Q4 2022 Crown Holdings Inc Earnings Call
Thank you for standing by conference will begin momentarily until such time, you will hear music. Thank you. Please continue to standby.
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Okay.
Yes.
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Good morning, and welcome to Crown Holdings fourth 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'd 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 don't already have the earnings release it is available on our website at Crown Court Dot com.
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.
In the press release.
And in our SEC filings, including Form 10-K from 2021 and subsequent filings.
Earnings for the quarter were <unk> 74 per share compared to a loss of $7.95 in the prior year quarter.
Adjusted earnings per share were $1.17 compared to $1.66 in the quarter.
Net sales in the quarter were down 1% from the prior year as global beverage can growth of 3% and the pass through of higher raw material costs were offset by foreign currency and as expected lower volumes in the transit packaging business.
Segment income was $292 million in the quarter compared to $357 million in the prior prior year, primarily due to timing of cost associated with higher inventory levels lower cost absorption from planned inventory reductions and higher energy prices in Europe .
As outlined in the release, we project EBITDA to grow.
Between eight and 12% in 2023.
So the projection assumes better results in our global beverage can and transit packaging businesses.
All set.
By lower results in North American Tin plate business. The result of Q1 inventory games not recurring in 2023.
As stated in the earnings release.
First quarter adjusted.
Earnings per diluted share are projected to be in the range of $1. One dollar intentions with the full year projected to be between $6 20, and $6 40 per share.
The adjusted earnings guidance includes net interest expense of $400 million in 2023 compared to $270 million.
'twenty two.
40 cents of incremental noncash pension and postretirement costs.
Average common shares outstanding of approximately $120 million.
Exchange rates of <unk>.
Current levels with the Euro at 107 to the dollar and full year attach rate between 24% and 25%.
Depreciation of approximately $350 million compared to $301 million in 2022.
Noncontrolling interest to be in the range of $140 million.
Dividends to Noncontrolling interest are expected to be approximately $110 million.
We currently estimate 2023 full year free cash flow of approximately 500 million with approximately $900 million in capital spending.
We expect a net $100 million improvement in working capital, which is driven by lower inventory, partially offset by continued investments to support beverage can growth.
We expect the majority of free cash flow.
Go towards debt reduction until we get within our stated leverage range of three to three and a half times with that I'll turn the call over to Tim.
Thank you, Kevin and good morning to everyone.
Before reviewing our fourth quarter results, we want to briefly update you.
On the company's situation in Turkey.
For those of you not aware twin earthquakes the first registering seven eight magnitude in the second at seven five star.
Struck southern Turkey on Monday.
Across the region several thousand buildings have collapsed, resulting in significant loss of life.
With brutal winter weather further complicating rescue and recovery efforts.
At the center of the first Quake was only 50 miles from our beverage can plant is mauney.
And are we at Crown feel truly blessed that all employees are alive and accounted for.
Electricity has been restored to the plant.
And with no damage to the physical plant structure equipment for inventory.
We have resumed shipments to those customers able to receive deliveries.
The company is currently coordinating shelter for displaced employees and their families.
And we have every confidence that.
The global Crown family will again rise up to support their fellow associates in Turkey.
As reflected in last night's earnings release performance in the fourth quarter was a bit ahead of our previous expectations due primarily to firm global beverage can demand.
Cost reduction activities within transit and the weakening of the U S dollar.
Prior to the prior year fourth quarter lower cost absorption from planned inventory reductions.
Higher cost inventories related to the timing of customer sales higher energy costs and inflation all weighed on income results.
Looking ahead to 2023.
We expect significant improvement in segment income as higher beverage can volumes.
<unk> cost recovery and benefits of cost reduction activities will more than offset the significant 2022 steel repricing benefits realized within our North American Tin plate operations.
Below the line as Kevin described we will face headwinds from higher interest and pension costs.
As Kevin also noted capital expenditures for 2023 are currently estimated at $900 million.
And looking forward, we project $500 million of capital expenditure in 2024.
The commercialization of our various beverage and food can capacity expansions are described in last night's release.
Turning to the operating segments in Americas beverage.
Unit volumes advanced 4% in the fourth quarter with the gain found primarily in central and South America as North American volumes were up only modestly.
Volume advances were offset by lower cost absorption. The result of planned inventory reductions and the timing effect of higher cost inventories.
We estimate that the North American market that is Canada, and the United States was down 8% in the fourth quarter with much of the decline found in fewer imported cans year over year.
While only five weeks into the new year, we remain confident in our outlook for 10% North American volume growth in 2023.
Volume growth combined with contractual inflation recovery leads us to expect income in the segment to be up significantly in 2023 with flatter performance in the first half and the gain to prior year spread over the back half hour.
Our north American growth assumption assumes an overall flat market.
Unit volumes in European beverage increased 2% in the fourth quarter with growth noted in Greece, Jordan and Turkey.
As previously discussed the impact of higher inflation in energy cost coupled with timing of higher cost inventories negatively affected income in this segment for 2023.
We expect to begin to claw back margins about halfway back to 2021 levels as low to mid single digit volume increases coupled with the benefits of renewed contract terms and recovery of prior cost accelerate income performance beginning in the second quarter.
Beverage can volumes in Asia Pacific advanced 2% in the fourth quarter as growth in most southeast Asian countries was partially offset by economic weakness in Cambodia.
The carrying cost of higher cost inventory ahead of customer sales continued to weigh on income performance, which we expect will continue into the first quarter of 2023.
However, we do expect income in this segment to advance in 2023 as comps in the back half of the year become much easier.
When adjusted for currency and the divestiture of the key we planned business fourth quarter segment income in the transit packaging business was it was within $3 million of the prior year.
The benefits of the previously announced overhead reduction program, coupled with positive price almost entirely offset high single digit volume declines.
Continued benefits from the overhead reduction program combined with a more favorable steel cost price relationship is expected to drive mid to high single digit income improvement in 2023.
So north American Tin plate in can making equipment businesses closed out an exceptional performance in 2022 with another firm performance in the fourth quarter segment results and 2023 will be down compared to 22, mainly the result of inventory repricing benefits realized in the first two quarters of 'twenty two.
Recurring in 2023, coupled with continuing weak aerosol can demand.
As Kevin described target leverage given the existing business portfolio remains in the range of three to three five times and we are committed to applying excess free cash flow towards reducing leverage to that range over the last two years. We have returned in excess of $1 9 billion to shareholders in the form of quarterly <unk>.
Dividends and share buybacks.
In summary.
And looking ahead to 'twenty three we remain confident in our ability to Reaccelerate reaccelerate EBITDA growth in 2023.
Contractual terms will allow us to begin to recover significant inflationary increases our inventory positions have largely been right sized at year end 'twenty to.
Renewed European contracts with more appropriate terms initiated significant overhead cost reduction activities within transit packaging and have or will commercialize significant new beverage and food can capacity in the United States and Europe to continue to serve our customers' growing requirements.
And just before we open the call to questions. We ask that you limit yourselves to one or two questions.
So that others may have the opportunity to ask their questions before we run out of time.
And with that Nicole we are ready to open the call to questions.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star and then one please mute your phone and record your name and company name clearly when prompted.
To cancel your request Crestor and into one moment. Please for the first question. Our first question is from the line of George Staphos with Bank of America. Your line is now open.
Hi, everyone. Good morning, Thanks for the details.
My two questions. Tim you mentioned that you remain confident in the 10% growth outlook for North America for this year.
And we appreciate that can you remind us about what is making you most comfortable about that outlook either by by end market or whatever you would be able to share and talk to how the risks may be to the upside or to the downside on that 10%.
Relative to where you.
Where you were and what you were speaking to last quarter. The second question is on cash flow.
Kevin can you talk to us about some of the other key line on as we need to.
Consider.
Getting to or at least evaluating your $500 million free cash flow target is there anything that you need to put in for pension recognizing the pension expense is noncash. Nonetheless, it does reflect no balances that you need to amortize anything in there for pension funding et cetera. Thank you guys.
Okay. So George on growth I think the.
The upside or downside to the 10% projection.
Revolves around what the market is going to do as we said we were confident with the 10% assuming a flat market in 23 of the market is up.
I'll do a little better if the market is down.
Then our customers may not pull as many cans, but the the entirety of our growth.
Centers around.
Those customers.
Who have continued to grow principally in the carbonated.
Soft drinks and sparkling water categories as well as some of the some of the energy energy and other nutritional type drinks.
That growth for us is principally centered on their growth and door.
Crown, gaining a greater percentage of that customer's volume from where we stood last year.
Boy, Kevin provided a sea of numbers already I'm not sure how you digested all of that already but to the extent you can give you any more numbers go ahead, Kevin Okay, Hey, George.
In terms of pension.
We don't expect a material difference.
From where we were this year.
Remember this year included some recovery from the UK pension plan that we had.
So if you exclude the UK pension plan it should be in line.
Uh huh.
Not much different from there in terms of.
The other line items, if you think about you know.
Fair amount of taxes paid that we have.
Anywhere between you.
You know call it 250 and two.
$280 million, depending on how much income we make.
We will have to pay in taxes.
And interest paid is you know obviously up as a result of the P&L being up but.
To some modest severance related to the overhead reduction yeah. So I mean, that's January the pieces, George and working cap you said would be $100 million source to you this year.
Yes.
Okay. Thanks.
Thanks, I'll turn it over.
George.
Thank you next question is from the line of Mike <unk> with Barclays. Your line is now open.
Great. Thanks, Good morning, guys and maybe it's appropriate to throw in a quick go birds.
First on the left on the leverage side, you talked about Recommitting to the three to three five times I guess when do you expect it to kind of get there this year and I guess, given the interest rate and just kind of the macro backdrops that change at all how you think about the leverage do you want to get closer to the bottom end before you reaccelerate.
Purchases just kind of flesh out how you are thinking about that.
Really a really a thoughtful question. Thank you so.
I think if you take the midpoint of the EBITDA range, we provided you.
If you take the $500 million of.
Cash flow that we're going to generate less the dividends, we paid to the common shareholders as dividends to the minority partner I think if you're a flush all that you'll probably get yourself are down to around $3 to $3 25, something like that by the end of the year.
Just given the seasonality of the business and our borrowing requirements on a seasonal basis.
I would expect that much of the decline into the range as it does for many packaging companies, whose principal businesses in the northern hemisphere.
We won't.
We won't feel comfortable that we're within that range until the year till we get into the late into the fourth quarter as we collect receivables in the in the business winds down before the build of business into the next year.
Uh huh.
You can do the math there I think it's pretty close to what I've said I think.
The real thoughtful part of your question is what is the appropriate level of leverage within that range.
Just given the current global economic environment, we're in the.
The.
Central banks around the world what their what their motives are to curb inflation and and just the cost of the debt and the.
The relative dilution, let's just call it relative dilution that comes from higher cost debt and then the free money. We all experienced for the last several years. So I think two.
To your question I think three to three and a half it was a fairly large range.
At a half a turn.
In absolute terms is worth $1 billion of debt. So as you think about refinancing and refinancing at advantageous rates, obviously, the less absolute amount of debt you have to refinance the theoretically the better absolute rates you can get for a long term period of time, So I would say.
In this environment.
You'd feel more comfortable in the three to three and a quarter times range as opposed to the range is wide as three to three and a half but.
We give you a range because it's all subject to.
Our review as facts and circumstances change overtime.
Great I appreciate that answer and then second real quickly for.
For Kevin I apologize if I missed this at all in the numbers you threw out there, but can you quantify how big the headwind is for the first deal in the first quarter and then secondly, real briefly on pension is that spread out through the year or is it lumpy in a quarter or how should we think about that.
I'll take it Mike so the pension will be equally spread through the year. So.
That incremental 40, you can think about an incremental 10 per quarter.
On the.
On the steel repricing headwind I think last year.
In the first principally in the first quarter, a little bit into the second quarter, we had $35 million to $40 million of gain.
The year over year impact 'twenty.
<unk> 23 versus $2 22 was a little more than that because you've got a.
You've got a decline of low single low double digit decline in steel prices this year.
So if you had $35 million to $40 million gain last year.
And you've got a $15 million to $20 million loss. This year the year over year impact in the first principally in the first quarter a little in the second quarter totaling somewhere between 50 and $60 million headwind.
Great. Thank you.
You.
Thank you next question is from the line of Ghansham Panjabi of Baird. Your line is now open.
Thank you Hey, guys good morning.
On your comments on inventory level adjustments did that fully play out in the fourth quarter or was there any sort of spillover into the first quarter as well.
So ghansham, what I said, we're largely right size, we still have a little bit.
In Mexico.
And.
We have a <unk>.
<unk> and.
In Asia, which is probably going to.
You know the first quarter in Asia is going to cost us a handful or touch more in terms of income until we flush it through.
Okay Gotcha, and then in terms of the EBITDA guidance, I mean, 8% to 12% can you just give us more numbers in terms of I mean, there's just so much going on with the contractual recovery cost savings et cetera can you just give us the dollar amount associated with that in terms of what you're embedding for <unk>.
For 2023 EBITDA guidance.
Yeah. So so.
Kind of want to stay away from.
Too much but I think.
If you.
You think about.
As we sit here today we.
Take care of the easy ones you've got.
FX was flat we're talking about EBITDA. So we don't have to talk about depreciation increases.
I think.
Between volume and price.
Youre well over $200 million and you've got some cost reduction principally in transit, but also in <unk>.
In Europe in Asia, probably in the 25 to 30 range.
And then a little bit.
A little bit more than that adding for the overhead reduction in transit.
Yeah.
We will have higher benefit of a higher bonus accrual.
We hit these numbers the folks might get a bonus in 'twenty three as opposed to getting very little in 'twenty two.
I'm not sure I really want to give any more than that on a public call ghansham, but thats.
Think about price cost and volume being in the range of $2 million to $250 million.
Cost reductions in overhead restructuring benefits being in the range of 50.
And then I guess the.
The thing I would say that $2 to $250 million.
Inclusive within there is the $50 million to $60 million headwind I described for you for tin plate, So some pretty big numbers year on year.
That's perfect. Thank you so much.
<unk>.
Thank you. Your next question is from the line of Anjelica CEO of Morgan Stanley . Your line is now open.
Alright. Thanks for taking my question I was wondering you talked a little bit about kind of <unk> expectations. I was hoping you could give us a little bit more color as to whats embedded by region and your assumptions.
For volume as well as kind of EBITDA and go on what that breaks looks like.
Yes.
Yeah.
So again Angel we gave you so many numbers I'm not sure I can give you any more but.
Yes.
We look at.
I think.
The big headwind in the first quarter as the steel steel repricing benefits, we had last year in the steel cost this year selling to $50 million to $60 million.
I would say.
For the most part.
When you get through that $50 million to $60 million and some higher startup costs in the first quarter, because we've got a number of lines coming up.
In the first quarter that pretty much everything else is flat in the first quarter, but.
You've got the you've got the earnings estimate and.
You can work through the earnings estimate.
You could probably come up with a you've got $50 million to $60 million headwind on steel and everything else you'd probably get yourself, a total of $75 million EBIT headwind.
In the first quarter, principally centered around that as I said, the steel and the startup costs.
And then we start to we start to return to.
<unk>.
Better better earnings and better acceleration.
In the second quarter, but I would say that.
In the Americas beverage business.
First and second quarter in total largely flat to the prior year.
European beverage.
We will be down in the first quarter will be up in the second quarter.
Asia will be down in the second quarter down in the first and second quarter start to return to growth in the third and fourth quarters.
I think we expect transit packaging and packaging to be up in every quarter.
And obviously, a tin plate business is down significantly in the first quarter as we described.
Down a little bit in the second and then up in the third and fourth quarter. So.
And just to clarify that was kind of from an EBITDA perspective, right. So from a volume standpoint, what are that the segment income perspective, So segment income yet so what about from a volume perspective kind of embedded in that by region.
Listen the Americas beverage business is going to be up in every quarter.
Mainly as a result of the North American volume increase we also expect some some increase in Mexico.
Brazil, we had a pretty good performance in Brazil in the fourth quarter, I think Brazil, perhaps off to a little slow start here in January but we expect Brazil expect Brazil to do better.
This year than we did last year.
European beverage.
I'll be down in the first quarter.
As we start to bring on capacity in Italy, Spain, and even the UK as the year progresses, we will begin to accelerate volume performance in Europe .
Asia.
I think southeast Asia, and China has reopened southeast Asia doing well with the exception of Cambodia right now.
Q1 down and then I think we start to see volumes start to accelerate Q2 Q3 as the year goes on and I think from the standpoint of signaled.
Compared to the prior year volumes down in the first and second quarter.
Easier comps in the third and fourth quarter.
And then I think.
And North American Tin plate, we expect food volumes to be up each quarter and aerosol can volumes to be down each quarter.
That's very helpful. Thank you and you talked about your inventories, maybe a little bit more right sized with snow answer is across all regions could you give us a little bit more color on what youre seeing across your customers kind of the supply chain distributors retailers. What are you hearing from customers in terms of their inventories and the overall kind of levels of Destocking there.
You kind of anticipate here as we think about the beginning of 2020.
Yeah.
The beverage world.
Customers don't carry a lot of inventory rights, we deliver just in time, they fill and they ship.
And I don't think.
I think at the end of the year or even as we sit here today there is any.
Any significant.
Especially the large.
CSD water and beer companies I don't think theres any real large backlog of inventories in their possession.
Hum.
The retailers only have so much space to store, so I think the.
The channels are set up for a pretty good year this year.
The cost of aluminum is down.
Significantly.
From the first quarter last year it'll now.
On the order of 1500 a tonne.
So the hope is and we've seen some green shoots.
Promotions by to get to buy two get one.
So the hope is that we see some more promotional activity and we do even better than we've outlined for you.
Very helpful. Thank you. Thank.
Thank you.
Thank you next question is from the line of Erin Viswanathan of RBC capital markets. Your line is now open.
Great. Thanks for taking my question. When you look at North America. You know you guys have been talking about 10% volume growth for a little while.
Have you seen any kind of.
Downside to that.
We have seen in some categories there wasn't greater Destocking in September and December .
Maybe you can just give us an update on what you're hearing from your customers as far as.
And again, what gives you that confidence in that 10% and then.
Could you also provide us with maybe 24 outlook on new capacity.
Thank you.
Well so.
I think the third quarter.
And as you rightly point out the month of September was really disappointing.
The fourth quarter.
We talk about North America, we were on track to have a pretty good volume performance in the fourth quarter and then the last week of the year the holiday week.
Things basically shut down now having said that.
And only five weeks into the year things are really off to a strong start so but as I said, we're only five weeks in so don't read too much into that but.
All signs point to.
What we're hearing from the customers all signs point to we should have a pretty firm performance this year and as I said, our confidence with our number.
Considering the backdrop of a flat market.
Is entirely centered on carbonated soft drinks and sparkling water some energy guys.
They have.
Penetrated more retail outlets and Theyre growing <unk>, we've gained a greater share of that customer.
As compared to where we were last year.
I think we.
We said in the prepared remarks.
Capex looking at $500 million next year, we obviously have a fair amount of capacity coming online.
In North America.
In Europe this year and so we will have increasing capacity next year to absorb further growth.
As those lines come through learning curve and produce more cans.
Tim.
And then on Europe .
This segment income recovery effort.
Wayne.
Give us an update.
And how you're thinking about.
That segment has evolved.
The fact that 2019 levels for 2018 levels.
In 2004.
Okay, I'm sorry again.
Prepared remarks, we.
We we expressed.
Our belief that.
With some modest volume growth this year and.
The renegotiation of numerous contracts, where we've more appropriately.
Reset based pricing plus pass throughs for inflationary items and recovered some past inflation.
But we expect the 23 segment income.
To be halfway back to 'twenty. One that is if you took 21 and 'twenty two we should be somewhere in between.
Thanks.
Next question is from the line of Christopher Parkinson of Mizuho. Your line is now open.
Hi, This is John on for Chris.
Please breakout the various substrates that led to some weakness in the fourth quarter and then what specific substrates give you optimism in 2023. Thank you.
I'm, assuming you're specifically talking about beverage in North American beverage am I correct, yes that is correct.
Yeah, So listen we were up.
In north in the Americas, we were up 4% which was.
Double digit growth in central and South America.
And a little bit less than a half a percent in North America. We had previously thought we might be up 2% to 3% in North America as.
As I said, we were tracking for that.
And basically across all product lines are all end markets that we support in our North American beverage business.
Shipments of.
I don't want to say they shut down the last week of the year.
But certainly the holiday week between Christmas and new year's shipments were very light the pull from customers was very light, but that was across the board I wouldn't necessarily ascribe it to any one end market versus another.
Thank you very much I'll turn it over thank you.
Thank you next question is from Adam Josephson of Keybanc. Your line is now open.
And Kevin Good morning, Thanks, very much morning to my question.
Tim one on Brazil, which my understanding is last year cans lost some share to returnable bottles for economic reasons that Brazilian economy had a rough go of it and there was some trading down going on.
You mentioned the year's off to a bit of a slow start there, but you are expecting a recovery. Thereafter can you just talk about how youre expecting hands to do relative to returnable bottles as distinct from last year are you expecting the economy to get better what exactly.
Are you expecting regarding Brazil this year, yes.
So.
We were I mean, I'll give you if you want the exact number for Brazil, I'll give it to you I don't know what you guys do with all this data, but I think we were up.
13, or 14% in the fourth quarter in Brazil.
So.
Tremendous performance in the fourth quarter.
The first quarter of last year was really weak so even though we're off to a slower start here in the first quarter, we're fairly confident in Brazil, having a good performance this year I think our.
If I was to go back or you were to go back and look at last year's transcript, we probably see that.
We in the market I think we were down about 20% the market was down about 25% in the first quarter of last year, having said that the performance over the last three quarters last year I think we ended up down one 5% for the full year. So we almost claw back the entire <unk>.
First quarter shortfall.
Where we're at I think most fillers and most consumers.
In a market like Brazil prefer the aluminum beverage can over glass.
Yeah, the glass guys might want to tell.
Tell you otherwise, but I think history over the last 10 15 20 years will tell you otherwise.
So we're pretty confident.
We're pretty confident that.
The flexibility of cans to produce numerous sizes with numerous decorations to promote the product on the shelf is far superior than the bottle.
I think.
As we've said before you can.
You can get all hung up looking at.
Six months, one year performance in Brazil, I think if you look at a period of time three to five years and I don't care. When you want to start that period of time and when you want to and you take three and five year chunks of time.
Youre going to see can penetration rates higher and youre going to see absolute level of can volumes higher and we continue to believe.
The Brazilian market is going to be a tremendous market for the aluminum beverage can.
Got it thank you and back to North America. So I think some of the energy drink customers to beer.
Companies were still implementing price increases late last year and even into early this year.
Embedded in your expectation of a flat market are you expecting much of a return to promotional activity in the summer time or you not what exactly you're expecting in terms of price increases promotions. Neither I'm just trying to understand how you think the market might evolve this year as this.
Thanks from whatever I know you said do you think the market was down 8% in the fourth quarter I don't know if you said, what what you think it did for the full year, but how are you thinking this year will be different from last year.
So I think CMI doesn't publish the data anymore, but if I had to try.
Fisher and I were looking at this the other day, if we had a.
Try to give you a view as to the full year I would tell you that perhaps the market was down on the order of 6%.
5%, 6% and I think it.
All related to fewer imported cans I think domestically produced cans were probably up.
1% and imported cans down six or 7% leading to an overall five or 6% decline Youll grew that Tom yes, yes. So.
As I said earlier, we started to see some evidence of promotions and so.
Adam I know living in Florida, we've.
We've got the office down in Florida, So I've seen some promotional activity in the Tampa area, but.
Not all over the country.
But we have started to see two per twos in or buy two get to buy two get one.
We're starting to see more activity in the carbonated space in <unk>.
<unk>.
On the <unk>.
Sparkling water side.
They never really took their prices up as high as the CSD guys, but.
They are beginning to promote a bit more as well.
But I think that.
Where are you.
Kind of like when you give benefits to people you never taken back when you put inflation into the system. It never goes it never goes back so while the rate of inflation is slowing there is still inflation on a higher base.
So the consumers are faced with higher and higher cost, even though the rate of that inflation year over year is slower.
I think only people in Washington, and Wall Street can try to tell US inflation is better right now you cannot tell that to the people in Iowa, and Ohio, and Oklahoma. The people that are out there working every day trying to make a living so for promos.
Most of us on the call today, we can absorb this for many people around the country. This is.
This is a week to week situation and things are more expensive now having said that.
Drinking can beverages is a small pleasure and people like to give themselves. The enjoyment of small pleasures in I think we will see some moderation in the rate of increase in the cost of canned beverages.
I think we will see some promotions and I think the.
Our estimate of an overall flat market is.
Our current estimate of our where our current belief.
That's a higher base level of cost that people are feeling.
At some level is offset by promotional activity to another level and so that may be that.
Those people at the.
Lower end of the economic spectrum are buying less but the people in the middle and the higher end or buying more as promotions come in it it doesn't have to be equally across the board.
For all folks depending on their economic situation.
Thanks, a lot Tim thank.
Thank you Adam.
Thank you next question is from the line of Kyle White of Deutsche Bank. Your line is now open hey.
Good morning, Thanks for taking the question.
The actual recovery of inflation within in the beverage business did those been incidents principally begin in <unk> or is the major reset period for you later in April just how should we think about the timing of those benefits.
Depending on customer and depending on contract and when the contract was renegotiated.
It could be January one April one or July one but.
The large majority of especially in North America.
In North American beverage centered around <unk>.
April one.
On the food can side.
In North America more centered on January one so thinking about food cans, while there is a.
A significant were.
Low double digit decline in tin plate pricing.
The price of cans to our customers is almost the same because we're passing through the PPI to them on January one so.
There is no increase to them the steel price decline offset the PPI that theyre getting.
Got it yeah that makes sense and then it's been a couple of years. Since you did the board led capital allocation and portfolio review, what's your view of the portfolio now do you like the diversification with transit in food and beverage end markets or do you see more shareholder shareholder value being created by being a pure play beverage can company.
I knew this question was coming so I.
I had to get it in.
No I know you did I. Thank you for the question, let's be real clear I think.
After today there are two beverage can companies that have reported you're going to see a report from another beverage can company over the next couple of weeks and the other private.
European private beverage can company that has entered the United States you probably saw there.
Their recent rating agencies reports.
I think the beverage can world.
If we're all being very honest, we all understand it's an expensive business, but it's a business with exceptional upside and we're prepared to invest the money in the business, but the cash flow performance of all of the beverage can businesses in 2022.
Not very not very positive I think youre going to see cash flow performed performance.
In other packaging businesses beat a food or industrial or combination of both.
Where they've got positive cash flow in 2022, and we happen to be.
Pretty close to breakeven on free cash flow.
What I am trying to explain to you is the combination of our.
Of our food and industrial packaging business is generating significant cash flow offsetting the continued investment in the beverage can business now we do believe beverage cans will generate significant cash flow in the future.
But you need cash flow to pay your bills.
And it's a fantasy to think that cash flow is not important as some investors like to tell us from time to time.
And so I think we like the diversification of cash flows we like cash.
With cash we can pay dividends with cash we can buy back stock with cash we can make more investments in beverage.
However, having stated that we are all about trying to increase shareholder value.
I'm a shareholder just like many of you on the call I have a lot of shares I'm, all about trying to make more shareholder value, but I'm also.
All about making cash flow. So we can accomplish all the things we need to accomplish to satisfy the wide variety.
Of investors that we have and the reasons why they invest in a company like crown. So.
Listen we've got a couple of new board members. We welcome their input we think our interests are exactly aligned with their interest that is to drive further shareholder value.
By the company for the benefit of shareholders, and we will see where that takes us.
Thanks, Tim I appreciate the response thank you.
Thank you next question is from the line of feeling of Jefferies. Your line is now open.
Well, Tim you stole my Thunder I was going to ask you about free cash flow.
But it's good to see free cash we're going to certainly accelerate going into 2024, you talked about a capex number closer to 500 million, which is pretty on par of DNA.
Is that a level of Capex that you think is sustainable for call. It. The next few years, starting 2024 and with all that cash what do you guys do with that cash flow.
So Phil.
Let's assume.
It's a little hard but let's just go back to this question has been asked a number of times over the last several years.
<unk>.
Standard responses, let's hope, we get the opportunity to spend more capital that means there is more growth.
Well, we had an acceleration, let's just deal with the North American beverage can market, we had an acceleration of <unk>.
Can volumes from about $90 billion to 115 to 120 billion from 2019 to 2022, which required a tremendous amount of capital by the can makers.
To meet the customer requirements and consumer demand.
I am hopeful we will have that period of time occur.
Occur again in the near future and if so we are prepared to invest ever increasing amounts of capital to meet that customer demand depending upon the.
The economics of contracts, we can enter into to get proper returns on those investments.
Short of that.
If if from time to time, there are lower growth expectations or lower.
Lower conversions from one substrate to another.
We are prepared to reduce capital to.
Through appropriate maintenance levels and incremental volume growth.
In a region like Southeast Asia for example, where I think we're going to continue to have.
Volume growth opportunities, but so thats the answer around capital it could be.
I think as we sit here today, we're we're looking at $500 million for 24, and 500 million for 25, it's hard to think that we're going to need to go.
Significantly above $1 billion over that two year period, and then we'll see where post 25 cases, so that leads to your second part of your question, what I'm going to do a lot of cash flow.
We're going to.
We're going to get that down to where we think its appropriate given borrowing rates.
And.
We'll we'll continue to assess the level of the dividend in <unk>.
And then obviously once you're through that the excess cash flow.
The best way, we found to deploy the excess cash flow was two <unk>.
Is to reduce the share float.
Yes.
That's super helpful.
On Europe can you remind us how you're set up now I mean, you guys have done a lot of good work contractually renegotiating some of this.
Wanted better understanding Howard you de risk as it relates to energy how do you kind of restructured where it's more of a pass through and when we think about lower energy prices. This year in Europe is that a good guide going forward and just lastly.
Claw back call it half of that.
The shortfall.
When do you expect to kind of fully recouped that is that a 2024 event or it's going to take a little more time.
Okay.
So hey, Phil So in terms of your last question in Europe , we expect to get back to the 2021 level by the end of 'twenty four.
Largely this is right sizing the contracts.
That required.
Energy recovery.
Within the contracts.
The lower prices that we're seeing now in energy Phil.
We've gone out and we've hedged a fair amount of the energy exposure that we had this year.
To eliminate any volatility so embedded in the numbers that we've given you.
It takes that into consideration. So if you think about the lower energy prices.
A potential upside.
Robley Navy.
Maybe on a minor level, but if you think about it by the time, we get into 'twenty four were right sizing the rest of the contracts that we could get that as a pass through so if it stayed at a lower level that would pass through to the customers, but allow us to get back to our income level that we that we like.
Really great color guys I appreciate it thank.
Thank you thanks Bill.
Thank you. The next question is from the line of Adam Samuelson of Goldman Sachs. Your line is now open.
Yes. Thank you good morning, everyone.
Hi, Good morning, I wanted to ask.
On transit and if you can just help us think about.
Some of the profit outlook and some of the key kind of year on year drivers for 2023, especially in the context of a of a weaker kind of macro kind of where the book to bill since entering the year kind of the magnitude and cadence of some of the restructuring savings and how those would.
With Marin.
Yes, sure. So I think as we described earlier.
From a volume perspective.
We will expect volumes to be down in the first half of the year and we expect volumes to recover in the second half of the year.
Largely.
The comps actually become easier in the third and fourth quarter from a volume perspective.
I think we're doing a real good job in the businesses to holding price or put a different way.
Recovering our costs.
Significant overhead reduction program that we announced and implemented.
In the second quarter last year, where.
We're looking to take out.
In excess of 600.
Hedged these our heads above the factory floor.
And I think through the end of December .
We're at least two thirds of the way through that process.
We recognized.
Fair amount of value.
Last year in that in the fourth quarter, and we're going to continue to accelerate the savings each month.
You thought about it it's.
It's $2 million to $3 million, a month of overhead savings at least you're going to have so.
The backlog.
Principally in our automation business.
That is equipment and tools, but automated packaging technologies.
<unk> is in about the $280 million range. So.
It's on the order of so.
So on the order of a full year's worth of equipment that we sell is the backlog and.
From time to time, we still struggle with supply chain for motors and circuit boards and things like that but the situation is beginning to ease.
And as we get as we get more supply from those guys or supply those integrated parts.
We can finish assembly and ship products. So.
Actually as we sit here today the outlook for that business is quite strong this year. Despite from an income perspective, despite what you might think about.
Softening industrial economy, we think that the.
The need for.
Backend automation.
Lowering cost with automation.
We think we're really well positioned in that business to benefit from.
And I guess along those lines.
I mean is there an actual expectation of the volumes recovering or is it purely easy comps that frame the kind of current current outlook no I think I think we are.
We think we think that as we get towards the fourth quarter not only the easier comps from the third and fourth quarter, but we start to see volumes start to reaccelerate in the fourth quarter.
Okay. That's all really helpful. I'll pass it on thank you. Thank you. Thank you.
Thank you. Your next question is from the line of Mike Rosslyn of Truth Securities. Your line is now open.
Thank you, Tim Kevin and Tom for taking all my questions.
Okay.
Tim I Wonder if you could just talk about the cadence of volume growth you expect in North America in 2023, obviously your confidence in terms of that.
10% volume growth, but just wondering if that's the case, particularly with your new capacity still beginning.
No that's a good question.
<unk>.
I'm hesitant to say anything but.
You guys.
Scratched the surface you guys scratch every everything so but.
As we said, we're five weeks in and things are really good.
And if I had it.
If I had to take a look at the month of January we.
We're up somewhere between 5% and 10% and we're going to bring a lot more capacity on.
Beginning this month with the second line and Martinsville.
And bowling Green is he is back up and running full steam ahead as compared to last year at this time when it was down from the tornado and.
And we bring mosquito beginning in the middle of the year. So you should expect.
Volume growth to accelerate second third quarter, but.
I'm not what we're trying to tell you is that we have volume growth right now as well, we're not waiting for all that capacity to come up with things or things are pretty good right now.
Okay.
Got it. Thank you for that and then just one quick follow up can you talk about what has changed internally regarding how you got your customers' growth forecast and their demand for cans and I realize you are close to your customers, but I'm just trying to get a sense of what's changed with your either your interaction your interactions with your customers. The diligence that gives you more and diligence what gives you more confidence regarding.
Their forecast now relative to the way that you did see historically.
So I think.
Okay.
I want to.
What I will say is we had a little blip, perhaps in our understanding of the market.
Last year as we headed into the summer months and into the third quarter I will tell you that.
The disappointing thing for Kevin and myself is that we had that blip because we are.
We're not apply at 30000 feet operation.
Kevin and I are in everybody's shorts everyday.
Somebody wants to ask me, what I do as a CEO and I told him I Chase people all day long.
So.
I think.
Part of the problem.
With the success that we had in North American beverage business over the last several years.
We kind of took it for granted that the customer's forecast were accurate and.
<unk>.
Perhaps that at some level, we we didn't realize the customers were concerned with supply chain and they were overestimating. So we're back to where.
We're back to square one chasing people all day long in.
Doubting people and that doesn't mean.
Doubting our customers that means staying on top of our team internally to make sure we.
We don't have that happen again so.
Understood. Good luck in the quarter and year. Thank you. Thank you.
Thank you. The next question is from the line of Gabe Haiti Wells Fargo. Your line is now open.
Tim Kevin Tom Good morning.
Okay.
Hi, I had a question about I guess.
And our capacity and just.
I know you won't speak to what you guys are running out, but just from an industry standpoint, it looks like we're sort of in the maybe the high Eighty's exiting 2022.
And I think obviously you guys had had renewed a lot of contracts domestically the industry has.
So.
Do you feel like your and where the industry is in a comfortable spot.
From a contract perspective, maybe until the middle of the decade.
Historically speaking high Eighty's Ninety's wasn't a great spot for the beverage can industry and perhaps things that changed to the extent that there are more sizes.
The size requirements, and maybe label changeovers and things like that just how youre thinking about optimal utilization rates for the for the industry.
Yes.
You bring up a good point different sizes.
The changeover to different sizes.
And the complication, sometimes it's running different sizes will reduce capacity from.
Manufacturers rated speeds to what is actually.
Actually achievable.
When you bring down the size and you bring back up another size.
I think that.
You are right to point out.
We would prefer utilization to be in the 92% to 95% range.
I would say that.
We're at least.
At that level.
Comment.
On the other manufacturers in the marketplace, but I will say that.
Much of the decline.
That we had last year.
More than all of the decline was related to imported cans.
So the domestic produced cans were actually up last year. So I don't know if I don't know if the industry is as low as you think it is right now and I think there's there's been some capacity realignment or the announcement of some capacity realignment.
By by one or two of the other manufacturers. So I think we are.
We're not in as bad a shape as in the industry as you think we are but.
We'd rather be 90% to 95% as you point out and.
Now the contracts.
A lot of.
I cant again, I can't comment on the competition, but so many of the contracts are out several years, we're not we're not in the near term too concerned with where the market is today, we'd be more concerned with where the market is a few years from now.
Okay. Thank you Tim.
And kind of segue to the next question a lot of those important cans. Some of them are decent chunk, maybe a third were coming from the middle East and so.
A logical part of me says to the extent they were able to find their way into North America.
Certainly maybe find their way into Europe , I think you guys are talking about low to mid single digit growth.
Heard from a competitor was mid to high single digit growth.
It's still a decent amount of capacity coming there is that a concern or something that you guys are.
Jason people down for as you look at the European market and then I think we didn't see an announcement of.
Second I guess Chinese sponsored plant over in Europe .
Any thoughts on that thank you.
Well anytime you you export cans or customers, where companies want to import gains there was a significant freight component to that.
They are not competitive to locally produced gains.
So somebody has to absorb freight cost.
Whether that's the customer <unk>.
The company that can company, that's importing to support their business. So.
We're not overly concerned with cans being imported in from the middle East and to Europe or the United States.
Unless customers want to pay that incremental freight costs and I don't think they want to do that.
The European market.
Listen it continues to grow.
Sure.
We don't happen to be.
Where the Chinese the new Chinese rumored Chinese plant is going we don't happen to be very large in that region. It is four eight.
It is for a specific customer.
In the near term, we do not we don't see that impacting US again I can't comment on how it may impact others, but we don't see that impacting us.
I appreciate the response.
Thank you.
Thank you. Our last question is from the line of Anthony Pettinari of Citi. Your line is now open.
Good morning.
I just had a question on specialty cans I think at the Investor Day, you had guided to a 25% specialty can mix in North America.
By the end of 'twenty, two so I'm, just wondering where you stand there now and where you think that could go once the announced capacity adds are completed and maybe just broadly if you've seen any sort of change in competitive intensity, specifically for specialty sizes, yes.
Yes, so I think.
I don't know if we're at 25 or 23, and a half of 'twenty, four but where in that range and I think the market will continue.
To demand more specialty cans as opposed to the standard 12 ounce can whether thats.
16 ounce cans or smaller portion sizes were sleek slim.
Slim 12 ounce cans versus the standard.
12 ounce can.
<unk>.
Okay.
All of the capacity, we're putting in.
As multiple or multi sized capability.
Taller can shorter cans fatter can skinny hurricanes.
So as the market.
Demands or requires different sizes, we are well positioned.
To support our customers with those sizes I would point out that.
And again.
Hope that somebody is looking at this.
While our specialty can mix might be slightly below some others in the marketplace I don't think our.
I don't think our margin profile is lower than there so.
I think we do a pretty good job managing the business the portfolio of customer business, we have in.
And running our industrial infrastructure.
To maximize income regardless of the size of the cans, we're making.
Great Great I appreciate that and that's very helpful. Just one maybe one quick one last one.
Kevin is there like a rule of thumb on EPS sensitivity to changes in.
In the euro and maybe interest rates.
Well on the euro.
A <unk> one move typically is eight point is it <unk> change in EPS.
On interest rate sensitivity.
I don't have that in front of me.
Yeah, why don't we circle back on that reflect on that and we'll try to give you a better feel for that in April .
You can go through the 10-K and look at our debt as to whether its fixed or floating and you can apply.
Rates to that but as Kevin said I don't think we have that with US right now so okay.
Thanks, I'll turn it over you are welcome.
So Nicole I think you said that was the last question I want to thank everybody for joining us that will conclude the call today and.
We will speak with you again in April thank you.
Thank you that concludes today's conference. Thank you for participating you may now disconnect.