Q1 2023 Crown Holdings Inc. Earnings Call
Global beverage can volumes were down two 5% to the prior year and.
We expect the business to continue to perform well with improvement expected year over year in each of the remaining three quarters of the year.
Despite the outperformance in the first quarter.
From Mizuho. Your line is now open great.
Not very big in beer, we do supply some beer, so I'm going to.
I think youre going to continue to see ready to drink.
I think we'll see sparkling water.
The slowness of the Chinese new year.
Hey, guys. Good morning, good morning, good morning, Yes.
Is struggling with food inflation.
Let's be clear the most important thing that we were looking to accomplish this year in Europe .
That they oversee <unk> scans among crowd on the other can suppliers.
It's largely dependent upon promotions right.
Which drive the consumer to stock up on cans.
They are reporting lower volumes and higher profits and that's a formula that works. So we understand that we understood. It as the year unfolded last year, we understood it better.
Thank you. The next question comes from the line of George Staphos from Bank of America. Your line is now open.
We had a.
The market the market in Brazil in Q1, and 22 was down like 25%. So it was an easy comp.
And we're more than just one business in one geography right we have.
A number of businesses, which we believe serve the company and the shareholders well in terms of balancing out.
As I said until we until we see some indication.
Of larger promotional activity in the North American market.
You.
Optimistic is as we said earlier optimistic is different and confident I am I am optimistic because it would be.
Very difficult to run a business if you weren't optimistic there too many good people in the organization working too hard and doing too many good things in.
Why haven't we raised guidance well because the year is not without risk.
Thats helpful in Brazil, and I think we are we have a pretty well balanced portfolio in Brazil, we have a variety of customers, we're not weighted towards one customer so.
<unk>.
Northern brings us back to North America, which is the one that you all care so much about and focus on so much.
What the fillers are going to do with promotions, we will know better in a few weeks.
Yes.
In the international market for 11, just wanted to make sure if that flushed out at this point of the year as well, yes, So I mean, obviously.
Well I said the market was down 25, I think we were down 20 last year up.
It seems like most of your customers are still pushing out a decent amount of price at least from what we can ascertain.
And the consumer is a little bit pressured, but I wasn't clear.
Brazil.
Interest rates are high and.
Our estimate for Brazil, as they are up they're up a couple percentage points for the full year, which means.
Mix of customers versus <unk>.
The market will be up a couple of percent, 2% to 3% and our view at this point, we should be up.
Listen I think most of the business in Brazil is under contract.
There is.
In our forecast as I said in the prepared remarks, we did adjust our.
We will lose some of them will pick some up as it relates specifically to that customer pluses and minus maybe we're a little bit on the minus side, but we still expect to be up more than the market for the year.
You're still on track for that apparently are you ahead of that pace, a little bit here to start the year.
Then could you give a little more specific on the volumes I think you've talked about.
Something to the effect of volumes were down commensurate with that.
I don't know if we said we probably.
We probably realized 10 or $12 million of the 60 last year, we will get.
Okay.
Let's say, we get another 40, this year and maybe theres a little bit fiber so spills into next year, but were.
We are well ahead of our target to get the full $60 million.
<unk>.
And that's gone exceptionally well and combined with that.
We went through a process.
So.
In Q1, I'd say, a third of that was due to pruning of customers and Skus and two thirds of that was market.
Thank you.
Thank you.
Thank you. The next question comes from the line of Anthony Pettinari from Citigroup. Your line is now open.
Hi, This is actually Brian Bird Meyer filling in for Anthony Thanks for taking the question.
Maybe just big picture it seems like.
Theme of this call is then your volumes a little bit worse than expected and you call out a customer issue in Brazil, maybe what are some of the better than expected items that have allowed you to reiterate the guide for.
For the full year is it.
Solely the <unk> is there maybe a little bit of upside to Europe . If you can just maybe.
Some of those big picture things that allow you to keep the guide yes, so Brian that's a good question.
No.
Whether in the prepared remarks are to this point in the call. If we havent made this clear I apologize but.
We are doing much better in Europe in transit not only in the first quarter, but our outlook for the full year for Europe and transit better than we initially anticipated when we put the budget together and communicated to you in February .
We've obviously adjusted as I said earlier, our sales forecast for Brazil.
And I.
On a bigger slowdown in Asia than we expected.
So there are offsets as well as.
We've made a little hedge in our.
And our internal guidance as it relates promotional activity here in North America. So.
But I would say the all of the negatives are.
If Kevin doesn't give us all COVID-19 will be talking to you again in July but Kevin is doing its best to try to kill us here I apologize for that.
All of that.
All of the three negatives that I described more than offset.
By the improved results that we see continuing in Europe and transit over the original forecast.
Got it. Thanks, that's really helpful and maybe just zooming in on Europe , a little bit you mentioned volumes have been firming up I think on the last call you said margins for 'twenty three could get back to half of the 21 level.
Is there a new target that we should have in mind is it maybe it's too early in the year to.
To to update that so no it's not too early and I knew somebody was going to bring this up.
So.
Why don't we why don't we say instead of halfway back why do we say 75% of the way back.
We're going to do a lot better in Europe than we initially anticipated.
The team did an exceptional job so again as I said earlier.
And.
Not to sound whatever it sounds like but the goal is to we've got to make money right. The goal is to make money and the only way to do that is to properly price. So I think the team did an excellent job.
Redoing the contracts.
And.
And it's important that they were redone or we're putting a lot of money into the system.
In the Europe and into the Americas to support our customers' growing needs in the future.
We need to make sure we are healthy enough to do that in the future and I think the team did an excellent job.
Got it thanks, Tim I'll turn it over stay safe. Thanks.
Brian .
Yes.
Thank you. The next question comes from the line of Mike Watson from <unk> Securities. Your line is now open.
Thank you Tim Kevin Tom.
I hope, you're all wearing masks appropriately.
Just one quick question for you.
You mind talking about the competitive landscape and have you seen any increased pricing actions, maybe discounting maybe some from.
Some of your larger private peers, particularly as their balance sheets have become increasingly stressed.
Well I think.
Youre, specifically talking about one competitor only.
Although you could consider the other one a private company as well, even though the public.
I think.
The one for one company is used to operating with leverage.
The other one the more private one that youre alluding to.
Is used to operating with far less leverage and have communicated that they want to get their leverage down.
So many as we said to you.
In February I believe we said to you in February so many of the contract. So much of the business is under contract for the next several years, we don't see.
Large.
Pricing risk.
Over the next couple of years.
Albeit.
The marginal businesses is obviously going to become more competitive.
As the market is a little bit slower than it was two years ago. So.
We'll just see where that takes us.
Got you in.
Any way to quantify like when you say module that will become more competitive how much of your book roughly is that marginal business I would just say broadly rough percentage just to get a sense of if so much as 85%, 90% under contract in 10% qualify as margin a little bit that become that could become more competitive.
Yes, I think.
That's not too.
Without getting too specific that's not too unreasonable.
Okay.
Got you I appreciate that and just one quick question follow up on the bankruptcy issue in Brazil.
Can you provide some more color on that customer and what gives you the confidence that you should be able to recoup most of their receivables that you have outstanding with them.
So we have registered collateral and one of their large new breweries.
Land and building.
Yes.
Sure.
So I don't.
I don't really want to talk about.
What the customer is going to do be they haven't filed their plan yet but.
A variety of things can happen when they file their plan there.
They can try to run the business as it is going concern and they can sell one or two breweries that can sell the whole company. There there's a variety of things they can do.
We believe that large new brewery.
Where we have collateral as a brewery that they or somebody else would be more than happy to run and make berens. So.
Our hope is.
That they remain.
An independent going concern and.
And we have a broader.
Customer base that we continue to supply in the market, we'll see where it goes but.
I think from a collateral standpoint, as I said, we have comfort, where we sit right now.
Got it thanks, very much and good luck in the balance of the year. Thank you.
Thank you. The next question comes from the line of Angel Castillo from Morgan Stanley . Your line is now open.
Alright, Thanks for taking my question. So just wanted to follow up on the strength that youre seeing in transit in particular, you updated on what Youre seeing now in Europe .
Maybe it has an impact on your outlook for <unk> I think you had talked about mid to high single digit improvement year over year in terms of earnings could you just update us on what that kind of looks like based on the strength that youre seeing.
Okay, great. Thank you.
Youre talking about transit in total or specific to Europe .
Our transit in total I'm, sorry, Okay, I am sorry.
The only I was going to say is Europe is a smaller part of the business but.
I think.
Currently what we're seeing is commodity volumes.
A little softer.
I think we still expect commodity volumes.
To pick up off of easier comps when we get to Q3 and Q4.
Equipment volumes.
Currently pretty.
Pretty strong the order book is still really healthy more than one year sales in the backlog.
<unk> tools are a little soft right now, but we expect that to pick up so that's the volume.
Picture I think the the.
The more important thing is we.
We are well ahead of plan as I've said earlier on the cost out and.
And from a.
Material margin standpoint, we're managing very well.
Raw material inputs and pricing.
To the customer and.
So the business.
Im glad you brought it up because the business.
Largely described by by many as cyclical.
Some of the end markets. It supplies are no doubt cyclical. This business is so diverse it's remarkably stable.
And with the exception of the Covid year in 2020, if you adjust for currency with almost no capital invested each year. This business has been remarkably stable since we acquired it and this year, we will we'll do quite well my sense is that.
If you if you adjust for currency and the divestiture of the business.
Although we had last year that by the end of this year were up 10% over what the income was two years ago. So it's a.
That's adjusted for currency. So obviously currency has an impact but I think.
The business is stable and the cash flows that it generates are remarkable for the level of capital required to be invested so it's a it is a contributor to the company.
Contributors to Delevering, a contributor to return them.
Cash to shareholders. So I think we are really positive and where the business sits today, we've got a new management team since last year in the third quarter.
Lot of changes and I think there's even more more improvement that we can make in the business.
That's very helpful. Thank you and then I just wanted to touch on.
Application given the amount of uncertainty and how much maybe hinges on what happens in the second half I recognize there's maybe some limitations as to what you can say, but.
I think.
In the past you've talked about resin and perhaps returning to returning cash to shareholders. Once you get into that three to three five kind of net leverage range.
The uncertainty would you want to be more solidly kind of at the lower end of that or.
Once we reached $8 five turns should we anticipate that free cash flow will start to flow through to buyback.
Interconnect our shareholders. How are you kind of thinking about that from a risk standpoint.
I think that.
I think given where the financing markets are generally.
And that.
That means.
The rate at what it's going to cost us to refinance coupled with.
An incredible number of issuers that have to refinance over the next couple of years that.
We'd be well served to be towards the lower end of that range that we've discussed previously discussed so.
I think Kevin May have said in his.
The prepared remarks that we're going to apply.
Cash generated this year of Delevering and we'll pick up next year and see where we go we do have we do have a bond that comes due in September of 'twenty, four having said that we can meet that with internal cash flow but.
We need to think about.
The refinancing towers that we and others have over the next couple of years and it would be prudent to be at the lower end of that range now.
That's one answer or the other the other answer is that based on where.
Interest rates are today.
Yes.
The accretion dilution analysis is much closer on paying down debt versus buying back stock than it has been in the past when rates were well below historical norms.
Okay helpful. Thank you.
Yes.
Thank you. The next question comes from the line of Kyle.
White from Deutsche Bank. Your line is now open.
Thank you and good morning, Thanks for taking the question I think last quarter in the beverage can business you were cycling through some lower cost absorption.
Some of the regions, giving planned inventory reductions I think it was mostly in Europe and Asia Pacific is this behind you or do you have inventory levels now where you would like.
Well I think with the exception of Asia, where.
We're where we'd like to be.
As we described earlier Asia came out of Chinese new year, the customers came out with far too much feel good inventory and we still have a little bit too much inventory in Asia.
We're working aggressively to bring down so there.
There will be some absorption shortfall in Q2, it's why I earlier said that.
Yeah.
Asia, we expect to be more or less well I don't want to stay on top of but more or less close to last year in total for the year, but weighted towards the back half of the year.
Got it that makes sense and then in North America, just how is the ramp up of Martinsville going.
And then as well.
The startup for the Nevada plant.
And more importantly, how should we think about absorption cost.
After those plants are fully ramped do you have the volume throughput for these plans and your overall network, where do you need to see some underlying market growth in the United States, it's fully absorb it.
So we are we had an excellent startup and Martinsville I would I would say with.
With the exception of the startups, we've had in Brazil. Historically this might have been one of the better startups we've ever had.
And mesquite is still on schedule to start up.
Line one in July so.
And we need mosquito startup well because we have a.
Fairly large customer commitment in the southwest.
But we would prefer not to be.
Freighting cans, all over gods Green Earth to get them, there so that'll be quite helpful.
<unk>.
We do have.
Others do a little slack in the system right now and so as we always do we balance.
Where we make cans based on the cost per thousand and where the customers need cans, but.
As I said in the prepared remarks, we are well positioned to support our customers' needs and that's the number one goal to support our customers' needs I would say that.
Over the last several years.
We were running far too tight.
And.
Far too exposed to.
To any one problem in the system that could have happened that would have would.
Would have caused us to not meet a customer requirement.
We have the luxury right now of.
Having a little bit of slack as perhaps some others do but.
The number one goal is to make sure we're prepared to satisfy and serve the customer through the summer months and I think we're there.
Got it thank you I'll turn it over.
Thank you.
Thank you. The next question comes from the line of Ireland Viswanathan from RBC capital markets. Your line is now open.
Great. Thanks for taking my question.
I guess first question is just on on volumes when you think about you.
You know, what I'm, saying being.
Maybe up 10% this year in a flat market.
When you look out I guess in the beverage can markets in general.
Do you now view them back to our historical level say, 1% to 3% growth or is it two to four.
And considering it would be maybe two to four do you expect that your volumes in 'twenty four would be kind of within that range or would you be down just given that the tough 10% comp that you face in 2004.
So starting with the premise that the market is flat this year and were up 10.
I think we will also be up if the market I do agree with you that we're going to return to.
I've been.
More saying this and then everybody else for the last couple of years.
Eventually we're going to go back to history right. So I think.
We'd be quite happy.
With a 120 billion can market if it grew 1% to 3% every year. That's the that's the business. We're used to we know how to run a business like that we know how to keep our costs down to drive more value in a business like that and it while it doesn't require it while it's not exceptional growth that doesn't require any capital we generate a lot of cash we pay down debt and return it to shareholders.
It's an old tried and true model that works real well so were.
We're okay with that.
I think that.
Using your numbers.
We returned to a 1% to 3% growth market in 'twenty. Four we will also be up more than that in 'twenty four because of the mesquite plant and some of the new business, we have in the southwest.
I'll leave it at that because I don't really know.
Where we're going to end this year, what promotions are going to look like this year and then what our customers might say about depending on how this year ends what they might say about what their promotional intentions are for 2024.
Okay. Thanks.
Also another longer term question on free cash flow then so assuming that you were in a kind of more modest growth environment, one to three going forward.
What does your capex kind of revert to normalized does the 900 come down to say 700 and then.
Already said in February and we reiterated it today that.
That we believe Capex next year is $500 million.
And in a market with.
123% in North America, and maybe the same in Europe , we have a platform.
That we believe is.
Sufficient right now to support their growing and diverse needs over the next couple of years, the only growth capital we would see in the system would be some smaller expansion projects in Asia, if theyre warranted, so $500 million would be next year's number.
As we sit here today I would I would expect 500 million way too early to give you a number for 2025, but it is hard to understand how it would be more than that in 2025.
Sure, but just to clarify that that would imply that free cash flow is closer to a $900 million.
And plus as you move forward is that right.
All else being equal yes.
Perfect all else being equal.
The one thing that we have $100 million of.
Inflow in this year's number from.
Working capital.
Clearly, that's not something we'll get out of the year.
Numbers not far off.
Got it thank you.
Thank you.
Thank you. The next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is now open.
Yes. Thank you good morning.
And I wanted maybe it was a.
A follow up on that last question on market growth I think previously you talked about a potential for a mid single digit global market growth this year.
It sounds like you might be.
<unk> kind of lower on that at this juncture, but could you help just frame kind of how you think about the global market.
At this point.
Yes, I think that.
Given the challenges we see in and.
And one of the specific Asian markets Cambodia.
In Asia getting off to a much slower start than we had initially anticipated.
Probably.
Bring our overall growth EBIT, even if we hit.
Let's say the U S market is flat and we're up to 10%, even if we had 10% in North America, we're going to be closer.
So flat to 2% for the full year based on some of the slowness we've seen.
Starting in Asia.
And even the early slowness in Europe , that's correct.
Okay.
That's helpful. And then maybe just following up on transit.
Obviously, a strong start to the year and in cost driven kind of offsetting some of the some of the volume and market issues that you talked about.
How do we think about.
As you get through some of these are kind of more significant cost actions in the last year the system. This year.
Backlog on.
And the equipment side.
Visibility to volumes kind of returning to growth in 'twenty four or just what are you seeing in the forward leading indicators in that business don't think about the growth trajectory is where some of the more significant cost actions aren't as big of a tailwind again, yes.
So as I said earlier the business is far more diverse.
Most people understand it's not as cyclical as people want to discuss the end markets might be but the business is not.
But I think we will have a cost structure.
Now that I think we've got some proper management manufacturing management techniques into the business, we've got our cost structure.
Exceptionally competitive.
And.
As the economy, the economy is going to make the turn at some point whether thats.
Early 'twenty four or mid 'twenty four.
I'm not an economist but.
Our business exceptionally well positioned to benefit from the economic turn.
And I think that one of the.
One of the benefits, we're seeing in that business right now is with things slowing down a little.
Some of the supply chain issues that we've struggled with in the equipment business over the last couple of years are starting to ease.
Which is allowing us to do a couple of things, obviously complete orders and get them out the door.
But reassess our own supply chain.
To further protect ourselves from stresses in the future so.
As I said earlier were.
For our business, where we invest money, we're exceptionally positive on the outlook for the business.
Okay I appreciate that color I'll pass it on thank you. Thank.
Thank you.
Thank you. The next question comes from the line of Jeff Zekauskas from Jpmorgan. Your line is now open.
Thanks very much.
Your accounts payable dropped $450 million sequentially.
Which is unusual for the first quarter.
What's behind that.
And.
Are your payables and accrued liabilities.
Higher by the end of the year year over year or lower can you talk about that line.
So two things behind that.
One of which is the cost of raw materials are obviously lower.
Right now than they were last year, so as we're bringing materials into <unk>.
Preparing inventories for the season, they they cost less and therefore, the payable is less.
And then the other thing.
We've been working real hard.
To bring bring inventory levels down so we're not ordering as much.
As we would have ordered last year were far more cautious.
On the outlook and what our customers are telling us.
For the outlook than we were at this time last year so the cost.
And the actual level of inventories therefore, the the purchases, we're making far lower.
Then we would've been making at this point last year.
The value of inventory and the level of inventory, even lower trying to drive it lower than where we finished the year at the end of December so by the time, we get through the end of this year some of that will be depend on.
Pricing in the market for raw materials as well as our outlook.
Four.
For 2024, specifically Chinese new year.
Throughout Asia and Carnival in Brazil, as those markets are more weighted towards.
The winter our winter months and then the two.
Typical northern hemisphere markets.
So what I should take away from your comments is that that's a representative number for the year, maybe it's a little bit higher maybe its a little bit lower but given where raw materials are okay.
That's where you are.
Payables and liabilities are running.
Yes.
Tick up a little bit we're trying to drive inventory values down to take risk out of our system.
We and others carried far too much risk.
The third and fourth quarters last year as sales sales did not materialize.
We're very focused on not carrying that risk any more in the future. So we're going to be a little bit more cautious as to how much we carry.
Great. Thank you so much.
<unk>.
Thank you. The next question comes from the line of Cleveland Records from UBS. Your line is now open.
Hey, good morning, Thanks for getting me in here at the end of the call I appreciate it.
I just have two questions I'll ask them separately, because they're not really related but you know just to start off I want to be a little bit more direct about the guidance and all of the discussion that we've had around promotional activity.
If that promotional activity does not materialize as the guidance range is still achievable.
The range is achievable, that's why I mean, it's a pretty wide range I think if you.
The top end and the bottom end theres, probably like $70 million of swinging there and.
And as I said earlier.
Even with.
No.
Optimistic as opposed to extremely confident and promotional activity, even with with that with the outperformance against our original target in Europe in transit.
It will more than offset some of the internal caution we've placed against.
What we see is perhaps less were delayed promotional activity from where we would've liked to have seen at the beginning of the year. So the range is the range is achievable.
Thanks for that I, just wanted to make sure that was the that was clear I mean, I sort of got some tidbits of conservatism, but it's pretty clear that promotional activity would represent upside to the plan for the balance of the year.
Well it would it would resent it may.
It would yes, it would represent the high end of the range, maybe it takes a little higher than the high end of the range, but let's just stay within the range. Yeah. Okay. Alright, that's that's clear I just wanted to be a little bit more.
Direct and explicit about it.
And then just looking at a little bit longer term and this is a question that's come up with some of our conversations with the industry and investors over the past couple of weeks and I'm just wondering bigger picture.
Whether you're seeing your customers filling capacity investments keeping pace with that 30% capacity increase that you were talking about over the last three to four years or whether some of the investment that's required to absorb that capacity is being delayed.
Such that were.
Not on purpose necessarily but it's just fading at feeding your investment a little bit such that you would have a longer tail of growth to absorb some of the you know some of the slack in the system that you're experiencing.
I don't want to speak too much towards our customers but.
Our customers have more than enough capacity installed.
To meet.
Let's just say that the north American beverage can market has about 130 or 100, whatever the number is somewhere between 130 to 135 billion cans of capacity, maybe its 128 or something our customers have more than enough.
Can filling capacity installed in their plants.
Absorb that they are.
The can companies run 24, 7%.
Most of our customers do not run 24, seven and they run five two.
Listen if they had a dial up more ships they could dial up more ships to feel more product thats not the issue.
Okay. All right. So it's really a more of a market question anything structural or you know investment yes.
Got it thank you very much appreciate it.
Welcome. Thank you.
Marshall do you have any more questions or is that it.
And that's all further questions speakers today will proceed.
Thank you Marcia.
That will conclude the call today. Thanks.
Thank you everybody for joining us.
We'll talk to you again in July thank you.
Thank you that concludes today's conference. Thank you for participating you may now disconnect.