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Crown Holdings Inc. (NYSE:CCK)

Q4 2007 Earnings Call

January 31 2008 9:30 am ET

Executives

Alan Rutherford – Vice Chairman, EVP and CFO

John Conway – Chairman, President and CEO

Tim Donahue – SVP of Finance

Analysts

Ghansham Panjabi - Wachovia Securities

Claudia Hueston - J.P. Morgan

Richard Skidmore - Goldman Sachs

Tim Thein - Citigroup

Chris Manuel - Keybanc Capital Markets

Mark Wilde - Deutsche Bank

Sangita Jain - Lehman Brothers

George Staphos - Banc of America

Joe Stivaletti - Goldman Sachs

Andy Feinman - Iridian Asset Management

Joel Spungen - Merrill Lynch

Bruce Klein - Credit Suisse

Wayne Cooperman - Cobalt Capital

Garo Norian - BlackRock

Gary Marts

Operator

Good morning and welcome to the Crown Holdings full year 2007 Earnings Call. (Operator Instructions)

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

Alan Rutherford

Thank you very much and good morning to everybody. With me on the call this morning are John Conway, Chairman and Chief Executive Officer, and Tim Donahue, Senior Vice President, Finance.

Let me point out that on this call, as in the news 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 our SEC filings, including comments in the section called Management Discussion and Analysis of Financial Condition and Results of Operations in Form 10-K for 2006 and in subsequent filings.

In view of Regulation G, we do not intend to provide non-GAAP financial measures of performance on liquidity beyond those already contained in the company's earnings release.

I will comment on the results, Tim Donahue who will then comment on, tax, LIFO, and retiree medical, after which John Conway will discuss the quarter and outlook for the coming year before opening the call to questions.

Total Company, revenues grew 11.6% in the quarter and 10.7% in the year, reflecting generally improved volumes worldwide, higher raw material costs passed through in pricing, and foreign exchange impact.

Segment income recorded a decline of 0.9% in the quarter and was 11.7% higher for the full year. However, adjusting for the post retirement and vendor settlement of $7 million in the quarter, year-to-date the quarter would have improved 6.5% and the year by 12.7% over the prior year at $649 million.

Americas Beverage revenues were 6% higher in the quarter and 9% for the full year, reflecting volume increases of approximately 0.5% for the quarter and full year. [Segment income] when the quarter was soft primarily due to lower production, to reduce inventories at the year end, and the impact of the Canadian dollar - US dollar exchange rates. For the year however, Americas Beverage recorded an increase of 13.8% in segment income, and also improved firm sales volume and good plan productivity.

North American food revenues improved 4% on 3% in the quarter and year-to-date respectively, on volumes which were flat in the quarter, and up 1% for the full year. Reported segment income includes the vendor settlement, without which income would have improved 19% in the quarter, and 13% for the year. Improved productivity, additional volume, and better product mix, has helped to improve North America's food results this year.

European Beverage revenues were 34% higher in the quarter, and increased 22% for the full year. Volumes were very robust in the quarter up 25% over prior year and 11% for the full year, with the strong demand being supplied, in part by the company's capacity additions installed in growing markets.

The result with segment income growth of 54% in the quarter and was 10.9% of sales of $37 million. The full year segment income was 12.9% of net sales of $185 million, which was 52% higher than last year.

Food Europe revenues improved 11% in the quarter and were 6% higher for the full year, reflecting a volume recovery from the very weak third quarter, but still resulting in a 3% volume decline in the full year. Segment income in the quarter improved 25% to $35 million, resulting in an almost flat year-on-year comparison at $173 million.

Specialty Packaging did not have a good quarter, the revenues declined 3% reducing the year-on-year growth to 8%.

Segment income recorded a loss of $4 million, a $7 million turnaround from the prior year, which reduced full year segment income by 39% to $14 million.

The quarter was impacted by two major events. One customer, for which we're the only supplier, closed their filling plant for 8 weeks to reduce inventory following a weak summer season, and we recorded lower deliveries to another customer as a result of a contract dispute. All these issues were resolved, but too late to improve the results in 2007.

Non-reportable segment revenues grew 11% in the quarter and 15% for the full year. Segment income reflected improved aerosol volumes in both the quarter and year-to-date, along with strong results from Asia helping to improve the income 20% in the quarter, and almost 12% year-to-date.

Corporate and unallocated items in the quarter included a charge relating to the post retirement benefit settlement. The reversal of the US valuation allowance reflects the continuing improvements and positive outlook in the company's financial position in the USA, and will result in a more normalized book tax rate for 2008 and future years which Tim will review in a moment.

These adjustments along with movements in post retirement and pension liabilities results in a positive shareholder equity bounce at year end 2007 from which the company can build in the future.

A review of 2007, from our financial viewpoint, the company increased segment income by 12.7%. Generated free cash flow of $360 million, with which we repurchased approximately $5 million shares of common stock, and continue to deal over the balance sheet.

We settled various disputes to our long-term advantage and returned shareholder equity to a positive balance at the close of the year.

Turning to 2008, based upon current knowledge and current exchange rates, we expect segment income to grow approximately 16% in 2008 over 2007 to around $750 million. We project free cash flow to be in the range of $330 million to $370 million after capital expenditure of $160 million for the year. This includes the $20 million for one-time cash settlements to be made in '08, as noted in the press release.

Additionally, we are not planning to achieve further working capital reductions in a market where both, sales, volumes and prices are increasing. However, that does not mean we will not be looking for range to improve as the year progresses.

I will now turn the call over to Tim for his comments.

Tim Donahue

Thank you, Alan, and good morning to everyone. As Alan highlighted there were a few accounting adjustments recorded in the fourth quarter of 2007. As we go through this in a moment hopefully, you will come to the same conclusion as we did and that these adjustments reflect the continuing positive trajectory of the company and outlook for the future.

As we briefly described in the earnings release during the fourth quarter, the company made the determination that we considered it more likely than not that we would realize the benefits of our US deferred tax assets through future income from operations.

Several years ago, in 2001, the company established a valuation allowance on certain deferred tax assets including net operating loss carry forwards. The US valuation allowance has now been reversed with the corresponding positive income impact being recorded a $479 million or $2.94 per diluted share.

As Alan noted this is not only a reflection of the continuing improvements but also reflects the positive outlook for the future of our US businesses. It is important to note that the reversal of the valuation allowance is an accounting adjustment only and has no impact on cash taxes paid. We still maintain the benefit of our net operating loss carry forwards.

Net operating loss carry forward totaled approximately $1.1 billion and will continue to serve as a tax yield for the company over varying periods of time in the future. We've up to 20 years to use the NOLs in the United States and in France the NOLs have no expiration.

We currently estimate the cash taxes paid in 2008 will be $80 million which is down from the $90 million in 2007. The reduction is due to our already having paid the taxes related to the sale of the Spanish real estate.

Having already recorded the $479 million of tax benefit to income, we will no longer be recording so called tax free book income in the future, but will be required to record book tax expense on future US pre-tax income.

Previously, there was no tax charge on income in the United States as it was offset by the valuation allowance. The impact of this will be an affective tax rate for 2008 of 29%, which reflects a more normalized rate than the 17% to 20% we have recorded over the last two years.

You should still expect the higher rate in the first and fourth quarters of the year and a slightly lower rate in the second and third quarters where we do generate more pre-tax income.

During the fourth quarter of 2007, the company changed the accounting method for determining the cost of its US inventories from the last-in, first-out method or LIFO to the first-in, first-out method or FIFO.

The company made the change for many reasons, including that we believe that the FIFO method better matches revenues with expenses, yield and inventory balance that more closely approximates replacement cost and reflects the actual flow of goods, i.e. the first inventory-in is the first inventory-out.

And finally, the use of FIFO now makes us consistent with much of our peer group. For the full year of 2006, we had zero LIFO expense. Had we not made the change, LIFO expense would have only been a $200,000 charge in the fourth quarter of '07.

As now presented with all prior periods being recast on FIFO, there is no LIFO income or expense in the fourth quarter or full years of 2007 and 2006.

Litigation covering retiring medical benefits for certain retirees was settled in the fourth quarter. Several years ago, we embarked on a strategy to consolidate the numerous plan designs we had in place for retirees and existing employees into a single company wide benefit program for union and non-union employee's independents.

The resulting consolidated plan allows the company to reduce and control its administrative burden for healthcare and it provides the company the ability to leverage economies of scale. For example, the negotiation of discounts for services.

Since the litigation dispute has been resolved the company has completed all of the necessary communication to the affected retirees and the consolidated plan is effective January 1, 2008 for those groups.

The impact of the settlement is as follows. We recorded a one time charge of $4 million in the fourth quarter of 2007, and as noted in the release, we'll make a one time cash settlement expenditure of $14 million in 2008. Most importantly however, the company's long-term liability for retiree medical benefits have been reduced by $101 million, as reflected by the fourth quarter gain that we recorded to the comprehensive income components of shareholders equity.

Both cash outlays and expense for retiree medical were each expected to be reduced by $9 million per year in 2008 and future years. Lastly for 2007, at December 31st, there were no outstanding borrowings under the company’s committed $800 million of revolving credit facility. So, as we begin, 2008 liquidity remains very strong.

Hopefully that helps. If any of that is still not clear please ask during the Q&A. I will now turn it over to Jon for his comments.

John Conway

Thank you, Tim, and good morning. As you can see, and Alan and Tim covered so comprehensively we had a very solid fourth quarter and of course concluded one of our best years ever. Performance of all of the businesses was good, with one exception, which I will discuss in a moment.

We are obviously very gratified that things turned out as we would have expected at the outset of the year. Most importantly, we achieved these excellent results in the right way for a manufacturing company in the rigid metal packaging business.

Volume was solid throughout our product lines, and in certain cases such as International Beverage simply outstanding. Productivity improved throughout the company. We maintained price discipline and achieved price improvements, where it was necessary in almost all of the businesses. Our application of capital to achieve these results continues to be very efficient, and very frugally and carefully managed.

Finally, we are getting outstanding sales and income contributions from the new capacity that we have been adding. 2007 was truly one of those years where we can look back now and say with some conviction, that things turned out really well, not exactly as we had thought in each business, but all that we could have hoped for. I am not going to go into a lot of detail about the various segments in the fourth quarter for the full year. Allen has given you a lot of information already in those regards.

Very briefly, our America's beverage group had an outstanding year. Volumes were solid, and income was up substantially. Our North American food team made another tremendous effort with resulting improved contribution, and we are extremely pleased with the fine leadership and what they have been able to do with our food can business.

Our European beverage sector had an outstanding year, as you can see as the year progressed, the new capacity that we have been adding in Europe and in the Middle East, made an accelerating contribution to quarterly income performance. This is a reflection of the large effort that has been under way for a number of years and has culminated in a solid and substantial positive benefit for Crown.

Our European food can business had a disappointing year as a consequence of a very poor wet summer in Europe. Nonetheless, the fourth quarter was relatively strong and we think it set up what should be a strong recovery in 2008. We were not happy with our European, especially packing business, in 2007. While the problems are not pervasive Allen mentioned to you two significant issues that applied in the fourth quarter. It is quite clear that we have several business units within the spec pack sector that need substantial attention and we are going to straighten out those areas. We have plans to do so. We have been placing a new and energized management team to lead the business and we are confident that it will turn around in 2008. Finally, our global aerosol business in Asia Pacific region had a very good 2007, they did a great job. Overall, things went very well in 2007.

I will characterize very briefly for you our expectations for 2008 underlying the financial results that Alan described to you for segment income and free cash flow. We have laid a good foundation for 2008's improved performance. In 2008, we expect somewhat improving volumes in our America Beverage business, as well as continued productivity and careful price cost management in North American Food.

There has been good price achievement and there will be further significant volume growth in our European Beverage business. European food can sales were returned to more normal levels and we expect good price cost realization.

The spec pack business rebound in 2008 and we will have another solid year of performance in our aerosol business. We believe Asia will really take off in 2008.

We continue to have opportunities for growth, principally internationally. We plan to pursue these opportunities in a very careful, focused, disciplined manner. We look at many more opportunities than we decide to execute. We will not abandon our objective of highly effective application of available capital, and the absolute requirement to achieve maximum capacity additions with minimal capital dollar spending.

At this point we will like to review some key management changes that have occurred recently. First, as we previously announced, Frank Mechura, the President of Americas division, retires today. I have worked with Frank for the past 34 years and I want to thank Frank for his leadership and dedication to the company. With Frank's retirement, each of our operating divisions, Americas, Asia and Europe, have seen their respective President's retire over the last 12 months, and replaced by highly qualified and experienced operating mangers.

Ray McGowan now leads our Americas division. In Europe we have an excellent leader Chris Homfray who has been in place for about a year. Asia is lead by Jozef Salaerts, who took over the division mid-2007. We believe our 2007 results and 2008 outlook are a testament to the strength of our global management team.

In closing, the 12.7% segment income growth in 2007 and free cash flow generation were outstanding achievements for the Company. The performance levels which produced those results in 2007, give us great confidence that we have an opportunity to build on the 2007 success by doing even better in 2008, and increasing segment income approximately 16%.

And once again, we will generate very substantial free cash for application in the best interest of our shareholders. We had a great year in 2007. We think 2008 will be another great year.

And with that operator, I think we can open it up to questions.

Question-and-Answer Session

Operator

(Operator Instruction)

Ghansham Panjabi, your line is open. Please state your company name.

Ghansham Panjabi - Wachovia Securities

Hey, guys. Good morning. Wachovia Securities.

Alan Rutherford

Hi.

John Conway

Morning, Ghansham.

Ghansham Panjabi - Wachovia Securities

Just a couple of clarification questions, the $114 million of segment income that you reported. How is the $7 million charge allocated by segment, is it corporate expense or somewhere else?

John Conway

Well, as I said Ghansham, 4 of it is in the corporate and other non-allocated and that's why of course it's 40 and up a bit, and the other three is in North American food.

Ghansham Panjabi - Wachovia Securities

North American food? And how much do you estimate the inventory draw down cost you in terms of margins or in a dollar amount?

Alan Rutherford

Well, I think, if we wanted to take a look at what we could have ran, what cans we could have ran in the fourth quarter both in the US and European beverage cans. It's probably in total it's cost us close to $10 million.

Ghansham Panjabi - Wachovia Securities

$10 million in operating income. Okay. That's very helpful.

Alan Rutherford

Yeah. But having said that Ghansham, as John made very clear in the third quarter, we don't run inventory at the end of the year to make earnings per share. Right, that's now what we are trying to do here.

Ghansham Panjabi - Wachovia Capital Markets

Right, and just in European specialty what was the product line did the customer closed?

John Conway

That was

Tim Donahue

What happened, Ghansham within our Spec pack business, which is to a large degree industrial, but we also have some, highly stylized shaped, highly decorated containers. Some for food products and some for promotional items, things like high-end Brandy's and Scotch Whisky's and so forth.

One customer that makes it, special product in France is really, actually a beverage kind of like squash, if you know the U.K market at all. Had a poor summer, as a consequence of the wet weather and simply didn't continue to run in much of the fourth quarter and that hurt us. And the other had to do with some promotional containers in the U.K.

So, as Alan said, we were over those problems. We think they are going to return to satisfactory levels. Those two customers for 2008, we know we solve that. But we are not kidding ourselves to, we are not happy with Spec pack.

We think the industrial underlying industrial businesses are not doing as well as they should be. You could see that pretty clearly when you see the effects of these high margin items that I just mentioned. So, we are going to be putting a lot of attention to Spec pack as we have been for the last number of months, but it's going to be renewed and we are going to straighten Spec pack up.

Ghansham Panjabi - Wachovia Capital Markets

Hey, John. And one final question if I could. Your operating income forecast '08 versus '07 is a $100 million higher. Your CapEx is pretty much the same. I understand there is a $40 million settlement charge. But why shouldn't we expect free cash flow to push closer towards 400?

John Conway

I think as Alan mentioned on his notes as he was talking Ghansham. We have not made any assumption that we are going to generate significant working capital sources of cash in '08 as we did in '07. We are certainly going to try, but our initial assumption is having generated over $100 million of cash from working capital reductions in '07 that will be a bit flatter in '08.

Ghansham Panjabi - Wachovia Capital Markets

Okay great. Thanks so much guys.

John Conway

Next question please.

Operator

Claudia Hueston, please state your company name and ask your question.

Claudia Hueston - J.P. Morgan

Hi, it's J.P Morgan.

John Conway

Good morning.

Claudia Hueston - J.P. Morgan

Thank you very much, good morning guys. I was intrigued by your comments around Asia for 2008, and I just wondered what gave you confidence that Asia will really take off?

Alan Rutherford

We're finishing the year with very strong demand Claudia, that's the first thing. The second is, we're doing well as a consequence of capacity utilization supply demand in the region. We have done quite well on the pricing. We anticipate, we know South-East Asia is going to be sold out for us. We are going to be sold out in China, and as everybody knows in the beverage can business, with higher demand you find the way to run a little bit more effectively and efficiently.

So, we're pretty confident things are going to go really well for us. We also have a very strong food cans business in Thailand. We don't talk about it a lot, but demand there is also very strong.

Claudia Hueston - J.P. Morgan

That's helpful, thanks. And then, I just wondered in terms of the European volumes, I wondered if you could, maybe give any regional breakdown there was there any sort of specific region that maybe contributed more to the volume increases in the fourth quarter?

John Conway

Tim is going to be our volume person here this morning, so Tim.

Claudia Hueston - J.P. Morgan

Okay.

Tim Donahue

As Alan said we were up 25%, over 25% in the fourth quarter. I can tell you that not only was the Middle-East very strong but the volume results coming out of Greece and Turkey and Spain, in fact almost every region that we produce and supply cans. We were up over 20% in almost every region.

Claudia Hueston - J.P. Morgan

Okay, it is very broad based. And then just finally, could you just remind me what your percentage of fixed versus floating rate, that is?

Alan Rutherford

Floating rate debt right now is approximately one third of the total debt. Keep in mind that at year end, the floating rate debt is much lower than it is on average for the full year, because the revolver sits at zero and then we use the revolvers we go for the year. So I think about 30% at year end and then on average for the year perhaps 35% to 40%.

Claudia Hueston - J.P. Morgan

Okay. Thanks that's very helpful. Thank you guys.

Alan Rutherford

Welcome. Next question please.

Operator

Thank you. Richard Skidmore. Please state your company name and you may ask your question.

Richard Skidmore - Goldman Sachs

Thank you. Good morning. From Goldman Sachs. I just wanted to talk about Europe and how you're seeing the outlook for European bev cans and also the capacity that you are bringing up in Spain, how that project is progressing and timing of that?

John Conway

Yeah, for next year we're anticipating that European division is going to have another strong volume year in beverage and we think it's going to be spread throughout our region. So we anticipate that growth in the Middle East, North Africa is going continue to be very strong Southern Europe and so on. So we are pretty confident of that. We think supply demand is in quite good balance. We are sold out in Europe and we're going to be pretty close to sold out we think in the Middle East.

So that looks very positive. The Spanish project is online, but you need to remember that we are anticipating that we will be making first cans in approximately September October. And so we'd be coming up learning curve and you won't see a lot of contribution in Spain. We are not planning for much contribution in Spain. We're looking ahead for the Spanish investment to start making contributions in 2009. So just in general I think all of you need to remember one line additions are great, but they don't happen that quickly and there is a learning curve factor.

Richard Skidmore - Goldman Sachs

Thank you. And just to follow up on Europe beverage cans primarily, with some of your competitors adding capacity are you incrementally more concerned about the supply demand balance or you are feeling pretty good about how that's shapes up over the next couple of years?

John Conway

We feel pretty good about it, we are as concerned as you are and every time we think of doing something or we hear of a competitor is doing something, and we of course instantly compare it to our model. And we are probably more conservative about invested market -- anticipated market growth than others, but we haven’t heard of anything that we think is going to upset the good supply demand fundamentals over the next three to five years.

Richard Skidmore - Goldman Sachs

Thank you.

Alan Rutherford

Next question please.

Operator

Tim Thein, your line is open. Please state your company name.

Tim Thein - Citigroup

Hi. Citigroup. Good morning.

John Conway

Good morning.

Tim Thein - Citigroup

I apologize; I missed Alan's presentation, just the first introduction there. Did you review at all the volumes in the European food can segment?

Tim Donahue

We did, Tim and what Alan had previously mentioned in European Food, we are essentially flat in the fourth quarter and down 3% for the year.

Tim Thein - Citigroup

Okay. So, no it doesn’t look like there is any pull ahead in terms of trying to buy ahead of price increase.

John Conway

No, it was a nice turnaround in Q4 and it should lead to a good rebound in '08.

Tim Thein - Citigroup

Okay. And, Tim what is your expectations for both pension expense and the cash impact as well as this corporate line? I know there are a lot of things that are moving around, but what's a good number to use per quarter?

Tim Donahue

Great, question. On pension expense; I think for the year we are probably looking at about $17 million in 2008 and the cash contribution will be right around $70 million. So, the numbers, the cash number is very similar to what we had in '07 and the expense number is up a bit in '08 versus '07.

Tim Thein - Citigroup

Okay. And then on the corporate?

Tim Donahue

Yeah corporate, I think that the corporate numbers we are looking at for next year probably are a little bit lower then we had in '07. We had a $120 million for the full year, we're probably right around that number may be a touch lower, touch higher. It's hard to say with certainty, but right around that number.

Tim Thein - Citigroup

Okay. So what you said 17 for pension expense and 70 for?

Tim Donahue

Preferred cash

Tim Thein - Citigroup

Okay. Alright, thanks a lot.

Tim Donahue

You are welcome

Alan Rutherford

Next question please.

Operator

Chris Manuel. Please state your company name and you may ask your question.

Chris Manuel - KeyBank Capital Markets

Good morning gentleman. KeyBank Capital Markets.

Alan Rutherford

Good morning, Chris.

Chris Manuel - KeyBank Capital Markets

Couple of questions for you. First John, sort of big picture question, a number of your competitors have been very busy, making announcements of added capacity, particularly in Eastern and sort of North Eastern Europe. I know you are adding a line in Spain that you spoke about earlier, and it continued to work in the Middle East. As you look around the globe, are there other areas where you think CCK could use some more presence or beef up, add some lines? And I know you done a lot of capacity recently last couple years, what do you think looking for the next year uses, is there more capacity for you to add?

John Conway

Yeah. As you just said, we are adding in beverage can capacity as we speak, in Spain and in Brazil. We just finished within the last couple of years, major capacity expansion program in North African, in the Middle East, also a major expansion in South East Asia with a new plant in Cambodian and doubling the size of one of our big plants in Vietnam.

So, I think we are very pleased with the regions where we are active in beverage, and you shouldn't anticipate that we are going to be making ventures in to South Asia. For example, that's not particularly of interest to us for the time being. We are well established and we are growing rapidly where we are.

We have a pretty large relatively speaking food can aerosol, metal packing and closure business in Eastern Europe including even in Russia. And so, we kind of watch it a little bit to see maybe the time will come to do something in beverages. We're in Greece and in Turkey, so we're pretty familiar with Balkans, well up into Eastern Europe and so that's something that we look up.

But, we don't want to do anything, as we have said before that creates problems for us and we wont but there could be an opportunity but otherwise, I would say, we're growing extremely rapidly where we are, and when the best countries in South America, we think we're in the best part of Asia and we're extremely pleased of what's happened for us in the Mediterranean region and North Africa and the Middle East. So, we think, we're going to keep going in those areas.

Chris Manuel - KeyBank Capital Markets

Okay. And then, one other question with respect to price particularly in Europe with the markets continuing to be so tight there for bev cans, will there be any reason to believe that you couldn't continue to favorably work though the price level over there to your advantage?

John Conway

No, there is not.

Chris Manuel - KeyBank Capital Markets

Okay. And then last question I had was, Alan with respect to your free cash target for '08, $330 million to $370 million.

Alan Rutherford

Yeah.

Chris Manuel - KeyBank Capital Markets

What do you anticipate and your debt levels have got to -- I would almost thought you were more reasonable level here or stable level. What are your anticipated objectives for free cash in '08?

Alan Rutherford

Well, to be honest Chris, we haven't really made a decision on that at the moment. Obviously, the stock market and the financial markets are a bit volatile, where use of cash is in the first half of the year. So, we really have time to consider our position. As we get later into the year, we'll decide if we are going to buy shares, or just use the cash to pay down the debt. We are going to keep ourselves a bit flexible at the moment. I think we have the ability to do that.

Tim Donahue

And just to add Chris, as you know, our debt maturity portfolio, we don't have any debt coming due until September of 2011. So, as Alan said it gives us the flexibility.

Chris Manuel - KeyBank Capital Markets

Okay. Thank you very much gentlemen.

John Conway

You are welcome, next question please.

Operator

Mark Wilde, please state your company name, you may ask your question.

Mark Wilde - Deutsche Bank

Good morning, it's Mark Wilde with Deutsche Bank.

John Conway

Good morning.

Mark Wilde - Deutsche Bank

I wondered John, are you seeing any signs yet of your customers in the US in the beverage market, perhaps shipping the mix a bit more to at the cans, as they maybe focus more on promotions for the slowing economy?

John Conway

We haven't seen that yet, I mean, I can tell you that we are having a pretty good January, what I am told, but I think just wait as soon to draw any conclusions, I mean, we are assuming for North American Beverage cans that the markets are going to be up maybe about a percent and we think we'll be at least inline with the market and of course our mix has been changing a little bit as I have told you in the past. We are kind of move a little more towards non-carbonated soft drinks and we had some success in that area. So, but we haven't yet felt a strong move as a consequence of the economy or rapidly increasing resin prices and glass prices are there.

Mark Wilde - Deutsche Bank

Yeah, would you expect to John, if the economy were to -- it is going to recession or something close to recession?

John Conway

I don't know, we took a look at, I think, the last 20 years of volumes in Western Europe and North America for food cans, Aerosol cans, and Beverage cans versus GDP growth or contraction. And we can see almost no correlation.

So, I kind of think, yeah there are to be little bit more demand as the consequences the things you are referring to people eating at home more, being more value conscious and so forth. But we are not planning for it, but if it turns out that way great. Our numbers were all predicated on pretty normal situation.

Mark Wilde - Deutsche Bank

Okay. And just as a follow on. Can you talk a little bit about what you see going on in tinplate market right now?

John Conway

Well, the steel companies in North America and Western Europe were very successful in getting the price increases they set out to achieve. And so, we've had to absorb that and pass it through, and we've been quite successful. I see nothing that argues that they are not going to be able to continue to push price and here or in Europe. So, we are anticipating that we're going have to continue to maintain discipline and push price so to cover cost.

Mark Wilde - Deutsche Bank

Okay. Thank you.

Tim Donahue

You're welcome. Next question please.

Operator

Sangita Jain, please state your company name and you may ask your question.

Sangita Jain - Lehman Brothers

Hi, good morning. It's Sangita Jain from Lehman Brothers.

John Conway

Good morning.

Sangita Jain - Lehman Brothers

Good morning. This is a follow-up to Chris's question. If you guys were to decide to do a stock buyback, should we kind of expect the same kind of lump sum accelerated stock repurchase that you've done in the last couple of years, or is it going to be more opportunistic, you think?

Tim Donahue

Yeah, possibly, it's, we found it a very good way to do it. So, it's possible we would consider that again, yes.

Sangita Jain - Lehman Brothers

Okay, great. Thank you.

Tim Donahue

Welcome. Next question please.

Operator

George Staphos, please state you company name and you may ask your question.

George Staphos - Bank of America

Thanks. Bank of America. Good morning everybody.

Tim Donahue

Good morning, George.

George Staphos - Bank of America

Listen, I wanted you to come back to the economic question. If we go back to the late-90s, in some of the emerging markets we saw a shift, particularly in South America, back towards returnable glass and returnable packaging overall. I think you saw a little bit in Europe, as well, and that had some volume impacts probably more in bottles and cans.

Did you have any effect at all realizing those markets were perhaps much smaller for you then, and they've matured since then. But did you remember seeing any effect there and would you expect any effect going forward if in fact, as what we see today?

John Conway

Well George, we've got a lot of history in the industry so, you remember it too, in the early 90's in particular, when there were some extremely sharp downturns in Brazil and Argentina for example. It is true that there was a movement back to one way or rather returnable blast in soft drink can and beer, when there were sharp economic downturns. But that was at a time when cans were a very smalls portion of the mix and their relative cost was quite high. And that's no longer the case. Now the can share, beverage cans in particular share of the mix is quite high, the customers become very.

George Staphos - Bank of America Securities

Sure

John Conway

For the convenience and value and so forth. In addition, relative prices come way down. Remember that the aluminum cans were priced in dollars, and so all the aluminum prices have gone up, in many, many local currency turns they've actually flat to gone down.

And also the size of the plants producing cans, in this so called emerging markets are now large and highly efficient. So, prices are very reasonable and very comparable with North America, Western Europe and many of the markets.

So we don't, we just don't think that, if you are referring to the potential of a global slowdown, having a significant adverse affect on one way packaging the can, namely the packaging. We really think that's a very slim probability.

George Staphos - Bank of America Securities

Okay. And I guess it sounds great too, it's a lot like ones the [CTV] had its impact on the farm. So again, people get more accumulated to the convenience actually.

John Conway

Well on the disposable income so much larger.

George Staphos - Bank of America Securities

Yeah. Within your EBIT guidance for the year plus 16%, I know don't if it's possible, since you are in so many geographies, so many product lines, but how much of that do you think comes from net price, how much of that do you think comes from productivity, how would have us think about how you bridge that 16% growth for the year?

Alan Rutherford

We don’t really have it broken down. We’ve done a good job we think, as far as we can tell, on price covering cost. And we think volume are going to be strong, we’re pretty well positioned for every product category. And the other thing I think that you need to keep in mind is, and we were also aware of it to your point, our product mix is so diverse now, and our rounded positions are so strong in the parts of the world in which we’re located, we think are fundamentally good. And as we’ve reminded you in the past we’re not there by accident, we used to be in some places that we’ve gotten out of over the years, and so we think it's largely, just a consequence of good strong demand where we’re doing business.

George Staphos - Bank of America Securities

Sure. Maybe if we think about it differently, again thinking about the 16% growth, which of your major segments would you expect to be growing better than that rate, which might be below that rate? I would assume that you're not expecting any of your major segments to be actually flat or down from a segment EBIT standpoint how would you [separate]?

Tim Donahue

I think that’s fair, Allen took care -- obviously the beverage business internationally we think it's going to be extremely well. Europe we think is going to come back to a good solid year, but beverages are growing more rapidly in just unit volume than as a consequence generally it's doing very well.

George Staphos - Bank of America Securities

Alright. So the beverage business is stronger and probably European Food ahead of US Food.

Tim Donahue

And Asia also, as John said early that we’re going to have a very good year in '08 in Asia.

George Staphos - Bank of America Securities

Okay. Last question I’ll turn over to just house keeping, should we assume $25 million or so for specific cash growth for '08 I missed it if you had said so?

Tim Donahue

Yes $25 million.

George Staphos - Bank of America Securities

Okay. Thanks guys. Have a good quarter.

Alan Rutherford

Next question please.

Operator

Joe Stivaletti. Please take your company name. You may ask your question.

Joe Stivaletti - Goldman Sachs

Yeah. Goldman Sachs.

Tim Donahue

Good morning.

Joe Stivaletti - Goldman Sachs

Following up to your, the question about your application of free cash flow. If you were to come across some opportunity to expand your acquisition, do you have sort of any leverage targets that you could share with us, obviously you've gotten that down to three to four times which is a lot of progress. Is there any willingness to increase that if the right acquisition came along or should we be thinking much more along the lines of smaller transactions?

John Conway

Why don’t I comment on the acquisition trail, if you will and Allan will talk about, Allan or Tim leverage and in ratios etcetera. We feel we've been very successful with our organic growth strategy, and there are a variety of reasons for, of course we're wonderful managers, we've got a great company and all the rest of it, but we are located in excellent markets where we do have real good organic growth opportunities. And we've got critical mass every place that we are, which is to say we can employ our capital effectively. We're not breaking into Greenfield situations in countries in which we've never done business with all the delays and all the governmental problems, and we are very familiar with all those things and they are not insignificant.

So we think that our capital application as a consequence has been proven to be very efficient, very frugal. We get a lot of capacity for the money that we spend. We compare ourselves and bench mark ourselves constantly to what we are hearing about others activities and how they are doing. So we've got such a good, such a good strategy going here. We're executing it so effectively. We are extremely reluctant to move away from it. So any time we think of an acquisition in the can business frankly, we're thinking about asset value. Somebody wants much more than asset value, we can't figure out why it's a better use of our cash and doing what we are doing. So, Alan can maybe elaborate on that and talk about as it relates to the balance sheet.

Alan Rutherford

On the leverage front, obviously at the end year end, our net debt is just below $3 billion. We are about 3.4 times leverage on our net debt basis. With the numbers that I gave earlier, our EBITDA in '08 is going to be something like $970 million. Obviously, we are going to generate a lot of cash, so we see our leverage coming down probably to 3 around, perhaps even a tad lower but probably around the 3.

In the past, we have said that that was our target. However, there is nothing magical about it. Some of our competitors are less than that. But in principle, we believe that this year we are going to get the debt down to a number which the leverage, sorry, down to a number which we are going to be very comfortable with.

Joe Stivaletti - Goldman Sachs

Okay, that's good color. Thanks

John Conway

You are welcome. Next question, please.

Operator

Andy Feinman, please state your company name. You may ask your question.

Andy Feinman - Iridian Asset Management

Thanks. Iridian Asset Management.

Alan Rutherford

Good morning, Andy.

Andy Feinman - Iridian Asset Management

Good morning. Did you say earlier that your pension funding was $70 million this year? I'm sorry, I missed it.

Alan Rutherford

For '08, I said 70, yes.

Andy Feinman - Iridian Asset Management

And can you tell me how much the dividend to the minority interest was for this year?

Alan Rutherford

I think it's about -- I want to say it's about $35 million.

Andy Feinman - Iridian Asset Management

Okay. Now, if the dollar stays where it is today, at the end of the year, how much would that inflate the value of your debt? And is there anything you can do to hedge that, because -- so that you get the benefit of the free cash flow in your enterprise value?

Alan Rutherford

Andy, the balance sheet as it is presented in the $2.980 billion of net debt that we reflected to you in the earnings release, is where the dollar was. Viz a viz the Euro and Sterling in the other foreign currencies that we borrow as of December 31, 2007 and certainly the dollar has moved a little bit from the end of the year. But more or less, the debt that we have is, valued much like it was at the end of the year.

I think you need to be careful when you think about hedging the debt, we do have some hedges in place. Where some swaps, I should say in place, where we have swapped dollar debt that we have issued to Euro debt.

We get the debt in a right currency where we generate the cash flows and we also get the lower Euro LIBOR versus LIBOR borrowing rate. But I don't think there is any reason distinct that right now, we are going to embark on a large hedging program that certainly will cost us money in terms to what we pay the banks. And we don't know where we're going to go.

What we try to do is put the debt where we generate the cash flows and I think that's the right strategy.

Andy Feinman - Iridian Asset Management

So, the answer is zero. If it always stays where it is?

Alan Rutherford

Right

Andy Feinman - Iridian Asset Management

And you will get all the benefit of your free cash flow and your enterprise value?

Alan Rutherford

Right

Andy Feinman - Iridian Asset Management

Okay, thanks.

Alan Rutherford

You are welcome

John Conway

Next question please.

Operator

[Joel Spungen], please state your company name and you may ask your question.

Joel Spungen - Merrill Lynch

Yeah hi there. It's Joel Spungen calling from Merrill Lynch. I just have two questions for you. Actually, the first was, you may have said this is a beginning I am afraid I missed the first couple of minutes of the call. But could you just give us a little bit more color on the volume growth in the Americas division? Particularly if you can speak and elaborate a bit on to the North versus South America?

John Conway

Are you referring to '08 here?

Joel Spungen - Merrill Lynch

No, I am referring to '07 actually year just finished.

John Conway

Okay

Tim Donahue

I think, I mean to say, Alan said in the beverage cans business in the Americas we were up about a 1.5% both in the quarter and for the full year.

Joel Spungen - Merrill Lynch

Right.

Tim Donahue

And as we were flat in the quarter and they were up about 1% for the full year.

Joel Spungen - Merrill Lynch

Right. And then, within that one, I mean, was there any, can you give us any color on sort of performance of South American business versus the US?

Alan Rutherford

Yeah, I think, certainly, the South American business is particularly for us Brazil and Columbia was up more than the North American business. The North American business was flattish to up about a quarter percent to 3/10 of a point and the South American businesses, well they are a bit smaller than the North American business were up about 5% to 6% in the quarter, and looks like about 8% for the year.

Joel Spungen - Merrill Lynch

Okay. And just also instead in the European businesses looking at the strong profit progression there over the course of the year. As you probably know some of your competitors have had issues in their business of moment dealing with raw material cost and transportation cost things like that I was just wondering how you managed to sort of avoid those problems and how you feel looking into '08?

John Conway

Well, we in Beverage cans in particular but food cans as well, I mean, we've been on about a 2-year course now of insisting on formula pricing with our customers because of the volatility of the varios items that you just mentioned. And our impression is that so is the industry generally, so when we hear these reports, we assume there must be some other issues because we're not experiencing these issues. And so, your guess is good as mine as to what's really going on now, we don't really know, but I suggest you look some place else because we don't think it's there.

Joel Spungen - Merrill Lynch

Okay, thank you very much.

John Conway

You are welcome. Next question please.

Operator

Bruce Klein, please state you company name. You may ask your question.

Bruce Klein - Credit Suisse

Hi, Credit Suisse. Just two questions what are the tinplate, it sounds like, I mean, are you fully, I guess, recovering what sort of was announced by the, your guys in the US and Europe?

Tim Donahue

Yes, we are.

Bruce Klein - Credit Suisse

Okay. Do you know yet or is it too slow?

Tim Donahue

We largely know, as you may know from the past calls at this point we're usually estimating to a degree because we won't finish with price activity particularly in food cans until about April. But based upon how things have so far in food, aerosol, metal vacuum closures, it's clear to us that our competitors were getting the same kinds of steel price increase etcetera, as we are and it looks to me like everybody is as determined as we have to push it through and so we think we are going to very successful, but we're already, largely into it.

Bruce Klein - Credit Suisse

Okay thanks. And the second question is just the covenants soft drink volumes, I think in '07 were down on a mid to maybe above mid-single digits. I am wondering, sort of how your numbers, sort in Americas Beverage square with that and what you would say about the covenants soft drinks, and maybe how those business also because of you guys in that segment?

Tim Donahue

Yeah. We did little better that the industry. Overall, we did about the same as the industry which is to say we were up 0 to 1% in the US for the year. And we've got a fairly diverse mix of customers in that industry we're spread across quite a few customer, many of whom have a strategy of pushing cans as a value package. So, we did quite well in soft drinks actually.

Bruce Klein - Credit Suisse

Do you know why? The end market for CST it was down a lot you are saying?

Tim Donahue

Our customer base just did a good job of pushing cans in '07 and so we were just the beneficiary of that.

Bruce Klein - Credit Suisse

Any sense if the CST your view of whether CST will continue sort of mid-single trend down in '08, do you have any feel for that?

Alan Rutherford

We think it’s a general proposition, some of the bigger users of cans didn’t push cans very hard in '07. We anticipate they're going to push them harder in '08. It's a great way to move volumes and with slowdown in the economy and so forth, you could argue although we don't see any super hard data, but you could argue that they should do that, should be able to do it. So we still believe the overall North American market will be up about by 1% year-on-year in beverage cans, beer and soft drink, energy drinks, teas, all the rest.

Bruce Klein - Credit Suisse

Thanks, guys.

Tim Donahue

You're welcome. Next question please.

Operator

Wayne Cooperman. Please state your company name, you may ask your question.

Wayne Cooperman - Cobalt Capital

Cobalt Capital. Did you guys give interest expense guidance for '08 and if not, could you and because I'm a little not sure why it's as high as it is?

John Conway

I'm not sure why you are thinking it's not -- why you think it's not as quite high as it is, but we did not give any guidance.

Wayne Cooperman - Cobalt Capital

No, for last year, but?

Alan Rutherford

For last year, well…

Wayne Cooperman - Cobalt Capital

You gave some guidance for '08, could you just walk us through what your average debt and average interest rate?

Alan Rutherford

I think if we looked at where we're at right now, we would project interest expense at about $285 million.

Wayne Cooperman - Cobalt Capital

Okay. But given where your debt is, I know it builds and then comes back down. It still seems your average interest rates pretty darn high and could you talk about ability to bring that down?

John Conway

You've got to remember that we've got seasonal borrowings.

Wayne Cooperman - Cobalt Capital

I understand.

John Conway

Much of the cash as Alan mentioned earlier, much of the cash that we generate every year and as you could see, this year in the fourth quarter we almost generated $500 million of cash in the fourth quarter comes in late in the year.

Wayne Cooperman - Cobalt Capital

Sure.

John Conway

So the average carry is high for the year. And you got to remember this you've got to add the securitization into that, because you are paying interest on securitization.

Wayne Cooperman - Cobalt Capital

Right.

Tim Donahue

So, the reason why it was a bit higher this year, perhaps then you were expecting, you've got to remember that currency had a huge impact, as we mentioned earlier, we have debt placed in numerous other currencies, the euro and the sterling, for example.

Wayne Cooperman - Cobalt Capital

How much of your debt is floating with LIBOR because, I know LIBOR went up a lot in Q4, but it's come back down quite a bit?

John Conway

As we said earlier about 35% of the debt floats.

Wayne Cooperman - Cobalt Capital

So you should get a benefit if that has come back down.

John Conway

Yeah.

Tim Donahue

Correct.

Wayne Cooperman - Cobalt Capital

Okay. Thanks.

Alan Rutherford

Welcome. Next question please.

Operator

[Garo Norian]. Please state your company name. You may ask your question.

Garo Norian - BlackRock

With BlackRock. It's more of comments on the question. Just regarding the release I thought it was pretty confusing and could be improved. I think if you look at some of sell-side notes they also seem to have some confusion and I would just suggest, perhaps in the future when there is so many non-recurring items at tabular format, maybe would be helpful. And then also on the LIFO impact side of things. Mentioning that it really didn't have an impact would have been helpful as opposed to kind of just leaving it out there for people to not know? I just wanted to mention that and hope you guys take that into consideration going forward.

Tim Donahue

Thank you for your suggestion.

Alan Rutherford

Next question please.

Operator

[Gary Marts].

Tim Donahue

Hi. Gary Marts

Operator

Please state your company name

[Gary Marts]

Yeah, hi. I was wondered if you could provide some additional color on the asset impairment charge?

Alan Rutherford

Asset impairment charge.

Gary Marts

That was not correct, you can close it.

Alan Rutherford

With the

Gary Marts

You can close it.

Alan Rutherford

It was the asset impairment charge was the European closures where we had a good write down. About a $103 million I think.

John Conway

I mean to follow up with Alan. We had a little bit of tough year in the business and in '07. It's in the European food segment in part it was a consequence of the large part, it was consequence of the weather. But also, we just had some operating issues and it led to the conclusion that we had to do that.

Gary Marts

Did you actually shut any plants down over there or?

John Conway

No, we have not.

Alan Rutherford

It's just an evaluation. It's done in accordance with one of the issued FASB's and the accounting requirements or requires after that valuation exercise to take the charge.

Gary Marts

Okay Thank you.

Alan Rutherford

You are welcome. One more question if there is one, operator.

Operator

Okay, that was our last question Mr. Rutherford I will turn the call back over to you.

Alan Rutherford

Thank you. Well that concludes Crown Holdings fourth quarter conference call. We thank you very much for your interest in our company.

Operator

That does conclude today's conference. You may disconnect at this time.

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Source: Crown Holdings Q4 2007 Earnings Call Transcript
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