Q3 2020 Crown Holdings Inc Earnings Call

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Good morning, and welcome to the crown Holdings third quarter 2020 conference call your lines have been placed on a listen-only mode until the question-and-answer session. Please be advised that this conference is being recorded. I would now like to turn the call over to mister Thomas Kelly senior vice president and Chief Financial Officer sir. You may begin. Thank you Jimmy a good morning with me on today's call is Tim. Give you 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 vary is contained in the press release and in our SEC filings, including our form 10-K for 2019 and subsequent filings.

Earnings for the quarter of $1.59 per share compared to $1.36 in the prior-year quarter.

Campo Bello earnings per share Rose to $1.90 in the quarter compared to $156 in 2019.

Net sales in the quarter up 3% from the prior year due to increased beverage in Phuket volumes offset by the pass-through of lower material costs.

Segment income and proof of 461 million dollars in the quarter compared to $395 million in the prior year due to the higher sales unit vines in the metal packaging businesses.

Corporate expenses in the quarter. We're up over the prior-year primarily due to higher incentive compensation.

As outlined in a release, we currently estimate fourth quarter adjusted earnings of between $1.22 and $1.27 per share and full-year adjusted earnings of between $5,000 and $570 for sure. These estimates assume exchange rates remain at their current levels and full-year tax rates of approximately 26%

We currently estimate 2020 full year adjusted free cash flow of approximately $550 with the approximately six hundred million in capital spending.

Dividends to noncontrolling interests are expected to be approximately eighty million dollars.

We expect full-year 2020 adjusted ebitda as defined in the release of approximately 1725000000 and and a year-end net leverage of 4.5 guys with that. I'll turn the call over to Tim.

Thank you. Tom. Good morning to everyone we continue to wish you and your family is all the best as we enter what appears will be a challenging virus environment over the next several months.

and

before getting into the review of our third quarter results

We want to again Express sincere appreciation to our Global Associates for their continued efforts during the pandemic our customers in the global food and beverage and transportation Industries count on us need a high quality food and beverage containers in a safe and timely manner and your efforts remain critical to those Global Supply chains. The next several months will prove to be challenging as a so-called on a second wave of the virus is well underway throughout Europe and parts of the United States and we ask all of you to remain Vigilant in your compliance with recommended behaviors to ensure the safety of your family's dead or Associates and your communities your efforts to date have been exceptional and we thank each of you.

using a virus related shutdowns towards the back half of the second quarter allowed the company's operations to get back to full production and the earnings power of the global organization to be realized

when we last spoke in July, we described sharp demand recovery and many of the markets where we operate. We also described a situation in which cans would continue to be in short supply across most of those markets long as we enter the fourth quarter and look ahead to 2021. We expect the demand for cans will continue to increase as customers and consumers alike continue to recognize the environmental benefits of aluminum and steel compared to other substrates.

We were pleased to report that our efforts related to the environment and sustainability have not gone unnoticed recently. We were ranked in the top 1.4% of the more than 12,500 companies rated by 6X and we're also ranked in the top ten globally by The Wall Street Journal for environmental issues management. The only United States company in the top ten.

When it comes to the science of sustainability, dr. John Ross in his team working with our suppliers customers and the can manufacturers Institute continue to be true leaders in our industry.

An American Beverage overall unit volumes Advanced 17% as the overall North American Market was complimented by exceptional demand and Latin America as those markets rebounded sharply from government managed to shut Downs which impacted many of our customers during the second quarter.

We expect demand will continue to outweigh supply for the foreseeable future and have several projects underway to increase production capacity in 2020. We have already commercialized more than two billion annual capacity across the Americas beverage businesses and in 2021, we will bring on more than 4 and 1/2 billion units of annual production capacity with projects in Bowling Green, Kentucky, Olympia, Washington, and now the second line in Rio Verde, Brazil.

European beverage recorded a 19% Improvement in segments income with higher volumes higher production levels and cost control all contributing sales unit volumes were up 3% as strong volume of Northwest Europe Eastern Europe and Saudi Arabia offset tourism-related softness in southern Europe and Border closures surrounding Jordan.

Sales unit volumes in European food increased 10% over what was a poor harvest in the 2019 third-quarter and while better than 2019 the Harvest was a bit short of expectations as some of the props came to an early end this year. However performance was strong in the quarter as the benefit of higher volumes was supported by continued cost reductions our customers continue to report positive energy from consumers related to can food and fully expect the 2021 season to commence with increased plantings compared to Prior years.

Sales unit volumes and asia-pacific declined 5% in the third quarter while slightly improved from the shortfall in the second quarter our operations and Southeast Asia continue to be affected by birth related mandatory lockdowns in several countries. Our Chinese operations posted another strong quarter with volumes up 6% partially offsetting the 7% declined in Southeast Asia.

Results in transit packaging were notably improved from a soft second quarter as Better Mix and good cost management offset industrial demand that while improving is still down from the prior-year the track team continues to structurally reduce costs, which will benefit earnings and cash flow for years to come.

Performance was strong in North American food. And in the equipment businesses offsetting continued soft demand across Global aerosols.

Tom with an estimate for the full year and expected year-end leverage and with leverage approaching the top end of our targeted range and as described in last night's release the company will initiate the payment of quarterly dividend beginning of the first quarter of 2021 and we'll opportunistically repurchase shares from time to time beginning also in 2021 again, as Tom and we expect earnings will continue to be very strong in the fourth quarter about 20% above the prior-year

At the outset we projected to have a very strong 2020. The virus may have slowed performance down in the second quarter the so-called Corona quarter, but performance and the other three quarters was and will be very strong in wall of Irish may cause near-term demand patterns to be choppy in some markets our overall Outlook remains, very bullish has continued demand growth will yield greater earnings cash flow and shareholder value month and with that Jimmy. We are now ready to open the call to questions, please.

Our first question comes from Anthony pettinari from Citigroup.

Anthony line is not looking good morning with regards to the the strength in America's Bev. I was wondering if it's possible to put a finer point on Thursday and growth you saw in in u.s. And Canada versus Mexico versus Brazil and were there any kind of one-offs or maybe pull Ford's of demand or any sort of reason you couldn't meet or exceed, you know, this number that you know next year any thoughts on that. So I think we're up like 17% in the division and I

I want to say

US Canada up about 14%

Is that right or is that not right? That's that's not right, Canada up about 13% I'm sorry.

And Brazil in Latin America up a little higher than that with Brazil being up quite a bit in Mexico being flattered.

As related to was there any pull-ahead boy, you know.

The answer is probably yes, because customers are trying to get their hands on every can. They can get having said that we in the other members of the industry have certain production options. We can only make certain amount of cans every day. So while they may be trying to pull ahead we're probably not able to ship them any more than we can produce otherwise, so I don't think you should have any impact on Q4. I think we're going to have another strong fourth-quarter in in North America and and twenty Twenty-One will will be very strong as well. We'll the percentage growth that we experienced.

Yeah in North America in 2020 be replicated in 20 21. The answer to that is is yes and no yes, if we have the production capacity up and running in time and end up we're a little slow to get production capacity up and running will be a little short of that number. But anyway, we look at it. We're going to be up significantly in 20 21 verse 20 20 just a it's a matter of available production capacity as to whether or not the the growth will be similar to the levels we had this year.

Okay, that's very helpful. And then you reference the portfolio review and the release and providing updates and do course, you know understanding you might be limited in terms of what you can say. Is there anything you can tell them about, you know timeline or or major steps that have been taken or in terms of whether you feel there's opportunities, you know, you feel more positive less positive sort of anything. You can tell us on that process. Well, I think I think you know, any move we make would need to make overall economic sense for the company in our shareholders. And when I say that we're talking about gross and net proceeds, you know, what what we believe the use of proceeds is dead having said that we have retained advisors. We've got Bankers we've got accountants. We've got lawyers. We've made significant progress in the review and

You'll probably hear rumors long before before we say anything publicly. So I'll just leave it at that.

Understood. Thanks. I'll turn it over. You're welcome.

Thank you. Our next question comes from gunshot Punjabi from Marin your line is not open.

Thank you. Good morning. Everybody Morning Show.

Hey.

On the on the 2q call, you know, you had made the comments that during the initial onset of the pandemic customers basically cancel orders and and then they came roaring back in terms of order patterns and inventories were very tight etcetera. You know, where are you on that? How much did sort of that inventory replenishment contribute towards the you know ferocious sort of operating leverage. We saw in 3Q specific to the Americas. Thanks, you know, no doubt.

The the shock recovery we had in 3Q after specifically when you look at Mexico and Brazil the customers that were shut down for four to six weeks had had nothing to do with the recovery. But having said that we posted a dollar Ninety Six. That's probably about only a nickel higher than we had in our budget to begin the year. Now. That nickel is is a little different. It's probably we're probably about a nickel lower in interest costs right now that we have that budget and and so maybe we're maybe we're

You know ten cents more in in in operations in the quarter it you know, we had obviously Asia's not come back Asia still subject to to some of the the the lockdowns off of the European businesses did well transited well, but but you're right there was some bounce back in in America's beverage now as I was just saying to Anthony.

Having said that, it doesn't matter whether there was a bounce back or not. You're very familiar with what is going on in the North American market place every can that can be produced. I can be sold. So whether there was shortfalls in the second quarter or not. We were we were always going to have a tremendous third quarter.

Got it. And then in terms of signode, you know, the the bounce back and three Q is that just a reflection of you know, pent-up demand following, you know, obviously the chaos when the first step of the year, you know how our Autopac sort of shaping up as we as we enter the fourth quarter, maybe an early read on October the subject to that business in terms of sustainability that improvement from 3 to yeah. So, you know one thing I'll say about this is part of the Improvement. I mentioned in the prepared comments that structurally they have reduced costs tremendously and those costs will not come back so that we feel very comfortable with going forward. I you know, you're you're probably as familiar with industrial ordering patterns and and p.m. Eyes as I am. I think you know, that could be from month to month and as we have

You know increasing virus concerns, especially right now if you look at the Upper Midwest and and we'll see how it progresses towards the east coast as as the quarter progresses. We there there's no reason for us to get out of keys and projects something right. Now. We're going to have a really strong overall Q4. I think the opportunity for for signal to perform well above the business that we purchased is there life as as demand returns to more normalized levels in the future complemented by a lower cost structure, but I think just like Asia, maybe choppy you could have some choppiness in in other markets whether it's European beverage and or and your Transit given the virus, but but in total we're going to we're going to keep accelerating here.

Just to clarify, you know, the four and a half billion capacities. You mentioned the 2021 is that was that cumulative or was that specific 2021 vs. 2020 and if so, which shows so twenty twenty-two. Yep. These are annual units condemn. So it doesn't mean we're going to make that many more we've got to get through learning curve and but the the actual production capacity brought online 2 billion + 4 and 1/2 6 and 1/2 billion over the two years.

Thanks so much. You're welcome.

Thank you. Our next question comes from Mark will be from Bank of Montreal.

Your line is no.

Thanks, Tim. Congratulations on a very good third-quarter. Do we have any visibility yet into sort of what capex is likely to look at in in 21 for the full year off.

Well, I you know, I I believe it will be at least six hundred million as we have this year. Obviously, we're we're in the middle with towards the end of the budgeting process, but I will need board authority to consider, you know, the first dollar spending let alone the six hundred million, but you know our hope is that that we come back to you in a number greater than that 600 million because we see that many more opportunities to continue to expand the business.

Okay, and can you just when we think about twenty Twenty-One just with the startup of all this capacity and you helped us in thinking about the benefit from some of that capacity coming in through the year is what start-up costs will look like on a year-over-year basis.

You know on the start-up cost I you know, we we have start-up costs every year. So it it more or less becomes annualized and it it it's you know, the the incremental start up cost is plus or minus.

Pretty close to what it was in the prior-year. So I wouldn't get yourself too hung up on that unless we had a a start-up issue and and we and others from time to time do have start-up issues. It's it's it's not easy to bring a can plan up with a new Workforce and run cans at at 3,500 units per minute. So it does take a fair amount of training and learning and and we all go through that but more or less money, you know, you should think about that as not being incremental year-on-year in terms of what I mean. We brought up two billion cans.

This year much of that being third lines and nickels and and in Toronto. So the the 2021 capacity starts to come on in late to do with the first line in Kentucky. But really most of the capacity comes on in in late three Q with with the second line in Kentucky in in Washington. So wage there there will be significantly more capacity available next year and much of that will replace the the Imports that we brought into the country this year.

Okay, and just a two final quick ones. Can you give us a sense of what the your Imports beverage cans in the North America were this year what they'll be next year and then also took one of your competitors is talked about a a big shift taking place down in Brazil from two-way glass into into aluminum beverage cans suggesting. They just year-over-year that change might be like mm basis points. Can you just can you talk a little bit about what you're seeing down there?

The first question I'm getting old though Imports. How about up on the Imports happen if I just say greater than a billion in 20 and perhaps a little bit less than a month and

21 is there still?

Yeah in Brazil, I I you know again, I think directionally the comment you just made is correct the the pace at which we get there again will be dictated by the amount of capacity in in Cannes. I'm not sure we know where the industry have enough can capacity even with the announcements that are made by everybody over the next couple of years to get to that level you just described but in time I think directionally to comment you made is correct.

Okay, great. I'll turn it over. Thanks Jim. Thank you.

Thank you. Our next question comes from fill in with Jeffrey's your line is now open a good morning everyone very impressive quarter particularly in your ability to kind of rent wage reduction with pretty tight Market conditioned. So I'm just curious heading into the fourth quarter. Will you continue to be building inventory to play catch-up and and markets in particular that we should be mindful of them?

Well, you know, the the fourth quarter is the season for Brazil, so there will will run full production throughout the fourth quarter and Brazil much of that will be sold in the fourth quarter. Some of it is sold pre Carnival and in January, I don't expect.

Any real inventory build their other than what's necessary for the season and their season doesn't father follow the calendar as follows, you know, the the carnival timing other than the business is just bigger this year because the Rio Verde line one in Rio Verde.

we and others would like to be able to sit here today and tell you that we're building inventory in North America during the fourth quarter for next year and we'll all do the best we can to challenge we're all going to have is as we make sure the customers whenever you can we can make and

So we'll see. We'll see how we help how much progress we can make. I I think we're going to continue to see beverage can't growth in Europe. We will have an opportunity to build some inventory in Q4 for fourth season next year.

Okay. All right, sounds good. Sounds like you're running full out in the Americas and it sounds like you're if you'll be able to catch up a little bit on that backdrop. America's obviously Snapback really hard. What are you seeing in Southeast Asia and southern Europe as we can. Look at look at the fourth quarter the pace of recovery in those markets. Well, the fourth quarter in Europe is a smaller quarter the softness we have a game.

Not only the third quarter but but in the second quarter in Europe related to lower tourism and and southern Europe, you know where the tourist hotspots and that's where we're particularly strong in Europe. Think about Spain Italy Greece. Those are the markets where we're we're very strong. So we had some impact there that impact will be lesser in the fourth quarter We Still project our European beverage business will do significantly better in the fourth quarter this year than it did last year all biet. Those markets may continue to be a little slower. But but as I said tourism is loan No Quarter.

And we'll see how the virus progress is right. Now. It's there are some concerning issues with the virus and several countries in Europe. And and many of the countries are taking off increased or enhanced measures to try to control the virus. So we'll see how that progresses southeast Asia again the the market in Southeast Asia the fourth quarter of the end of November December typically, very strong ahead of the Chinese New Year. And again, we'll see how the

You know the the mandatory lockdowns if if they're used in certain countries as we get get to those those Seasons the challenge across many of the country at the bars and the karaoke bars and and everything else are are shut down. So the you know, the celebrations around Chinese New Year, maybe a little less and then obviously the demand for for alcoholics is lower. And I either demand then for for Kansas lower. So listen to business is still really healthy. It's it's it's nothing more than a speed bump along the way but you know, you look at you know, we've talked about Thursday Brazil before whether it's Brazil or South East Asia, you've got bumps along the way but if you look at this over a three to five-year. These are markets to continue to grow it. It really attractive rates. So we're not concerned in the near-term.

That's that's super helpful. And just one last one Tim you competitive recently had an investor day and flagged they have an eleven billion of committed business in North America on the outside through 2023. Can you kind of share any sites your insights on your pipeline? And if you think you're getting your fair share of new business going forward as it relates to opportunities in North America. Thanks a lot.

So, you know, I'm not going to comment on what what our competitors said. I I think that we've been very aggressive in North America to try to place as much Capital into the system as we can and I think we've tried to be responsible in that when we place Capital we have it with commitments behind it. Having said that the market is as you know is roaring. So Monday, there is there is the risk that somebody could just start building capacity without commitments behind it and but

or we get

Singing our Representatives share of the market Road. Yes what I like to get more than that. Yes, will we get more than that? I don't know. We'll see how it progresses but you know things are things are really really positive right now in North America. So we're we're trying to you know win our share of customer Awards and and dedicate as much Capital as we can in a responsible way.

Okay. Thanks a lot. Super helpful. Thank you.

Thank you. Our next question comes from Debbie Jones Deutsche Bank debit your line. Hi, good morning. Thanks for taking my questions morning. So my first question just if we could bring on a. Cans for a second. I realized that the, you know the result coming in a lot to do with covet and the comp but is there any evidence either in Europe or the month? You could see a bit of a shift away from plastic that would help the food can and is there any reason to think that with consumer behavior and COVID-19? It seems like people are more willing to stock up on food cans and and utilize the food can is there a reason to believe and talking to your customers that there's more acceptance going forward. There could be a bit of a return. I think that's something that maybe even unclear to you at this point, but I'd still like to get your thoughts on on those Trends. So I think we just do Europe first and I'll come back to North America cuz yep.

If your question has to do with North America the food can is is and has been widely accepted across Europe for as long as I can remember and and we continue to believe that our customers believe that the consumer increasingly is returning to the food can somewhat brought on by the pandemic and and somewhat brought on by sustainability concerns so long, they believe that the future is extremely bright for food cans in Europe. They're prepared to plant considerably more next year than they planted this year. And so we would expect them in the Harvest to be much greater in 21 than than in 20 and and going forward in 2020 in North America.

The North American markets a little bit different than the European market in that much of the market is two piece cans as opposed to three piece cans and we in the industry are limited package or 2-piece can capacity. So some customers did choose to take three piece cans this year in lieu of two piece cans, but it's been I used the expression couple of quarters ago. I spent all hands on deck trying to support customers and and the customer is trying to get packaged food to the consumers during the pandemic. So we have not seen any notable shift away from the other substrates. I think just the opposite they're trying to get as much food into the store. So consumers can can buy what they can buy. So I think over time, you know, we could see a healthy return to the food can that remains to be seen? I think I do think for the next couple of years food can demand in North America is going to continue to be strong though.

okay, thank you for that perspective my second question on

Sustainability made a number of or highlighted a number of your achievements. However, you've been saying for a number of years that you have a strong sustainability footprint and now you seem to be getting more recognition. I'm just wondering if you would have anything that you think you're doing differently or is this more, you know around getting the message out? Yeah. So I think you know one one of the things I will say is that our sustainability efforts led by a scientist doctor Ross is a chemist and I don't say that to be dismissive of other people, but he doesn't have a degree in 13th century Russian dance pretending to be a scientist leading a sustainability effort. So he's quite an impressive guy. We we spend a lot of time working with others in our industry. It's an effort that we're all trying to help each other along better ourselves. We work with our as I said in the prepared notes with our

Our our customers or suppliers that can manufacturers Institute does a lot of work in this regard. So we work in coordination with them. I think the and this isn't a this isn't a johnny-come-lately effort. We've been doing this for for at least, you know publicly for ten years publishing a sustainability report. But even before that in the early part of the two thousand two thousand and three and for our corporate Technology Group, and I'm sure you've seen Dan abramowitz before very impressive individual was touting the sustainability benefits of of metal cans long before anybody else was and it fell on deaf ears, but I think some of the recognition you're seeing now is we've we've just done a better job of reporting our accomplishments and what we're doing to these various rating agencies.

Okay. Thank you very much, and I have heard and he does a very good job of supporting the can thank you. I'll turn it over. Thank you.

Thank you. Our next question comes from George staphos with Bank of America. Your line is now open.

Thanks, everyone Good morning George regulations on the quarter and for that matter all the recognition on sustainability as well. Hey, I guess my first question Tim would be you know, if we go back 3 months the Outlook was for a very strong third-quarter for the reason that you had mentioned then obviously, we're not complaining you shouldn't be but you hadn't even better quarter than I think most investors and analysts wasn't expecting. So when you look back at three Q, what was the big impact in terms of variance and I want to try another attempt at marks question on the on the volume growth that you saw how much of that percentage wise would have been Imports. Is there any way that you can give us a bit of a color on that?

So I think you know the outperformance we had it. Let's cut it up into four buckets George.

Sure.

And I'm not trying to be difficult. But let's let me just try to give you as much as I can. I I think maybe 25% of the outperformance is related to Transit. We just had a better quarterback. Then we expected coming out of a aloe second quarter Brazil performed a lot better and snapped back even much harder than we thought it was going to when we talk in July. That's number two. You mentioned Imports. I'll come to that in a second. But we our ability to supplement North American Demand with imports from various regions around the world only the third reason and then the fourth reason

Let's be honest. We were probably little bit cautious coming out of the second quarter. Just you know, you come out of a Corona corner like that and you don't really know what the future is going to hold. You don't know if governments are going to lock you down again. So there was a little conservative in built-in so that that would be the for reasons and I you know, I can't really describe to you whether or not there are 25% each, but you're an analyst they'll let you do that.

Sometimes no no. No you you guys are all smart guys. Come on, I think North America.

I'm trying to.

Give me give me 2 seconds here. Let me just I'm going to you're asking me to make up a number. I'm trying to make up one that's relatively reasonable.

You know year-to-date in North America Canada. I'm talking about we're up about a little over 10% which is you know, a couple of billion units and and maybe that's maybe about four of the 10% is Imports something like that. But you know, you got me making up numbers here and but but directionally, there's those are they're not exactly right, but that's directionally, right? And that's fair. No, I appreciate it. I guess the second question I had

You know, I don't know that we've ever seen environment like this. I think you'd have to go back to nineteen eighties for sure in terms of when we saw can grow that these levels. Maybe that's what are you doing right now on two fronts to leverage this growth so that I mean, we're not going to see double-digit growth forever and and beverage cans we could hope you don't think so either. Well, Hey, listen, we'll take it as it comes. But I agree with the bigger bigger picture question is what are you doing with in your facilities. Now, how would they as you're adding capacity? How is that capacity add different than the ones you would have been making in Prior environments and certainly again off on your commercial Arrangements. What additional protection features. Are you adding two contracts leveraging the very very strong growth that you have four cans at Birth.

In time and then my last question all turned over, you know.

One more question on the portfolio review given that food can look to be doing better given that signal is performing but then it was a quarter or two ago recognizing, you know, the cops are easy, right? How is that if at all impacting the way you'll approaching the Strategic review on a gun card basis, I'll leave it there and and thanks and good luck in Florida, Georgia need to stay on the call cuz you just ask me three questions. So I'll see if I can remember the one question. I remember is capacity adds to the North American system in this environment compared to previous environments previous environments would have been modest speed speed UPS where we put you know with two pieces of equipment in to an existing line to try to generate more cans what we're doing now beginning with the Nichols plant in late 2015 16 is we're building new facilities.

Which for the industry is the first time since the early nineties, so all of us are putting new facilities in adding new production. Are you putting in redundant capacity redundant printers off, you know that sort of thing know everything that's going in is nothing is redundant because everything's sold out now if you tell me the markets going to back up ten or 20% off five years and some of this may be redundant but that doesn't look like the case. It looks like the case over the next three to five years. We're going to need to continue to put capacity. And so there's there is nothing redundant. We are trying to get as much capacity in to meet customer demand as we can as quickly as possible and

There's no room for any redundancy right now because everything you can make is sold. So that's one of your questions you had another question before the portfolio review like forget it commercial. Well, what do you think? You know, like I think we we and others have talked about commercial some of the commercial things. We've we've tried to undertake to let's say reposition the balance of power among our customers and ourselves and and that balance got way out of whack for too long. We're we're trying to make that a little bit more fundamentally Fair now than it was in the past. Now, it may not feel fair to the purchasing a large customers, but it's it's still short of the 50/50 line. I can assure you of that. So we provide them a a tremendous service. We provide them a tremendous product.

And so, you know, our our belief is we deserve to be compensated for that and I won't I don't really want to talk about anything specific but you've heard us and others talk about some of the types of thoughts are doing as relates some of the sequential Improvement in food or Transit, you know food was always going to get better. We had two bad harvests. It was always going to get better the European Food business is a walk-in extremely solid stable business and it and it does look like with the pandemic and and consumers understanding the benefit of the food can that that the business will continue to grow grow at higher rates than it has in the past signode not well understood by and perhaps that's our fault. We haven't explained it. Well enough to too many of you not well understood by investors, perhaps they don't care to understand it but a very strong business a business that when we bought it had it had a lot of opportunity for us to take cost out and have that flow to the bottom line wage.

With stable stable demand and an environment we're in.

Will demand is going to increase the the products for for signode will increase so, um, I don't you know, I think the board and management or having an honest assessment of what the name of the company should look like going forward. I don't think that one quarter's performance be at the second quarter or the third quarter changes anybody's mind as to what what your evaluation of a portfolio should look like.

Thank you very much, Tim. Have a great day.

Thank you. Our next question comes from Michael Ethan with Barclays. Your line is now open great. Thanks gud morning guys, I guess first question just on the margin strength in America. The European beverages obviously volume Leverage is a key contributor there. But can you give us a sense of how sustainable this level of unit? Margin is I'm going forward just assuming aluminum prices stay the same and things like that.

So I think Europe you know that we haven't we've talked about it before we haven't been necessarily pleased with the margins in Europe. I still think there's a lot of room for margins to expand in Europe especially as I just said the George considering the service and the quality of the product that we provide and the and the amount of capital required to get there. There's there's room for them to expand in Europe but volume, you know, operating leverage volume leverage does contribute to that and you saw that come through in Q3. I think you'll you'll see again in Q4 we're going to do better. So you're going to go back to the prior. You'll see that again in Q4 compared to the prior-year to 4, I think in America is the margin in total was was high off. Some of that has to do with you know, just incredible demand in North America. But but a lot of that has to do with the The Waiting of of Brazil in the quarter of Brazil has a yep.

Higher-margin the North America. So you had you had a big quarter in Brazil and and we expect will have another big quarter in Q4. So

Got it, that's helpful. And then just secondly higher level question on Capital allocation. You announced some moves last night that will return a bit more cash to shareholders your big competitor two weeks ago really announced there at the early stages of a big capital investment cycle the next three to five years so curious how you think about your capex outlook the next couple of years and just that balance between Capital return and capital investment based on your view of the market, you know, you know, as I said earlier, I think I don't want to comment too much on what they suck but I think directionally what they proposed

Is correct I think the magnitude will will will have a deeper dive in and understand the magnitude by region off but we will allocate as much Capital as we think is reasonable.

To position ourselves in the market so that we can supply our customers right now. We and the others are having to tell customers know as a supplier as a partner. You never wash your customer know and it's so as frustrating as it's for the customer it's frustrating for us. So we're going to we're going to dedicate as much Capital as we can reasonably to continue to grow the business. I don't think the initiation of a dividend which you know might amount to let's say one hundred million dollars in the first year of of over five hundred million cash flow impairs our ability to dedicate our Capital needed to continue to grow the business.

Thank you. Thank you.

Thank you. Our next question comes from Jeff with JPMorgan. Your line is now open. Thanks very much. I think your incremental margins in the office is beverage business in the first quarter where your volumes were very strong was about 25% and in the third quarter your volumes were again pretty strong but it was 50% off what accounts for the the large difference in margin.

Well, as I said earlier, well, I'm just going to assume your numbers are correct. And I and I don't know how you calculated them. But big proportion of that is the strength of Brazil in a big quarter in Brazil after a very weak order in Q2 and then just operating leverage third-quarter was exceptionally strong in North America. You just you're pushing so many more cans to the system. So, you know absorption of cost and and other things I you know as a as I said, I'm going to assume your numbers are right. I yeah and secondly in the European beverage Market or you you talk about the Americas beverage Market is one where you know every can can be bought that that can be produced. How would you characterize the European beverage bought it at this point? So coming out of the second quarter of the situation was the same and I think we probably told you that in July when we talked to you that every can that could be made off.

Was going to be sold and so Q3 was very strong Q4 is typically a softer quarter to one is a software coder in European beverage just because of the the season much more many more of those markets or in in in the, you know further up in the northern hemisphere if you will and so the the weather is a little different the opportunity for tourism and and outdoor Gatherings wage is smaller, but I think we're going to continue to see growth in Europe. I don't think you're going to I don't think you're going to have the

The demand the outsized demand in Europe that you have in North America, but having said that the man is going to continue to grow.

Okay, great. Thank you so much.

Thank you. Our next question comes from Brian Maguire at Goldman Sachs. Your line is not open.

Can you know some have speculated in in North America the markets oversold by as much as ten billion cans for the industry. Obviously you and others are are importing to try and fill that Gap and you know, despite that the shows are are empty. It quite a few supermarkets in major brand owners or kind of calling excuse to seems to try and increase the efficiency of urine their production wage. I guess with that backdrop, you know, it sounds like you know, Nicholas is starting up relatively. Well hoping you could just comment on how that startups progressing and you and you laid out the the the capacity that you'll have available next year. It seems like you might have to maybe two and half million incremental cans available next year that you didn't have this year just from domestic production. I was just curious about your comment. That impact might be lower next year. Just wondering if there's any reason you think Imports might need might actually come down next year if we really are is oversold as we are and there is you know as much as a month.

For for cans in the industry. Is it is it simply a function of you think demand in other regions will be better and you just won't have as much capacity to bring into the or is there anything else that play there?

You know, it's exactly what you just said, you know the available cans from let's say Mexico and Brazil Colombia South America what was available in 20 won't be available in 21,000 markets will require those cans short of another pandemic lockdown and then okay, whether the market short ten billion or five billion or 7 and 1/2 billion. The market is significantly short this month, correct.

Okay, I appreciate that. And and then just a follow-up on prior question in Europe market we've talked about for a couple of years being a little bit looser than North America, but we're seeing good volume growth, especially in the northern countries. Do you think that we get to the point over the next year or two where we will be tight enough that some of the commercial terms there could start to walk become more aligned with the North American renegotiations. You were able to accomplish over the last year or two. Do you think we're approaching a Tipping Point in that region?

You know, I I I hope so. I don't know. I think I just have to leave it as I don't know we are.

We're just short of 20% of that market. Whereas in North America. We think about North America Canada Mexico. We're probably closer to twenty five or 26% something like that. So how long the waiting of competition is is a little different in Europe than here. So we have and the demand while it is increasing is certainly not as strong as it is here. So I hope you're right. I just don't know the timing off.

Okay, there's last one for me just on the the change of the free cash flow Guidance. Just wonder if you could Bridge any components besides the Improvement that you're seeing. Is there any significant changes in the working capital assumption Texas relatively the same but any any other assumptions changing their know Brian is essentially the flow through of of the ebitda Improvement working capital looks to still be a drain of a eighty or a hundred million and then otherwise will be a little bit better on cash interest perhaps but otherwise about the same it's mostly driven by working capital.

I'm sorry.

Yep, makes sense. Okay, I appreciate the the time.

Thank you. Our next question comes from Anil Kumar your line is open.

Hi, good morning. Thanks for taking my question. Do you think you're running pull out in most of your key regions maybe with the exception of Southeast Asia. Would you characterize your operate in the midwest Europe and Brazilian markets being the high-90s percent currently, is that a sustainable level going forward and will your new capacity additions provide complete waste your offering ready to come down a bit?

Yeah, we're we're definitely in in the high nineties. It's it seems that a number of times. We're sold out. We wouldn't mind a little slack in the system if we could get the operating rates down would allow us to build some inventory. So if we could we're okay with with going from high nineties to let's say let's say mid-nineties.

Okay, that's helpful. And then in transit you talked about structuring improving costs. Can you just highlight? We're specifically you've been able to reduce cost in the business and should we expect that 14% off a mortgage be sort of the Baseline going forward or will there be some seasonality to that? So there are a number of things that the team has done we've

Probably have about three new managers. We used to have inside Transit. We used to have five different platforms. We've we've reduced that to four platform. We are, you know, all the costs you can imagine that you're taking out of the business as well as some quality improvements, which we we actually took somebody out of the beverage business in Crown been transit to lead to Quality effort. And that's yielding tremendous cost savings and then previously to five platforms, especially in North they were two two or three platforms. Now, there are two they didn't, you know, the cross the opportunity for cross-selling wasn't exploited as well as it should be. So we're trying to do that. I think we're doing that much better off. We have a tremendous opportunity to increase the service portfolio of that business across the equipment and tools space and so we're trying to create a branded service projects.

Signaled across its industry which they've started I think you know just like in the in the can industry margins sometimes are impacted by the cost of the raw material cuz you're passing through steel and aluminum and when we think about Transit business, you're you've got steel you've got paper and you've got some small smaller amounts of resins. So I think some of that impacted that by that but you know for me, you know, if I if I look at Transit it's a business that in total over at a minimum should generate 15% So I think we need to get back there and that'll that will come I feel very confident that that will come when industrial demand re approaches historical levels opposed to what we've seen for the last 12 months.

Okay. Thanks for detail. Thank you.

Thank you. Our next question comes from Adam Joseph Cinema KeyBank, Tim and Tom. Good morning. Hope you and your family as you're well you as well Adam. Thank you. Debbie earlier asked about your longer-term view of food can demand Tim and I just wanted to go back to that for a second. Can you just talk about what your visibility is in the future food? Candyman versus is future beverage can demand either in the US Europe or both? I'm just wondering how much more visibility you might have in the beverage can demand and why?

Well, I think as we sit here today, it's easier to feel comfortable with your visibility three to five years out on beverage can demand because the market as so many of you discussed in one of our competitors is discussed life is so short this year and and whether as I said, whether the number is 5 billion or 10 billion, it doesn't matter. It's so short. So, you know, you're going to try to catch up to that market.

Over the next several years and all the time while you're trying to catch up to demand for beverage cans We Believe like others is going to continue to grow. So we're all trying to get there as soon as possible. As I said, you don't like to tell your customers know you want to serve customers. So we're trying to deploy Capital as rapidly and as responsibly as we can to get their food can a little bit different as I said earlier when I asked the question in North America, the big challenge is that it's more of a two-piece can Market than three piece, which is much different than Europe.

Go in North American food. I think we're going to see because of the pandemic. We're going to see and we have seen robust food.

Man, it's hard to sit here today though and tell you three or four years from now. If we don't have another pandemic that I feel confident that the market will grow 10% from here in beverage. I feel pretty confident that there's going to be significant growth from here. So I I can't tell you any more than that. Sure now thanks to men. It's also on food versus time in years past food was call it a flat to slightly down-market beverage was flattish and now obviously beverage is up substantially food is a big this year. But as you just said, who knows what the future holds as a result, you know used to be the beverage and food can companies traded at pretty comparable multiples. And now there's almost a ten turn gap between beverage pure-play birth companies and and pure-play food can companies. Do you think that Gap is appropriate, you know, given the amount of capital chasing the the growth and Bev cans versus probably no Capital wage.

Eating food cans anytime soon or how do you think about the valuation discrepancy between those two businesses and and how that may be informing the the portfolio review?

Else it's an interesting question. So let me let me try to be careful how answer this I think the the desire for investors to have growth and off at any price as probably pushed some valuations to be ten times higher than other valuations. I mean just described that. Yeah, it does appear life right now that nobody seems to care about cash flow. I don't know about you Adam, but try to run your household without Cashflow similar to running a it's not as complicated as running a company without cash flow and I think they're dead. There are a lot of companies that still have an issue right now. Although perhaps fewer companies than in the second quarter had an issue but cash flow Is Like Oxygen if you don't have cash flow some point you gotta have a problem. Now, I think on the beverage side having said that there's so much growth right now that we're all willing to forego cash flow to get as much Capital into the ground and yep.

Manage of the growth understanding that if growth slows that you slow your Capital down in the future and you will harvest more cash in the future having said that the returns in the food can business and wage for what it's worth and Transit business where cash flow cash returns are exceptional compared to the capital needed to run in place. Those returns are are tremendous returns and they are really really attract the businesses. I you know growth we all know growth will yield a higher multiple than than slower growth? So that is probably appropriate should it be ten times different life? I'm assuming that people in the food can and other businesses would tell you it shouldn't be ten times having said that based on one of where one of our competitors trades we believe we should trade much higher than we trade off now.

Yeah understood time. Thank you very much. You're welcome. Thank you.

Thank you. Our next question comes from Arun viswanathan with RBC Capital markets. Your line is not open.

Great. Thanks. Good morning. Thanks for taking my question congrats on the on the great quarter here. I wanted to go back to how you're thinking about segment. So this year looks like or you you're going up forty million year-on-year to that 1.725. And a lot of that though is coming from America's beverage over a hundred of it. Um, and we're seeing you know declined elsewhere next page resume Ubly some of those businesses that were weak this year because of Q2, maybe signode and and um, Europe beverage and Brazil and so on will be better and America's yep adding all the capacity you described so um, are there any puts or takes that that that we we should look at that, you know, you don't see similar segment ebitda growth next year in in America's or any of the other segments. Yeah, you know, I think everything you just described is directionally, correct. I think, you know in addition to that.

We had some tinplate carryover costs that were a headwind in q1, you know, if you go back to q1 and you take those tin plate carrying cost out and you normalize that for a normal year, you know Q one was up twenty or twenty-five percent versus q1 last year. So, you know, as I said earlier all three, you know q u s 1 3 and 4 up 20 to 25% and we just had the corona corner there in Q2. So all of that what you say is correct, you know, we'll we'll see how the year ends with interest rates and discount rates, but certainly discount rates are lower. So we're going to have some pension headwind off next year compared to this year. But I think as we sit here today, we feel pretty confident that you know will will more than earn our way through that and things, you know am here today. It's too early to tell you but you know, we feel pretty good about next year.

Okay, that's helpful. And then I guess kind of an unusual question. But is there any scenario where you would consider potentially increasing your position in either Thursday or Transit? You know, you know when we when we initially looked at Transit that was a business that was contemplated to be a platform for future growth as well. So is that even within the club at all bill or is that something that's now not being considered that I would say until the portfolio review is completed. No.

Thanks.

Thank you. Our next question comes from Gabe Haydee with Wells Fargo Securities. Your line is not open morning gentlemen. Congratulations on the sustainability related a nice work there. I guess wait Nicole a couple of quick ones. Can you give us maybe the tools to help analyze this this segment Improvement in America said Tim specifically I'm thinking about the headwinds that you incurred in Q2 in the Mexican glass business. I'm assuming that was shut down for a big part of the quarter off relatedly, you know, your Brazil every can't operations what that headwind the underdog fixed overhead might have looked like to get us to Q3.

Yes, I well I give you the tools.

You know, I'm not going to give you too much.

You know you if you look at q1, I think you one we had an outperformance in America's beverage. We did an outperformance in Q3 compared to the prior-year. I'm talking obviously Q3. The outperformance is much greater got operating leverage and just a much bigger quarter and in Q2, we were down in the Americas beverage business inside that North America was up tremendously and it was offset by Mexico and Brazil now Mexico was cans and glass not just glass and Brazil was cans. So yeah, you know, the customers were were managed Charlie shut down in those markets beer production was beer production was outlawed.

For some period of time so they were not allowed to make beer if you're not making beer. You don't need cans in and Bottles. So, you know, I I really don't I really don't want to give you too much more than that.

Not a problem. I'll try to revisit the Strategic review one more time, maybe a little different angle you guys are committing obviously to this hundred plus million dollar annual dividend off and and from maybe our vantage point would seemingly imply the organization kind of stays intact with given the the global beverage an investment that you're probably are contemplating on a multi-year basis. Is there any way that you can handicap for us or or discuss the potential that you know, do nothing is the outcome given the the cash flow profile of the other two boxes that you've described?

Well, you know, I'm not going to handicap that I think as I said earlier, we have engaged a variety of third-party experts be they bankers lawyers accountants, you know internally to the teams are doing work. I don't know if you've ever been involved in a in a process, but if there's a considerable amount of work that is necessary, especially when you look at the the universe of buyers that might be available for those businesses what really will happen is that the board will continue to go through the review process and am in the process won't be completed until the board makes the determination as to whether or not

You know, we get the right answer for the company and its shareholders. So I don't think it's I don't think you know, you you know, that's where you guys get paid to handicap things. I you know, I don't I don't even want to get into the handicapping business.

Thank you to I appreciate it. One quick last one on on inflation for next year. I know we're optimistic on the volume side as it relates to to beverage cans and then food cans in Europe. At least I can you discuss any potential headwinds and we're hearing about Freedom policing next year that kind of took some of us by surprise in 2018. Just thinking about the bridge.

Yeah, so, you know George asked the question earlier on contracts what might have we done two more fairly balanced?

Our future as compared to the past and and we have talked in the past about Freight. We we've tried to you know, make Freight more representative of actual Freight is opposed to a basket. So, you know may go up. I think you know, we're not we're not a hundred percent immunized from rising Freight, but we're we're took in a better position today than we were in 2018 as it relates to Freight.

Thank you. You're welcome.

Thank you. Last question comes from Salvatore Keanu with Global Securities. Your line is not open. Yeah, hi. Hi Tina Tom after taking my car off a couple of quick ones firstly. How should we think a little bit about operating profitability in a specific in the next few quarters, especially even if volumes increase you're bringing online if I see it as we speak and you had one in 2019. So I would assume these volumes have not been solved yet given the the lockdowns. So what pressure can we seen earnings in you know in 2020-21 in the in that segment?

You're talking America's beverage asia-pacific. I'm sorry. Yeah, so, you know we expect Thursday Pietro's in Asia will accelerate in 21 over the next several years beginning in Twenty-One this year. Obviously, there is negative GDP growth across several several other countries, and it's dead and packaged products are down with many other Industries. So

We we brought up a line in in Thailand as you described this year. It is a it is a partnership arrangement with a large filler cap in Thailand that makes an energy drink.

We we expect as the markets in Asia returned to normal and consumers become more comfortable, you know with their future and and they have greater disposable income and GDP grows that that that Asia will return to to growth, you know, we could have some choppiness in Asia over the next couple of quarters, but you know that choppiness is off is on the order of you know, a handful more joke and millions of dollars. They're not big numbers. We're still going to do quite well in asia-pacific. And as I said earlier, we've had these moments in the past in summer Emerging Markets whether it's Brazil or or Asia, but you look at any of these markets over a three to five year. And you're always happy at the end of that three or five-year period that you continue to stay the course and invest Capital because at the end of that three to five year. You're you're much much higher than you were at the beginning. So we're not overly concerned.

Okay, perfect. And I guess the the last one for today.

Building on a field earlier question about some competitors mentioning they have additional contracts and they will they're planning on bringing additional additional capacity beyond what they have a mouse.

Besides the six and a half billion cans that you bring online. Do you have or can you disclose of additional line of sight to approve contracts approved projects that we still have not heard of the details, but we should be hearing the next couple of quarters. Well, I think you're going to have to wait for the next couple of quarters to see what we have to say. You were just not prepared to say yet.

Fair enough. Thank you very much.

You're welcome. Okay, Jimmy. Thank you very much. I think that concludes the call today. You said that was the last question. So we look forward to speaking with everybody again in early February by now.

And that concludes today's conference. Thank you all for joining you may now disconnect.