bank of Montreal.

Just a follow-up on the North American food margins. I think if I heard you correctly, you were suggesting that you didn't expect any further change from business moving around and maybe contracts being redone over the next six months and into next year. Is that correct?

That is true. There may be a few small things, but generally speaking, we're pretty well set for next year.

Okay. And I know you don't want to get too specific about what might be in the capital program going forward, but can you give us just some broad sense of areas where you might be looking at for expansion? It sounds like China is probably not a place given what you said about the operating rates and continued supply coming in there, so any direction you can give us on that would be great.

I think Tim did a pretty good job covering it a little while ago. We're looking particularly in Europe and North America at specialty-size expansion, if you will, and doing things with our existing plants to make them more flexible and responsive to what the customers want to do going forward. So that's a part of it.

We did a lot of good things with cost reductions in Europe associated with better productivity simply with the physical plant that we had. We think there's money that can be spent to lower costs there, both materials and speed up lines to get a little better productivity, and the market is growing somewhat.

And then if you just look at the places that are growing so nicely, Brazil, for example, where we just completed Teresina, makes a lot of sense to us. Asia generally growing very well. China growing but capacity utilization not changing a lot. So you're absolutely right. We're not putting more money into China. Southeast Asia is still doing very well. So that pretty much captures it.

As we look ahead at synergy opportunities and the food business in Europe, it may require somewhat more capital to allow us to capture those. But I think Tim did a good job of pointing you in the direction where the capital is going to be going in the years ahead.

Okay. That is helpful, John. Good luck in the second half.

Todd Wenning, Morningstar.

Given the political risks in the Middle East that we discussed earlier in the call, how does Crown think about applying discount rates or hurdle rates for projects in the Middle East versus projects in other emerging markets?

Well, we want to make more money in the Middle East, obviously, and we want higher returns. We don't have any plans now for capacity expansion in the Middle East. So it's a little bit of a moot point, but clearly anything that we might do in the future in the Middle East might be discounted more heavily than it has been in the past.

Great. And then regarding new plant in Teresina, if my numbers are correct, the region in which the plant is located has low income per capita relative to the rest of the country. What makes a plant in the region particularly attractive from a long-term demand perspective versus other regions in Brazil?

The Northern part of the country in a relative sense has been growing much more rapidly than the south. This has been true for quite some time, and beer consumption per capita has been growing much more rapidly in the north than in the south.

And then the other thing that is happening that is very noteworthy is, the brewers would prefer to expand cans sales, and most of their new brewing capacity in the north is focused on cans more so than glass. So all those things are working in favor.

And then finally, as you undoubtedly know, the Brazilian government has been attempting to develop the north, has been putting more money into the north, and that has been favorable, as well.

And it's a big, big population up there. So all those things have made it very -- our customers have done exceptionally well. All the brewers have been adding capacity in the north. So have the soft drink guys and juice and so forth, and that has been buoying the demand.

That is great. Thanks very much.

Thank you. We have time for one final question. Tim Burns, Cranial Capital.

Tim, you mentioned that you were putting in some sleek can capacity in Europe. Is that something that is customer directed or that you are doing to procure new business or how does it work?

This is customer directed, and it's an expansion of both the existing platform across a number of factories just reacting to the market and the customers' needs.

Got you. We've been talking about specialty can technology that can be run at the cost of 12-announced can capacity for quite some time. Obviously, Excel has fallen short, and we are seeing Budweiser with Belvaux assistance come up with some pretty nifty cans, but I'm not quite sure of the cost. Are we going to see a breakthrough there? Is that something that your technical people led by [Abramalence & Co.] can crack at some point?

Tim, if you are referring to specialty sizes, let's say different diameter or different heights, the issue tends to be length of run, breaking up production runs on sizes that are in higher demand, and how long that takes you and so forth.

So what has happened over the past five years or so, this is mainly the prominence of the equipment companies and why, frankly, we are so lucky that we have one of the leading beverage can equipment companies in the world in CMB Engineering. But this is largely about flexibility of production equipment and flexibility of being able to change an integrated line rapidly without too much loss of production at either end and being able to ramp back up and being able to achieve good spoilage below and high efficiency rates quickly.

And a lot of work has been done in that area. Not just by us -- all of our competitors, all the equipment for tourney. So that is what is helping, I think, to add the flexibility in lines at an acceptable cost.

Got you. So coil the can, we're not giving up on yet, but there's a lot of variables.

Yes. And don't confuse yourself. To the extent that you are talking about a substitute for impacting extruded aluminum cans, that's a whole different subject. We're just talking about flexibility in beverage can production.

Got you. Got you. And I had one last question. Mivisa, obviously, was a great buyer of metal. Their hub-and-spoke system was spectacular, perfectly suited to seafood and fruit, and shipping it all over the place as needs be met.

They also had access to Africa. More and more people are looking at Africa as a potential real market. I think it's only about 10 billion beverage cans, as we speak. Is it too risky, or is it a marketplace that you guys will continue to pursue?

Well, we continue to look at it. Our beverage can activities are Mediterranean-based in Africa. We don't have anything in beverage in sub-Saharan Africa, and we don't have any plans to go to that region.

We have some food activity there, and that has done reasonably well, and we plan to support that, and that is what we are referring to when we said that Mivisa will now be managing its African business, if you will, along with Crown's African business.

So yes, I think the overall market trends are good throughout Africa. But we're focused as to beverage, on the north of Africa, not sub-Saharan.

Great. Listen, good quarter, and we will talk to you next quarter.

Thank you. And at this time, I will turn the call back over to the speakers.

Okay, good. Shirley, I think that's all of the questions, so we thank you very much, and we look forward to speaking with you in a few months time.

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