Crown Holdings Inc (CCK) 2015 Q1 法說會逐字稿

Good morning and welcome to Crown Holdings' first-quarter 2015 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. John Conway, Chairman of the Board and Chief Executive Officer. Sir, you may begin.

Thank you very much, Ashley. Good morning, 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 details. Tim Donahue will review carefully the performance of the various businesses and discuss our views as we look ahead.

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 2014, and in subsequent filings.

Crowd just finished a very solid first quarter of 2015, which was in line with our overall plan for 2015 performance. In fact, at $0.53 a share, our earnings were at the high end of the first-quarter range which we advised you of in February. The adverse trends that we noticed then have continued, which is to say that the value of the US dollar continues to affect 2015 results relative to 2014, and regional aluminum premiums, principally the European premium and the Midwest US premium, continue to be elevated compared to the first part of 2014. However, premiums are falling and the headwinds that they have caused a reducing.

Crown sales around the world were quite strong. In unit volume terms, beverage cans sales at Crown increased globally by 4%. Global food can volume sales increased by 17% compared to the first quarter of 2014.

There were, however, some notable differences depending upon specific regions. In our European beverage division, our continental European sales were actually down year-on-year as a consequence of some contract timing issues with several large customers. But we anticipate on a full-year basis our European beverage can business will grow in line with the market at approximately 2% to 4% up for the year.

In the Middle East, demand continued to be weak as a consequence of widespread conflicts. Tim Donahue will speak more about this in a moment.

Our North American food can unit sales were down in the first quarter compared to the first quarter of 2014, largely as a consequence of the loss of a large customer. Despite these issues, overall, the performance was very good and we anticipate results for the year will gain strength as we move into the seasonally larger quarters.

We thought it would be useful to give you an overview of Crown's thoughts concerning broad market trends for 2015. We anticipate that the North American beverage can market will be down 1% to 2% over the course of the market -- of the year. We believe European beverage cans will be up 2% to 4%, but that the market in the Middle East for 2015 will be down 5% to 10% versus 2014. In Mexico, we expect the beverage can market to be up between 3% and 5% and in Brazil to be flat to 1% up. In China and Southeast Asia, we forecast beverage can market sales to be up between 8% and 10%.

Regarding food, we believe that the market in the US and Canada will be roughly flat, and in Europe, we are anticipating market growth between 1% and 2%. Tim Donahue will address Crown's performance within all these categories in a moment.

Looking ahead, we remain on plan regarding earnings and free cash flow. Overall, earnings per share in 2015 will continue our upward trend of recent years and free cash will be very strong at a level of at least $550 million.

As you know, we closed on the purchase of EMPAQUE, the leading beverage packaging company in Mexico, on February 18 of this year. The integration is going very well and is on plan. All the businesses are performing strongly, including beverage cans, bottle caps, and glass bottles. The plants we acquired are running exceptionally well at high levels of efficiency and very little spoilage rates.

In February, we announced the construction of a major new beverage can plant in Monterrey in the northeastern quadrant of Mexico, and the project is underway. We expect to be in operation in the first half of 2016, servicing more efficiently and cost-effectively the beverage can markets of northeastern Mexico.

So, in conclusion, we had a good start to the year and we anticipate that 2015 should be an excellent one for the Company. And, with that, I will turn it over to Tom Kelly.

Thank you, John, and good morning. Diluted earnings per share were $0.32 in the first quarter of 2015 compared to $0.17 in the first quarter of last year. Diluted earnings per share before certain items were $0.53 in the quarter, or $0.59 using comparable 2014 exchange rates.

Net sales for the first quarter were in line with 2014 as contributions from the Mivisa and EMPAQUE acquisitions were offset by a negative currency translation impact of $172 million.

Segment income of $192 million in the first quarter includes $16 million of unfavorable currency translation. First-quarter segment income benefited from the inclusion of the EMPAQUE results since the close of the acquisition in February as well as from the Mivisa operations that were acquired in the second quarter of 2014. As John mentioned, these benefits were offset by lower sales unit volumes and higher aluminum premiums in the European beverage segment and a loss of a customer in North America food.

Anticipating a question, with the recent decrease in aluminum premiums, we now estimate the year-on-year impact of the premiums on the 2015 European beverage segment income to be approximately $10 million as compared to our previous estimate of $20 million.

Looking ahead, we are maintaining our estimate of 2015 full-year comparable diluted earnings per share of between $3.50 and $3.70 per share. This guidance assumes an average exchange rate of $1.08 per euro compared to our previous guidance that assumed an exchange rate of $1.13 per euro. As a reminder, we estimate that a $0.01 change in the euro exchange rate has a net earnings impact after interest and tax of approximately $0.012 per share.

We currently project 2015 second-quarter comparable diluted earnings per share of between $0.95 and $1.02 per share. We currently project a 2015 full-year tax rate of 25%, consistent with our previous guidance. Finally, our estimate of full-year 2015 free cash flow of at least $550 million assumes approximately $350 million of capital spending.

I will now turn it over to Tim.

Thanks, Tom, and good morning to everyone. As both John and Tom described, we have had a good start to the year. Global beverage can unit volume sales increased 4% and food can unit volumes were up 17%, resulting primarily from the inclusion of the acquired EMPAQUE and Mivisa assets.

Against our earlier guidance, the first quarter came in a little ahead of where we had anticipated, mainly the result of some customer pull-ahead in European food. As Tom just noted, despite the headwinds that we face in 2015 relating to currency, the impact from aluminum premiums in Europe and Brazil and the numerous Middle East conflicts, 2015 is still expected to be another year of earnings growth for the Company.

In Americas beverage, beverage can unit volumes were up 8.5% in the quarter, due to the inclusion of EMPAQUE, for six weeks. Excluding EMPAQUE, unit volumes were flat across the segment as Latin American growth offset a 1% decline in North America. Brazil was flat in the quarter as a continued favorable shift to cans in the pack mix offset the impact from an earlier Carnival celebration this year and last year's World Cup inventory build.

Currency had an adverse $3 million impact in the segment's income as the average Mexican peso and Brazilian real rates were approximately 11% and 17% weaker against the US dollar, compared to the first quarter of 2014. Currency is expected to be adverse in the coming quarters as well and, for reference, the spot March 31, 2015 US was dollar rate was 14% and 30% stronger against the peso and real, respectively, compared to March 31, 2014.

Just to remind you, the acquired EMPAQUE assets serve the beverage industry and include two beverage can body plants, a plant that manufactures beverage ends, aluminum closures, and bottle caps, and a glass plant with three furnaces, all of which are included in the Americas beverages segment.

Strong demand continues in Mexico with EMPAQUE forecasting growth over 2014 across all of its beverage packaging products, which, at the EMPAQUE level, we expect will offset the currency impact of a weaker Mexican peso.

Earlier in the quarter, we announced the construction of a new two-line beverage can plant in Monterrey to service the growing Mexican market, a project that the EMPAQUE management team has had in their plans for several years.

In North American food, revenue and income declined primarily due to the loss of a large customer account as we previously have discussed with you, and a slower start to the year for many of our customers due to harsh winter weather.

Unit volumes in European beverage declined 8.5% in the quarter as demand remained weak in the Middle East, the result of numerous conflicts across the region, a situation we expect will continue through the balance of the year.

As we discussed with you in February, we are converting one of the two steel lines in our French plant to aluminum and we expect commercial shipments to commence in early May. Income in this segment was in line with our forecast and was down as a result of forcing headwinds, notably currency at $4 million, aluminum premiums at $9 million, lower demand in the Middle East, and lower absorption in the French plant from the line conversion. For the full year, we expect overall segment unit volumes to be up 1%, reflecting growth across Europe and continuing declines in the Middle East.

As Tom noted, our full-year estimate from the impact of higher aluminum premiums compared to the prior year is now forecast to be $10 million, of which $9 million has already been realized in the first quarter in the European beverage segment. We expect a smaller year-over-year headwind in the second quarter, which will be recovered in the fourth quarter with no impact currently expected in the third quarter.

European food volumes improved 32% over the prior year, primarily due to the Mivisa assets acquired in April of 2014 with the integration progressing according to plan. Additionally, shipments were strong from our operations in northwest Europe, a result of some customer pull-ahead in the first quarter. Despite a currency headwind of $10 million, the income increase over the prior year was notable and reflects the Mivisa consolidation, the customer pull-ahead, and what was a slow first quarter in 2014. The segment is off to a good start. However, it is far too early to comment on crop plantings or the expected pack for 2015.

Beverage can unit volume sales improved 10% in Asia Pacific, while food can units advanced 9% in the quarter. The contribution from the unit volume growth offset continuing price compression mainly in China. All operations continue to show growth and we are in the process of installing a second beverage can line in our Bangkok, Thailand plant, which we expect to be complete and begin making commercial shipments in the late third, early fourth quarter this year.

So, in summary, we are off to a good start, although the first quarter is seasonally small. And, as we said, it is still far too early to comment on the food pack. And, with that, I will turn it back over to John.

Thanks, Tim. Ashley, that concludes our prepared remarks, so we are ready for questions now.

(Operator Instructions). Al Kabili.

I guess the first question is on the pull-ahead in Europe. If you can just help us size the amount and I guess the equivalent drag, which I assume is in the second quarter.

I wouldn't describe it as a drag in the second quarter. It is just comparatively year-over-year, we were little better in the first quarter this year and it will offset the second quarter in comparison to last year. But, you know, you're not talking a lot. If you wanted you talk about overall unit volumes in the quarter, maybe 1%, 1.5%.

Okay. That helps. And, broadly, organically, how did unit volumes do in the quarter, adjusting I guess for the pull-ahead?

Call it, instead of 32%, we would have been up 30%, something like that.

Right. But, that's I guess excluding the Mivisa, so just on an organic basis, are we sort of --

As we've told you before, we have moved so much of the production around, it is hard to exclude Mivisa. But, if you want me to take a guess, I will give you a wild guess right now. If you want to exclude Mivisa in the pull-ahead, maybe we were up 3% in the quarter, if you want to guess.

Okay. All right. That helps. And then, a question for Tom is just the D&A, it looked like it declined sequentially, which is a little bit surprising with six weeks of EMPAQUE. And I understand FX is obviously pressuring that reported number, but can you just help us with the moving components on D&A and decreasing sequentially?

Yes. I don't have the FX number in front of me, but that is clearly what is driving it and, again, it was just six weeks of EMPAQUE. We still think about $245 million to $250 million is a good number for the year.

Okay. That helps a bunch. And then final question is just the free cash, it is good to see. I mean, the first quarter, the working capital, seasonal working capital drag was a lot less than what we have been seeing in the last few years. And is there opportunity? I know it is early in the year, but is there opportunity for a notable source of cash from working capital or how are you feeling on that part? Thanks.

The difference -- the improvement over the prior year is really due to the timing of factoring of receivables, so it is purely a timing issue, and that will smooth out over the remaining nine months.

But, Al, I think we have had significant contributions from working capital reduction over the last several years. And I think, as Tom said, we are staying with the cash flow target of at least $550 million. It is just a timing issue here.

Okay, good. Well, sounds good on the progress, and I'll turn it over. Thanks.

Ghansham Panjabi, R.W. Baird.

On the contract timing issue that you called out for European beverage, can you just give us some clarity on that and what is going to change between the first quarter and your guidance for the full year for that business?

Well, the reference I think, Ghansham, was simply to somewhat lower sales in the quarter as a consequence of, frankly, what some of our customers wished. So we are sliding a little bit later into the year versus the first quarter, and I am referring to Europe and that's what we were referring to earlier.

Overall, as we said, we think we are going to be up 2% to 4% in units in Europe, which is in line with what we think the market is going to grow. So just we have a little bit of an anomaly in the first quarter, but it is just associated with some of our customer contracts and some of our customer preferences.

Okay. And then, just kind of thinking about your full-year guidance, you are anticipating a significant improvement in earnings as the year progresses. I realize aluminum is a little bit better than your initial thoughts, FX is a little bit worse, but there is also so much uncertainty across many of your businesses, including the Middle East. So, I guess, what gives you confidence for that improvement, particularly as it relates to the back half of the year?

So, I think, Ghansham, the first comment I will make is that, with the acquisitions, you rightly point out we have headwinds, and I will talk about that in a second. But, with the acquisitions, we're going to, frankly, earn our way through the headwinds. And there is significant earnings power coming from both acquisitions. And then, notably, year-over-year, EMPAQUE, which is a full add this year, especially in the last three quarters and especially in their strong quarters of the second and third quarter. Obviously, the first two quarters this year will feel headwinds from aluminum premium, which, as we just said, we expect to subside and actually turn around in the back half of the year. And then, currency will be the -- give us the most pressure in the first half of the year and then, as we get back -- the back end of the fourth quarter, obviously, the currencies already had started moving. So on a comparative basis year-over-year, you start to lapse some of the currency move, although not all of it. And then we are not going to sit here and forecast where the euro or the other currencies are going, but largely it is the pressure in the first half of the year and the real answer is the earnings growth we are going to have from the acquisitions.

Yes. If I could just add something to that, I mean, two things and they are related exactly to what Tim said. The European food business was very strong in the first quarter. We think it is going to be very strong for the balance of the year. So, the Mivisa acquisition has had the effect of stabilizing the market in many regards and also improving our cost base significantly. And we anticipate those benefits, which you have seen in the first quarter, are going to continue.

And then, of course, the EMPAQUE acquisition, if you want to think about North America as Mexico through Canada, has had a significant positive impact upon the profile of our beverage can business in North America. And that, we think, is going to continue as well.

Okay. Thanks so much guys.

Tyler Langton, JPMorgan.

I just had a question on Europe. The 2% to 4% growth that you are looking for, could you just talk a little bit about what is driving that? Is it cans taking more share? Is it just a strong market and is it sort of I guess different for beer versus CSD?

I think, for several years, we have seen a pack mix shift change in Europe as well and underlying growth. I mean, there is growth not only for carbonated soft drinks, although at a lower rate than beer, but beer is growing and beer in cans is growing as it takes share from glass. It has been a market that, if you looked out over the last 10 years, it would be -- you wouldn't be wrong to say that it has grown 3% to 5% despite numerous hiccups in the economies over those years.

Okay. Great. Thanks. And then just with North American food, did you say volumes were down I think close to 10% in the quarter?

Well, we did lose a very large customer account.

Right.

And that number would not be a crazy number. And then, you obviously have seasonality. It has a bigger impact in the first quarter, just given the seasonality of the business. But yes, that's not a wild number.

I mean, so I guess for the remainder of the year, is that the type of volume declines that we should see throughout the remaining year?

I think you will see in the first two quarters, something like that. And I think in the back half of the year, it won't be as great.

Okay, great. Thanks. so much.

Alex Ovshey, Goldman Sachs.

So on the premium, just to take a step back, from the start of when it really started to increase, I don't remember exactly when that was, 2012 or 2013, how much negative impact has it had on the earnings of the business? And I know you said you would get $10 million back this year relative to initial expectations. But if we sort of assume that we freeze the price at where it is today, what kind of tailwind would you potentially have for 2016?

Yes. I wouldn't say -- it is only a tailwind if it goes all the way back to the rates of $0.04 a pound. But, in any case, cumulatively, if you look at the point to point, it's cost us about $50 million in EBIT since it really started moving.

In Europe.

In Europe.

Thanks. Would that include the $10 million that you would see this year or would that be --

Yes.

It would include the $10 million.

It would include the $10 million.

Okay. And so where else are you seeing the headwind from the premium and can you quantify that?

Brazil I think really just started last year.

Last year. And in the first quarter this year, if you wanted to look at a headwind number for Brazil, $3 million.

Great. Thanks, Tim. European food, do you expect pricing to contribute to earnings in that segment in 2015?

In European food?

Yes, in European food.

I think pricing is stable.

Got you. And then North America, of course I appreciate all the color from your end on the annuals for the businesses. In North America, I think you said down 1% to 2%. So are there enough levers to pull in North America where even if you see 1% to 2% volume decline, the operating earnings in the business don't necessarily have to decline in 2015?

Yes. I think we are always getting better in the factories, our performance productivity always improving and there is always room for improvement, lowering our costs.

Got you, great.

Anthony Pettinari, Citigroup.

Just to follow-up on Ghansham's question, if we look at Q1, acquisitions obviously drove a lot of income growth in European food and Americas bev and the rest of the segments were flat to down. My question is, is that a good template for 2015? Understanding you don't give segment guidance, are there segments outside of European food or Americas bev where you think you can really grow earnings year-over-year in 2015?

I think, as we said, there are a number of challenges we have this year. You have got premiums in the first quarter in European beverage in Brazil. You have got currency across all of our non-US operations. And these are not insignificant currency impacts. We are not surprised by the strength of the dollar, but like many people, we are probably surprised by the -- how fast it moved and how far it moved in that period of time. But currency is going to have a big impact for everybody, not just us, and that is going to overshadow the fundamentals of the business, which we believe are quite sound. But, looking ahead, as I said, the fundamentals are sound and we are going to do well.

Now, as I said to Ghansham, with the acquisitions, and then primarily EMPAQUE, because year-on-year it is an entire add this year, we're going to earn our way through those headwinds, which are really outside the Company's control in large part.

Okay. That's helpful. And then I was wondering if you could share what your utilization rates are in North America and if you could talk about opportunities for specialty can conversions or the demand that you are seeing from customers for specialty cans and how you (multiple speakers).

In North America, I would say our utilization rates are 90% to 93%. Obviously, as we get into the high season, which we are just starting to enter now, through August, that number is really above 100%. And there are opportunities for specialty can conversions. Customers are looking to rebrand and market their products and drive more sales. And we have those opportunities, like others, and we are evaluating those.

Okay. That's helpful. I'll turn it over.

Chris Manuel, Wells Fargo.

A couple quick questions. First, kind of a big picture question, John. And before you -- I know you're going to point out to me that you are a small -- the smallest player in Europe, but when you think about the opportunity to recover aluminum premium, I think the number Tom just gave was in the order of $50 million of cumulative hit. As you get into 2016 and beyond and in theory you would begin kind of recovering some of that, how do you feel about the opportunity or your thought process, I should say, as to how you would want to potentially change contracts? Would you want something that would make it more like North America where you don't have the risk? How would you think about long-term structure and now being the opportunity to do so?

Well, we have said for a number of years, Chris, that we thought that the European structure was very risky and not advantageous, but it was one company's view and it has proven to be the case. So now I think, obviously, I think there is going to be momentum to move more to the North American model, but the issue is going to be timing. And we wouldn't want to do it right now. We want to do it when the premium reaches more reasonable levels. So we will see. I think maybe there will be some appetite for that with everyone from our customers' perspective. They are able to hedge, we can hedge for them so there can be protection on erratic, unexpected price movements, but we will see what occurs. But we would like to see a movement to a more sensible arrangement. It has worked pretty well in North America and we don't see any reason why it couldn't work in Europe.

Okay. That's helpful. Just one other question. For interest expense, Tom, what do you have baked in there for this year? And then I had a follow-up, too, related to currency.

Probably about $265 million or so for interest expense for the year.

Okay. That's helpful. What we think about -- I appreciate how you have couched it as you are your way through the year to offset some of the currency stuff, but I also appreciate that has cost you about $2 billion to earn your way through the average currency. But when you think about the opportunity to maybe place more debt different places, what can you do to help offset some of the currency issue? I think you are doing most of your sourcing in local regions anyway. Is there anything you can do to kind of help offset some of the currency? Maybe place more debt in different regions, et cetera, number one? And then, number two, what can you do in the Middle East to mitigate some of the risk with geopolitical stuff that has got volumes off kind of upper single digits?

I will take the interest, Chris. Yes, there are things we can do with a combination of lower interest rates in Europe as well as simply driving down the profits in Europe compared to the US. And that is, in fact, something we are looking at now.

Yes. I think, Chris, on the Middle East, there is not clearly a quick and easy answer. The markets that we service are primarily the Gulf states, Saudi Arabia, Iraq, and Jordan, in the Middle East, of course North Africa out of Tunisia. So as long as those remain the geographic markets that we can reach easily and legally, it is hard for us, frankly, to imagine how we are going to be able to turn around the volume picture other than simply wait for greater stability. And there have been periods of greater stability where sales have done very, very well, as you know.

Now, to the extent that something happens on the other side of the Arabian Gulf, and the territory can be expanded, well, we are extremely well situated to take advantage of that. But we are just going to have to wait and see how that goes.

Okay, that's helpful. Thank you.

Philip Ng, Jefferies.

It has been about a year now since you've acquired Mivisa. Any thoughts on how the integration is coming along? And have you identified any incremental synergies? I think, in your prepared remarks, you alluded to a strong back half, so are the cost savings flowing a little more fully into the latter part of the year?

Yes, I don't think I alluded to a strong back half. I think what I said with Mivisa is that the integration is progressing according to plan. I would say that we are fully integrated from an operations standpoint in terms of synergies. I think we estimated at the time we made the acquisition about EUR25 million of synergy savings, and I think we are on track to achieve that through the end of next year. But I think the business is going to perform well.

I don't know -- the reference to the stronger back half. We have a stronger back half in a number of businesses just because the headwinds we face start to subside in the second half, or the comparisons. But food is going to be strong throughout the whole year in European food.

Okay. That's encouraging because comps are somewhat tough, especially in 3Q. How should we think about D&A and CapEx 2015 and 2016 to factor in price accounting for EMPAQUE and some of your new expansion projects with Monterrey and Bangkok?

CapEx Tim can address, but D&A, again this year, we are looking at $245 million or so. That has got a full year of Mivisa and most of the year of EMPAQUE. So I don't -- a little early to say, but I wouldn't expect it to be significantly different next year.

Yes. And then, you're going to spend, whether it is Monterrey or whether it is Thailand, it is included in the $350 million of CapEx. So you can to do the math. Take $350 million and divide it by the useful life and take a half a year in the first year and a full year in years two and onwards. So it will add -- it certainly adds, but you have assets that roll off as well and you have got currency this year that is dragging all the line items down. It is just a translation item, but it will be up a little bit just on the spending.

So $350 million this year and $350 million next year as well? How should we think about (multiple speakers)?

I didn't say $350 million next year. I said $350 million this year.

Okay. All right. That is helpful. And then the Monterrey and Bangkok expansion, how much of that business is locked up contractually?

Well, Monterrey, the market is growing 4% per year. We have a significant number of units under contract in the Monterrey region that we currently supply for Mexico City. So we offer great savings -- freight savings in service to the customer by being in Monterrey and we take advantage of the growing market.

Thailand, the market is growing. It is a market that is moving entirely to sleek for soft drink and we just need more capacity in the region.

Okay. And just one last one for me. One of your competitors obviously added a plant on the food can side this year. It is up and running. Any disruption on that front that was incremental? And how they have generally behaved in the marketplace?

I would say the only impact we have seen has been the loss of a large account that we told you about last year.

Okay, all right. Thanks.

George Staphos, Bank of America Merrill Lynch.

Thanks for taking my question and all the details. I guess first question I had, John, and I just wanted to make sure there wasn't anything behind this. You talked about price compression in Asia and you said it was primarily China. Should we assume it is 100% China or are there any pockets of price compression beginning in some of what have been your better regions?

No, it wasn't entirely China. It was predominantly China. And, George, in Southeast Asia, the supply demand is still in quite good balance, growth is still very strong, but we have several more new competitors over the past several years than we have had in the past. So simply, the results of more people competing, there is always going to be a little bit of an effect on price and that is what we have seen in Southeast Asia. Does it alarm us? It's kind of natural. We have expected it, but that is what we are referring to.

Okay. I appreciate that. John, I know it is difficult to comment or predict something like this, but in China, what do you think would have to happen to trigger a round of consolidation or more rational focus on return within the industry, not yourselves, of course, but other players in the market so that the can market in China, specifically beverage cans, could be what you thought it would have been a few years ago?

Well, George, you can speculate on what might trigger consolidation as well as I can. You could argue that a great more deal pain. I suppose you could point to the Chinese banking system or the state owned banks going to begin to drive try to collect interest and principal from people to whom they have loaned money who have political connections. We don't know. And there is that.

And then, as to more rational pricing that is more associated with return on invested capital, what is happening in the can business in China is not unique. It is happening, it seems to us anyway, in virtually every industry in China, certainly those that are involved in commodity products, which is that we are competing to a significant degree with state owned companies who do not appear to have any regard for return on investment at all. They are focused on simply making more units, selling more units, employing more people and following a strategic plan that they carry out without regard to the consequences of the plan. So this is a China problem. I think everybody in China recognizes it, including the Chinese government. As to when it is going to be addressed, I have absolutely have no idea. But this participation of these very large state owned companies is an interesting -- has an interesting effect on everybody who is trying to earn a decent return on capital in China.

Thanks for the thoughts on that, John. I appreciate that. I guess the two questions I had related -- can you update us at all on your capital allocation priorities? You talked about capital spending. But the free cash flow that you generate subsequent to that, is it largely, in your view, going to be towards debt pay down? And can you comment at all, recognizing it is a sensitive topic, what opportunities and, frankly, what challenges might arise from what have been some other consolidating events within the industry?

Well, on the first question, the capital allocation, yes, we would expect all the free cash flow to go to debt pay down this year and at least a good portion of it next year.

I think, as Tom said, all of it goes to debt pay down. I think, as Tom previously described, the leverage when you do that gets to about 3.5 times by the end of the year. We still believe that provides us with a very flexible capital structure that, if we are afforded opportunities that make sense, that we can participate in those opportunities.

Okay.

Yes. And, George, and your question of consolidation, we are all -- we, of course, among others, are watching with interest this consolidation that is underway between two of our major beverage can competitors. Generally speaking, consolidation is good for the industry, good for the customers, reduces costs and could present some opportunities for Crown. So we will just sit and watch and hopefully we'll be the beneficiaries, but even if not directly, certainly indirectly we think it is going to be to Crown's benefit.

Okay guys. Thanks for the time. I'll turn it over. Good luck in the quarter.

Scott Gaffner, Barclays.

Tom, I just was hoping you could quantify the change in the FX, the rising US dollar. What sort of EBIT hit are we now talking about, just the incremental change from the last guidance you gave for the whole Company?

Don't have the number with me, Scott. I am sorry. I can tell you off-line. I don't have it with me.

Right. I guess where I was going is it seems like the EBIT hit from that change would likely be more than the $10 million aluminum benefit, if you want to call it that, from the premium declining. Is there anything else fundamentally within the business that has changed and improved?

Scott, it is Tim. Let me just -- I think what we said was that our current estimate is now $1.08 average versus $1.13, which is EUR0.05, and we said it is $0.012 per share [per $0.01]. So that is $0.06 and $10 million pretax more or less comes to around $0.05 or $0.06. So a $10 million reduction on the premium kind of offsets that currency move.

Okay.

Of course, other things happen as well. I mean, there are lots of moving pieces.

Yes. Remember, while the number in EBIT on currency is larger, it is offset by the impact on currency at interest expense and minority in tax and everything else. So it whittles its way down. That is why you only get $0.06 per share on a EUR0.05 move.

Sure. Fair enough. I was just looking at the other currencies as well. But it sounds like they are in the ballpark.

We are giving -- when we say $0.01 equals $0.012, we are aggregating our currencies and we are using the euro as a proxy for you.

Okay. And then, just on the industry consolidation piece that George was mentioning, is there -- do you know of any major customer contracts coming up for renewal, whether it is in your business or just within the industry in general, over the next 12 months. I would think that might be some opportunity for you there.

We don't have that information. There are various around the world going off all the time. So we don't look at that as an opportunity for Crown and we don't see it as a particular opportunity.

Okay. And then lastly was on Latin America. I think you mentioned 0% to 1% for the full year. I don't know if that was the market rate or your forecast. But it sounds like 1Q -- can you just remind me what you said about 1Q? It sounded like maybe Carnival helped out little bit in the quarter. I'm just trying to get more to the quarterly trends there within that business this year because I think it is going to be quite lumpy.

Yes. What we meant Scott was actually the reverse. Carnival was more helpful last year than this, but in spite of that, the market was essentially flat. But what you heard was 0% to 1% for the market, 0% to 1% for Crown.

Brazil.

For Brazil. Yes, exactly. We are talking about Brazil. And so we think it is just going to be flat. It's going to be very hard to grow because of the two things that Tim mentioned, the World Cup and the fact that Carnival was --

Earlier.

-- somewhat earlier, yes.

So Scott, that is Brazil. But the other Latin countries that we operate in, as we said, we expect roughly 4% growth in Mexico and Colombia is growing quite nicely as well.

Great. Thanks for all the color guys. Have a good quarter.

Adam Josephson, KeyBanc.

A couple on premiums. One is I guess for Tom. How low do premiums have to go in order for you to actually get a benefit in 2016? And just for context, where are premiums now for you in both Europe and the US?

To get a benefit in 2016?

Right.

That is tough to say right now because you have the averaging effect and we don't know what is going to happen.

The premiums -- you have to look at Midwest, Rotterdam, duty paid, duty unpaid, the Japanese premium, so there are a number of them. But if we just look at the Midwest premium, I think the most recent quote is around $390 a metric ton, and the Rotterdam duty paid is something like $270 a metric ton.

All right. Thanks. And just one more on the premiums. Do you have a good sense of what is driving them up and down as dramatically as they have been going up and down? And do you have any thoughts as to what you think the normalized level for these premiums is or should be?

Adam, I think the answer is manipulation, right, what moves them up and down. The normalized level -- and John alluded to it earlier on a question that was asked, in terms of would we want them to be pass-through, but historically these premiums have been on the order of about $100 a ton. And, for whatever reason, they skyrocketed to $500 a ton. So I think we expect them to go back to historical norms, which is somewhere between $100 and $200 a ton.

Yes, Adam, you probably know the history of this as well as we. And as Tim said, the regional premiums are supposed to simply reflect differences in supply-demand and storage costs in different regions of the world for aluminum ingot. And with Central bank imposed exceptionally low interest rates, even negative interest rates, traders have found that they can leverage their investments very, very highly and easily at extremely low interest rates and sell forward on a curve that is in contango, that is upward. Now, that trade has recently become not nearly as lucrative and that, combined with some of the changes in the warehouse rules, has made it more risky as well. So as Tim said, yes, we ought to get back to something that reflects real trading conditions, and maybe we will, but the distorting factor is basically the metal trader.

Got it. Thanks, John, for that. And just one more on the consolidation that you talked about earlier. How do you expect large beverage can customers to react to the consolidation that you talked about? And, in a previous case in the (inaudible) merger, customers didn't seem to respond all that favorably to it. So just hoping for your perspective on that.

I really think it is a question of customer by customer. It is possible that some of the very, very large customers might see themselves to be in a position to realize a competitive benefit against some of their smaller competitors. I don't know. Many of our large customers strongly feel that they want multiple sources of supply as simply a matter of sound purchasing policy. So it's really, really difficult to characterize them collectively.

Thanks a lot John and Tim, appreciate it.

Chip Dillon, Vertical Research Partners.

One thing I noticed is that, in a way, the Crowd shareholders might actually see more free cash than we were expecting because I notice the preferred dividends to the -- I'm sorry, the dividends to the minority interest were down by more than half in the first quarter. And I believe that must be because of the heavy concentration of the minority interest in the Middle East. Should we expect, kind of based on your comments, that that number that you end up paying for the year could be -- I mean, will it be cut in half? I know in the first quarter went from $23 million to $9 million.

No. I think that would be kind of a dramatic drop. I think, last year, we paid about $77 million. We were originally estimating about $70 million of minority interest dividends this year. Perhaps that number comes down a little bit, as you say, depending upon how we do in the Middle East and in fact Brazil.

Depending on what we do when we pull Jordan.

Yes. I think the first quarter is really just a timing issue, but overall the numbers should be down little bit.

Okay. That's very helpful. And then when you look -- and I know your balance sheet jumps all over the place seasonally with working capital, et cetera. But if we think in an abstract sense, could you see, with Mivisa and EMPAQUE being done, could you see a situation like a year from now after you have generated the $550 million in free cash of being in a position to make, let's say, $1 billion in acquisitions? And would you probably need to use some equity to go that high or do you think a year from now you would be comfortable entertaining it at least if a situation came about where you could go that high and it was very accretive, would you consider doing that with debt based on what you see today?

That is a good question. I think, as we said earlier, and Tom has given everybody the numbers before, just by paying the debt down this year, we are at about 3.5, 3.6 times. And you pay a little bit more debt down in 2016 and you could see yourself back to 3 times. So clearly, if there was a large acquisition that made sense and it was a quality franchise, we would again see doing it with all debt, no equity.

Got you. Very good answer. Thank you very much.

Andrew Feinman, Iridian.

Well, Chip just asked all three of my questions, but I will just ask you this. At the end of this year, could we see net debt around $4.8 billion to $4.9 billion?

Absolutely.

Absolute, yes. That sounds about right.

Gross or net?

Oh, probably about 3.5 times.

Okay, that's it.

(Operator Instructions).

Ashley, it appears we don't have any further questions, so with that, I think we will wrap up the call. Thank you very much.

That concludes today's conference. Thank you for participating. You may now disconnect.