Q3 2022 Crown Holdings Inc Earnings Call
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Good morning, and welcome to Crown Holdings third quarter 2022 conference call. Your lines have been placed on a listen only mode until the question and answer session. Please be advised that this conference is being recorded.
I would now like to turn the call over to Mr. Kevin <unk> Senior Vice President and Chief Financial Officer, Sir you may begin.
Thank you Nicole and good morning.
With me on today's call is Tim Donahue, President and Chief Executive Officer.
If you do not already have the earnings release. It is available on our website at Crown Cork Dotcom.
On this call.
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 are contained in the press release.
And our SEC filings, including Form 10-K for 2021 and subsequent filings.
The company recorded diluting diluted earnings per share in the quarter of $1.06 compared to 79 cents in the prior year quarter.
Adjusted earnings per share in the quarter were $1.46 compared to $2 <unk> in 2021.
Net sales for the cool in the quarter were up 12%.
From the prior year preliminary primarily due to pass through of higher raw material costs and increased beverage can volumes.
Segment income was $336 million in the quarter.
330, $344 million at constant currency compared to $379 million in the prior year, primarily due to higher energy prices in Europe .
Costs associated with higher inventory levels in Europe and Asia.
Partially offset by improved profitability in North American Tin plate in can making equipment businesses and 6%.
Global beverage volume growth.
During the quarter.
Company amended and extended its credit facility to August 2027.
We raised an additional $1 billion in floating rate debt and used the proceeds to retire 885 million euros.
Euro notes due in February 'twenty, three that carried a blended rate of one 3%.
Our balance sheet remains strong with no significant near term maturities until September 2024.
As a result of the refinancing and higher rates. The company now project net interest expense of $270 million for the year.
And $350 million if rates were in place for the entire year.
As of September 30th, we repurchased six 4 million shares of <unk> common stock.
It's been 700 to 22 million other current $3 billion board authorization.
Since we re initiated the share repurchase program in 2022, we've repurchased $15 3 million shares or 11, 11% of the shares outstanding.
For the balance of the year.
We assume continued headwinds from the stronger U S dollar.
Higher energy higher European energy prices slowing demand.
Higher interest expense.
The company currently expect fourth quarter adjusted earnings to be in the range of $1 to $1 10 per share.
Full year adjusted earnings in the range of $6 60 to $6 70 a share.
The current projected EBITDA.
We currently project EBITDA to be approximately $1 billion $770 million.
Capital spending of approximately $850 million.
Free cash flow of approximately $100 million.
Free cash flow of $100 million is considerably lower than our previous projection of $400 million.
Due to greater use of working capital, mainly driven by the timing of inventory purchases and higher interest paid due to rising rates.
We expect leverage to be between three and a quarter in three and a half times and we remain even more committed to maintaining a strong balance sheet.
In this rising rate environment.
With that I'll turn the call over to Tim.
Thank you, Kevin and good morning to everyone.
As reflected in last night's earnings release performance in the third quarter.
Outlook for the fourth quarter are both well below our previous guidance.
As noted while beverage can volumes were up 6% globally in the quarter customer demand was lower.
Every market and product line compared to our prior expectations.
We now estimate global beverage can volume growth of 4% for 2022 down from our prior estimates.
Looking ahead to 2023 global beverage can volumes are expected to increase by 6%.
With growth expected in each of our operating segments.
As a result of lower than expected third and fourth quarter beverage unit volumes, we now carry too much raw material inventory across our Asian and European operations at a time when the price of aluminum has declined approximately 10% to 15% from July and August averages.
This higher cost material impacted our third quarter results in both Europe , and Asia, and we will continue to have an impact in the fourth quarter.
Hoping to avoid supply chain issues that we dealt with over the past two years and considering long delivery times, we ended up with more material than needed given the lower sales the impact of the company is lower margin, resulting from the pricing formula on the sell through of finished product later than anticipated versus when the material was purchased.
These balances will be worked down in the fourth quarter.
As Kevin discussed, we have reduced our 2022 capital spending to $850 million from $1 billion.
The result of unannounced projects being indefinitely postponed.
Our two projects in the United States, Martinsville, and mesquite are progressing well and it is important that we have good startups to meet customer commitments and expected, 10% North American volume growth in 2023.
Mosquito improves our north American footprint, allowing us to more efficiently serve the southwestern United States.
Today, we serve this region from our plants in Ensenada, Mexico, Wyoming, and Washington State.
The mesquite plant frees up volume from currently supplying plants for their own region that allows us to recapture volumes with previously supplied customers in the southwestern U S.
While we have no current plans for any future capacity expansion in the United States. We do believe that the North American market will continue to grow.
Perhaps more on the order of 1% to 3%.
Supply chain issues for our customers continued to improve.
Earlier. This month, we began shipping commercial cans from the second line Uberaba, Brazil, and expect to progress quickly through the learning curve.
With all planned projects in Brazil, now complete we are well positioned for future growth, including this coming summer season and Carnival in February .
Turning to the operating segments.
In Americas beverage unit volumes advanced 2% over the prior year, but this was well short of our earlier expectations Brazil.
Brazil, and Mexico, both up 8% to the prior year were offset by North America, where volumes declined 6% in the quarter led by a sharp decline in the month of September .
And while CMI no longer publishes quarterly shipment data, we would estimate that the north American market, including lower imports was down 4% both in the quarter and for the nine months to September .
Previously, we estimated that our north American volumes would be up 5% to 6% for the year. We now revised that to a flat volume performance in 2022 for North America.
We currently expect fourth quarter shipment growth in Brazil, leading to an overall flat volume performance for the year, which is a nice recovery from a soft first half.
And for the segment in 2003, we expect.
We expect overall volume growth of 8%, including the aforementioned 10% growth in North America.
Unit.
<unk> in European beverage increased 3% in the third quarter.
With shipment growth noted in Italy, the middle East and the U K.
And again, while volumes advanced versus the prior year. They were short of our early earlier expectations.
Largely related to hyper inflationary conditions in Turkey and.
And customer supply chain issues in the UK.
The expected headwinds from energy and currency both accelerated during the third quarter.
Primarily as contracts used to hedge energy in earlier quarters rolled off <unk>.
Volumes are expected to be modestly up in the fourth quarter and up low single digits in 2023, as we bring on more capacity in both Italy and Spain.
And we do continue to make very good progress on contract renewals to restore margins to acceptable levels in Europe .
Beverage can volumes in Asia Pacific advanced 26% in the third quarter.
Off a very easy comparison in the prior year.
With strong growth noted in Thailand and Vietnam.
Similar to North America volumes being up 26% to the prior year. They were certainly short of.
While our earlier estimates due primarily to economic softness across the region and.
And COVID-19 related shutdowns and electricity restrictions in China sequentially volumes were down 12% from the second quarter and fourth quarter Asian results will continue to be impacted as we carry a higher carry higher priced raw materials through the fourth quarter.
Volumes in the fourth quarter are expected to be modestly higher as growth in southeast Asia will be tempered by China, and we expect about 5% to 6% growth next year.
Adjusting for currency performance in transit was largely in line with the prior year third quarter inflation related selling price initiatives and cost reductions largely offset a 6% blended volume decline.
Price and cost reductions are expected to benefit again in the fourth quarter and similar to the third quarter will be offset by volume and currency.
We do expect income improvement in the segment in 2023 as inflation recovery and cost reduction will outweigh economic related volume softness.
Performance across North American Tin plate in can making equipment continued to be firm compared to the prior year.
As we continue to sell more self made two piece food cans.
Aerosol sales unit volumes were down 20% in the third quarter, resulting in lower than expected overall performance.
Known for their convenience and dispensing products aerosol cans are economically sensitive and demand softness is expected to continue into the fourth quarter.
Segment results in 2023 will be down compared to 2022 the.
As a result of continued economic softness in aerosol cans and the year over year impact of inventory benefits realized in 2022.
So in summary.
Disappointing third quarter performance and fourth quarter outlook.
When we last spoke to you in mid July we expected the impacts from energy and currency to be steeper in the second half.
What we did not foresee however was such a sudden and sharp decline in global demand for beverage cans, nor such a sharp increase in interest rates.
While we remain cautious as to the effects on demand from continued inflation and higher interest rates. We currently expect volume growth in each of our global beverage can markets next year and this volume growth combined with contractual inflation recovery is expected to more than offset unfavorable currency and the effects of the 2022 inventory benefits.
Leading to opportunity for significant EBITDA improvement in 2023.
And below the line the company will face headwinds as Kevin alluded to from higher interest expense as well as increased retirement expense.
With that Nicole I think we're now ready to take questions.
Thank you we will now begin the question and answer session.
I would like to ask a question. Please press star and then one leaving mute your phone and record your name and company name clearly when prompted to cancel your request press Star and then two one moment. Please for the first question.
Our first question is from the line of Mike Rosslyn of <unk> Securities. Your line is now open.
Thanks, Tim Kevin.
I appreciate you taking my questions.
Thank you.
The first question Tim.
You mentioned that just recently in terms of your confidence in getting to 10% volume growth in North America in 2023.
Given what's happened with customers adjusting their order patterns. What gives you that level of confidence that you'll be able to achieve that level of growth in North America next year.
Yes, so it's a good question, Mike and I expect that this in.
And I guess, it's fair to say, we expect all of you to be a bit skeptical.
Given that we misread the back half of the year. When we last spoke to you I will tell you two things the first and importantly.
We regained.
Some customers that we had previously supplied.
In prior years with some of the new capacity, we have so that is.
Share growth for crown not that and I would say that we werent necessarily looking.
For share growth.
<unk>.
Some of it some of it came to us, but that's not an insignificant piece of the equation the other.
The other thing is simply in it it doesn't feel good to say this but.
<unk>.
With our growth being flat in North America for 2022, the prospect of 10% growth in 'twenty three is easier.
Then it was when I suggested to you that we could have let's say 10% growth back in July when we expected higher growth. This year. So that's <unk>.
A mass thing.
I think.
I think it's fair to say that.
Units shipped next year will be up significantly in North America.
Units shipped next year in North America will be down compared to what we thought they would've been in July and Thats just from the starting point, but largely relates to.
Contracts, we do have in place fairly.
Fairly confident now.
If if customers decide they're going to fill.
Another substrate instead of the aluminum beverage cans, and then things will.
Change, but I do think that.
I do think there was a significant destocking.
That the customers went through in September September volumes really weak.
Caught us off guard and.
It's only we're only three weeks into October here, but it seems to be.
At least the shipments so far here in October seem to be holding up to our revised.
Estimated and customer forecasts.
Got you and I appreciate the color and then just Tim just one quick follow up just regarding the last comment on October volumes holding up.
Where do you see them trending I know, we're only a couple of weeks into the fourth quarter, but where do you see them.
Volumes for <unk> trending and then last question just quickly when do you actually start to notice customers in Georgia.
And their order patterns, because when I look through your comments last quarter, you mentioned, some slowing demand for some products I don't know, if you actually called out which products, but it sounds like you.
We're starting to see slightly.
Progressively got worse as you proceeded through the quarter. So whether you started to notice this change what products and markets experienced any change is there particular reason that you'd notice were this year.
So it wouldn't.
When we talked to you in July I think we were we probably talked to you about a week earlier in July then we're talking to you know so we only had a couple of weeks data and I think at that time, we were seeing weakness specifically in craft beer and craft beer weakness has continued here through the third quarter at least at least the craft customers that we supply.
But I would tell you that.
Beginning in early September at an accelerating rate through the end of September .
And quickly accelerating through September we saw broad based.
Customer reductions in order.
Placements across all products and.
Specifically for us.
D.
So.
Cortisol.
You never hate you.
You never like to say, we're caught off guard.
We were really we were surprised by how quickly.
Are the customers.
Started to adjust their order patterns in September .
And Mike I'm, sorry, there was a there.
There was a question you had before that and in between.
Yes, apologies just lastly, so you've seen though has it.
It doesn't say that older parents, who got any worse, thus far in October with a four key in the first couple of weeks right.
The orders that you are seeing thus far in <unk> are in line with your revised lower expectations.
No I think so far in October as I said.
We're only a couple of weeks in and what we see.
Looking out it does appear that.
Orders are holding up to our revised forecast in and more importantly to our customers revised forecast certainly thats significantly below where we thought we'd be when we talked to you in July but.
As we have re forecasted.
The numbers that we've just provided the Kevin just provided you were.
We look like we're holding on.
So those fairly well right now so.
Got you good luck in the <unk>. Thank you. Thank you Mike.
Yes.
Thank you. The next question is from the line of Ghansham Panjabi of Baird. Your line is now open.
Thank you and good morning, everybody good morning Ghansham.
Good morning.
Just as a follow up to the last question, Tim you know in terms of the customer feedback.
Receiving I mean, obviously, there's been a pretty significant change in the month of September .
I, just kind of look back and connect with your customers is it just previous shortages that maybe led to your customers to over order or is it more pronounced consumer elasticity that they're seeing.
What can you share with us on that.
Yes.
Don't think this is a.
Well.
Let me start that again.
Clearly I think.
<unk>.
We came out of Covid and perhaps the COVID-19 benefit.
To the beverage can was a bit greater than we thought.
So coming out of Covid.
Perhaps we didn't.
Understand or anticipate.
Lower beverage can sales for at home consumption I think the bigger piece of this ghansham as.
Elasticity, and we talked a little bit about that last time and I.
And I think I used the phrase that beverage cans were not any elastic and.
Maybe theres more elasticity.
The phrase not in elastic.
But I think the consumer is.
Consumer knows a lot more.
About where they stand then than we do and.
Certainly the consumer.
In most parts of the country understand their situation better than.
Perhaps the folks in Washington, and New York, and I think we're seeing that right now at least in our business and.
As I said, though I think we are.
Hopefully we've got a reset.
On inventories and forecasting.
It's really early in this quarter, but it does appear that we're we're tracking better to the new forecasts.
Okay and then just for my second question, maybe a two parter just one in terms of the.
The metal loss with <unk> and <unk> can you sort of size that and I also assume you're right, there's going to be worse fixed cost absorption in the fourth quarter, just as you rightsize inventories if you could just.
Size that for us as well and then just lastly, as you think out to 2023 and if you just set aside your comments on volumes what are the major variances.
You should think about 23 versus <unk> 22, and I guess im referring to <unk> interest expense and also.
The price adjustment.
We're doing in Europe , as well as the positive areas. So stay on the line Ghansham Fisher.
Asked a bunch of question, let me explain that the metal issue. This is a raw material issue for us so.
It's not a north American issue for us because we are tied up pretty well with the customers. We have some customers in Europe and.
And certainly the large majority majority of customers in Asia, where we have pricing formulas, whereby we priced cans to them.
Based on a formula that includes.
Let's say the <unk> price one month two months three months prior from when we deliver the cans. So we will have procured metal.
At a period of time and then we will sell the can's after converting.
In the future and that generally that conversion.
And that contract.
If you want to use and minus one and minus two to three month minus one if you follow me generally lines up pretty well and as I said.
Coming out of the last couple of years, where we've had significant supply chain concerns around aluminum.
And expecting higher volumes specifically in Asia.
We would certainly not have wanted to miss shipments to customers and we procure the metal we felt we needed.
To make deliveries and when those call offs began to.
Become lower or disappear, we now have more raw material at.
At prices.
That reflect the <unk> in May June July August and now we're not going to deliver those cans on on an M minus two and minus three basis, we're going to deliver them four or five months out now when the <unk> is 10% to 15% to 20% lower so that gives rise to the cost headwind, we're describing for you.
We had to put up.
Bucket around it how much it was in the third quarter think about.
$15 million to $20 million in <unk> and.
And perhaps in the fourth quarter.
Think about another another 20% to $25 million something like that as we as we try to work down this metal and get it behind US here in 2022, and not have anything exposed going into next year.
So it was that clear yes.
Yes, Okay clear and then I'm sorry, the other part of your question.
The fixed cost absorption from <unk> as you right size your inventories and then also.
I don't we don't so so the raw material issue and we did it was one of these things I just went through an explanation on the <unk> issue for you.
And it's a difficult a difficult explanation that try to put it in writing in the release and Thats why we didnt do what I prefer to do it here.
So.
We don't have a tremendous fixed cost absorption issue.
In the fourth quarter, we will have lower absorption in the North American beverage business. This year in the fourth quarter than last year, because last year, we were running flat out. This year, we will have a little bit more slack in the system, which as I said last time isn't a bad thing but.
Not theirs.
Theres, a little bit in Asia, I wouldn't describe it as.
As our primary concern our bigger concern.
In Asia, and a little bit in Europe is this <unk> issue and then frankly the bigger concern in North America is the lower volume than we expected and I. Appreciate you asking the absorption question, we're going to do our best to.
To work down inventories, but the finished inventories are not our problem right now its the raw inventory.
Okay, and just on the 2023 variances.
Yeah, you did ask us.
Lot of questions I think the.
As I said.
As we sit here today the opportunity for significant EBITDA improvement.
He is right in front of us.
I know youre not going to like this because it's a wide range I'm going to tell you $100 million to $200 million EBITDA improvement.
And.
I think the.
The swing factor in that as well.
Really currency or.
Or our ability to recover cost under our contracts I think the two big swing factors are.
We're looking at we're estimating let's say, 6% volume growth for next year, and what we have 4%, 6% or 8%.
And then globally I'm talking and then.
The other thing is we have inflation pass throughs into contracts, so we're going to get to recover.
Inflation.
Through this year.
We haven't forecasted further inflation or any inflation of abatement next year. So.
That could swing, one way or the other as well.
But they would be the two the two big ones I think.
Kevin gave you Thats EBITDA and then certainly below the line, we're going to have a headwind from.
Kind of a funky accounting thing on retirement benefits, which if you want to discuss it Kevin can.
And in.
And interest expense, Kevin gave you a feel for.
Incrementally if you think about current rates and projecting another fed hike or two.
What our interest expense might have been this year on a full year basis at current rates versus what we currently projected and so you can see that as a headwind next year, but.
At EBITDA significant improvement yes.
Thanks, so much.
Thank you.
Thank you. The next question is from the line of Phil Inc of Jefferies. Your line is now open.
Hey, Tim Thanks for all the great color.
On some of these are levers for 2023 to get to that $100 million to $200 million can you kind of give us a little more color, particularly on the price recapture piece I believe North America, a big part of that is the nonmetal escalators can you kind of size that up and then on Europe as well how much progress we should expect in terms of your ability to kind of recoup some of the inflationary.
Thanks.
I think that the.
<unk> two segments.
Almost all of the increase that we're going to have next year will be in the Americas and European beverage businesses.
With Asia.
Transit offsetting the non reportable so.
I don't have in front of me, nor would I, probably feel comfortable telling you on an open line.
But inflation recovery in volume both significant.
More inflation recovery or I should reword that contract.
Adjustment, whereby we reset prices.
And carve out certain costs in the contracts in.
In Europe , and then in the United States.
<unk> recovery in volume growth.
But I don't.
As we sit here today, we are.
We've got pretty good visibility into.
Indeed, the amounts on those I don't feel comfortable talking about it on an open line.
Got you okay.
And then Kevin you gave an update on Capex coming down to 850.
Is there any early look for 2023, how we should think about it in some of these unannounced projects that you guys are taking off the table any color is there any markets in particular and when you kind of reassess your footprint more broadly whether it's North America, Brazil are there any fatigue.
Facilities that are potentially suboptimal that you may take a hard look at Tim as you kind of look at reassess based on the current growth outlook.
I think that.
Globally, we have been in a situation, where we've been capacity constrained.
In almost every market over the last several years and certainly some facilities are better than other facilities.
The newer facilities certainly have the potential long term to be great facilities the older facilities.
In the near term operate much more efficiently than the new facilities.
<unk> got equipment, that's adjusted perfectly after 20 or 30 years and you've got workforces in those facilities that that really understand how to make cans and change designs over and change sizes over in.
And the existing Workforces are really tremendous operators. So I wouldn't I wouldn't describe anything as suboptimal and I would describe for you when we're expecting 6% volume growth on a year over year basis, we don't have the ability.
To take any capacity out we were.
I don't want to get careful how I say this I will just say that I think we were very responsible over the last couple of years spin.
Specifically in the North American market.
Not to announce we're sized plants bigger than we thought they needed to be certainly in light of the contracts, we were able to garner.
So we don't see any need for that as we look ahead to next year.
One of the.
We sold the European food can business last year and one of the.
Provisions of that sale was that we would relocate our beverage can operations.
From the Braunstone UK facility to another site. So we're in the process of building another facility in the UK, because we have to be out of that facility by mid 'twenty four.
<unk>.
So.
Incrementally, it's a little bit of a capacity increase but it's not a lot of capacity increase because you're going to.
Youre going to build a three line plant to replace a two line plant.
But the cost of construction.
A new beverage can plant is certainly much higher and has grown to be much higher over the last couple of years than previously anticipated so a big portion.
Of our Capex that we see in 'twenty three is the Peterborough site in the UK, which is.
Really nothing more than a replacement of the Bronx don't move, but if you wanted to pencil a number in for next year.
It's the money that we're spending to finish off mesquite.
And it's the mud.
Money that we're spending to finish off the line additions in Italy, and Spain and in one or two projects.
In Asia, as well as a big chunk of money in Peterborough.
And youre going to get back up to a number like 900 or a $1 billion again.
Short of.
US adjusting it when we get into the year next year.
And Tim 70 unannounced projects that you guys are.
Pushing out and definitely any color, which region in particular.
So that's why they were unannounced.
So they will.
They will stay on announced in.
They may be unannounced forever right, they may never come back but.
At one point in time.
You think they are okay based on where you see the world going in the world changes So we change in them.
Perhaps they come back in the future, perhaps they don't but I don't think it would do us any good to tell you what we're thinking about.
Okay I appreciate the color.
Thanks, Phil.
Thank you. The next question from the line of George Staphos of Bank of America. Your line is now open.
Thanks, Operator, hi, everyone. Good morning, Tim Thanks for the details and taking our questions here I guess first question I had for you you might have mentioned it but I didn't see it in my notes did you cite an expectation for volume growth in North America for the fourth quarter. You said you are running in aggregate.
More in line with your re forecast.
Could you tell us what in North America.
<unk> to be at in that re forecast and I had a few follow ons would say that north American volumes, we expect to be up a couple percent in the fourth quarter. Okay.
And that would be stronger it sounds like well, let me ask you where is the strength coming from on a relative basis in that 2% by end market.
Oh.
We're largely.
A carbonated soft drinks and sparkling water supplier in North America.
Okay, Yeah, we knew that but okay understood. So I guess second question I wanted to ask you is.
Do you see any potential.
Challenges over the next two years in terms of your demand outlook, what you're seeing from the market and where you see capacity coming on.
You talked earlier to one of the questions about youre going to need the capacity that you're bringing on because you see 6% growth, but in recognizing that where are you.
A bit more pensive in terms of that supply demand balance hanging in within any one region and could you remind us across your regions.
Do you have any important years, we should remember in terms of contract renegotiations or qualitatively how do you stand over the next two to three years across the regions on that front.
So I think I'll take the second one first I think in North America.
Contractually, we're we feel like we're in a pretty good position for the next.
I'll, just say two to three years, depending on customer could be longer than that.
Brazil, I believe we're out a few years and.
The market that's more of an annual market would be the Asian market, but we have we have some pretty big shares in and most of the countries there and we tend to do well its more a function of.
How much volume growth, we get how much cost we can take out in dealing with the competitive pressures.
From new entrants or threats of new entrants, but.
And then Asia I'm, sorry, Europe .
As we've described to you over the last probably 12 months, we're in the process of.
Renegotiating several contracts this year and next year.
<unk> doing quite well with it trying to restore margins such that.
Actually.
Thankfully, we have the opportunity to renegotiate some contracts so.
But that largely will be done by the end of next year and that will take us out a few years from then so.
On the.
The factors George I think that.
The unknown factor is it.
I don't know how much further the fed's going to go in.
There is an argument to be made that perhaps they waited too long and they've got to do what they've got to do and we're all going to need to pay the price.
Get inflation under control and.
Listen I think inflation's up a terrible thing for people at the bottom of the economic ladder.
And it's probably not fair to them.
If the fed does not get inflation under control because they don't benefit from the stock market gains and everything else. They really struggle when they go out the byproducts. So I think the fed does need to get inflation under control help how much further they go and how much demand destruction that causes.
In the near term before things level out and start to Reaccelerate.
<unk> I can't answer that for you.
But as we sit here today based on <unk>.
What our customers are telling us for next year, what we have under contract.
<unk>.
We can see significant volume growth next year and Thats, what we are.
Trying to elaborate on here.
On that point I will ask one quick one and then I'll turn it over just to be curious so have you haircut to a larger degree what customers are telling you relative to the experience this year or youre more or less banking in what customers are telling you in terms of your volume expectation.
For next year, and then maybe for Kevin can you just give us that quick.
Update on the retirement issue and what that's going to mean at the bottom line for 23. Thank you guys and good luck in the quarter. Thanks, George So.
The answer yes, George you should expect that we've we've grown certainly much more skeptical with customer forecasts.
Yes.
George Yes, we've been advertising through about $15 million of unrecognized gains related to postretirement changes, we made back probably more than 10 years ago.
They're going to disappear next year, we also see some.
Some potential higher below the line pension costs. So we're probably looking at.
In the neighborhood of.
$30 million.
Kevin is a 30 inclusive of that 15 or that would be additive to the 15 boosted the 15 George.
To summarize that George we made significant changes to our post retirement medical benefit programs.
A decade ago, resulting in large gains, which the accounting universe requires us to amortize over a period of time as opposed to booking at the time you make the change that amortization period has run out.
Makes sense.
Alright, Thank you guys I'll turn it over thank you George.
Thank you. The next question is from the line of Mark <unk> of Bank of Montreal. Your line is now open.
Good morning, Tim Good morning, Kevin and Mark Hey, Mark.
Tim I Wonder just two.
<unk> away from beverage cans for a minute can you just talk with us about what Youre seeing right now in terms of both volume and then kind of price cost issues in the transit packaging business. You know it seems like global economy is slowing down how is that manifesting itself in transit packaging.
So as we said in the prepared remarks Mark.
So.
Blended average volume decline of about 6%.
In the third quarter, we certainly anticipate volumes to continue to decline in the fourth quarter and into next year.
As you would expect when economic economic activity ticks up ticks down our transit business follows that.
Pretty well.
We.
We've been working pretty hard this year to to correct and right size, a a steel inventory imbalance and.
And perhaps we have had bigger volume declines. This year then we should have had as we try to bring inventories down in and change the way, we we order and we sell through to customers and that will largely be behind us. This year it will be behind us this year.
But no we're going to we're with you we think that.
Economic activity specifically in Europe .
Over the next year.
Has the prospect of being.
Quite dim.
And we're looking at all ways, including the head Count reduction program, we announced for you back in.
In July to rightsize our cost.
And.
And then certainly on the pricing front.
No volume is going to be down, but we cannot afford to take and carry any of these any of the inflationary costs they have to be pass through.
If we sell less product.
Because customers don't want to pay for the inflation, whether we're going to sell less product, but we're not going to we're not going to sell products in that business just to sell product and take losses, but.
No we are forecasting.
In the fourth quarter and next year in the prepared.
Remarks that we described lower volumes in that business.
Largely largely offset.
The fourth quarter and more than offset next year by price and cost reductions.
Okay. Just two other real quick ones. Tim one can you just can you give us any kind of updated thoughts on impact of recession across the.
Both the beverage can in food cans, how you think about that if we go back to <unk> nine.
Kansas actually did pretty well because there's some share shift mix.
In that period.
And then also on food cans I wonder if you'd just give us a sense of kind of where we're at with the ramp up of the new lines and new facilities that you've put in.
Somebody somebody here in the company reminded me somebody I respect a lot.
Recessions don't bother the can business, what bothers, all businesses, including ours as inflation, so the big difference between.
Today in the 2008 financial prices as the level of inflation. We have so inflation is the thing that destroys demand the recession doesn't necessarily destroy demand in fact as you are.
You're trying to get to we typically perform better in a recession.
Because our products are priced much more advantageously to deliver product.
To the consumer.
But inflation is is the big differentiator here I think and so that's why I said in response to George's question.
Little difficult to understand.
Hard to envision inflation is going to get much worse from where it is today, but certainly if it persists.
There has to be a breaking point at some point.
Either on input costs or in consumer demand I'm not smart enough right now to tell you that but that'd be the that's the big difference Mark.
Okay, and then just that Fujian ramp up Tim.
So we.
We brought up the Hanover facility I think the third line in Owatonna.
Start up sometime in November so we'll have all all of our two piece food can needs.
We will be met by our own internal production.
Going into next year.
Okay very good good luck. Thank you.
Thank you. The next question is from the line of Mike Lee Barclays. Your line is now open.
Great. Thanks, Good morning, guys good morning, Mike.
First just a couple of around capital deployment, you've talked about finishing a few projects off that gets you to about 900 to a $1 billion next year, but just should we expect that to start kind of normalizing or falling off after that or is that a fair run rate and just related to that just given the macro or whatnot EBITDA is obviously a little bit later, but is there any change to your.
Your framework or thinking about target leverage of three to three five times EBITDA.
Two great questions I think post 2023, as we sit here today, we would expect capital to come off significantly from that $900 billion to $1 billion number.
Little early to say because we're not there yet and we don't know what the world is going to bring us in terms of opportunity but.
It's not out of the question to think that that number couldnt fall to something like $600 million.
On the balance sheet as Kevin said, given a rising interest rate environment.
And we.
Expecting that the fed is going to probably do something in November and maybe even another hike in December .
We're more committed than ever to maintaining a strong balance sheet.
And so we've typically described for you.
Target leverage in the three to three five range.
I think you know.
We have a board meeting later this week.
We will have a significant discussion with the members of the board.
Take on their experience from past inflationary times.
And it wouldn't surprise me if they want us to earn towards the lower end of that target range and be closer to three to three five.
Fair enough and then second maybe for Kevin I apologize going back to it but I just wanted to kind of tie a knot around what youre, telling us around earnings outlook for next year.
It looks like EBITDA call it up $150 million or so and then obviously, there's a wide range. If I take some of your net interest comments it looks like it could be a net $80 million headwind or whatnot for next year, and obviously pension. So I guess net net when we add up all the different pieces should we still.
Expect EPS to still be up next year or just kind of how should we think about all of the below the line items there.
Yes, Mike.
Youre a little early right now.
Little early in the process.
Thank you are identifying all the right issues.
When we think about the other variables that are out there is what's going to happen with our tax rate and some of that really is depending on when you were.
Make the money and how it rolls up sell.
It's a little early to say, where we're going to be but.
Youre hitting on all the major items that we see the only thing I would say is right now we're assuming.
So for rate of.
Three three excuse me $4 three 5% so if the fed goes out and raises rates.
More next year, you could see interest expense actually been even a little bit higher than what you are.
Quoting there so until we kind of get a little further along I don't want to commit that we're going to be on an EPS basis.
Fair enough I appreciate it.
Thank you Mike.
Thank you next question is from the line of Arun Viswanathan of RBC capital markets. Your line is now open.
Great. Thanks for taking my question good morning.
So I just wanted to go back to an earlier comment that.
That you made Tim did you say that most of the improvement.
On the segment EBIT level would be in Americas, and Europe beverage and then.
Some improvement in signal, our transit would offset non reportable and in APAC is that what is that what you said yes.
We gave you a very wide range of EBITDA improvement.
And if you consider that there'll be.
Some smaller gains in Asia and transit they will offset the decline in other and so.
Pretty large gains in the Americas and a.
And a large gain proportionately in Europe as well.
Okay, that's helpful and.
Considering all of that and considering your comments on volume growth and some uncertainty there I know that.
You have our customers' outlook.
Leads you to believe or around 10% for next year, but.
Would you say that the fixed asset base and in certain of these locations.
He is carrying too much cost I mean is there an opportunity for rationalization, especially when you look at Europe as you said could be continuing to be weak.
Next year materially and and maybe some other areas like you as Youre doing an in transit.
No listen I.
As we sit here today, we are.
We've got customers.
Who have given us contract requirements contracts for the most part saying that.
They expect a certain amount of volume next year, and we're committing to supply them that volume.
We've largely been capacity constrained over the last several years.
If things accelerate we could be capacity constrained next year or so.
You'd like to hear it.
<unk>.
We don't see our ability to take out any beverage can capacity on a global basis right now the only the only market.
Where we have.
Opening capacity next year will be in the middle East.
And we've used the middle east from time to time as our sponge.
To supply other markets when we have been short in other markets. So, but as you think about North America.
Broadly the Americas growth in Asia, and Europe , where we've been significantly capacity constrained we have no ability to take capacity right out right now.
And then just a quick one if I can on non reportable.
I know there was a $35 million so metal gains so we'll take that out.
But then you would likely be down from that beyond that as well just given some of the extraordinary equipment sales that you guys achieved this year is that right. So maybe back yet.
We will see listen I wouldn't describe anything in our equipment businesses as business is extraordinary I think the.
If you were putting the pieces together for the other segment I would say, it's the inventory gain we had last year and it's the expected decline in aerosol can sales next year versus the full year this year.
Equipment might be down a little bit, but it's not going to be down that much.
And as I said that decline in the other.
Businesses from those two primary areas will be offset by growth in transit in Asia.
Great. Thanks, a lot thank.
Thank you.
Thank you. The next question is from the line of Christopher Parkinson of Mizuho. Your line is now open great.
Great. Thank you so much for taking my question. If we just take a step back on the Euro energy costs.
Is there any way to quantify the extent of that headwinds.
Back to the beginning of the year and what the cumulative rate is year to date and then also what you're expecting for the fourth quarter and just any incremental information we could utilize to help us assess the cushion from the contractual renewals for 2023. Thank you so much.
Okay. So on the <unk>.
Energy front in Europe .
We had expected some increase in European energy costs, when we started the year.
Once the Ukraine warhead, and the natural gas storage stopped flowing from <unk>.
Russia as you know the prices have skyrocketed.
Right now when we look at it on a full year basis versus our original guidance, we think the numbers probably in the range of $52 million and $55 million.
Year on year.
That's.
Up a little bit from our previous guidance, but.
Largely in line from a fourth quarter perspective.
We're looking at probably ahead of around $20 million.
We do have some hedges but.
We still probably think that.
We're in the $20 million range, the TTS is a little bit lower.
Right now than we expected so maybe we pick something up there but.
It's too early to tell.
Go back and look at the history of the CTF. So.
Yes, that's where we're at the number in the third quarter was a similar hit to what we've seen in the fourth quarter.
Okay.
Got it thank you and just circling back to your comments about North American demand I mean, clearly some things were a bit rough in the second and third quarters and you have a bit of an inflection interest rate for the fourth quarter. Just and this question is more pertaining to kind of the outlook for 'twenty three but what in particular are you hearing from your customers. I mean, you mentioned some reluctance to trust others, but is there a specific such as substrate outside of <unk>.
Shrinks or seltzer.
That gives you the confidence to say hey, we're going at least bounce back a little bit and kind of get back into.
It'll be at a lower growth rate, but back to growth.
As we approached 23, and hopefully thereafter or is there something in ready to drink or.
Moderation in the declines in hard Seltzer, just any additional color based on product substrate would be very helpful. Thank you.
We're not.
Very large supplier to the hard seltzer market I think that.
As you think about the big volume moves.
I don't know what the exact number we ship over certainly north of 25 billion units in North America. So when you are talking about moving the needle on a percentage basis on a $25 billion.
We're more base.
Ready to drink is nice and it's a growing category and perhaps it has opportunity for the future.
In an incrementally positive world, but.
To move the number that we're describing to you it's got to come from your your bread and butter in the bread and butter for us is carbonated soft drink as well as sparkling water. So.
They are the markets that we see coming.
Coming back and they are the markets, where we've garnered additional business under contract next year versus this year.
Yes.
Thank you so much thank you.
Thank you. The next question is from the line of Angel Castillo of Morgan Stanley . Your line is now open.
Hi, Thanks for taking my question.
Tim I was just wondering as you think broadly in terms of strategy. So there are a number of things.
Things that have been an impact so we talked on this last question about energy hedging and maybe some of that.
Playing a factor in the fourth quarter, how are you thinking about your level of hedging for next year and then more broadly as you think about sourcing obviously metals has been a bit of a headwind here in the second half how are you thinking about your strategy evolving or are you buying less or.
Changing as you see the kind of the macro being a little bit more difficult.
I'll do the metal and Kevin I'll come back on hedging our thoughts around hedging on the metal.
Yes, listen I think I think we're going to take a different approach.
<unk>.
We went through the.
Early pandemic and post pandemic.
Fighting through supply chain issues trying to get as much material as we could to meet growing customer demand coming out of the pandemic.
Kind of caught up with us here.
This summer and we're left with too much material at higher prices were.
We're going to take a different approach and we're going to order what we think we need and if we're short were short, but we cannot afford.
Especially in markets like Asia and in markets like Europe .
Where we don't have specific back to backs with customers to take the risk.
So what I'm, saying is.
If we're short of material and customer demand is greater than we forecast.
After taking into account their forecast.
And that's going to be that's going to be where it is but we can't afford to take the risk.
That volumes don't materialize.
As we initially thought as we were initially told.
So that will be.
That'll be a change and that change is already happening I think thats. The question Youre asking that changes already happening for the fourth quarter right now we are bringing in much less material.
So we haven't talked about.
The procure your thing on our cash flow statement, but as you bring in less material Hugh.
You have a much lower accounts payable balance so the liquidation of payables.
No.
And Ah.
In a strange way reduces your cash flow because it just.
It looks like Youre utilizing more working capital than Youre utilizing but the right thing for us to do is bring less material and have less payable as we go into next year, Kevin you want to take the energy, yes. So on the hedging front for next year.
At this point, we're very limited in terms of the number of hedges that we have in place.
I think we've been pretty clear in terms of our overall strategy in terms of covering the energy cost is.
Can hedge from one year to the next but.
In terms of overall risk.
Our view is that this isn't something that we can absorb at any time. So our view is that we need to pass this onto the customers we've done a number of things.
Renegotiated a number of contracts to actually get the pass through was put in place and we think that that's the best way to handle this.
I wouldn't expect it.
A material amount of hedges for next year.
Got it that's very helpful and then in terms of copper.
Capital allocation can you just remind us how you're thinking about buybacks I think you had outlined a $1 billion number for this year.
Can you just help us understand I guess, how do you think about that this year and next year in terms of repurchases.
Yes.
Think we we described earlier for you in this interest rate environment and depending what we.
What we see D.
The rates do after the next several fed meetings.
We will certainly take a closer look but as I said, we have a board meeting later this week, we have another one in December .
We're going to take.
Some good advice from our.
Our board members as to where they think the appropriate level of leverage should be.
And that will directly impact the amount of shares we buy back this year and next year so to be determined.
Helpful. Thank you. Thank you.
Thank you. The next question is from the line of Gabe <unk> of Wells Fargo Securities. Your line is now open.
Kevin Good morning, Thanks for taking my question.
Yes.
Maybe I'm getting a little too precise, but I think coming into the year.
There was an estimated don't Wanna say $40 million headwind or so in Europe beverage as it relates to aluminum conversion costs that were supposed to be rectified over the next two years. So I'm curious you also called out a dollar of headwind in your press release that was related to interest.
Europe energy.
<unk>.
Higher.
What was the other component.
See here Oh, Yeah, FX. So I think FX was $35 million interests. As we are seeing a is around $25 million or so year on year.
So 50 for NRG as the rest of this aluminum issue that youre talking about.
Then.
No.
So Dave I'll just go through the pieces.
This is about.
Call it between 40 and $45 million.
The interest.
Guide at the beginning of the year, we expect interest expense to be around $210 million.
That was really if you think about last year, we took the proceeds from the tin plate sale and paid off.
It was like a 1 billion Ada bonds. So we fully expect interest expense to be at a much lower number.
Coming into the year and really throughout the year.
So when we think about the guide, we're really up from $210 million to $270 million. So it's a $60 million hit and then energy is in the $50 to $55 million range.
Okay, but the aluminum conversion issue should be resolved with the contract renegotiations for next year and sort of an extension of that Tim.
We're reading some articles here about labor inflation next year in Europe . So I'm just curious how your contracts are positioned to deal with that and I want to say its around labor is typically 12% to 15% of the cost structure just any thoughts there.
So just.
So the.
The aluminum conversion issue would have been included.
The outlook or the the headwinds that you mentioned would have been included in our earlier guidance Thats why Kevin didn't include it in the <unk>.
And the dollar reconciliation was gift, giving you and that is that is one of the components.
Contract renewals, where we're dealing with as we go forward.
Labor as you point out, yes, labor I think labor is going to increase everywhere.
We don't have specific carve outs for labor.
But they are included in our inflation adjustment features within contracts.
In both the U S and Europe or yes.
Okay, and one last one if I may Tim you made a comment about your customers potentially choosing.
To fill other substrates versus I've ever seen I'm curious if that was just a hypothetical.
Or if in fact, maybe as we're seeing consumers.
Move to more on the go consumption.
That that you're getting through your commercial discussions.
Does it take anything away from the can winning no no no no. It was purely a hypothetical as it relates.
Looking forward and the unknowns as we look forward I don't think we've seen any of that right. Now I don't think we've seen any negative sub substrate shift away from the can in fact, just the opposite but as we think about volume growth and inflation and the consumer going forward.
Purely hypothetically you don't really know.
What the customer's going to do.
Understood. Thank you.
Thank you.
Thank you. Your next question is from the line of Kyle White of Deutsche Bank. Your line is now open.
Hey, good morning, Thanks for taking my questions late here on the call, but I'm curious about Europe volumes, there continue to hold up quite well any concern that that region might see a similar situation to to the U S of the sizeable drop off like you experienced in September just given the inflationary pressures on the consumer.
Turned about that risk and then anything you can do to prepare for something like that.
Well.
If you think about it I think the European market.
I think the U S market.
There is perhaps a little correction here that happened in late in the third quarter.
Get ourselves rebalanced and we move forward.
The U S market.
Perhaps not just for beverage cans, but a lot of products a lot of reasons is much more resilient.
Then the European market.
The European market would be a market.
If I was looking at from the outside in any in any industry I'd be more concerned about the European markets in the U S market.
So we are.
We are.
We agree with your <unk>.
Your premise that Europe could be under more pressure as you look forward.
And then the United States.
Again.
We've been capacity constrained.
However, we.
As part of contract renewals, we picked up a.
Incremental business with a large customer and we will need to supply that so as I said earlier to <unk> question I think that we don't have.
The ability right now to take any capacity out.
We would look at our situation next year in Europe and elsewhere elsewhere around the world.
With the exception of the Middle East is being capacity constrained again.
Got it and then on the U S. Understanding that you have some incremental business that you're reading to use to serve previously next year, just curious what kind of underlying market growth you need to see in the U S. For next year in order to reach your 10% target.
Okay.
I would think that.
Underlying market growth for us to achieve our target is low single digits.
Got it appreciate it I'll turn it over.
Thank you.
Speakers call is our last question.
You May proceed.
Oh I am sorry, Nicole did you say that was the last question.
Oh Im sorry, okay. Thank you very much that Nicole.
Thank you everybody for joining us that will conclude today's call and we'll speak with you again in February Bye now.
Thank you that concludes today's conference. Thank you for participating you may now disconnect.