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Crown Holdings Inc. (NYSE:CCK)

Q1 2012 Results Earnings Call

April 19, 2012 9:00 AM ET

Executives

Timothy Donahue – Executive Vice President and CFO

John Conway – Chairman and CEO

Tom Kelly – Senior Vice President, Finance

Analysts

Alex Ovshey – Goldman Sachs

Philip Ng – Jefferies

George Staphos – Bank of America

Chris Manuel – Wells Fargo Securities

Ghansham Panjabi – Robert Baird

Mark Wilde – Deutsche Bank

Chip Dillon – Vertical Research Partners

Al Kabili – Credit Suisse

Phil Gresh – J. P. Morgan

Adam Josephson – KeyBanc

Scot Gaffner – Barclays Capital

Todd Wenning – Morningstar

Operator

Good morning. And welcome to the Crown Holdings First Quarter and Full Year 2012 Earnings Conference Call. Your lines have been placed on listen-only mode until the question and answer session. Please be advised that this conference is being recorded.

I would now like to turn the call over to Mr. Timothy Donahue, Executive Vice President and Chief Financial Officer. Mr. Donahue, you may begin.

Timothy Donahue

Thank you, [Shirley] and good morning to everybody. Welcome to Crown Holdings First Quarter 2012 Conference Call. With me on the call today are John Conway, our Chairman and Chief Executive Officer; and Tom Kelly, Senior Vice President of Finance.

Before we begin, I would like to point out that on this call as in the earnings release, we will be making a number of forward-looking statements. Actual results could vary materially from such statements.

Additional information concerning factors that could cause actual results to vary as contained in the press release and in our SEC filings, including comments in the section titled Management’s Discussion and Analysis of Financial Condition and Result of Operations in Form 10-K for 2011, and in subsequent filings.

A reconciliation of Generally Accepted Accounting Principles to non-GAAP earnings can be found in our earnings release and if you do not already have the earnings release, it is available on the company’s website at crowncorp.com. You will also find reconciliation from net income to EBITDA, credit ratio computations and supplemental cash flow data on the company’s website.

I’ll first review the quarter, update our 2012 guidance and then hand the call over to John for his comments.

Diluted earnings per share were $0.46 versus comparable earnings of $0.48 in last year’s first quarter. On a currency comparable basis, net sales increased to 5.4% over the prior year on the back of strong unit volume sales in North American food and beverage cans globally.

Demand in our European three-piece steel packaging businesses, that is food can enclosures, specialty packaging and aerosol cans was soft in the first quarter, and while reflecting over all in all conditions in Europe, we caution that the first quarter is a very small quarter overall in Europe. And with respect to our food business, most seasonal crops have not yet been planted.

Inventory re-pricing non-recurring this year impact segment income globally in our food, aerosols and specialty packaging businesses.

In America’s beverage, revenue increased 4.3% over the prior year with overall volume in the division up more than 5%. Volume in North America was flat to the prior year, while Brazil was again up strong double digits.

Our volume growth in Brazil continues to come from strong demand in those regions, where we added considerable capacity last year. That is in the South at our new Ponta Grossa plant and in the Northeast, with a second line in our Estancia plant.

Sales unit volumes were up more than 5% in North American food, due to an early pack for some products and customers pulling shipments ahead. Segment income at $32 million in the quarter, was up $4 million over last year’s total of $28 million, referencing contribution from additional sales unit volumes and strong operational performance, which more than offset the 2011 inventory re-pricing.

Increased demand in Saudi Arabia and United Kingdom contributed to an overall 8% increase in European beverage sales unit volumes, segment income down $3 million in the first quarter, compared to the prior year reflects carryover of prior year price compression.

On a currency comparable basis sales in European food were level to the prior year as 5% lower sales volumes offset the impact of higher tinplate costs.

Segment income at 10% to net sales compared to 12.3% in the first quarter of 2011, reflects a lower volume levels and the impact of 2011 inventory re-pricing, which should not recur in 2012, and currency translation.

Specialty packaging revenues were down $10 million to the prior year, due to lower promotional sales and $3 million of currency. Segment income reflects lower sales and the inventory re-pricing last year.

In Asia, we are off to another strong start this year with beverage and food can volumes up more than 12% and 9%, respectively.

Global aerosol can volumes were down 8%, reflecting softer economic condition and lower demand for this premium dispensing packaging. Compared to the prior year, income was lower as our aerosol business did not benefit from the inventory re-pricing as in the prior year.

Supply remains tight in Asia with demand picking up in March post the Chinese New Year inventory rebalancing. Commissioned last year both the new planned Hangzhou, China and the second line in Cambodia are performing well and progressing up their respective learning curves. Our newest plant Putian in China successfully began commercial operation at the end of March and will go to a full three-shift operation this month.

In Guangdong Province we have a large new plant in Heshan which over the next 30 days will begin production of beverage end. The can line in Heshan is expected to shift its first commercial cans in August.

Further Western China, we expect to begin commercial shipments from another new plant in Ziyang in about six weeks.

So a lot of activity, as has been the case over the past two years, but the construction and start-up teams continue to execute multiple products -- projects very well, which will allow the company to meet future expected demand.

The effective tax rate from ongoing operations was a bit over 26% in the first quarter and for the full year is still projected to be between 28% and 28.5%.

It is early in the year, but we are on plan and at this time, we still estimate full year 2012 earnings per diluted share from ongoing operations to be in the range of $2.90 to $3.10 per share in the first half of 2012 to be comparable to the prior year. Free cash flow after net capital expenditures of $325 million is projected to be at least $325 million.

And, with that, I’ll turn it over to John.

John Conway

Thank you, Tim, and good morning. As usual, Tim has carefully summarized for you the highlights of our 2012 first quarter performance. We are right on our plan for the year and business is unfolding essentially as we thought that it would. Beverage can demand continues to be strong, particularly Southern Europe and the emerging markets.

In Europe, the demand for food, aerosol specialty packaging has been adversely affected by the overall economic condition. However, we’ve planned for this and developments have been in line with our expectations. As Tim mentioned, this is a seasonally very small first quarter, so we do not read too much into it.

The many major capital projects underway to increase capacity principally for beverage cans are on budget and on schedule. We continue to believe that the countries and specific factory locations that we have selected together with the customer relationships that support these investments are well chosen and that resulting sales and profit growth will be substantial and in line with our plans.

In sum, we expect another year of very solid growth and improving profits.

And, with that, operator, we are prepared to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Alex Ovshey with Goldman Sachs. You may ask your question.

Alex Ovshey – Goldman Sachs

Good morning, guys.

John Conway

Good morning.

Timothy Donahue

Good morning.

Alex Ovshey – Goldman Sachs

On the inventory holding gains not the recurrent, can you just provide more clarity of what the actual headwind was for you in the quarter and how it was allocated across the steel tinplate businesses?

Timothy Donahue

Sure. I think in each of North American food and European food about $5 million to $6 million, in specialty packaging $2 million to $3 million, aerosols Europe and the U.S. I think we would say in each about $3 million. So overall about $15 million, $16 million.

Alex Ovshey – Goldman Sachs

And is there any incremental headwind that you expect to see in the second quarter?

Timothy Donahue

No.

Alex Ovshey – Goldman Sachs

That’s helpful. Thank you. And then second question, it seems like all the projects in China are on track or at least the ones aren’t that are scheduled for 2012 startup. Can you just comment on what percentage of the business in China is contracted at this point?

John Conway

The -- are you referring to the new plants or all the plants?

Alex Ovshey – Goldman Sachs

The new plants.

John Conway

Yeah. The, all of the new plants for the year are essentially fully loaded with contracted business. So we’re talking about I think, Tim, just mentioned, Putian in the first quarter, Ziyang in the second and Heshan in the third.

Alex Ovshey – Goldman Sachs

Thanks, John. Just last question on pricing in European beverage cans. How should we be thinking about the headwind from the carryover in the pricing compression in Europe this year, I mean is it going to be a headwind for the entire year or at some point that headwind starts to abate?

John Conway

No. I think it’s going to significantly diminish in the second quarter and we began referring to margin compression in Europe in the second quarter of last year, and but we think we’re largely through it. However, you did see a small impact or a continuing impact in the first quarter, but it’s going to diminish to virtually nothing over the balance of the year.

Alex Ovshey – Goldman Sachs

Great. Thanks, John and Tim.

Timothy Donahue

Thank you.

Operator

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

Philip Ng – Jefferies

Good morning, guys. It seems like you’re seeing a bifurcation of trends in beverage and food in Europe. Just want to get a sense what’s driving that?

John Conway

Yeah. I think the first thing to remember about food is, it is a seasonally very small quarter. It is not unusual for the European customers to move filling volumes around from quarter-to-quarter. It’s not unusual for them to fall from Crown in a quarter to the disadvantage of a competitor and the reverse in the next quarter.

So we’re not too alarmed about the food situation as Tim said. But we acknowledge the European economies are generally weak and you’ve got to take that into account and we did. So we’re not overly concerned about food or any of the steel packaging products in Europe.

Turning to beverage, all the things that we’ve talked about in the past regarding beverage continue to be true. That is to say what they call off-premises consumption in Europe, take home continues to grow at the expense of the so-called on trade, the bars and restaurants.

Particularly so because of the economic conditions but in addition because of drinking and driving laws, because of smoking, et cetera. So that continues. The brewers continue to move pack mixed more to cans away from glass. We think that’s going to continue as well.

And of course, in the Middle East, as we referenced and Tim referenced, we had quite a strong quarter as well. So, I’d just say that all those factors put together but there’s nothing really new here. These are continuations of trends that we’ve talked about in the past.

Timothy Donahue

Phil, just one thing on food cans Europe, just we had to look back and last year in the first quarter it was an unusually strong volume quarter.

Philip Ng – Jefferies

Okay.

Timothy Donahue

… volumes and last year’s first quarter in European food were up 3% to 4% and as we look at profitability, our 2012 profitability in the quarter is right on top of the 2010 profitability as you level out the volume issue and the re-pricing side. As John said, it is early in the year and we don’t get too excited at this point.

Philip Ng – Jefferies

Got you. And you guys referenced that you’re seeing good strength in the Middle East, is that why you’re pulling forward that plant in Turkey?

John Conway

Well, I mean, the Turkey plant has been under, as you know it’s been planned for quite some time, but yeah, Turkey is needed by us to support various places including even Southeast Asia, so that’s one of the reasons.

Philip Ng – Jefferies

And then just one last, final question, I believe RG Steel is adding a mill on tinplate, is that going to impact your cost for any in much this year, and just supply over all for food can -- for tinplate?

John Conway

No. It will not. It will never. Our deals for tinplate are all set and done.

Philip Ng – Jefferies

Okay. Thanks, guys.

John Conway

Thank you.

Operator

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

George Staphos – Bank of America

Thanks. Hi, everyone. Good morning.

John Conway

Good morning, George.

George Staphos – Bank of America

John, I have a question regarding the press release. You mentioned towards the end of your comments that you’re going to closely monitor demand trend in all your markets and you’re committed to conserving deployment of capital, and that’s always true, and looking back historically, the company has done a very, very good job of that.

Is there any other takeaway that we should have from that other than the obvious, are there signs, perhaps, despite what you said this morning thus far that maybe you are concerned about supply/demand or the outlook say, two or three years from now in any of the emerging markets?

John Conway

No, George. It doesn’t and but it just makes reference to the fact that the various projects we have announced and listed for you in the past, we have a significant number and certainly you’re looking at eight, fairly significant projects that are coming on and going to be commercial in 2013.

So those in the first and second quarters, we’re pretty confident about, we’re confident about all of them, but the, those projects that are further out into the future will adjust depending on how the markets unfold.

But we still believe that all the growth and opportunities that we have identified in the emerging markets are going to come good. We continue to be encouraged by the fact that our customers, the big soft drink guys, the brewers, the Asian drinks, the retorted juices, et cetera, are all continuing to add capacity, all continue to be very bullish in these markets. And so are we, but we just felt that it was worthwhile to put in there, but we’ll adjust our plans as they adjust theirs.

George Staphos – Bank of America

Okay. Appreciate that. When we moved to the non-reportable segment and the decline on EBIT year-on-year, I think you mentioned earlier and talking about the inventory re-pricing or lack of that gain this year that it was about $3 million in aerosol globally, if I heard you correctly. A, could you…

Timothy Donahue

Yeah. $3 million each in aerosol North America and Europe, so call it $5 million to $6 million.

George Staphos – Bank of America

Okay. Fair enough. So was that the primary reason then for the segment…

Timothy Donahue

In aerosol volumes were down 8% globally as well.

George Staphos – Bank of America

Yeah. Okay. So then could we confirm that…

Timothy Donahue

The volume

George Staphos – Bank of America

… your Asian can profits even though you don’t disclose them were actually up year-on-year and could you put a percentage around what the gain might have been in EBIT year-on-year and…

Timothy Donahue

In percentage terms, I would say the profitability in Asia was up at least 10% and that’s after, for us, fairly significant startup cost that we’re absorbing for multiple projects that are either in construction or just completed.

George Staphos – Bank of America

Okay. That’s very good. Two last ones and I will turn it over. At this juncture, what are the growing indications for Europe across your various regions, any color that you could share that’s relevant from your customers in terms of what they think they might be planting and what customers’ ability to buy might be?

And then in terms of the beverage business globally, frankly, more so in North America, any early read on 2013 in terms of contracts and how good you feel about your volumes? Thanks guys. Good luck in the quarter.

Timothy Donahue

Thank you.

John Conway

Yeah. Thanks George. As to food, we’re not seeing anything abnormal and we feel that the planning and so forth are going to be reasonably normal and pretty good. Now, mix of crops always varies and I won’t get into that. But overall, we think the, what we’re getting from our customers is promising. Moving on to the beverage question, I imagine it’s directed to a degree at the North American beverage situation.

George Staphos – Bank of America

Yeah.

John Conway

We’re not going to get into individual contracts but I’ll say this, we think, we have excellent relationships today with all of our beverage canned customers in the United States and Canada. We monitor very, very closely our quality service innovations, sustainability, et cetera performance.

We ask our customers and they do to rank us versus the industry. With every customer today that we have, we’re either at the top or tied for the top. So we feel very, very confident about demand outlook over 2012 and 2013 even into 2014. So we can sit here today and tell you don’t be worried about Crown for you conceivable for the next several years in beverage in North America.

George Staphos – Bank of America

Okay. Thank you, John.

Timothy Donahue

Thanks, George.

Operator

Thank you. Our next question comes from Chris Manuel with Wells Fargo Securities. You may ask your question.

Chris Manuel – Wells Fargo Securities

Good morning, gentlemen.

Timothy Donahue

Good morning, Chris.

John Conway

Good morning, Chris.

Chris Manuel – Wells Fargo Securities

Couple of questions for you. I want to go back to an earlier question regarding, I believe some of the capacity you’re adding in Asia is not all the way sold out yet. I think particularly stuff that comes online in 13 and you answered for us, I believe, what you’ve already added is running at full capacity, what you’ve got slated to come on either just coming on or coming on in the near-term is sold out? Can you talk a little bit about where you are at speculated capacity and maybe what portion is sold or how that’s progressed over the last three, four, five, six months?

John Conway

Yeah. I’m looking at our list for 2000 projects as we speak, George, I’m sorry, Chris, 2013 projects and I would say we’re 60% to 70% pre-sold on the 13 projects.

Chris Manuel – Wells Fargo Securities

Okay. And if my memory serves, I think last quarter, you were, I believe less than half. So that’s you’re making good progress there, is that fair?

John Conway

Yeah. It’s true.

Chris Manuel – Wells Fargo Securities

Okay. Second question I had was with regard to South America. I believe you’re still moving forward, you’re adding your plant in Belem. Could you just give us an update there? Is that all sold out, does that come online as well?

John Conway

Yeah. We -- that plant if you will recall is supported by a large customer who’s very large brewery is just several miles from our new plant. And so we still plan to begin commercial production in the first quarter of 2013 and that’s one of the ones that I included in capacity that has firm contractual commitments supporting it.

Chris Manuel – Wells Fargo Securities

Okay. That’s very helpful. Last question I have is, in North America, you mentioned that the food business had some pull ahead. Could you maybe give us a little more color there? That’s something that, I guess, a bit abnormal, usually, customers try to delay as long as they can for working capital reasons or what have you? Maybe a little more color as to why you think customers were pulling ahead so much or is it something you think that, last year was a substandard year as far as crops go and things maybe, the volumes end up being a little better this year than what you’re anticipating?

John Conway

No. I wouldn’t, George, don’t lead too much into it. First of, or rather, Chris, I’m sorry, don’t read too much into it. The volumes as Tim mentioned are seasonally low in the first quarter anyway. And if you think about soups and prepared meals, pet food, dry beans, you’ll be surprised, the customers do have some, it is possible for them to move filling around a little bit.

Also we have a number of shared accounts. At times we can do a little better in the quarter and a competitor do better the next quarter. So we don’t read too much. We’re really delighted that we did so well in food in the first quarter but we recognized that this will balance out over the course of the year. As Tim mentioned, we’re still on plan for the year and that’s what we’re providing for.

Chris Manuel – Wells Fargo Securities

Thank you very much. Good luck, guys.

John Conway

Thanks.

Timothy Donahue

Thank you.

Operator

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

Ghansham Panjabi – Robert Baird

Hi, guys. Good morning.

Timothy Donahue

Good morning, Ghansham.

John Conway

Good morning, Ghansham.

Ghansham Panjabi – Robert Baird

Yeah. Just given all the macro headlines recently, China apparently slowing and Brazil having slowed over the last few quarters? John, can you just sort of give us a regional outlook for the rest of the year for your global beverage can business and maybe sort of overlay what industry supply/demand looks like for some of the emerging markets?

John Conway

Yeah. I think our estimates of beverage can growth around the world are not too different from what you’ve been hearing from can sheets suppliers and bits and pieces of what we’ve heard from other people in our industry. We still think, our European beverage business will be up 5% to 7% units for the year.

We think Brazil’s going to up 5% to 8%. These are the markets now some were going to be better or worse, but usually better. And we still think Asia is 10% to 15% growth depending on the market, China and Southeast Asia combined.

Now, we acknowledge that the Chinese economy is slowing somewhat and yet at the same time, as you know and we see it, because we’re there, we’ve been there, we’re all over the country. The Chinese government’s got a tremendous push on to try to improve increased consumption, increased disposal income.

We understand they’re going to try to increase interest rates paid on savings. They’ll to try encourage consumers to spend a little more money. So that’s a big push and they’ve been pretty successful in everything else they’ve done for the last 25 years but at least they’re responding to the situation.

Europe, I talked about beverage, why we’re doing so well in face of the soft economy. I think that’s going to continue. The Middle East appears to be strong.

Brazil slowed, but we’ve been very, very fortunate because we installed capacity in regions of Brazil that needed a lot of capacity. And we felt that we identified some geographic areas that were tremendously underserved that had great growth prospects. We were right and so we hope we’re going to take advantage of that going ahead. So were pretty bullish about the whole beverage scene globally…

Ghansham Panjabi – Robert Baird

Okay. And just sort of -- on your last comments of Brazil, the sequential margin decline in the Americas 4Q versus 1Q, how should we think about that?

John Conway

In Americas Beverage?

Ghansham Panjabi – Robert Baird

Americas beverage, right.

John Conway

It’ll just be volume, right. The fourth quarter is a -- well, the first quarter is a strong quarter for Brazil. The fourth quarter is a much stronger quarter for Brazil, ahead of the Carnival.

Ghansham Panjabi – Robert Baird

Got you. And just finally, just an update on the rationalization efforts in Europe on aerosol food and specialty?

John Conway

Yeah. We’re right on-track. Everything is unfolding as we had expected it too, so there’s nothing really new to report, but we’re right on the plan that we laid after the year for the restructuring program.

Ghansham Panjabi – Robert Baird

Okay. Thank you.

John Conway

Thanks, Ghansham.

Operator

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

Mark Wilde – Deutsche Bank

Good morning.

John Conway

Good morning, Mark.

Mark Wilde – Deutsche Bank

I wondered, John, in Asia, both China and non-China, if you could give us a little bit of color around what you’re seeing over there in terms of margins?

John Conway

The margins are holding up well. And that’s true in China and throughout Southeast Asia. In spite of the capacity that’s been added, what we’re seeing is our customers were adding capacity at least just faster, faster than the industry. And so I think things are unfolding well. We are very pleased with what we are seeing.

Mark Wilde – Deutsche Bank

How would those margins compare that kind of what you see in other markets?

John Conway

Well, you really have to go country by country, and frankly, region by region in China, and it’s just purely a reflection of relative supply-demand characteristics in each, so -- but I’d say, the margins are healthy, and as we would expect them to be in these countries.

Mark Wilde – Deutsche Bank

Okay. And then, John, if you look at China, it seems to be the most fragmented market you compete in globally in the beverage can business. Any thoughts on kind of potential consolidation or rationalization in that market?

John Conway

Well, we think it will come, and I think, you’re right, the way you’re characterizing it, but it’s going to take little bit of time. At the moment, the market is growing, everyone is very ambitious, and so you’ve got six, seven companies with relative strength and all of us want to grow. But I do think there will be consolidation and our customers are consolidating, but there is still plenty of them for all of us, but it’s going to take some time.

Mark Wilde – Deutsche Bank

Okay. And to the last question I have, we got past this government decision on BPA, I’m just curious about what you are seeing your customers do in terms of BPA use right now. Are they moving to other types of coatings, or is that penetration still pretty low?

John Conway

Yeah. I mean, the question has been reviewed once again in Europe by several different bodies, and found that BPA poses no threat. And in the same now, frankly, it’s really what’s happened in the U.S. and Canada, I think our customers are much calmer. So now you need to go customer by customer, take a look at the products that are being packed, and each of those reacting somewhat differently. But I would say generally speaking, everyone’s quite calm and the incentive for marketing reasons they want to consider moving to BPA. It’s all being done in a very orderly fashion.

Mark Wilde – Deutsche Bank

Okay. That’s helpful. Thanks a lot. Have a good second quarter.

Timothy Donahue

Thank you.

Operator

Thank you. Your next question comes from Chip Dillon with Vertical Research Partners. You may ask your question.

Chip Dillon – Vertical Research Partners

Yeah and good morning. Looking at the Belem plant in Brazil, I know that that had originally, I think been 1 billion cans for the first quarter of ‘12 and I think Johnny mentioned just now, first quarter of ‘13, and I believe it’s still 700 million. Could you just confirm that and do you think is this something that’s still short of a touch-and-go decision in terms of the timing or do you feel a lot more firm now about the current first quarter ‘13 timing?

John Conway

No, no. We’re very comfortable about the timing. Capacity is still about 700 million, 750 million and the lines are very well against the big customer that we’ve contracted with and some additional volume in the region. So we’re still right on plan. We’re very confident about it.

Chip Dillon – Vertical Research Partners

Got you. And then one more on the future, I know, gosh, I think it was back in the fourth quarter or so, you all I think postponed indefinitely the Phnom Penh, Cambodia second line. Is that still something we should just keep out of the forecast for the foreseeable future?

Timothy Donahue

Phnom Penh -- the second line in Phnom Penh went in, in November. The second line you’re referring to was the second line in Hanoi. And for the time being, you should consider that one just postponed.

Chip Dillon – Vertical Research Partners

Hanoi. You’re exactly right. You can see my notes through the phone lines. Thank you. And another question I had, if you could help us with, if you look at the cash flow and the balance sheet statements, it looks like the cash flow show the cash going down by $92 million but the balance sheet was $159 million which is a pretty big spread.

I don’t -- I would assume that’s not just foreign exchange it might be. And just on the same token, the net debt -- when the cash statement went down $440 million or actually went up $443 million, but if you just do the balance sheet calculations at $601 million, is that just foreign exchange or are there other things going on there?

Timothy Donahue

Yeah. The difference between the balance sheet and the cash flow will be foreign exchange. I don’t think there’s anything other than that. There’s very little below the line free cash flow activity, so it’s mainly…

John Conway

It’s because the balance sheet is March to March…

Timothy Donahue

March to March.

John Conway

And the cash flow is…

Timothy Donahue

December to March, yeah.

Chip Dillon – Vertical Research Partners

Yeah. Okay. Got you. And then lastly, last couple of years, you’ve been able to buy increasing amounts of the non-controlling interests and I just was wondering if you think you’ll be able to do more of those and what areas will they likely be in?

Timothy Donahue

Well, I think we will have opportunity to do that overtime. The only areas where we have a significant minority are Brazil and the Middle East. And as we’ve said in the past, we have a very longstanding healthy support of wonderful partner in Brazil who chooses to remain our partner. And in the Middle East, we could have opportunity from time to time to acquire some of the interest from the partner there.

Chip Dillon – Vertical Research Partners

Got you. And lastly, I know at some point I think you guys we’re looking for about a 54-billion can year this year globally. Are you still comfortable with that sort of number in terms of volume overall?

Timothy Donahue

Yeah.

Chip Dillon – Vertical Research Partners

Thank you very much.

Timothy Donahue

Thanks Chip.

Operator

Thank you. Your next question comes from Al Kabili with Credit Suisse. You may ask your question.

Al Kabili – Credit Suisse

Hi. Thanks. Good morning, guys.

John Conway

Good morning, Al.

Al Kabili – Credit Suisse

I guess, John, on the Chinese contract, could you clarify for us in terms of contract length? Are the newer contracts similar to what you’ve historically seen in terms of contract lengths?

John Conway

Yeah. They are. I mean, I would say, generally speaking, the Chinese market is characterized by somewhat shorter-termed contracts, but we are still talking two to four years in duration, and not too different, frankly, than what we see in other markets.

Al Kabili – Credit Suisse

Okay, okay. Terrific. And then, also, on the aerosol volume performance this quarter, was that all sorts of market-driven, or were there any shifts in business market share that’s also been going on with the new year?

Chip Dillon – Vertical Research Partners

No. There were no shifts of any significant sort, so it’s basically just the markets in Europe and North America.

Al Kabili – Credit Suisse

Okay. And final question, I know it’s taking a little bit here on North America bev which I think you have mentioned was flat, a little bit below the industry bev can growth that was positive. I imagine its customer mix, but any color you can give us on the relative difference there?

John Conway

No. It was just that. I mean, the industry growth was a little bit 1.5 to two something like that...

Timothy Donahue

Yeah. 1.5.

John Conway

1.5, so it just, it’s, in the quarter, I wouldn’t read anything into it, it’s just mix, and we don’t expect anything to -- we don’t think it’s significant at all.

Al Kabili – Credit Suisse

Okay. Terrific. Good luck for the rest of the year. Thanks.

Timothy Donahue

Thanks, Al.

Operator

Thank you. Our next question comes from Phil Gresh with J. P. Morgan. You may ask your question.

Phil Gresh – J. P. Morgan

Hey. Good morning.

John Conway

Good morning.

Timothy Donahue

Good morning.

Phil Gresh – J. P. Morgan

Just on Brazil, could you tell us what you’re operating rates are looking like down there? I’m thinking that with the ramp up of the plants from last year, you should really start to see some productivity from some of those lines this year, so could you tell us where you stand?

John Conway

Yeah. I mean, taking into account the learning curve, because we are still on the learning curve in the second line in the north, and they’re both pretty much through to the south, but take that into account, we’re well over 90% utilized in one of the factories 100%. So a full utilization when you take into account learning curve.

Phil Gresh – J. P. Morgan

Should we be seeing some nice sequential improvement there then from a margin standpoint?

John Conway

Well I think, yeah, I mean if everything else stays the same, we keep coming up the learning curve and spreading the cost more effectively but that’s going to take some time.

Timothy Donahue

Yeah, Phil. I think you’ve started to see it already certainly Q4 and even Q1 in our volumes. In the segment, we’re up 5% and operating profits, we’re up 10%. So I think you’re starting to see that.

Phil Gresh – J. P. Morgan

Okay. And then just on the projects that has been announced for 2013, it seems some of the CapEx spend will be this year, some will be next year. Is there a way you can kind of calibrate for us? If you go forward with all those projects where the growth CapEx would stand for next year at this point?

Timothy Donahue

Yeah. I think if we didn’t -- if we completed everything we’ve announced today and we left at about, I think, total CapEx for next year, we could easily see in a 225 to 250 range but as we’ve always said to you, we have selected locations and markets and try to align ourselves with customers where we believe there’s going to be continued growth. So we would hope that we continue to have more opportunities. But based on where we’re at now, total CapEx next year would be 225 to 250 but I wouldn’t get yourself to that lower number yet because we would hope to still have more opportunity.

Phil Gresh – J. P. Morgan

Okay. And just the last question is on the working capital front, it was -- is a little heavier this first quarter than last year’s first quarter. Just kind of wondering what drove that? Is there -- your volumes have obviously been strong in the first quarter. So is there any expectation that you can -- some of this is build for a stronger summer or how you’re thinking about that right now?

Timothy Donahue

Actually, it’s all going to be in payables. Inventories and receivables as a use of cash are lower this year. Payables as use of cash are much higher. We are making a big effort to try to keep average working capital down from the start of the year versus last year. And for that reason, we don’t have the payable outstanding at the end of March that we had last year. We’re trying to bring less material in and adjust our working capital.

As I said earlier, we had a very strong first quarter last year European food, and we built inventory early in the year on the back of that for what we thought we might see for the balance of the year and certainly, the second half of the year last year didn’t turn out to be as strong as the first half. So we are a bit more careful bringing in material and then you don’t have the payable at the end of the quarter.

Phil Gresh – J. P. Morgan

Okay. Very helpful. Thanks a lot.

Timothy Donahue

Thank you.

Operator

Thanks. Your next question comes from Adam Josephson with KeyBanc. You may ask your question.

Adam Josephson – KeyBanc

Thanks and good morning, everyone.

Timothy Donahue

Good morning.

Adam Josephson – KeyBanc

This question relates mainly to China and Brazil. Generally speaking, to what extent do you think beer consumption growth is linked to GDP growth? In Brazil last year, GDP growth slowed fairly dramatically and so did the beer market. But I realized there were other factors involved such as bad weather, the largest brewery raising prices, higher taxes, et cetera. So, can you go into some details about that issue, the linkage between GDP, yeah?

John Conway

Yeah. I’m no expert on the beer industry and its correlation to GDP growth. I’m a little bit more provincial and focused on cans in relation to the beer industry into a degree GDP growth. But if you think about China, it’s the biggest beer market in the world now by 20%, 30% I believe. It’s been growing 5%, 6% a year year-on-year for 10 years faster often and we think that’s going to continue.

And so even if GDP growth in China were to slow from 9% to 6%, and nobody think it’s going to be 6% this year, let’s say, it’s 7.5%, we still think the growth is going to be significant. But then you need to keep in mind, I know you do, the package mix phenomenon is underway. And without almost without exception, the big multinationals and now the big local brewers in China and in Brazil prefer cans over returnable glass for sure and frankly cans over one way glass.

So all of that we think is good news for the can. We think the same thing is true in Brazil even if overall beer growth were slow somewhat as a consequence with reduction in GDP growth in Brazil, we still think that can is going to do relatively well.

Now, your point is well taken. Disposable income is extremely important and we’ve had countries particularly in emerging markets a decade ago where we saw a lot of GDP growth but a not a lot of disposable income growth for a variety of reasons.

And, of course, that’s changed in Brazil, changed in China, it has to do with availability, consumer credit. It has to do with savings and all those other factors. But put it all together, we think for us anyway our beer can business, if you will, in China and Brazil really healthy this year and on into the next numbers of years.

Adam Josephson – KeyBanc

Well, thank you for that. One other one, you talked about earlier the CMI beverage can data was significantly improved in 1Q relative to last year. How much of that improvement would you attribute to the abnormally warm weather this winter and how much would you attribute to other factors?

John Conway

Yeah. I really don’t know. Keep in mind, it is a seasonally small quarter in the beverage industry first quarter. And I’m really happy about 2% positive, not 2% negative or 1.5% positive, whatever it was. But we’re not -- that’s good, that’s good but we’re not too caught up in what it all means yet.

Adam Josephson – KeyBanc

Sure. Well, thank you.

Timothy Donahue

Thank you.

Operator

Thank you. Our next question comes from Scot Gaffner with Barclays Capital. You may ask your question.

Scot Gaffner – Barclays Capital

Good morning.

Timothy Donahue

Good morning, Scott.

Scot Gaffner – Barclays Capital

On the last quarter’s call, you mentioned that Europe was in a pretty good balance. I think you said most manufacturers were above 90% capacity utilization rates. Can you talk about the European market now for bev cans and if you’re seeing any sort of ordering ahead of the Olympics there?

John Conway

We’re not seeing ordering ahead of the Olympics but our customers were talking about wanting to be sure that we have plenty of capacity to service them over the next six months. So I think that’s very positive and as we said earlier, we do think the industry is in pretty good supply demand balance in Europe.

I don’t know of anyone who’s heading any significant capacity. I think the entire industry is focused on trying to run more efficiently and effectively, and of course, for our industry, that’s a great way to improve earnings by dropping incremental cash flow to the bottom line and contributions of online. So that’s when we continue to see that with no change.

Scot Gaffner – Barclays Capital

Okay. And as pricing in Europe, has that firmed up at all?

John Conway

It’s been quite firm through the fall and into the first quarter as I said earlier.

Scot Gaffner – Barclays Capital

Okay. And then just moving over to the tax rate, obviously the first quarter is a little bit lower than we were expecting. And slightly expanded the range for the tax rate for the full year, one is the tax rate for the full year, do you think there’s still room for that to come down and then just secondly, longer term on the tax rate. Do you think there’s a structural change there where it might come down over time as more earnings come from outside the U.S.?

Timothy Donahue

Well, I think the -- first, the answer on the first quarter is as you’ve heard us say more than once today, the first quarter is small. So small movements in country mix and we did mention that Saudi Arabia was stronger in the quarter, and we continue to do well in many of the emerging markets.

And you only need to move the number by one or -- about $1 million or $1.5 million to get the rate down a couple of percents. So because it’s such a small quarter, so I wouldn’t read too much again into the first quarter tax rates. It’s country mix.

I will say that like most multinationals, we do a fair amount of tax planning and we try to be as efficient as possible. There is always room for improvement but at the same time the U.S. federal rate is 35%, and we’re on about 28% to 28.5%. It’s right now Tom and I are sitting here. It’s kind of hard for us to see where we could be more efficient and -- overall. So, especially as the U.S. operations continue to generate more profit at a full 35%.

Scot Gaffner – Barclays Capital

Perfect. Thank you.

Operator

Thank you. We have time for one final question that comes from Todd Wenning with Morningstar. You may ask your question.

Todd Wenning – Morningstar

Hey. Good morning, guys.

Timothy Donahue

Good morning.

John Conway

Good morning.

Todd Wenning – Morningstar

On the food can side, over the past quarter or so, some of these big CPG companies have come out and said that they’re seeking alternatives to the tin cans for tinplate cost reasons. Are you guys seeing that in the ground and how soon are you thinking about that or in the coming future?

John Conway

No. We’re not. And tinplate price movement for the quarter versus prior year was very, very muted and so we’re not -- our customers are not taking that position with us. And we don’t anticipate loss of volumes as a consequence of higher costs for tinplate cans.

Todd Wenning – Morningstar

Got you. Thanks. And how are you thinking about debt reduction versus buybacks going in for the rest of the year?

Timothy Donahue

Well, I think we are confident in the cash flow generation ability as well as the company’s ability to continue to generate more EBITDA. So as opposed to looking at absolute levels of debt, we look at leverage as a multiple of the EBITDA. And we would err on the side of more share repurchase less debt reduction. But I think it will be a combination of both.

John Conway

Great. Thanks, guys. Good luck.

Timothy Donahue

Thank you very much.

Operator

Thank you. I’ll now turn the call over to the speakers for closing remarks.

Timothy Donahue

Okay. Shirley, thanks very much and everybody thank you. It concludes our call today. We do note for you that the second quarter 2012 conference call will be scheduled for Thursday, July 19 at 9 o’clock in the morning, Eastern Time. And again, we thank all of you for listening and we look forward to speaking with you again in July.

Operator

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

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