Q2 2023 Crown Holdings Inc Earnings Call
Thank you you're poised to anywhere to conference will begin shortly until such time, you'll hear music. Thank you and please continue to standby.
[music].
Good morning, and welcome to Crown Holdings' second quarter 2023 conference call. Your lines will be placed on a listen only mode until the Q&A session of today's call.
And please be advised that this call is being recorded I would now like to turn the call over to your host.
Mr. Kevin <unk>, Senior Vice President and Chief Financial Officer, Sir you may begin.
Thank you Jackie and good morning, everyone.
With me today 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 <unk> Dot com.
On this call as in the earnings release, we will be making a number of forward looking statements.
Actual results could vary materially from such statements additional information concerning factors that could cause the actual results to vary.
Contained in the press release and in our SEC filings, including in our Form 10-K for 2022 and subsequent filings.
Second quarter diluted earnings were $1 31, a share compared to $2.43 in the prior year.
Second quarter, which included <unk> 60 per share net.
From the sale of our TV business adjusted earnings per share were $1 68 per share in the quarter compared to $2 10 and 2022.
Net sales in the quarter were down 11% from the prior year, reflecting higher sales unit volumes in Americas beverage.
Shift by the pass through of approximately $300 million of lower raw material costs.
Lower unit volumes in most other businesses and $25 million from the impact of the stronger U S. Dollar.
Segment income at $414 million in the quarter compared to $432 million in the prior year and reflects the benefit from contractual recovery of prior year inflation every cost increases in European beverage and cost reduction initiatives and transit packaging offset by look lower.
<unk> overall net volumes.
Operating cash flow was $293 million for the six months of <unk> 23, compared to $196 million in the prior year.
The operating cash flow at this point in the year was the highest in the last 10 years.
The approximate $100 million improvement.
And operating cash flow reflects our efforts to reduce elevated inventory levels from year end.
The results in the second quarter were as expected.
We expect third quarter adjusted EPS to be in the range of $1 70 to $1 80 per share.
We expect full year EBITDA to grow between eight and 12%.
We expect full year adjusted EPS to be in the range of $6 10 to $6 30 per share with higher transactional foreign exchange expense and lower equity earnings to be in the difference from our previous guidance.
Our full year adjusted earnings include the following which is in line with our previous guidance.
Net interest expense of $400 million in 2023 compared to $270 million in 2022.
A 40.
Of incremental noncash pension and postretirement costs.
Average common shares outstanding to be approximately $120 million.
And the full year tax rate to be between 24% 25%.
Depreciation of approximately $345 million compared to $301 million in 2022.
Noncontrolling interest.
<unk> to be approximately $135 million and dividends to noncontrolling interests of approximately $120 million.
Free cash flow is projected to be 500 million with capital spending of $900 million.
We expect the majority of our free cash flow.
To go to debt reduction until we get within our targeted leverage ratio range of three.
Three to three five times Levered with that I'll turn the call over to Tim.
Kevin Thank you and good morning to everyone.
Trends were similar to the first quarter. So our prepared remarks will be limited.
Before we open the call to questions as reflected in last night's earnings release, and as Kevin Just summarize second quarter performance was in line with expectations.
As beverage in the Americas, and Europe , and transit packaging continued to perform well.
Offsetting below the line foreign exchange losses, and lower equity earnings.
Kevin also briefly noted our efforts to reduce raw and finished beverage inventories from yearend levels. The initial results of which are evident on the cash flow statement.
And as important inventory carrying risk that we experienced in the second half of 2022 has been mitigated this year.
In Americas beverage unit volume growth was one 5% in the quarter with North America up two 5% and Latin America flat versus the prior year.
After a weak April promotional activity in North America accelerated in May and June and we remain optimistic about the prospects for improved volumes in the back half of the year.
And while still early very early in the third quarter volumes to date in July are also strong versus the prior year.
Based on customer commentary, we estimate that the north American market was down in the 3% to 5% range for both the second quarter and for the six month period.
Accordingly, we revised the volume growth assumption for the full year to approximately 7% given.
Given the market decline in the first half.
Income performance was strong in the quarter with volume growth in the April 1st PPI increases almost fully offsetting bowling green insurance recoveries of $20 million in the 2022 second quarter and the impact of lower activity levels designed to bring down inventory levels.
Construction on the Mosquito, Nevada facility is nearing completion with commercial startup scheduled for late August .
Unit volumes in European beverage declined 5% in the second quarter.
With weakness in Greece, Italy, and Spain, offsetting growth in France, Turkey, and the U K.
Importantly, we have made significant progress in restoring investment justifying margins to this segment, which you will continue to see in the second half performance. The construction of the Peterborough plant in the U K is nearing completion with commercial shipments expected in August and October from lines, one and two respectively.
Similar to the first quarter beverage can volumes in Asia Pacific declined double digits, we did see recovery in Cambodia, Vietnam remains soft the cumulative effects of inflation combined with slowing economies are contributing to lower consumption across southeast Asia.
We do expect second half income performance to improve over the prior year, albeit against easy comps and be weighted more towards the fourth quarter.
Transit packaging had another solid quarter with income up 20% over the prior year with margins improving across all product lines as reductions to overheads and Skus combined with price cost management have more than offset the impact of lower volumes.
With 2023 income performance expected to be the highest ever the business is well positioned to deliver even more as industrial activity improves in future years.
In summary performance in the second quarter was on plan a solid first half with improvement expected in most businesses in the second half leading to a significant year over year improvement in segment income and EBITDA in the third and fourth quarters.
Turning to the balance sheet at the mid point of the year Leverages just under four times.
With improved EBITDA expected in the second half again against easy year over year comps, we expect to close 2023 leverage well within our stated range of three to three and a half times.
And just before we open the call we ask that you limit yourselves to two questions. So that as many of you as possible we will have an opportunity.
And with that Jackie we are now ready to take questions. Please.
Thank you.
Now begin the question and answer session for participants if you would like to ask a question. Please press star followed by the number one. Please go with your phone and record your name slowly and clearly when prompted your name is required to introduce your question to cancel their requests you May Press Star then the number two our first question is from George Staphos of Bank of America. Your line is.
Open.
Yes, hi, good morning. This is actually cash im sitting in for George We had conflicting calls. This morning. So firstly I guess why do you expect volumes to ultimately recover here and I guess what are your customers, telling you right now and Relatedly is there anything or an underlying trend that worries them or view about the longer term volume outlook.
From here.
Sure.
What region or are you just asking the question about and then I'll answer. The question I guess you are talking about North America.
Yes, I guess I, just North America would be helpful. Yeah, Yeah, well I mean, youre, saying one is volume going to recover I think.
For US we were up two 5%, but the market was down.
Listen I think the.
April was exceptionally weak.
We were down high single digits in April we were up high single digits in May and June were up high single digits already in July so.
I think the trend here, we have three solid months in a row.
I think we're going to continue to see.
High single digits for the balance of the year.
I think as we've described previously the market.
The customers have a new model right now the model is.
They're going to drive value for their constituents with price over volume.
And.
It seems to be working for them.
We don't control how they manage their business, nor should we really tell them how to manage their business with.
They're all doing quite well.
Listen, we can't complain, where we're up and we're going to continue to be up even more in the back half of the year.
Right.
Im not sure its a.
I'm not sure being down 3% to 5% is the new normal in the business I think that.
I think youre going to see a flatter overall market in the second half of the year and as I said will be up.
Got it.
Thank you for that.
Secondly, could your view just drop.
What your profit target is.
There for this year and for 'twenty for you guys still on track to get back to 2021 levels.
But by the end of 'twenty four.
Yeah. So.
We said last year and.
And as we said.
A few calls ago, we felt we'd be 50% of the way back to 2020 for this year I think what we said on the last calls would be 75% of the way back.
This year.
If you were to look at six months to date here in June 2023 is probably very close to 2021 levels through six months, even with currency.
A touch weaker than where we were a couple of years ago. So we're we're well on our way back to 2021 levels.
This year. So I think the trend is in the performance to date.
And we feel really good about the second half of the year were.
We're not we're not coming off of that estimate we're going to be.
Well on our way back this year at least 75% in.
And.
Really as we sit here today, it's pretty early but were pretty confident in getting all the way back if not even more next year.
Alright. Thanks.
<unk>.
Thank you. Our next question is from Christopher Parkinson of Mizuho. Your line is open.
Can you just dissect the second half North America, specifically the U S volume growth outlook as well just in terms of what Youre thinking about how your outlook changes with promotional activity in CSD no promotional activity in CSD as well as the momentum, which I believe youre benefiting from on the energy platform.
Drink platform as well as some pretty lucrative ready to drink ramps. So just any color on how the market should be thinking about.
Your growth target would be very very helpful. Thank you so much.
Yes.
I think we are.
The first quarter.
It was a little lighter than we expected, although we didn't have big numbers in the first quarter April was a big disappointment as I mentioned.
And as I've said May and June really really quite strong in July .
We're only 20 days into it but July also strong to date.
We're looking at the back half of the year.
Especially with the new capacity coming up back half of the year.
Roughly 10% higher than the back half of last year, which if you recall the back half of last year was also not very strong so.
So again, we've mentioned against easy comps a few times here.
So that'll be one reason, but I think the business.
Well positioned.
I think we are starting to see.
More promotional activity, specifically around carbonated soft drinks.
<unk> energy drinks.
Some of the other.
I don't want to call them, nutraceuticals, but enhanced enhanced waters.
Obviously growing rapidly, but much smaller basis basically is the only the only way you get these volume numbers as is.
As through carbonated soft drinks.
Alcohol to a lesser extent for us because we're not big in alcohol in the United States and then.
And then sparkling water. So we are starting to see those promotions.
Perhaps a bit more limited than we'd like to see but they are making they are making promotions at this point.
Okay.
Got it and just for my second question shifting down hemispheres could you talk a little bit more about the Brazilian market I mean, presumably there's going be some easier comps, but at the same time. It still seems like the market is challenging and there are other dynamics customer dynamics, which you mentioned on your last call.
Glass recycling trends so on and so forth can you just give us the kind of updated thought process on that market. How you see it evolving in the second half and probably more importantly, your view of it all falls in the intermediate to long term as we head into 'twenty four and onwards. Thank you.
Youre welcome listen I think we've said before we.
We and others view, the Brazilian market very favorably.
Over a medium and long term.
We're not going to get overly excited about <unk>.
Volume performance in a market and any one three or six month period I think if you start looking at.
Periods of time, and whether you want to describe those periods of time of three to five years any three to five year period, you you lop off and compare youre going to see significant growth in that market.
Obviously the market is much larger today than it was in the past so perhaps the growth percentages.
Or not as large but the volume growth.
Still still as large or larger and remains significant for a beverage can business.
In the context of.
When you need to.
Have capacity to deliver growth of one or 2 billion units to the market how many lines it takes and how much equipment. It takes so.
I do think again.
The back half of the year.
Comps are a little easier in Brazil, as we look at the back half of this year.
Compared to last year, but.
No I don't think Theres anything we're seeing I think.
Brazil was up a little bit in the second quarter, we were up tremendously in the first quarter, although the first quarter of 'twenty. Two again was very weak, but up tremendously in the first quarter.
Up a little bit about three.
Three quarters of a percent here in the second quarter and I think we're expecting a.
A fairly strong performance in Q4 as they go into their carnival season, So I think the.
Customer situation, we described in Q1 the.
The customer is in the bankruptcy process.
For one of a better term the work Theyre workout process.
They are pulling cans they are delivering cans there volumes are fairly strong right now.
They are paying for those cans in a relatively short period of time.
And I don't think they've seeded any market share in the near term. So we're very positive on Brazil right now.
Helpful color. Thank you. Thank you.
Thank you once again for participants if you would like to ask a question. Please press star followed by the number one. Our next question is from Mike <unk> of Barclays. Your line is open.
Great. Thanks, Good morning, guys.
First question on transit packaging I think this is one of the best earnings quarter since you've acquired the business and I assume demand isn't that great. So I assume it's mostly cost. So can you just give us some sort of thoughts around what you think this business is earnings potential is now or just kind of how much operating leverage you should have some volume.
Not much improvement.
That's a good question.
Listen I think if we look at volume.
In the second quarter, probably down on the order of.
12, or 13% you've got to understand that the business is very diverse.
So some of the commodity lines might be down 15% tooling was flattish in the quarter and tooling you make more money and tooling that you're making the commodity lines, but.
And as I said in the first quarter to think about a third of that.
Volume decline being us.
Walking away from customers <unk>, Skus, which we're not very profitable in fact.
The business, we walked away from it had no impact on profitability. So we simplified the business.
And done some other things around the cost structure by walking away from.
Unprofitable lines.
And as you rightly point out.
Profit profit growth in the quarter and year to date.
And as expected for the balance of the year largely around cost, but also around good price cost management.
On how we are recovering.
Index Hot rolled cold rolled steel and also paper so.
The team doing a very good job now with respect to the future.
What is the leverage of the business as industrial activity returns we.
I'm not going to sit here and make a prediction, but I do think.
The cost structure of the business.
And the way the new management team is managing the business.
It gives us far greater confidence the confidence that we do have that leverage.
And if we were to think about.
5% or 10% volume growth with industrial activity returning.
There is no reason to believe that that doesn't all fall to the bottom line, but I'm not I'm not prepared.
To step out and give you a.
A huge number at this point that's just.
I don't think that would be appropriate right now, but but we agree with you there is leveraging the business as you look forward.
Fair enough and then secondly, Tim just in the release you talk about using increased cash flow next year to pay down some debt and return that shareholders could you maybe just give us a bit more of your updated thoughts on where you think leverage this year and just where you still want to get too into it.
Next year.
So I think we will as I said, we will be well within the range. If you want us a much closer number I would say.
Depending on where the euro finishes the year in that because we do have euro debt and that translates.
The debt a little bit think about we'll end this year about three to three and a quarter times I think that's pretty we feel pretty safe in saying that as we sit here today.
We've always described our our range is $3 to $3 five.
We've said it over the last couple of calls just given where the financing markets are and the cost of debt.
We probably would feel more comfortable.
And we've heard from some of our larger shareholders, who would also feel more comfortable if we were at the lower end of that range or even slightly below the lower end of our range.
Before we begin to return.
Cash excess cash to shareholders.
Now having said that.
Next year.
Capital expenditures no doubt will be far lower than they are this year in free cash flow should be higher than.
So we should be able to achieve both of those that is bringing the leverage down to three or even slightly below three <unk>.
In contemplating returning the excess to shareholders at that point.
But as I said on the last call just given where we.
We're borrowing rates are today.
The differential.
In value accretion to shareholders between paying down debt and buying back stock as far narrower today than it has been over the last several years.
Makes sense. Thank you. Thank you.
Yes.
Okay.
Jackie do we have any more questions.
If we lost the operator Tom.
Give us a moment, we will see if we can find the operator for you.
Hello Hello.
Yes.
Our next question is from Michael Roxanne from choice Securities.
Your line is open.
Thank you Tim Kevin Tom for taking my questions.
Last call you said, you expect to see some type of recovery in Vietnam.
As well I guess, what's been driving the persistent weakness there.
Well I think the economy has slowed tremendously there I think.
Let's say you had estimated GDP or where PD, let me say it this way if GDP over the last several years has been.
Between seven and 10% in the rest of it this year was for six or 7%. They are probably now estimating GDP in Vietnam.
Closer to 1%.
<unk>.
A very stretched consumer.
The introduction of some very strict drunk driving laws.
And.
So I think our customers are trying to understand how they're going to deal with some of the changing dynamics in that marketplace. It will come back it's just.
They've got some.
Excess inventory that.
Still excess field inventory that they carried over from Chinese new year.
Didn't get fully absorbed in the February March timeframe, and Theyre working through it but again, it's a it's.
It's a big market, it's a growing market.
And as I've said, when we talk about Brazil, we don't.
We don't tend to get overly excited about.
Investments, we make in a market that we think has great future potential.
When when there are <unk>.
Volume disruptions in any three or six month period.
Got it and then just quickly I think.
Lastly, you also mentioned Youre seeing some customers defer or trying to repurchase a can is closer to the summer demand to better manage their working capital and to try to minimize their own interest costs.
Has there been any improvement on that and if that was referencing obviously I think you.
Okay.
There have been any improvement in that.
So.
So I think the reference there was Europe specifically.
Or Europe in general the U K, specifically youre right.
A little bit of improvement in the UK, but.
I think what I would say is that we.
<unk> been exceptionally focused on improving margins.
In that region, and we are not chasing volume at lower margins.
That's probably how I should say it and leave it at that.
Got it thanks very much thank you.
Thank you. Our next question is from Ken Sham Punjabi of Baird. Your line is open.
Good morning, everyone. Thank you operator.
Ghansham.
Good morning, Tim could you, perhaps going back to the promotional question in North America, just sort of frame the level of activity Youre seeing now versus maybe last year and what's typical.
Given the warmer months et cetera relative to history, just trying to get a sense as to how sensitive your earnings outlook for the back half of the year would be the expectation that promotional activity would be higher.
What's the best way for us to think about that.
And that's a good question, let me let me I'll answer the last part of that question last because I'm going to try to think while I'm talking which is always dangerous.
As we've described before and Ghansham you know this very well.
You've covered the industry for a very long time.
Promotional activity.
And specifically in carbonated soft drinks.
Over the last 20 years centered on the.
Let's call it the March to August September timeframe.
Discounting ranging from 12 facts being offered at four for $10 or 5% for $10.
So last year, they almost didn't promote at all and they were charging $9 for a 12 pack and.
Third third and fourth quarter last year, almost no promotions whatsoever.
This year the promotions were seeing are.
Buy one get one on some of the sparkling water brands. So.
Think about sparkling water being offered at $6 12 packs, so youre getting.
Two six which is like a $3 12 pack that's not awful.
On the carbonated soft drinks that are still.
Non discounted pricing is still running.
One 879% to $9 29 to 12 pack, depending on where you are in there.
We're now offering buy two get one free so thats when it comes out to about six Bucks a 12 pack, so certainly higher than than what we've seen historically.
How much volume will they drive with that they're going to drive more volume without even if they don't discount.
But that may be their new model, new model might be that their input costs have been elevated.
They're not prepared.
To sell product.
Our value in and their hope is probably that the consumer is going to get used to this.
And then the consumer will get used to paying $6 12 pack as opposed to $2 50, 412 pack as they have in the past and ultimately volume will return at these higher price points and so we have to be prepared.
As well within our system to deal with that I think that.
We have seen a lot more consumer activity.
Over the last several months and we can see that from the amount of cans.
But our customers are taking but.
And so.
As I said April was really weak.
May was mid single digits June was high single digits July as I said to date high single digits.
So we are seeing some activity and we're in we're seeing.
Customers pull cans.
To the point of.
How sensitive our earnings in the back half of the year.
If volume doesn't materialize, if I had to put a band on it.
Well, Kevin gave you the.
The range for EBITDA, 8% to 12%.
I think we're comfortably in that range right now with our forecast I think if the volume did not materialize we'd be at the lower end of that range is probably the easiest way to say that and that's a.
Pretty big number maybe its too big of a number to come down but still within the range.
Okay perfect. That's helpful and then if we switch to Europe .
There is a kind of indications that European consumer spending is as weakened sequentially and so on this year.
This year in particular.
What's the backdrop in terms of how your customers are responding to that dynamic.
And are they making any adjustments as they look out to the back half of the year I assume tourism deposits in Europe . This summer, but it looks like.
The core consumer there, it's very very weak.
Yes.
I think Theres no doubt Europe is in a recession you look at some of the.
Purchasing manager indexes for the various countries and they are well below 50% or in the.
<unk> 42 to 44 range, which are exceptionally low and these are some of the bigger economies there.
And as you rightly point out.
And the core consumer.
Whether it's the U K France.
Exceptionally weak I don't want to call them poor, but they are stretched.
Just.
To make ends meet.
Basic food supplies of energy.
Now having said that.
Our Mccann is still a relatively.
Economical way to deliver beverages or food or any other product.
And the business is holding up well.
I'm going to assume.
That the <unk> were down five.
5% in the quarter I'm going to assume the market is not is not down as much as we are we are.
We operate on the periphery of Europe that as we've described to you before UK, Spain, Italy, Greece, Turkey.
Couple of plants in the middle but not we're not so big in the middle up through Germany and.
In the Scandinavian countries I would imagine that the market will do better than we did and as I said earlier, we're not we're not chasing volume right now, we're really focused on improving margins. So.
While the consumer is weak.
And again our customers are.
Adjusting their buying patterns to deal with a weaker consumer I don't think the markets as weak as.
As you might think it is for beverage cans I just think.
Our strategy might be a little different than others right now and we're focused on improving margins.
Got it. Thank you. Thank you.
Thank you. Our next question is from artisan risk one of Brian .
RBC capital markets. Your line is open.
Great. Thanks for taking my question.
So I guess just back to the volume question I guess in North America. So if I heard you correctly I think you said, maybe maybe 2% to 3% in the quarter.
And this year, you're still seeing an overall down market.
Mainly driven by maybe some weakness on the alcohol side.
And some improvements on the CSD and water side, so as you look into.
Next year.
Would you characterize the market poised to get back.
Maybe a 2% to 4% growth rate.
I know that.
You can't really tell the beverage companies what to do but.
How do we kind of get back to that level of growth.
So I think the.
Again, it really really good question I think the.
The back half of this year, we probably have especially in the fourth quarter on easier comp. This year than we had last year. So I think if we were down.
And remember these are my estimates, we don't have published data when I estimated.
The quarter and six months down 3% to 5% Im really looking at what our customers have said publicly and I think there is only one one larger CSD company that's reported so far and they were in the four to four 5% decline range.
Just going from other anecdotal comments or information that's out there, but I do feel kind of confident in that range of decline I think we will see that.
That range of decline narrowed in the back half of the year and perhaps be flat or even slightly up just because the Q4 numbers last year were not very good.
If we were I think last last quarter a room, we probably.
We probably tried to guide you from two to four down to 1% to three in the future.
And it doesn't have to be less.
Listen for a beverage can company to be successful it doesn't have to be 3%, we can be exceptionally successful.
Managing our business with 1%, 2% growth, especially off a much larger base that we have as an industry today than we've had in the past.
Okay.
You've got a couple of things you always look at share of stomach.
And then when we think about share of stomach how much of that share of stomach growth is going to.
Come from substrate change from other substrates to the cans I think we all agree we all believe and perhaps some of you will agree that the can is well positioned.
Environmentally from a substrate point of view.
Sure.
The question is.
How long before the consumer feels more confident.
To step back out there and spend a little bit more money on something Thats a.
Nice treat a quite refreshing treat and that some of that has to do with consumer confidence some of that has to do with.
Our customers pricing, but the customers clearly have a model now that is very successful for them, but as I said, we don't we don't have to be at 3% to 4% growth for to be successful, we can be exceptionally successful at 1%.
There are there are some market share shifts happening right now.
Perhaps we're not we're participating in a little bit of that not as much as others, but.
I think responsibly, we're going to have a.
A pretty good year this year and we're going to have a very good year next year.
I don't know how else to say it right now it's a little early to talk about next year, but as we sit here today, we feel pretty good about the next 18 months.
Okay. Thanks for that.
Yeah, No I would agree that there is definitely a robust outlook even at a low single digit growth rate. So I guess on that.
No.
Right now you are guiding conference on EBITDA growth for 2023.
That really the target that you think is possible I mean, given that you are able to achieve that with.
Maybe more of a unit volume growth and you thought I know some of it's coming from restructuring that transit and some other driver of recovery in Europe .
Should we expect kind of a 12.
12% EBITDA growth rate as your internal targets and what you are trying to achieve on an annual basis. So right now the consensus for next year.
Maybe five or 6%.
Make you more conservative.
Yes, well listen we.
If you were sitting in Kevin clothing as office and if you looked at all the pay per season looking at you would see a number for EBITDA growth. This year, that's comfortably within the 8% to 12% range.
Our.
The high end of our initial range was predicated on.
10% growth in North American beverage, which.
Revolved around a flat market, we have now revolve revised up to 7%.
But I would say that in <unk>.
We've said it already both transit and European beverage are ahead of where we thought they'd be at through six months.
Pretty confident that they're going to remain ahead of initial plan.
For the full year, so that will offset that and.
We remain.
Comfortably within that 8% to 12% range again, I think it's a little early to talk about next year.
I don't know if I really want to say that.
I don't really want to comment on whether the number is 5% to 6% or 8% to 12% next year, it's a little early but.
But there are some things, we're doing really well across most of the businesses.
Let's just brief.
Briefly talk about them and there's always things that can go the other way, but we have.
<unk>.
The cost profile and transit packaging.
We've reset the way we sell product in transit packaging and that business is exceptionally well positioned from a much lower cost base.
A better manufacturing mindset.
To deal with lower volumes as we're doing this year and really benefit from a return to better industrial activity in the future. That's number one number two.
As we've said we have reestablished.
More appropriate margins.
That justify investment in our European beverage can business and we're well on our way to getting back to the.
The target that we've established so so those two businesses are doing quite well and I think.
I think within the Americas beverage business.
Whether it's the United States, whether it's Mexico, whether it's Brazil.
Some of the businesses may move around but in total these businesses are well positioned to continue to do well.
From a cost base and a manufacturing footprint that we believe is.
As.
Is well positioned to deliver value to us as we service customers.
Asia was a little choppy now.
I think we're.
We're still confident in our long term view that southeast Asia is going to be a growing market. So I think.
There's always things that can go wrong, we don't know where currency is going to take us.
We don't know if.
The economy, we're feeling right now is a bubble up and eventually will pop we don't know that but.
I don't really want to get into the next year I do I can tell you that we've made a lot of changes.
To our industrial infrastructure and our cost profile.
Which will allow us to weather storms and really benefit.
As market settle down and the consumers return to buying more product.
Okay.
Thank you. Our next question is from BLA.
Jeffrey Your line is open.
Bill.
Alright, Jackie we seem to have lost fill for a moment do you have another question.
Alright. Thank you let me see what it looks like you also queued up.
Let me just go ahead and.
This other line.
Hello, Phil can you hear us.
Yes, I can hear you can you hear me.
Can hear you Phil go ahead, sorry again.
Hey, sorry about that I missed parts of the call.
Can you give us a little more color on Europe , how the startup of some of your capacity coming along do you expect.
Some contribution in the back half of the reason why I asked because your comments earlier.
A little more cautious certainly on the macro backdrop. So just wanted to get a little more flavor in terms of.
Thinking about the back half with some of that capacity coming on.
Yes.
In response to <unk> question, we've talked about volumes in Europe .
And a fairly weak core consumer.
Tourism is is up this year.
In Europe , and potentially that's offsetting the weaker core consumer.
But as I said, we've been exceptionally focused on.
Driving margin recovery as opposed to chasing every last can and we will continue with that strategy, we need to we need to earn appropriate margins.
Before we consider investing further in a market like that.
Now, having said that we're going to.
Well the first thing I'd say is the back half of last year. The comps are ridiculously easy having said that.
We're going to trounce the back half of last year. So the Q3 Q4. This year are going to be multiples of Q3 Q4 last year. So.
Some of that will come from better price cost management and some of that comes from.
Additional sales out of Italy, and Spain, as the new capacity comes up and then.
And then we will work our way through the startup costs in the Peterborough as we wind down Braunstone and move it into Peterborough so but.
The back half of this year.
In the in Europe is going to look nothing like last year, it's going to be multiples better than where we were last year.
Okay. So you feel pretty good about the capacity coming on at a timely.
Just given some of the macro challenges.
Well listen.
When you make investments you know youre, making an investment for the long term.
If you told me I was going to spend.
Couple of hundred million dollars to build a beverage can plant in that.
He was really worried about the next three months or six months you would never do it. These are 50 year investments and we believe in the product.
We believe in the sustainability of the product that we ultimately believe in those countries in those regions we're investing in.
And really importantly, we believe and our customers to market their products to consumers and our consumers to want those products and that's how you make the investment.
As I said I've said a number of times.
We're not going to get overly concerned in any three or six month period. These are long term investments.
I think we manage our cost profile exceptionally well that we can.
We can overcome short term disruptions, but.
I'm not going to comment on what.
What I think the consumer is going to do over three or six months, but I will tell you. We're we feel good about the investments we've made in the future of the business.
Got it makes sense there and then from your perspective, you kind of pointed out how the background has been choppy.
Earnings profile has been pretty steady here can.
Can you give us a little perspective, and how youre thinking about the back half and how that progressed well lucky it sounded like you're expecting some sort of a pickup in the fourth quarter.
The only thing it correctly you said the earnings profile has been steady it has not been steady and Asia were down significantly not only in Q2, but year to date.
But I'm just talking about sequentially right.
Over the last few quarters, it's been relatively steady.
These trough levels from here.
Eric.
Q3 will be similar to last year's Q3, and Q4 should be better than last year's Q4, but for the full year, we're going to be down a touch.
We'll be down in Asia just.
Only because Q2 came in much weaker than we thought it would.
And again the back half of this year has easier comps in the back half of last year.
But as I said Q3, similar to last year Q4, better than last year.
Okay, alright, thanks, a lot appreciate the color. Thank you.
Thank you. Our next question is from Anthony Pettinari of Citi. Your line is open.
Good morning, this is actually Brian birchmeier sitting in for Anthony and thanks for taking the question.
Youre talking about outperforming the U S Canada industry by like 10% on volume growth I think the first half has been a little bit below the 10% Mark which is maybe a little surprising given the weakness of the US beer do you think once mosquitoes online that outperformance can expand in the second half and then.
And also what's the mesquite startup delayed a little bit thanks.
<unk> has been delayed we had.
We had initially hope that we'd be up already know we had some electrical component panels et cetera.
Delays from suppliers and.
But we are targeting targeting late August startup.
As we as we get components that we need.
It's been a little disappointing most of the supply chain for these things are starting to starting to ease, but there still are some issues out there.
I think the.
The growth we see.
In the back half of the year some of it.
Around the startup and mesquite some of it around the.
The acceleration of Martinsville through its learning curve, but largely around the promotional activity.
That our customers that.
We see our customers having begun to make in May June and here in July and we expect to carry through the end of the third quarter as it relates.
The business that we have under contract and the capacity that we have available to service debt.
Got it thanks for the detail.
Last question for me, we don't talk about non reportable too much but it is a bit weaker than we expected in the quarter.
Can you maybe remind us why non reportable as kind of unwinding. So much this year and do you think maybe on an EBIT basis, we start to get back to the 2021 levels. Thanks, I'll turn it over.
Well the big the Big difference and you saw it in Q1 was the.
Inventory carrying gains that we took from 'twenty one into 'twenty two at much higher tin plate prices that doesn't recur this year.
The other thing Thats happening.
And we have been.
Pretty open about it two things one aerosol can volumes for the entire North American market.
And I'm, assuming for Europe , although we're not in Europe any longer.
But aerosol cans exceptionally weak.
Double digits, so when I say double digits I mean.
Well over 10%.
Volume decline.
Across most aerosol can products year on year, which is a.
A preview of the economy.
We historically look back we always say that as we as we follow our aerosol can volumes we can predict.
What the economy is going to look like over the next six or eight months, so, but Arizona has been weak now for six or eight months.
And then secondly, we we noted to you at the end of the first quarter, we took a.
A head count reduction charge and in our global beverage can making equipment business.
And that business is now slower than it has been in the last several years as.
Companies.
Digestion startup much of the new capacity they brought up and so that business is the equipment supply business is lower.
It has been in the past, but I think.
I don't have 'twenty, one in front of me I'm not sure.
How far below 21.
We are in the business year to date I do think that.
As we look to the back half of this year.
The back half of this year.
In total will look very similar to the back half of last year in that business.
Got it thanks for all the detail Youre welcome Brian .
Thank you. Our next question is from Kyle White of Deutsche Bank. Your line is open.
Hey, good morning, Thanks for taking the question in the U S. Now that you have martinsville ramping up in <unk> about to start are you happy with your current footprint in the U S is there a room for improvement here to drive operating rates higher or are they in a good spot just given the current demand backdrop.
Yes, I think listen I think we.
I got to be careful I say this I don't it's not my position to talk about what others do I think we were always.
How do I say this.
We.
We probably didnt announce as much capacity as all of you wanted us to two or three years ago.
I would say that.
We were very measured and the capacity and the expansion.
That we announced and that we affected.
And we're happy with our footprint given a more measured approach to capacity expansion over the last couple of years.
As opposed to the market in total.
I would say that.
Where we sit today.
With our infrastructure in North America.
Where we see.
Gains.
Market share gains.
Transpiring over the next 18 months.
Throughout the industry that we're satisfied with our footprint geographically.
And size wise. So remember, we're not just all making 12 ounce cans anymore, we all have a variety of sizes and different geographies and.
I would say that.
We are quite satisfied with our platform.
Got it that makes sense and then on transit I think you said volumes in the quarter were down 12% to 13% switches in a relatively expected given the global backdrop.
Just curious how that progressed throughout the quarter or are you seeing any deceleration in demand as you go into the second half I know, you're youll start lapping some easier comps, but just curious how things are progressing going into the back half.
Yes.
I would have X.
I know exactly where question is because I agree with you I would've expected volumes.
To decline through the quarter in the second quarter and they didn't.
<unk>.
I think our team in transit is really cautious going into the back half of the year on volume.
I think however, theyre going to do better than.
Than that.
The back half of the year.
Comps are a little easier there not as easy as some of the other businesses.
The business is holding up better.
Then your question implies your business the business is holding up better than our fears and it's probably holding up a little better right now through July than even the transit team.
Put forward only because.
Kevin and I think.
<unk> been cautious now they've probably been cautious rightly so because we don't really know what's going to happen, but the business the business is holding up better.
We've talked about it before the business is really different.
And then the business was 10 or 15 years ago. It's just a it's a much more diverse business.
Much more end markets that they serve not so dependent upon this the metals inventory.
So some of the markets as we've said before some of the markets that we serve are certainly cyclical.
But the business has been very stable just given the diversity of it.
And market supply and customer supply so.
I understand the point, we understand the point.
We as well keep waiting for.
Even a bigger slowdown but.
It seems to be holding up very well.
Got it thank you I'll turn it over thank you.
Thank you.
And the next question is from Gabe <unk> of Wells Fargo Securities. Your line is open.
Thank you Kevin and good morning, good morning, Ken.
Tim There was a presentation out on the Investor part of your web site.
Detailing out.
Quite a bit of the cash flow characteristics of.
The transit business.
And maybe even I think that the north American food can business I'm talking about some of the dynamics in there I'm just curious I know it's tough in this forum to maybe go into a lot of detail, but just maybe the intent.
Of that presentation or what you are trying to.
Let investors understand with that.
Presentation, and then the cash flow.
Characteristics of transit specifically is there anything unique about it in terms of.
I guess repatriating that cash or where it generates a lot of its cash flow relative to the rest of your business.
Second part of the question real easy.
Almost no complications whatsoever in repatriating cash in transit.
Certainly far less than in other businesses, we don't have any significant when we might have one I don't think we have any minority interest positions in transit so.
All the cashes hours and.
And much of the business is in.
Greater than 50% of the business in north is in the United States.
And in almost all of the businesses in countries, where we don't have any any restrictions whatsoever.
I think that.
It's probably been a while since we had a fulsome investor presentation. So we just thought it would be helpful. If we put one together posted on the website.
Whether it's used in conferences or its available to investors to peruse.
So be it.
<unk>.
The point.
Point about <unk>.
Reminding ourselves and everybody else as to the cash flow characteristics of certain businesses, you need cash to run our business.
I know everybody got really excited about don't worry about cash flow, you're a growth company over the last several years.
Whenever I hear and investors I don't worry about cash flow makes me makes me wonder, which pension plan is investing their money with that guy because that's a that's.
That's a bad thing cash flow is always important.
And.
So whether it's.
Food and aerosol cans are where transit packaging these businesses.
Well established industrial footprints, which require very little capital to maintain and run and generate the cash that they generate.
Food and aerosol from time to time, especially food as.
As the business has grown more from human food consumption to pet food, we have made some investments.
For pet food.
We're a very large supplier to the north American pet food market.
And we do quite well there and that's where the investment has been focused in food can on transit.
We're we're talking about one 5% of sales in an annual capital.
To maintain or marginally grow the business and as we said when we acquired the business several years ago. The capital needs are not very great in that business.
That any growth in that business would come from bolt on acquisitions. So.
And so it's not a it's not a capital intensive business I think if you.
Somewhere in the annual report, we probably show long lived assets for that business. The long lived assets as a percentage of revenue is very low.
It is a business that's more of a service business then.
Than our other businesses, but it's still manufacturing at heart, so listen cash flow is important we just we.
We think it's important that everybody understand where we generate the cash.
Understood Alright, I think thats, a good business and so just.
The only thing I would say Gabe is that.
We have been growing the beverage can business over the last several years, so the cash flow and that business has been depressed but.
Obviously.
Expecting significant step down in capital over the next couple of years in that business. So that business is going to return to generating lot of cash as well.
Okay.
Second one two part I apologize.
One of the things that I am sort of scratching my head a little bit and we saw this play out obviously over the past pick a number 24 months in terms of where inventories were at but from your perspective is there anything that you can tell us as it relates to your customers' inventory or may be finished stock inventory and the reason why I'm asking is because obviously there.
I don't want say disconnect.
Got a timing difference between sell in and sell through.
For the beverage Hampden, specifically talking about North America. So we're looking at.
Nielsen data and I appreciate again on the beer side, it's not as big.
For Crown.
But it seemingly like I said there is this growing chasm in there and again I know there are some share shifts. So anything that you can tell us in terms of where you think inventories might be.
The system and then the second part is obviously.
With some of the noise going around with North American North American beer customer.
Mexico again.
Fisher can you talk about your ability to participate in that I think <unk> called out as a pretty big winter, but just anything around Mexican beer.
So.
I would say specific to both North America and Europe .
I don't believe our customers have any excess inventory on hand.
In North America, they almost carrying no inventory.
We deliver just in time.
The cans roll in.
On 15 minute intervals. They go into the Cayenne washer, they fill them and then they ship them out the customers don't carry a lot of inventory.
We have seen.
Customer inventory.
In Southeast Asia Post Chinese new year, and even in Brazil, a little bit post carnival being a little higher than we've typically seen in that might have led to <unk>.
Lower demand from our customers as they work down their inventories in those regions, but as it relates to North America. There is no inventory issue at our customer level.
On the beer situation.
We do have a very big.
A very large Mexican beverage can business.
We service.
Wide variety.
Of customers, including beer.
I would suggest that the.
Beer customer that youre, describing that ships into the United States.
It is not one of our larger customers. It is a larger customer for somebody else.
Got it. Thank you good luck. Thank you.
Yes.
Thank you speakers at this time, we don't have any questions on queue.
Okay.
Jackie Thank you very much I guess that concludes the call today. Thank all of you for joining us.
We will look forward to speaking with you again in October .
Thank you everyone that concludes today's call. Thank you for joining you may now disconnect.
Okay.
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