Q2 2020 Crown Holdings Inc Earnings Call

Thank you for standing by the confidence will begin moment.

Until such time their music thinking.

[music].

Good morning, and welcome to a pound holdings second quarter 2020 conference call.

Lines have been season.

Until the question answer session.

Good.

This conference is being recorded.

I would now like during the call over to Mr. Thomas.

Senior Vice President and Chief Financial Officer, Stinky, you may begin.

Thank you Hello, and good morning with me on today's call is Tim Donahue, President and Chief Executive Officer.

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 very is contained in the press release and in our SEC filings, including at our form 10-K for 2019 subsequent filings.

Earnings for the quarter were 94 cents per share compared to one dollar two cents in the prior year quarter.

Comparable earnings per share $1.33 cents in the quarter compared to $1.46 cents in 2019.

Net sales in the quarter were down from the prior year due to the impact of the Corona virus pandemic on unit volumes the pass through of lower material costs and $73 million of unfavorable currency translation.

Segment income of $322 million in the quarter was below prior year due to the impact of a pandemic on sales and operations and $11 million of unfavorable currency translation.

At the end of the quarter the company had over $1.8 billion and liquidity between cash balances and borrowing capacity under the revolving credit facility.

And the net leverage ratio of 4.7 times was well within the covenant requirement of 5.7 lifetime.

As outlined in the release, we currently estimate third quarter adjusted earnings of between $1.50 cents and $1.60 cents per share.

Full year adjusted earnings of between $5 in 10 cents and 5025 cents per share.

These estimates assume exchange rates remain as our current levels and a full year tax rate of approximately 26%.

We currently estimate 2020 full year adjusted free cash flow of approximately $475 million as approximately 600 million in capital spending.

With that I'll turn the call over to Tim.

Thank you Tom good morning to everyone.

Our continued best wishes for the health and safety to all of you and your families.

Before reviewing the operating segments I want to again take a moment to thank our global associates associates for their dedication during the current pandemic.

You are needed you are critical and you are essential to ensure that the global food supply and transportation support systems that so many take for granted operate without interruption.

We know that many of you had been directly impacted by the virus and we continue to take measures and ask you to follow strict protocols to ensure your safety while in the workplace.

From the beginning our primary concerns have been the health and safety of our employees their families our customers and suppliers and ensuring that liquidity as a company in order to maintain operations and support the essential needs of our customers.

Again, thanks to all of you.

When we last spoke to you on April we described what we believed was going to be a challenging second quarter.

In late March early April significant demand contraction was evident in our non north American beverage can businesses.

Fortunately demand in those markets has snapped back and a few weeks earlier than expected.

The challenge now is meeting the outsized requirements of our customers as they look to rebuild their supply chains. After several weeks of mandated shutdowns.

From now until the end of the year and it almost every market, where we produce cans will be a short supply.

In last nights release, we announced the addition of food beverage food and beverage can production lines in North America.

These projects originally scheduled to commence in 2021 had been accelerated into 2020.

And as such our capital requirements have increased back to the original 600 billion dollar estimate we provided to you in February.

In Americas beverage overall unit volumes declined 3% as strong demand in North America was not enough to offset early quarter weakness in Latin America.

Our north American shipments were up 16% as we utilized open Latin America capacity to fulfill U.S. customer demand.

Beginning in mid May customers in Latin America returned to full operations with demand now far outstripping production capacity.

We fully expect that cans available to support North America in 2020 will not be available in 2021.

As those Latin markets returned to normal demand patterns and as such I brought forward our plans for the second line in bowling Green as well as the third line in Olympia Washington.

As noted in last nights earnings release, the third line and Nichols, New York began commercial shipments during the second quarter.

And while the second quarter was short of the same 2019 period.

We expect the second half of 2020 will show growth versus 29 team.

European beverage down 38% to the prior year at segment income reflects demand weakness across all operations, except for Saudi Arabia and the UK.

The demand slowdown we began to see in March resulted in overall volumes being down 12% in the quarter.

As our operations in southern Europe that is Greece, Italy, Spain, and Turkey, all suffered from low economic activity lower expected tourism and lower consumption during the quarter.

Currently customer activity is strong and as is the case in Latin America demand is far more than production capacity.

The supply chain on the candidate straight like many other industries is extremely efficient.

Because of this we do not have the ability to make up months of demand in a shorter time period.

Frustrating for Crown and many of our customers.

But perhaps if we were ever faced with such severe demand contraction with the possibility of such a sharp recovery.

The we own our customers will find a way to fairly distributors carrying costs. So that inventories are available when needed.

While initially delayed due to the virus, our engineers were able to complete the conversion of our beverage can plant Seville to aluminum.

Adding much needed capacity to the system.

We expect the third and fourth quarters to outpace the prior year prior year respective quarters.

Sales unit volumes in European food advanced 10% during the quarter compared to a soft 2019 period.

Initial plannings were low this year due to customer concerns over a shortage of necessary harvest labor. A result, a virus related border closures. However, we are three weeks into July and demand remains very strong the weather looks good and all saw is currently point to a good good third quarter crop yields.

Okay build inventories are expected to be very low from the 2020 season.

And when combined with what our customers believed to be a more permanent consumer returned over the phone can they are already discussing increased plant things for the 2021 campaign.

We expect full year segment earnings to be slightly ahead of the 2019 level, implying that we will more than make up for the headwind to first quarter inventory carrying costs.

Sales unit volumes in Asia Pacific declined to 7% in the second quarter.

Shipments in China were up 11% and reflect that countries apparent pandemic recovery.

While southeast Asia with volumes down 10% struggled in April and May is alcohol sales were prohibited across many locales to curb the spread of the virus.

We expect gradual improvement in the third and fourth quarter as demand picks up across the region commissioning of the new beverage can plant and non Cai, Thailand was completed within the last two weeks.

And we are currently in customer qualifications.

Adjusted for currency sales in transit packaging declined 20% in the quarter impacted by the shutdown of customers and many industries deemed non essential.

And the general conservation of cash strategies employed by many companies to preserve liquidity.

Demand for consumer holes that is strap and film began to show recovery in June.

Although our higher margin equipment businesses are still impacted by an inability to access customer sites in many cases.

We expect income improvement in the back half of the year versus the second quarter with significant income income improvement expected in 2021.

Demand was from at our North American food business, almost fully offsetting weakness in global aerosols.

So in summary.

It was not the quarter, we envisioned at the beginning of the year. However, our teams did an outstanding job maintaining productivity and efficiencies.

In such a challenging environment as Tom noted.

We have reinstated guidance for the third quarter and full year based on what we see currently.

Despite the pandemic, we came within 5% of last year's currency adjusted second quarter earnings performance.

And we currently expect full year adjusted earnings to exceed last year.

We expect to generate significant cash flow this year and with significant liquidity, we continue to invest in capital projects, where we see opportunities for growth and productivity improvement.

And with that Lowi, we're now ready to open the call to questions.

We'll now begin the question.

If you would like to ask your questions from stifled side, and then May one season Jason.

Neiman company names.

Jamie.

Your question.

Sorry.

One moment for questions.

Our first question comes from line of George.

From Maxim.

Hi, everyone. Good morning, 20, George My question, how you doing.

Thanks for all the details tend to think going to uncover.

I'll ask three questions.

First of all.

Talk a little bit further on your comment on ways to distribute carrying costs in Europe, what you were getting there and what the implications could be and you know later this year and really over the next couple of years and then had a couple of follow ons.

Yes, Thanks, George I think it's not specific to just Europe. It applies to Latin America as well.

Applied to anywhere in the world So I think.

We had a.

Got a situation where and we discuss briefly on the April call somebody asked on April call. It we were still making Kansas, putting an inventory and and the response as no. We're not in the reason is we can't afford the extra carrying costs you know the margins in our business yours, there, they're nowhere near the margins of our consumer product customers and.

So they are currently frustrated that they can't get all the Canada, they need to refill their supply chains after telling us that they didnt need anything for three to six weeks and we're frustrated werent, we're not in the business of telling customers know if you go to a store, Georgia by a tie.

You can't find the saw you want they try to sell you a different shirt. So they can match decided I sure third and they're not in the business of telling you know so it's very frustrating.

So having said that the comment is nothing more than.

It's a comment and its you know if you want cans available when you want them.

Understanding you want and inefficient supplies supply chain, you've got an efficient supply chain.

However, the the downside of an efficient supply chain is when something like this happened in you tell us to turn off and then we start turning back on we can't make up several months worth of of demand in a short period. So it's I.

I don't want to go into anymore than that but the margins in their business when they're selling product for.

15 to $30 a case in.

They can far more afford carrying costs for.

For warehousing of cans.

Then weekend that's all the comment was for understand Tim would this be something that you could.

Adjust for if there was mutual agreement.

Within the year or would it need to be something I'd be more formal and therefore would have to be instituted as as contracts roll over and then kind of my last.

No question.

A little bit about Signode, how it's performed and again I mean this has been just unprecedent appearance hasn't been a normal recession.

But hasn't performed as you would have expected both in terms of.

The takeaway in within the end market and the operational leveraging de leveraging and for that matter specifically on working capital again. This has been sort of a light being around recession, but if we go back to the 18 analyst day. There was a view from the company that one of the benefits here would be you'd be able to.

If you were in recession squeeze working capital generate cash.

From the downturn are you actually being able to do that.

Again, given you know this period, we've been and thank you guys.

Yes, so I think to answer your first question George.

The.

The.

The way to build inventory and a fairly distribute carrying cost. If you will that does not need to be handled we've been a contract that can be handled.

On a one off be slow basis with customers as they as a foresee the need for cash. So we will have customers no doubt.

So it wouldn't be willing to do that we'll have other customers that are so fixated on.

Cost that they forget they need to get product on the shelf. So that's just going to be a.

And ongoing discussion, but there's nothing to say that that can be done mid mid season Thats.

That's just good business practice on Signode.

So first on the order of working capital, you'll you'll remember last year, we squeeze an incredible amount of working capital out of Signode, which was which was quite beneficial not only to the balance sheet last year, but.

More so to the.

To reset how we're going to operate the business going forward.

You're right. This this pandemic, there's a little different than the most we've ever seen.

Other recession's.

Kind of everybody goes down together in this recession, we've had entire industries, whether it be the auto industry to steel industry.

Appliances.

Just shut down I mean, no activity whatsoever.

And so thats, a little different and so.

Fortunately for Signode, there they are providing product across a wide variety of industries. They've got a number of industries that are still serving but a number of industry.

Better shutdown and are beginning to slowly open so I would say all at all.

Certainly we're not pleased with the results in any of the businesses, we've had because they're all down.

We understand that the managers in the in the employees are doing exceptional work across the entire company to try to make the best of it but.

Probably I would say.

You know.

If you told me this was going to happen I was going to lose.

30, or 40 or 50% of the industry's on supplying for a few months I thought that the signode results would have been far worse, but.

They're doing okay on price and they're doing pretty well on on cost reductions in the phase of this.

But its volume gain for them and they're they're material margin the margin after direct material cost is quite high. So it's it's all its a flow through business. So when when the volume comes back as we fully expected will next year into 22.

We fully expect to get it all back.

Thank you Tim.

Thank you George.

Thank you. Our next question comes from the line.

John.

Your line is now.

Great. Thanks, and good morning, guys warning.

A question first on the free cash flow I guess can you help us with how much incremental capex, you're baking into this guidance with associated with your new announcements this morning versus maybe a weaker operating cash flow outlook.

Yes, so I have personally I'll say, Mike and I I guess.

We also apologize because perhaps we weren't clear enough to all of you in April So in April we Oh, we suggested to you that even in the face of the pandemic and given the severe.

Cutback in beverage can demand across a number of businesses that we have around the world via Southeast Asia Latin America Europe.

That that with some with some adjustments to capital that we thought we could get close to the original 600 million dollar.

Free cash flow number and so perhaps we should have been a bit more specific around.

What we're thinking in terms of cutting capital at that time, and I guess, because we were not you all did not.

Fully reduce capital expenditures.

To offset to the.

Operating income was so the cash flow could get back to that number and so as we go back to.

A full 600 million I will tell you that as we sit here today that $600 million.

Is at least $100 million higher than we were envisioning.

When we spoke to you in April and as I say I apologize, perhaps we weren't clear enough, but given the uncertainty in the lack of visibility.

That we all had at the early stages of a pandemic and our concern with liquidity.

We were expecting fully expecting a cut more out of capital and delay projects.

Than than we are now so I would tell you that.

Maybe at least 100 million of that as capital the other 25 million.

We'll be working capital and as you will appreciate.

Businesses in Brazil.

And in Southeast Asia are quite large and there are quite large in the January February timeframe as they get near their holiday seasons of Carnival and Chinese new year, So the inventory builds.

Our expected to be exceptionally strong this year.

As peoples in those countries return towards.

More celebrations and gatherings.

Hopefully as we get passed this virus.

Got it Thats really helpful color and then just on some of the operational flexibility Americas beverage. This year could you maybe just give us a rough sense how much you've had this shift from Latin America to the U.S. This year, how much New addition next year.

Sure that roughly I'm, just trying to get a sense of how much is being replaced in north America versus going to true incremental capacity there.

So we ought to be a little careful here, but so to see a meyer earlier or later last week came out and felt the need to describe to.

It's recipients that the industry in North America was going to import.

2 billion or at least 2 billion units.

Into the United States to cover demand.

Outsized demand again this year, so and that 2 billion units is not included in the numbers a forecast so it.

If.

If in the first quarter the industry was up 8% in the second quarter, we were up 3%, so five and half percent year to date. It does not include important cans and only includes cans produced.

In North America. So in fact, the growth rates are considerably higher.

Ben the numbers you're seeing.

As it relates crown.

I'm, a little surprised to see EMI says 2 billion cans because of.

We're not 50% of the market and we'd be at least 50% of that number.

So we will.

We have.

So so what we what are we done recently here we started the Toronto the third line in Toronto back early in the first quarter.

Towards the end of the second quarter, the third line and Nichols came up.

They will be going through learning curve this year, but.

Hopefully are well through their learning curve and our planet and are much closer to full production levels next year.

And then we bring up bowling Green the first line in the second quarter and we'll get some we'll get some capacity.

On the second line in Olympia later in the air So there'll be significant capacity the crown brings into the system next year.

To offset what we brought in from Latin America, having said that.

Our view as we sit here today is that Thats still will not be enough given the trends we're seeing in the beverage industry in North America with spike shelters sparkling waters.

And stay at home and I believe just as in Europe I made the comment in in euros on European food.

What our European food customers believes that there is a more permanent return to eating food cans at home because of the pandemic.

I think we're going to see more of that in North America as well for some time as well. So I think we're going to see extremely strong demand.

In beverage cans globally, and especially in the United States.

Great. Thanks.

You're welcome.

Thank you.

Comes from the line.

From Goldman Sachs.

Hey, good morning, guys and congrats on the good result in a really tough quarter.

Just wanted to ask about the.

The margins in the performance in Europe.

The volume weakness, obviously, there was some fixed cost absorption on that but the margin I think 11.2% or so.

Quite a bit lower than it's ever been in the second quarter.

Just wondering if there were some impacts from the start up in.

The new.

Conversion and seen it might have impacted it there and.

What we might expect from a more normal margin in.

In that business in the seasonal quarter like Twoq.

So I know there they are.

There might be.

Some impact from the start up in Spain, but it all revolves around 12% volume decline and as the volume business because fixed cost are so high.

Especially.

Recently in the beverage can industry across the industry as we all have been modernized we're installing new plants new lines modernizing there's been a lot of capital spent recently, so thats all flowing through to operating income because the depreciations.

Reflected in that the EBITDA numbers with wouldn't look as drastic is that but.

It's volume and.

I'm a bit hesitant to say what it should look like I would like to be able to tell you as I sit here today that at a normal volume quarter. It should it should look any worse than what does look like in the past now having said that.

You probably you'll remember.

I, probably have stated that we've not been.

Exceptionally pleased with the margin profile and European beverage and us a European beverage margins do need to improve over time.

So the combination of returning volumes and then to an environment, where the market continues to grow in and the need for the industry to get.

Adequate returns to keep keep investing.

Tell me that.

What I would like for all of us to believe.

Is that the margin should be better than we've seen historically in the second quarter, we'll see if we get there.

Okay I just wanted to follow up on the on the free cash flow comment from from Michael's question.

I take it that the for 75.

Free cash flow in implies I think you were saying kind of $100 million higher capex or maybe 125 million are higher capex than what we're contemplating three months ago and that's due to the need for for more capacity given the strong demand you're seeing and then it sounds like maybe a $25 million swing on.

On on working capital so is that kind of higher in $25 million most of the delta between where like you would have thought you kind of hit maybe close to 600 million before and now it's it's for 75, it's really just kind of pulling forward some investments.

It's in working capital swings that there's going to clarify is that about it.

Yes.

That's exactly it I guess the original pre cobot in February the original estimate was 600 million was 600 million of capital.

So we're back to 600 million of capital got about 25 million more working capital now we think at the end of the year.

Due to Brazil, Vietnam Southeast Asia.

And then the balance is just the flow through of lower operating income.

Yeah, I mean, I think our original guidance was.

You know the midpoint of our original guidance is was probably.

30 cents or 35 cents higher than the midpoint of our guidance now we'll give if you say 35 cents and you weren't backup the income statement you get to a pretty big number at operating income so.

That's the Delta.

Got it appreciate it thanks, Ken Thank you.

Thank you. Our next question comes from the line.

Yes.

Your line is now.

Hey, guys good morning.

Got you.

So Tim going back to prepared comments and your characterization of at the back half.

Lease exit run rate is coming out of the second quarter.

Is it fair to assume that Threeq, you will be the quarter, where global beverage can volumes start to inflect higher again, it was down I think 5% in twoq.

Oh, we're going to we're going to be on a global basis, we're going to be positive in the third quarter gone job.

And I expect that.

Every market will be higher than last year, I think some of the southeast Asian countries, we're still the recovery as a little slow, but on a global basis will be higher.

The rate of growth, perhaps is not as great as we've had in.

In prior lets say first and fourth quarters, only because of the available available capacity we have.

So.

So the growth rates in the second and third quarter.

Are always going to be a little bit lower than growth rates in the first and fourth when demand is high because there's more capacity available in Q1 and for the numbers in two or three.

Got it that's helpful and then going back to North America.

There's a lot going on with bowling Green in Colombia. The line additions versus in addition to where you have already announced on for North America, specifically as it relates to production footprint for this year. What do you think you'll exit in terms of units. What's your best guess for 2021 at this point and then.

Just high level question as it relates to the the fundamentals I mean, obviously north American beverage fundamentals were good to begin with.

And now you have the.

We will kick in if you will for home consumption due to co bid.

Will there be a normalization period, you think coming out of the current situation I'm, just asking because you're adding capacity and then there's a new entrant potentially weekend back.

Yes.

The.

Pre cobot Ghansham, we were we were fairly bullish on the market. We we told you pre Cove and we thought we would be up 10%.

This year, just because the capacity we are bringing on and we knew it was needed and and we've we've.

We and others probably have been telling you that.

All the markets up three or 5% the market could be up five or 8%. If we had available capacity. So.

I don't know how much.

Extra demand is related to covert.

Even without cobot, I think we would be capacity constrained as an industry. So.

As as it relates the.

The new entrant.

We have one plant, they're going to build in the northeast part of the United States. We have we have a plant in New York and we have one in Toronto.

Listen there are a lot of people that live.

Between Washington, DC in Toronto So.

And there's a fair amount of can capacity there, but there's a.

Fair amount of demand and demand for new products be a spike smelters are sparkling water juices tease you name. It you know all products. So.

This is one location.

They'll probably have a when they are fully up and running and they get through their learning curve, which you know if they bring winds up in 2021, maybe by the end of 2022, they're fully through learning curve and.

And.

By the end of 2022, Bill what they're going to bring up in terms of capacity will be less than 3% of the market and they'll.

There will be caught us located in one geography of the of the country. It's a big country. So it doesnt give me that much concern to be quite honest.

And your capacity footprint 2020 to 2021.

Oh I.

I don't have.

You mean, how many points of how many cans are we going to have extra each year.

Yes.

We'll we'll probably have a.

Yes, I guess this year, we're going to have.

Uh huh.

And your you got me struggling here, but I'm going to.

Im going to I'm going to gas, we're going to have about we're probably going to sell about.

2 billion.

2 billion more cans this year in North America from our North American capacity that does not include what we're bringing in from other countries.

And next year.

Let's just say at least ability to have.

It really depends on how quickly we get the lines up and running but.

Whatever we can make we can sell it just how quickly we can we can get through get through construction and customer qualification and get cans out the door. So significance a significant amount of capacity continuing to be added.

Thanks, a lot Tim.

Thank you.

Thank you My next question comes from the line.

From RBC capital markets.

Okay.

Right. Thanks, good morning.

I'm.

Just wanted to take it back to that last comment so.

If you think about maybe this year 2 billion cans in North America next year, maybe billion dollars in a half.

Extra would that I guess imply that you should be up double digits in the U.S. next year as well.

Yeah.

No well.

I think the answer is I'd like to say, yes.

But I don't think.

Affiliated a half is not 10% of our current capacity right at the lower number.

So.

But I think I think you know.

Billion, a half is probably.

6% of what our.

Current capacity is.

Are we going to our way to do better than 1 billion and get the 2 billion I don't know into it as I said it depends how quickly we had the Kansas I I feel.

Extremely competent.

Whatever we can make we're going to sell so we can make 2 billion more will sell 2 billion more we can only make a billion to have more we're going to be able to sell a billion they have more.

And on that point, I guess you'd stand in the past that a lot of the new capacity is built on this from customer commitments. So are you still seeing.

That kind of agreement is it kind of three or five year contracts. Maybe you can just discuss that a little bit and then again.

You also mentioned, maybe potentially bringing up the returns in Europe.

I guess would that.

With those customer commitments in contracting.

Process include.

Potential for price increases in North America in Europe as well.

Well I think Weve I think we've we've.

We tried and you've seen in the results.

The results of commercial negotiations over the last couple of years in North America, hopefully you've seen that.

And I.

I think for the most part our customers understand that.

As I made a comment earlier right a lot of these guys sell their product for 15 to $30 a case.

No one to two cents per unit.

15 to $30 per case sale price is not their problem. There problem is if they can't get product and they can't get product on the shelf, they lose shelf space and they lose market share. So.

Hopefully they understand that better I and I think they do because.

Customers right now I understand especially during.

Growth phase, we're in the North America.

Pandemic related or not I don't think it really is I think it's a different function going step function happening here.

They know they need can so there are more than willing to can track right now to get cans.

As for Europe.

We are.

We have a sizable business in Europe, but we're only the third.

Third the third supplier, so pretty tough for us to to force that step change in Europe.

Okay, and then I guess I just wanted to ask about Signode as well so.

I would you characterize cigna and I guess do you believe Q2 results are kind of at the bottom and.

Activity rates kind of inflected higher globally.

And usually I guess I know, it's a relatively short cycle business on the on the consumable side and the strapping side. So.

What are you seeing there are you seeing kind of it should give you some decent visibility into order patterns. I mean are you seeing.

Resumption of higher activity levels across different geographies and cigna.

So I mean as I said the prepared remarks, we are starting to see strap and Phil.

The order patterns for scrap in the film improve.

And that will continue I think theres still some.

You know, there's still some countries in Europe, and perhaps of in India, where it's still a little slower than we'd like to see but but they're going to come back I think the.

As I said on the call. It the challenge we have a higher margin business the equipment business.

Just like all of you are.

Lets say youre not welcome at your Investor customer offices, you're doing everything remotely.

Our engineers and installers are also not welcome many customer sites sold and ability to access customer sites.

Making a difficult for us to continue to drive equipment sales so that will return.

As I said I think that the third and fourth quarters. The income income numbers in the third fourth quarter, certainly better than the second quarter.

And.

Obviously, we fully expect 2021 to be significantly better than 2020.

And then lastly, if you can just.

Provide any update on the strategic review.

Is there anything else you can share share with us there.

No I think what I said in April and I'll say it again, we are there there's a lot of work that goes.

This done behind the scenes to prepare.

Any business you might have.

For a review in a review.

Encompasses from the beginning to the end so were we continue to do that work.

As you'll appreciate there's not a lot going on in the M&A space right now.

And.

We're not.

We're not in the business of destroying value so.

We wanted to share price to be higher just like you do but we're not in the business is destroying value for our shareholders. So we're going to.

Right the business as best we can generate as much cash as we can.

And we'll see what the future brings us.

Okay. Thanks, Thank you.

Thank you.

Question Thomas from the nine.

Yeah on the Wells Fargo.

Yeah.

Good morning, Tim.

Well because they get.

I guess I wanted to dial in a little bit Tim on the commentary made about Europe food. This is encouraging in my mind, given kind of the past few years of challenging.

Crop yields et cetera, so if I look out into 2021 can you help us frame up maybe.

Volumes are up again, I don't know mid single digits or something like that again I know there's lot of uncertainty out there with what gets planted in.

Weather cooperates, but.

And then also I mean are you seeing potential for the commercial environment to improve over there as well such that margins are to March back to maybe where they've been in the past.

So I think we we.

Based on what we're hearing from the customers, we fully expect them to plant.

Your next year than this year, and whether that's 10 15 or 20%.

Rich I don't know this year they they underplanted as I said they were concerned they couldn't get labor.

Because of quarter closure, so they underplanted. So they will significantly plant more next year so that.

That we believe will happen.

We believe they're going to they're going to continue to can as much as they possibly can because they're going to come out of out of this year with very low filled stocks.

They're going to come come through this pandemic.

Having.

In a number of cases missed opportunities to sell more because they didnt have available product and they don't want to have that again. So I think demand is going to continue to be very strong.

Assuming the weather cooperates I think thats the the one variable like I can't talk too, but let's just say were.

We won't have a number of bad years in a row. This year looks like it's going to be really good. So.

On the commercial side.

Our hope is that.

With demand being that strong and customers needing product.

That they understand and we understand that the opportunity for appropriate margins.

So the entire supply chain or in front of us and so they have a job to do we have a job to do and we'll need to do our job to see that.

We get compensated appropriately.

Thank you and then southeast Asia I found interesting I guess, you said, China was up 11%.

I think I know the answer this but does that change at all your sort of retrenchment strategy in that particular country and then we've read some reports about.

A couple of new entrance and other southeast Asian countries.

Again part of that May be.

Being one or two supplier market, but.

Anything changed over there and the competitive landscape and or kind of that expectation for high single digit growth apps and pandemic endemic disruptions.

No I think China, nothing I'm not sure we've ever told you what our strategy in China is but our strategy is to.

To get the best return for our shareholders be that operating the business, we're selling the business but.

They are just they've recovered they came out of the pandemic. They went into the pandemic and came out of the pandemic earlier than everybody else. So doesn't change anything there in southeast Asia.

It's a big market Theres a lot of growth.

And there is people see opportunity there going to they're going to enter markets when they see opportunity but.

I'm not overly concerned with the new entrants in the market, there's theres a lot to go around.

Thank you. Thank you.

Thank you.

Comes from the line.

[music].

From Jefferies Your line.

Hey, good morning, everyone.

Good to hear that demand snapping back across the board for bed adds can you give a sense how to think about volumes in south.

Southern Europe, and Latin and then the second half and any cost involved an exit when you net cash for the surge in demand and impact on your profitability.

Cost in the resurgent demand.

That's right.

Listen I think.

So firstly, we're going to be sold out for the balance of the year in Latin America, we're going to be oversold in.

We're going to frustrate customers by telling we don't have enough capacity for them as they as I said earlier that just.

A function of.

You know, there's there's only so much capacity to go around when you don't make product for for three to six weeks. So.

But we're going to be sold out and we're going to be we're going to be up I don't see any extra costs.

Because we're sold out.

And in Europe, we're certainly going to be sold out.

Through through the end of the third quarter and I think perhaps there is a little oak open capacity in Q4 as there always is.

But we'll see the market continues to grow their well and I don't expect any incremental cost as well there.

Okay. So you should see pretty good operating leverage that's great.

Terms of the incremental capacity you announced.

Thank you talking Washington, how much more cancer, we anticipate from these investments in.

And what type of Capex, we care soon for 2020 launch.

Oh, I think its little early for us to start talking about 2021, but.

But you know if the business continues to grow when we continue to see opportunities that we're seeing globally.

It could be it could well be that the.

Capital number next year is similar to the capital number this year, but thats a function of what we continue to see in terms of opportunities.

I think on the capacity side, we in North America at least we.

We put a marker out there for ability to have more cans next year as I said, whether I could tell you, whether it's a billion and a half to two in the quarter right.

Really depends on how quick we get started up quick quickly we get through the permitting processes and then how quickly we finished the projects.

Got it.

Just one last one on North America.

Hey, guys ultimately the markets sold out very tight so thats really encouraging, but what kind of guide post from Marci would you want us to look at.

As comfortable as supply demand is balance it do you see 3% growth in North America for just wanted to understand the you in your competitors are adding a fair amount of capacity next year. Thanks, a lot well so I mean its a.

Going to be over 100 billion, Kansas year, the market is I think.

12 months trailing 12 months at the end of June were like 99.9 billion cans and that does not include the.

Two to 3 billion cans that are coming in from Latin America.

And so.

On a trailing 12 month basis, I think we're up about 5% puts 2 billion cans in there that 7%.

And then we're going have growth in the back half of the year. So let's say the markets I don't know 100 304 billion cans and.

And you get another you get another few percent growth in 2021, all the sun year over year over 100 506 billion cans and.

So even if even a 2%.

That's a that's that's about two and half billion cans that's up.

That's two to three can lines that are needed every year just to stay up with the growth. So.

There's a lot to go around here guys as long as the market continues to grow in.

There are products.

Consumer products that people are consuming now specifically.

Despite shelters.

Which are I don't I don't want to say they are entirely in cans, but I haven't seen anything not an occasion.

And they're replacing products in other substrates, so very good for the can market.

Okay. Thanks, a lot that's really helpful color. Thank you.

Thank you. Our next question comes from the line of Smart.

Yeah.

Lenschow your line is now.

Morning, Tim Good morning, Tom.

Just one more on the Capex, Tim Im just curious in North America, you called out that the Olympia line was going to be a specialty line can you give us a sense on all of the other projects. How many of those lines are set up to be able to do specialty sizes.

Well I think I think as we said in the in the in the earnings release last night every new project that.

That you've seen us due this year last year and even the year before theyre all set up to produce multiple sizes diameter isn't heights.

Okay, what does that do Tim just to kind of the capital cost on a line.

Right.

Marginally higher, but but the equipment suppliers.

Of which we are one.

There's a price for equipment and so there's a little bit more tooling involved I mean, you're you're not buying tooling for just one height or diameter, you're buying tooling to do different heightened diameter. So there's a little bit more but it's not it's marginal.

Okay and is there any impact on just sort of throughput or not really.

There is initially.

Until we all get accustomed to.

So running tall skinny can say they tend to tip over more than than the standard cans as you can imagine and kind of like when you go into the hospital Mark.

Urban and hospital, they give you a one of those little eight ounce squat cans and the reason they give you that can actually don't Philadelphia older yourself in the hospital bit.

So as you.

You think about a tall skinny can they tend to we just need to do some things differently and until the so the teams get used to doing that.

There's a little bit of slowdown in throughput, but but as we as we get more accustomed to that and as we experienced in many markets around the world be it.

Be at the Middle East Southeast Asia, Brazil, sometimes we are as good or even better running those cans than we are on the other cancer.

Okay, Alright, I wanted to turn into.

Brazil, and Mexico, and I Wonder is there anyway to quantify what all of that the volatility that brewers being out down in Mexico.

Drop off in Brazil, what that did to kind of second quarter results in it. If you could maybe include not only that can operations, but what impact that might have had on the glass business down in Mexico.

So.

If you look at our if you look at our earnings release and.

So in Americas beverage we were up.

What $21 million and segment income.

In the first quarter and it looks like we were down 10 million.

In the second quarter. So you guys are the analysts unless you model that but that's that's not insignificant European beverage were down 23 million in the second quarter. This is all volume right and.

So.

You know beverages volume business.

The volume volume is copy is back I mean, its snap and when I say, a snap back it snap back.

So.

So we'll get that back I think.

What what we can't make up.

Fuse the downtime.

Than we had in the second quarter.

Because we only have so much production capacity available at any point in time, so if we.

If there were two or three or four weeks, where we weren't running certain lines, you're not going to make that up you cannot run the lines any faster than the maximum speed.

So thats kind of behind us and we move forward exiting the second quarter with.

Really high demand and were flat out right now on the glass side.

Glass is a little bit.

More impacted only because it is generally more on premise.

And then cans, but that is coming back right now as well.

Okay. Alright, then last one for me we've heard some reports that retailers down in South America little more reluctant to handle returnables in the midst of the pandemic are you seeing that you think that has any impact on.

And the demand for one way packaging.

Well.

It makes perfect sense that they don't want to handle anything more more than once.

So it's why if when we look at southeast Asia, why the can jumped over glass.

Because the the shopkeepers, they're a very small shops and they don't want to waste any available space with Returnables MP returnable sitting there when they could have filled product that can be sold.

So that makes perfect sense. It makes perfect sense. It you're worried about the virus that you don't want to handle it having said that.

If our customers can't get enough fill product in or can't get enough cans are they can't filling up product than cans, and there's demand for beer or soda or other drinks.

They are going to fill what they can.

And pushing to the distribution system, what they can to satisfy consumer needs. So.

It makes sense, what you say, but right now things are real tight in South America, I think they're going to.

They're going to push whatever they cannot consumers one product.

Okay, all right. Thanks, Tim I'll turn it over good luck in the second half. Thank you.

Our next question comes from the line.

Your line is now.

Good morning.

Good morning.

It sounds like you'll be sold out in North America Europe in wet AMD, maybe until the end of the year in you see strong growth prospects for 2021 and beyond.

Understanding you got wind your Capex program is it fair to expect you may have to undertake additional capex projects over the next 12 to 18 months to meet this demand or is there a way that we can think about sort of normalized capex, whether it's 600 or a different number for what seems like kind of normal for demand.

Well.

We only have to go back four or five years, and we were spending 250 to 350 million in Capex. So.

This growth that we've we've all been experiencing.

Has pushed up capital needs significantly whether its $450 million last year 600 million this year and.

And I suggested earlier on this call that perhaps the numbers even that rate next year, we continue to see the growth might my hope is.

That when we sit here in February and we have this conversation with you that I'm, telling you 600 million that'll that'll mean that there is significant growth opportunities, we all want to growth.

You don't have growth.

Then things get a little difficult. So we're really quite fortunate that we have significant growth opportunities. So I don't know.

I don't want to tell you what a normal number is I'm, hoping that the new normal number is something more like we're seeing now which means that that this growth pattern. We're seeing is going to last for several years.

Got it got it very helpful.

And then in North America, we've obviously seen a resurgence of cobot cases here understanding on premise is much smaller here in Atlanta and were southeast Asia and this is obviously kind of happening in real time is this something that's impacting north American demand at all is it is it negative at the margin is it sort of neutral or is that even positive.

People find cans in the grocery channels staying at home.

So I don't please don't take this the wrong way as it relates to North American beverage can demand the pandemic doesn't matter.

The market was always going to be oversold this year.

And we were always going to be trying to find cans.

To serve the U.S. customers I would say that Fortunately for the us customers. The pandemic happened and there were more cans available from Latin America to come into the us otherwise the U.S. would have been significantly under supplied with or without the pandemic.

Now that is not that comment is not meant to downplay the impact of the pandemic.

On any individual any industry any employee group.

Listen people have really struggled this year.

I think our governments are struggling with how to handle this so that the minimize the impact on people. So please don't take that the wrong way, but the pandemic has no impact.

On the outsized demand, we're experiencing we were always going to have that this year.

Got it understood appreciate that thank you.

Q.

Our next question comes from the line.

From Keybanc your line is now.

Tim and Tom Good morning, pointing up.

Tim just on food cans, you talked about your European customers being optimistic about.

You have a new normal.

Post co that for demand I'm just wondering.

How if at all that affects how you're thinking about your food can't businesses.

This is your beverage can business as you had the surge in North America pre cope at which you just talked about and then you've seen these.

Varying trends elsewhere, but food cans are clearly benefiting in a major away from cobot and.

Well, we know it could last a while we don't know and as you've said food cans are very good cash flow business, even even better than beverage cans. So everything about food cans versus beverage cans in terms of being a long term party or portfolio.

Well I personally I would say Adam is that I wouldn't describe food cans is a better cash flow better business and beverage cans I.

I think beverage cans are as good or better than food cans when it comes to cash flow the.

The beverage cans system right now requires more capital than the food can system does because there's so much more growth and there's there's much more excess capacity that exist in the food cans system, specifically on three piece food cans.

But if you weren't growing in beverage cans you'd have tremendous cash flow coming at a beverage cans. So let's put that aside I think that.

There are there are a lot of people out there that have an opinion on what crown should be doing with its portfolio.

And we've always said that we have a nice mix of growth businesses, and we have a nice mix of cash flow businesses.

And cash flows never a problem and so you don't habit. So.

There are.

There are probably 250 Ceos in the Fortune 500 that would tell you. They wish they had our cash flow problem right now so and I read the pre qual knows that many of you put out in.

Some of you were disappointed with our reduced cash flow guidance. So it's never a problem and so you don't have enough of it. So we are request were quite.

We're quite pleased that we have a lot of cash flow.

Having said that there is no doubt.

An increase in food can demand because of the pandemic both in North America in Europe.

As I said on the earlier our customers in Europe I believe this is more permanent in terms of the consumers demand for food cans.

I don't know that to be the case right now in North America, but we'll see how it plays out but.

It's an extremely attractive business.

And we'll see where the review with the board takes us with regard to that business, but we are here to maximize value to shareholders.

Just along those lines it does the pandemic and the impact that had on food can demand change at all.

You're thinking about businesses is longer term.

No I don't think so I think it's still the same business. We always viewed it to be now you tell me youre going to have cold at 20% 21, and Koby 25.

I hope, we don't because that's going to be really painful for the global populations, but if you tell me that's going to happen then yeah, that's going to change I feel about about the food can if we're never going to go back to restaurants, and we're never going to have barbecues with our friends were just going to sit in the house and he can peas and can born that's going to change how you feel about it but but I'm hopeful that thats not the case.

So short of that this is a relatively short period of time and all of our lives. That's been very inconvenient for most of US. Some people have been extremely partially affected by this but for most of US. Adam. This is not June 619, 44, we're not storming the beaches of de de this is a short period of time.

In convenience and we're all going to get through this.

And when we come out the other side of this we're back to running businesses and operating our lives normally so.

In that regard it doesn't change your long term thinking about any business that you have.

Okay got it just to others, Tom just one on cash flow working capital beyond this year, you've done a tremendous job, but taken out working capital.

Over the past several years I know this year it'll be a use because of inventory building.

Particularly toward year end are you thinking youve taken out most of the working cap that trade working capital that you'll be able to do or do you think theres more to go perhaps next year beyond and then the dividends to minorities on the cash flow statement are you thinking so thinking about 70 million Tom.

Yes, I think that the big dollars have come out of working capital. We're in a period now where with the growth in beverage cans were actually using working capital so, let's let's assume that for the.

The near term anyway, and as dividends to minority about 75 million for 2020.

Thanks, and just tend to exit rates for for Bob can I know I think in response to got Jim's question, you said Gulf with that and volumes will be up you think in Threeq. You was your exit rate also up low single.

You mean in globally, yeah global beverage can volumes, if they're going to be up may call. It low single in Threeq Q was that the rate at which you exited the second quarter as well.

Adam we're sold out right I mean, we can't make any more cans nobody in the can't industry can make any more cans.

So we had a period in the second quarter globally in a number of markets Latin America Southeast Asia, Europe, specifically, southern Europe, where demand was impacted by the virus.

That that quickly came back in mid to late may across most of those markets. We are we are flat out and we're going to be up in Threeq. You now is the number going to be 2%, 3% or 5% I don't know, we're going to be up and the exit rates are extremely strong right now.

Terrific. Thanks, so much them. Thank you.

My last question comes from the line, that's Neel Kumar from Morgan.

Your line is now.

Hi, Thanks for taking my question.

Another follow up on your especially can footprint.

When you complete the Kentucky, and Washington projects can you give a sense of what kind of specialty can next will be North America, and how does that compared to where you stand currently.

I didn't understand English.

Neil can you can you just say I'm sorry, please ask that question again.

Yes, I'm, saying that after you complete in North American projects, we're adding use I think tank acne. He's given and we are actually can mix will stand in North America, where were written is winning is currently oh, so I'm sorry.

So we are let's say we are.

Hi teams right now 17, 18% when we come out of these two projects will be in the 20% to 23% range something like that in North America.

Okay. That's helpful. And then just given the tightness you've seen in North American.

Mark if you see any opportunities to kind of continued improved pricing and media address other provisions in customer renegotiations going forward on should we expect from margins continue to improve.

In North America, assuming demand remains robust.

Well I think as I said earlier in answering somebody's call Weve.

I think we've been fairly successful over the last couple of years and.

And.

The results in our Americas beverage business showed that.

We're going to continue to have growth.

On the.

On the volume side, which is going to fall right through to operating income and.

And as we.

Utilize fully utilize assets 12 months, a year and and as we put more lines under roof, we're going to expand margins because of the the operating leverage you get with two or three lines under one roof as opposed to one line.

And growing the grow in the specialty mix, what we'll do the same so.

But you know we talked earlier about fair distribution of caution to our customers are also looking for for us to do the most that weekend to help them.

Compete effectively with their competitors and with their retail with their retail customer so.

But we're always looking for opportunities to improve margins.

And then I think we've done we've done some of that already so I'll leave it at that I don't want only talk too much more about that.

Great. Thank you.

Thank you Neil.

So we I think you said that was the last question. So thank you that concludes the call today and we'll speak with you all again in October Bye now.

Thank you.

Thank you.