Crown Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2023

There are 16 speakers on the call.

Operator

Good morning, and welcome to Crown Holdings First Quarter 2023 Conference Call. Your lines have been placed in a listen only mode until the question and answer session. Please be advised that this conference is being recorded. I would now like to turn the call over to Mr. Kevin Clothier, Senior Vice President and Chief Financial Officer, sir, you may begin.

Speaker 1

Thank you, Marcia, and good morning. With me on today's call is Tim Donahue, President and Chief Executive Officer. If you do not already have, the earnings release It is available on our website at crowncourt.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.

Speaker 1

Additional information concerning factors that could cause actual results to vary is contained in the press release, In our SEC filings and our Form 10 ks for 2022 and subsequent filings, 1st quarter earnings Or $0.85 a share compared to $1.74 a share in the prior Q1. Adjusted earnings per share were $1.20 in the quarter compared to $2.01 in 2022. Net sales in the quarter were down 6% from the prior year, reflecting higher unit sales volumes in Americas Beverage, offset by lower unit volumes in most other businesses. The pass through of approximately $100,000,000 of lower raw material costs and $36,000,000 from the impact of the stronger U. S.

Speaker 1

Dollar. Segment income at $320,000,000 in the quarter compared to $383,000,000 in the prior year and reflects the benefit of contractual recovery of prior year's inflationary cost increases In European Beverage, cost reduction initiatives in Transit Packaging, offset by $60,000,000 of year over year Steel repricing in North America in the North American tinplate businesses. That is $48,000,000 of gains in Q1 of 2022 versus $12,000,000 of losses in Q1 of 2023. We had a better than expected Q1 and remain optimistic for 2023. We reaffirm full year guidance as follows.

Speaker 1

We expect EBITDA to grow 8% to 12% and we expect full year Adjusted EPS to be in the range of $6.20 $6.40 2nd quarter adjusted EPS is expected to be in a range of $1.60 to $1.70 per share. Our full year adjusted earnings guidance includes the following, which remains unchanged from our previous guidance. Net interest expense of $400,000,000 In 2023 compared to $270,000,000 in 2022. Dollars 0.40 of incremental non Cash, pension and post retirement costs, average common shares outstanding to be approximately 120,000,000 And the full year tax rate to be between 24% 25%. Depreciation of approximately $350,000,000 compared to 301,000,000 2022, non controlling interest to be approximately $140,000,000 and dividends and non controlling interest are expected to be around $110,000,000 Free cash flow is projected to be $500,000,000 with capital spending of 900,000,000 We expect the majority of free cash flow to go to debt reduction until we get within our target leverage ratio range of 3 to 3.5 times.

Speaker 1

With that, I'll turn the call over to Tim.

Speaker 2

Thank you, Kevin, and good morning to everybody. I'll be brief and then we'll open the call to questions. As reflected in last night's earnings release and as Kevin just summarized, 1st quarter performance was better than expected on the back of stronger results in European Beverage and Transit Packaging. Compared to the prior year, net results were impacted by prior year's steel repricing and higher interest and retirement benefit expenses. Global beverage can volumes were down 2.5% to the prior year and reflect the impact of an inflation weary consumer as well as economic slowdowns in some markets.

Speaker 2

From 2019 through the end of 2023, We will have added more than 25,000,000,000 units or 30 plus percent of annualized beverage can capacity Globally from which to serve local and regional customers. Our Americas and European beverage can platforms are well positioned to continue to serve our customers' diverse And growing needs. As discussed with you in February and as Kevin just reiterated, we expect capital expenditures to approximate $500,000,000 In 2024 with resulting incremental cash flows being used to delever and return cash to shareholders. In America's beverage, unit volume growth was 6% in the quarter with North America up 4% And Brazil up 23% off an easy comp from Q1 of 2022. While promotional activity was Lighter than anticipated in North America, we remain optimistic that summer selling season promotions will begin during the Q2.

Speaker 2

We estimate the North American market was down 2% during the quarter with the entirety of the decline found in imported cans. That is domestic producers were flat in total. Importantly, from April 1, the formulaic PPI increases are reflected in our selling prices, Beginning the recovery of cost increases you experienced over the past year. During the quarter, the second line at our new plant in Martinsville, Virginia Began commercial shipments and we expect the first line in Mesquite, Nevada to commence shipments in July followed by the second line in October. During the Q1, a Brazilian beverage can customer filed for bankruptcy protection and we have adjusted our Brazilian sales outlook for the balance of the year to reflect This specific customer situation, we believe the registered collateral provides adequate security for our receivable balance.

Speaker 2

Income in the segment is still expected to improve meaningfully for the full year and as discussed previously will be weighted towards the back half. Unit volumes in European Beverage declined high single digits during the quarter with notable weakness experienced in Spain, Turkey and the UK, Primarily due to the impact of the earthquake in Turkey, retail price increases as well as customers managing their working capital by deferring their Importantly, our efforts to restore margin with more appropriate contractual recovery mechanisms are underway With the Q1 registering notable sequential improvement from the second half of twenty twenty two, we expect the business to continue to Form well with improvement expected year over year in each of the remaining three quarters of the year. Beverage can volumes in Asia Pacific declined double digits With declines noted in almost each market, the impact of higher retail prices, inflation in general And slowing economies all contributed to lower overall demand. We do expect the segment's income to approach prior year levels, albeit weighted towards the back half of the year. Income and transit packaging improved almost 30% over the prior year As benefits from the overhead reduction program initiated last year coupled with the mix benefit of selective pruning of lower margin SKUs And accounts more than offset like for like volume declines.

Speaker 2

Margins were improved across Commodity product lines and in equipment. As expected, headwinds from prior Inventory repricing gains coupled with weak aerosol demand offset the benefit of higher food can sales driving income in other well below the prior year. During the quarter, we made provision to right size headcounts in our UK can making equipment business to reflect lower expected activity. So in summary, a solid start to the year and overall ahead of plan. Looking ahead, we expect the second quarter will continue to Improving results in European Beverage and Transit with America's beverage beginning to show improvement by the Q3.

Speaker 2

It's still early in the year, so we maintain our earlier guidance range of 8% to 12% EBITDA growth despite the outperformance in the Q1. And with that, Marcia, I think we are now ready to take questions.

Operator

Thank you. We will now begin the question and answer session. Okay. We have the first question coming from the line of Christopher Parkinson from Mizuho, your line is now open.

Speaker 3

Great. Thank you so much. Can you just hit a little bit more on your Specific performance in North America, I appreciate the market driven remarks. But in terms of just what you're seeing in various substrates across Energy, seltzer, nonalcoholic to be clear, CSD versus beer and as well as the ready to If you could just break things down and articulate how you see those substrates developing throughout the year and what that means for Crown specifically, That would be greatly appreciated. Thank you so much.

Speaker 2

You're welcome. So I think that in North America specifically, we're not very big in beer. We have a significant craft beer presence in Canada, but in the United States, not very big in beer. We do supply some beer. So I'm going to Stay away from beer for the time being.

Speaker 2

I think you're going to continue to see ready to drink energy drinks. Those new launches, those new lines continue to grow albeit off smaller bases Then the bigger products that move volume. So for example, carbonated soft drink teas, sparkling water, I think we'll see sparkling water do okay. Carbonated soft drinks, I think, is going to be largely centered around the level of promotional activity We see over the balance of the year and as Kevin said, we remain optimistic and albeit Little ahead of our earlier forecast here in Q1, but not adjusting our full year estimate only because until we see some sign of Larger promotional activity, it's really hard to step up step out and adjust the full year. We'll get a chance to do that again in July if we need to.

Speaker 2

But I think everything revolves around CSD promotions and we better start seeing that by By the middle of May before the Memorial Day holiday and straight through to the middle of June ahead of the July 4 holiday.

Speaker 3

That's helpful. And just turning over to the Asian market, one of what I presume to be one of your larger regional customers Has been citing the fact that underlying demand growth has been very, very healthy, but obviously there's a bit of a destocking on between the 4th quarter And the Q1. So if you could just hit on the underlying demand trends in that marketplace, what that meant for the Q1 versus What it means for the remainder of the year would also be incredibly helpful. Thank you so much.

Speaker 2

Yes. So I think we have Two different issues in Asia. 1, as we described for you in February, the Cambodian market is exceptionally weak. A big part of their economy relates to the textile industry with exports to Europe and elsewhere around the world and that industry is struggling and as the Cambodian consumer and certain industries in Cambodia Struggle can sales are down. The issue you referred to with the one customer you're referring to Has to do with the inventory, the filled good inventory that was built ahead of Chinese New Year.

Speaker 2

The sell through at Chinese New Year was not as strong as they and others had hoped. So there still is a fair amount of filled inventory in the system that has to be cleared out. The slowness of the Chinese New Year and the wedding season in certain countries in Asia, Largely a result of a stressed consumer. And so we'll see where that takes us. But I think we will see As we get into the back half of the second quarter into the third quarter, we'll start to see some recovery in most of those markets, Specifically Vietnam.

Speaker 1

Thank you.

Speaker 2

You're welcome.

Operator

Thank you. We have the next question coming from the line of Ghansham Panjabi from Baird. Your line is now open.

Speaker 4

Hey guys, good morning.

Speaker 5

Good morning, Gus. Good morning.

Speaker 4

Yes, good morning. I guess, first off, maybe you can give us a sense as Beverage can volumes in Europe as an industry, I know you broke that out for yourself, your geographic mix is a little bit different with Turkey, etcetera. So just give us some color on Continental Europe in terms of what you've seen? And then some of your customers that have been reporting have pointed towards the consumer there just Being increasingly cautious in terms of spending and so on and so forth, trading down, etcetera. How do you see the year unfolding for that region for you?

Speaker 4

So

Speaker 2

I think I agree with everything you just said Ghansham. I think beer has been exceptionally weak to start the year in Europe. Let's put the earthquake in Turkey aside. Let's just deal with the balance of Europe. And for the most part, we're on the Perimeter, we're not really up through the center of the heart of Europe.

Speaker 2

So when we say the perimeter, we mean UK, Spain, Italy, Greece, Etcetera. So but beer has been exceptionally weak. I think the consumer, specifically the UK consumer Is struggling with food inflation, the rate of inflation and the size of inflation over the last And then lastly, as I pointed out, we are seeing customers trying to defer their purchases of cans As long as they can closer to the summer to manage their own working capital and their own interest costs. So putting all that Aside, I do think we're going to have a reasonable summer. We'll cycle through this working capital issue And we'll have a reasonable summer.

Speaker 2

We'll see if we have enough if they try to buy all the cans in the summer that they should have bought some In February, March April, if they wait to buy them all, we'll see if we have enough cans for all of them, but it should be a reasonable summer through the end of Q3. We're going to do let's be clear, the most important thing that we were looking to accomplish this year in Europe Was to adjust the contracts to appropriately recover our costs and de risk our position in the contract. We don't sell to the consumer. We do not have any pricing power to consumer. We need to get it from our customers or we don't get it.

Speaker 2

And I think we've accomplished that. So The first goal is to make money. Well, the first goal is obviously to serve your customers. The second goal is to make money. And we don't make money, we're not going to be good at the first goal.

Speaker 2

So I think we've accomplished adjusting the contracts. We're going to have a good year despite whatever the volume happens here. So

Speaker 4

Okay, got it. And then for my second question, Going back to North America, I mean, obviously, 1Q is a very small quarter. There's a lot of complexity on the rise in, etcetera, as it relates to the outlook for Our customers have they rebased their expectations for volumes just based on your conversations with them for 2023 relative to initial plan? Do they see the year sort of unfolding pretty much in line at this point?

Speaker 2

Yes. So I think if they were being honest, they may tell us that they over sourced cans among Crown and the other can suppliers. I think we kind of feel we know where they're at. But again, it's largely dependent upon promotions, right? We've seen some promotions, but few and far between and not at levels Which drive the consumer to stock up on cans and consume more of the products that our customers are selling.

Speaker 2

So They are as they were last year, they are I don't know if they're Satisfied, but 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 and we understand it from where we're at today. So we have to deal with That changing dynamic in our end markets.

Speaker 6

Got it.

Speaker 4

Thanks so much, Tim.

Speaker 2

Thank you.

Operator

Thank you. The next question comes from the line of Mike Leithead from Barclays. Your line is now open.

Speaker 7

Great. Thanks. Good morning, guys. Good morning. First question, Tim, just two real quick on North America beverage.

Speaker 7

1st, can you just talk about what gives you confidence in the summer promotional activity hopefully occurring in this year 1st, it's not really occurring last year. And second, do you still expect to be up 10% in North America this year?

Speaker 2

Well, I think what we said Mike was that if the market is flat, we will be up 10%. And I think we were pretty clear That if the market's down, we probably don't make 10%. If the market's up, we're probably a little better than 10%. So Let's see where the market takes us. We were always more heavily weighted in volume growth Towards the second and third quarters as more capacity came up.

Speaker 2

So I don't think we're behind our original expectations with 4% in Q1, Although we're going to need to see some promotions to drive more sales at the retail level.

Speaker 7

Your confidence in promotional activity or maybe it's from customer conversations?

Speaker 2

Well, I'm not confident because They have their own business model and it's not for me to describe or well I can describe I guess I don't really Understand it as well as they do. They understand their business model better than I do and what they understand better than I do is the consumer. So I wouldn't say I'm confident. I'm optimistic that they will look to drive more volume. But there's somewhere in between those two words, there's a difference, optimistic and confident.

Speaker 7

Fair enough. Thank you.

Speaker 2

Thank you.

Operator

Thank you. The next question comes from the line of George Staphos from Bank of America. Your line is now open.

Speaker 8

Yes, hi. Thank you. This is actually Kashan sitting in for George this morning. Just going off some of the prior questions, I guess, is there a way to discuss the exit rate on volume Margin coming out of 1Q, particularly in the regions where you have some pricing resets?

Speaker 2

Yes. So I think if we looked at North America, January February were better than March. And as we sit here today in April, April is not very strong either. So that's why I said earlier, we're going to need to see some promotions As we get to the 1st couple of weeks of May through the 1st couple of weeks of June, I think Europe is starting to exceptionally weak in January, February. It looked better in March.

Speaker 2

And I think we expect Europe to be a little better as we each month as we go through. Brazil, they're going into their winter months. So You would naturally expect Brazil to be a little softer, but we had a the market The market in Brazil in Q1 in 2022 was down like 25%. So it was an easy comp. So and then The markets in Asia are all different.

Speaker 2

I think as I said earlier, we'll with the exception of Cambodia, we expect Most of the markets to regain some strength towards the end of the second quarter.

Speaker 8

Got it. Appreciate that color. And then just, I guess, given you exceeded the top end of your guidance for the Q1, I mean, ultimately, Why are you keeping kind of the full year EPS guide here? And what ultimately gives you confidence on that?

Speaker 2

Well, I think you put a forecast together for the full year. There's a lot of moving parts 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 risk And generating significant cash flow as opposed to being too reliant on one product which may be too up or too down in any one period. Having said that, we've just spent the last 20 minutes discussing Our expectation and our confidence level in promotional activity in the largest market we're in and a little early in the year to Really step out and raise the forecast. So as I said, until we see some indication Of larger promotional activity in the North American market, just too early to adjust the forecast.

Speaker 2

We'll get a chance to do that again in July if we have to.

Speaker 8

Great. Thank you.

Speaker 4

Thank you.

Operator

Thank you. The next question comes from the line of Phil Ng from Jefferies. Your line is now open.

Speaker 9

Hey guys. Hey, Tim. Sorry, I missed the parts of the first part of the call. I had some technical issues. But did you give us an update on your outlook for volumes for this bearish market for 2023?

Speaker 9

You sound optimistic, but obviously volumes are a little softer to start the year.

Speaker 5

How do you manage that risk?

Speaker 9

I know it's 3Q last year was a big in terms of how demand kind of fell off and you had excess inventory and costs, like how are you kind of better managing that in a Very choppy demand backdrop.

Speaker 2

Yes. Listen, Phil, the first thing I'll say, not to be defensive, but I'm going to be defensive. Volume in the Q3 fell off, but it fell off for the entire industry, not just for Crown, right? And I don't think we're the

Speaker 5

only 100% I agree.

Speaker 2

We aren't the only guys to misunderstand that. Having said that, if I sound optimistic, okay, optimistic is As we said earlier, optimistic is different than confident. I'm optimistic because it's it'd be very difficult to run a business if you weren't optimistic. There are Too many good people in the organization working too hard and doing too many good things and our customers are some really good people that are promoting their products and doing some really good things. So you always remain optimistic that we're going to find the right formula between price and volume and we're going to drive more volume which Our business and the customers are going to find a way to mix the price and volume to drive their business.

Speaker 2

And but The year is not without risk as we just said to the last question. Why haven't we raised guidance? Well, because the year is not without risk. But I think as I said, I think we expect in Asia, we expect the market to turn the corner Late in the Q2 into Q3, I think Brazil fortunately for us the customer bankruptcy that occurred Happened at the end of March. So they'll have the winter months that are typically the slower selling months to work through their issues, They're pre petitioning to get everything resolved before they get into the heavier requirements that they may have in late Q3, Q4 ahead of Carnival.

Speaker 2

So That's helpful in Brazil. And I think we have a pretty well balanced portfolio in Brazil. We have a variety of customers. We're not weighted towards one customer. So We're still confident in Brazil.

Speaker 2

We're going to have a year over year increase in Brazil. Europe, I think we're going to start to see volumes firm up. It was exceptionally weak in January February, got a little better in March, albeit still down. But I think you're going to start to see customers pulling more volume and we'll get into the summer tourism season and we should do quite well. North brings us back to North America, which is the one that you all care so much about and focus on so much.

Speaker 2

Listen, I said earlier, we're in a flat market, we're up 10%. I could I drive a pretty old car, but I'll bet my car on that. But if the market's not flat, we're not going to be up 10%. And so we'll see where the market takes us. We're going to do better than the market, but that doesn't give me any great comfort.

Speaker 2

I'd like to see some promotional activity. So We'll see. I think it's just too early to say what the fillers are going to do with promotions. We'll know better in a few weeks.

Speaker 9

Okay. That's really helpful. And then from a cost standpoint, you called out $60,000,000,000 still In 1Q, is that largely flushed out by 2Q? And I know late last year you had some high cost inventory And the international markets for Elones, just want to make sure if that's flushed out at this point in the year as well?

Speaker 2

Yes. So I mean

Speaker 10

obviously Anything that

Speaker 2

was left in Europe got flushed through with the repricing of contracts and you saw those numbers looking better than Q3 and Q4 last year. Asia probably had a handful in the Q1, but that's done. And then we still have a we still probably have a handful in the other businesses, the North American tinplate businesses, which will come through here in the second quarter And that will be behind us.

Speaker 11

Okay. All right. Thank you. Appreciate

Speaker 2

it. Thank you.

Operator

Thank you. The next question comes from the line of Gabe Hajde from Wells Fargo Securities. Your line is now open.

Speaker 7

Tim, Kevin, good

Speaker 2

morning. Good morning, Gabe.

Speaker 7

I wanted to dial in to Brazil, I guess, first. You mentioned up 23% versus Down 25 last year, so let's call it you're kind of back to flat.

Speaker 2

Well, I said the market was down 25. I think we were down 20 last year, Up 23 this year. So more or less in line with 2 years ago. You're right.

Speaker 7

Okay. And we have this customer issue down there. It seems like most of your customers are still pushing 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, Tim, about your expectations, I guess, for the market down there.

Speaker 7

Do you see that Evolving and I appreciate that we're really talking about September, October summer selling season and what your customers choose to do. But Is it possible that we have 2 years of 2 consecutive years of down demand in Brazil?

Speaker 2

Sure, anything is possible. I mean you're in an environment where unemployment and inflation are high and interest rates are high and Anything is possible. I think our estimate for Brazil is they're up a couple of percentage points for the full year, which means Sequentially as we go through the year here, they'll come off the large increase in Q1 And be a little lower. Now I think we were up more than we were up much more than the market in Q1 and that has to do with Mix of customers versus specifically being weighted to 1 or 2 customers as some of the others were. But I think In total, we still expect to be up in Brazil.

Speaker 2

The market will be up a couple percent, 2% to 3% in our view at this point. We should be up more than that. But anything is possible, Gabe. I mean it's a growing market and it's a big market. We and others have done exceptionally well over time there and we remain invested and we continue to expect market will do well in the future.

Speaker 7

Understood. But is there anything unique to Crown's system Again, depending on whatever the outcome is with this one specific customer that would make you advantaged or disadvantaged to service other customers down in Brazil To capture that question.

Speaker 2

Listen, I think most of the business in Brazil is under contract. I don't really want to describe the other guys, but What I said is we have an exceptionally well balanced customer portfolio in Brazil. So to the extent that If the customer who filed bankruptcy loses a little bit of volume and it gets picked up by others, we'll get some share of the other that the others pick up. So We'll lose some share of what the bankrupt customer loses in the marketplace and we'll pick up some share of what the others pick up. So I don't there is In our forecast, as I said in the prepared remarks, we did adjust our full year sales forecast in Brazil and income accordingly To account for the customer bankruptcy and for what we believe is a reasonable time to work for them to work through their issues, We'll lose some and we'll pick some up.

Speaker 2

As it relates specifically to that customer pluses and minus, maybe we're a little bit on the minus side, but we still could be up more than the market for the year.

Speaker 7

Okay. On transit, you talked about having other diversified businesses. You guys crushed it relative to our model. The $60,000,000 of cost out that you talked about, you're still on track for that apparently or are you ahead of that And then could you be a little bit more specific on the volumes? I think you talked about pruning some lower margin business, Something to the effect of volumes were down commensurate with that, I wasn't very clear.

Speaker 2

Yes. So I think I don't know if we said it last. We probably realized $10,000,000 or $12,000,000 of the $60,000,000 last year. We'll get Let's say we get another $40,000,000 this year and maybe there's a little bit $5,000,000 or so stills in the next year, but We are well ahead of our target to get the full $60,000,000 That's Going exceptionally well. And combined with that, we went through a process to reorganize Those products which we believed were the products we wanted to sell versus just trying to make everything for everybody.

Speaker 2

And so I think if volumes were down 10% to 12% in Q1, I'd say a third of that was due to pruning of customers and SKUs And 2 thirds of that was market.

Speaker 11

Thank you.

Speaker 2

Thank you.

Operator

Thank you. The next question comes from the line of Anthony Pettinari from Citigroup. Your line is now open.

Speaker 10

Hi. This is actually Brian Bergmeier filling in for Anthony. Thanks for taking the question. Maybe just big picture, It seems like the theme of this call has been volumes a little bit worse than expected. You called out the customer issue in Brazil.

Speaker 10

Maybe what are some of the better than expected items that have allowed you to reiterate the guide for the full year? Is it Solely the 1QB, is there maybe a little bit of upside to Europe? If you can just maybe hit on some of those big picture things that allow you to keep the guidance?

Speaker 2

Yes. So Brian, that's a good question. And whether in the prepared remarks or to this point in the call, if we haven't made this clear, I apologize. But We are doing much better in Europe in transit, not only in the Q1, but our outlook for the full year for Europe in 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 a bigger slowdown in Asia than we expected.

Speaker 2

And so they're offsets as well as We've made a little hedge in 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, we'll be talking to you again in July, but Kevin is doing his 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 Transo over the original forecast.

Speaker 10

Got it. Thanks. That's really helpful. And maybe just zooming in on Europe a little bit. You mentioned volumes have been firming up.

Speaker 10

I think on the last call, you said margins For 2023, you can get back to half of the 2021 level. Is there a new target that we should have in mind? Is it maybe too early in the year Just update that.

Speaker 2

No, it's not too early and I knew somebody was going to bring this up. And So why don't we say instead of halfway back, why don't 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 got to make money right.

Speaker 2

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 it's important that We're redone. We're putting a lot of money into the system into Europe and into the Americas to support our customers growing needs in the future. We need to make sure we're healthy enough to do that in the future and I think the team did an excellent job.

Speaker 10

Got it. Thanks Tim. I'll turn it over. Stay safe.

Speaker 2

Thanks, Brian.

Operator

Thank you. The next question comes from the line of Mike Roxlund from Truist Securities. Your line is now open.

Speaker 12

Thank you, Tim, Kevin, Tom, I hope you're all wearing masks appropriately. Just one quick question Tim for you. Do you mind talking about the competitive landscape? And have you seen any increased pricing actions maybe discounting maybe from some of your larger Private peers, particularly as their balance sheets have become increasingly stretched.

Speaker 2

Well, I think you're specifically talking about one competitor only, although you could consider the other one a private company as well even though they're public. I think the one company is used to operating with leverage. The other one, the more private one that you're alluding to is used to operating with far less leverage and they've communicated that they want to get their leverage So many as we said to you in February, I believe we said to you in February, so many of the contracts so much of the business is is under contract for the next several years. We don't see large pricing risk Over the next couple of years, albeit the marginal business is obviously Going to become more competitive as the market is a little bit slower than it was 2 years ago. So we'll just see where that takes us.

Speaker 12

Got you. And can you give any way to quantify like when you say that marginal business become more competitive, how much of your book roughly is that marginal business or just broadly, a rough percentage just to get a sense of So much is 85%, 90% on the contract and 10% qualify as marginal that could become more competitive?

Speaker 2

Yes, I think that's not too without getting too specific, that's not too unreasonable.

Speaker 12

Okay. Got you. Appreciate that. And just one quick question follow-up on the bankruptcy issue in Brazil. Just can you provide some more color on that customer?

Speaker 12

And what gives you the confidence that you

Speaker 13

should be able to recoup most of the receivables that

Speaker 12

you have outstanding with them?

Speaker 2

So we have registered collateral And one of their large new breweries, Land and Building. So I don't really want to talk about What the customer is going to do, they haven't filed their plan yet, but a variety of things can happen when they file their plan. They can try to run the business as is going concern. They can sell 1 or 2 breweries. They can sell the whole company there.

Speaker 2

There's a variety of things they can do. We believe that large new brewery where we have collateral is a brewery that they or somebody else will be More than happy to run and make beer in. So our hope is that they remain An independent going concern and we have a broader customer base that we continue to supply in the market. But I think from a collateral standpoint, as I said, we have comfort where we sit right now. Got

Speaker 12

it. Thanks very much and good luck in the balance of the year.

Speaker 2

Thank you.

Operator

Thank you. The next question comes from the line of Angel Castillo from Morgan Stanley. Your line is now open.

Speaker 5

Hi, thanks for taking my question. So just wanted to follow-up on the strength that you're seeing in transit. In particular, you updated on what you're seeing now in Europe and how that Maybe as an impact to your outlook, for Tuncay, 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

Speaker 2

You're talking about transit in total or specific to Europe?

Speaker 5

Transit in total, sorry.

Speaker 2

Okay, I'm sorry. The only thing 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 strong. The order book is still really healthy, more than 1 year sales in the backlog.

Speaker 2

The tools are a little soft right now, but we expect that to pick up. So that's the volume picture. I think The more important thing is we are well ahead of plan as I said earlier on the cost out and from a Material margin standpoint, we're managing very well raw material inputs and pricing to the customer. And so the business, Angel, I'm glad you brought it up because the business largely described by many as cyclical. Some of the end markets, it supplies are no doubt cyclical.

Speaker 2

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 We acquired it. And this year we'll do quite well. My sense is that If you adjust for currency and the divestiture of the business that we had last year that by the end of this year we're up 10% over what the income was 2 years ago. So it's that's adjusted for currency.

Speaker 2

So obviously currency has an impact. But I think Business is stable and the cash flows that it generates are remarkable for the level of capital required to be So it's a it is a contributor to the company. It's a contributor to delevering, a contributor to return of cash to shareholders. So I think we're really positive in where the business sits today. We've got a new management team since last year in Q3 and A lot of changes and I think there's even more improvement that we can make in the business.

Speaker 5

Very helpful. Thank you. And then just wanted to touch on allocation, given the amount of uncertainty and how much maybe hinges on I recognize there's maybe some limitations as to what you can say. But I think in the past you've talked about after returning cash to shareholders, once you get into that 3 to 3.5 kind of net leverage range, Given the uncertainty, would you want to be more solidly kind of at the lower end of that or once we reach the 3.5 turns, Should we anticipate that free cash flow will start to flow through to buybacks and returning cash shareholders? How are you kind of thinking about that from a risk standpoint?

Speaker 2

Yes, I think that I think given where the financing markets are generally and That means the rate of 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 previously discussed. So I think Kevin may have said in his prepared remarks that we're going to apply Cash generated this year was delevering and we'll pick up next year and see where we go. We do have a bond that comes due in September of 2024. 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.

Speaker 2

The other answer is that based on where interest rates are today, The accretion dilution analysis is much closer on paying down debt versus buying back stock than it has been in the Thank you.

Operator

Thank you. The next question comes from the line of Kyle White from Deutsche Bank. Your line is now open.

Speaker 6

Thank you. Good morning. Thanks for taking the question. I think last quarter in the beverage cannabis business, you were cycling through some lower cost absorption in Some of the regions given 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?

Speaker 2

I think with the exception of Asia, 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 that we're working aggressively to bring down. So There will be some absorption and shortfall in Q2. It's why I earlier said that Asia, we expect to be more or less well, I don't want to say 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.

Speaker 6

Got it. That makes sense. And then in North America, just how is the ramp up of Martinsville going? And then as well as the expected start up for the Nevada plant. And then more importantly, how should we think about absorption costs and utilization After those plants are fully ramped, do you have the volume throughput for these plants in your overall network?

Speaker 6

Or do you need to see some underlying market growth in the United States that's fully absorb it?

Speaker 2

So we are we had an excellent startup in Martinsville. I would say 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 1 in July. So And we need Mesquite to start up well because we have a fairly large customer commitment in the Southwest That we would prefer not to be freighting cans all over God's green earth to get them there. So that'll be quite helpful.

Speaker 2

We do have, as 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 1,000 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 any one problem in the system that could have happened that 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.

Speaker 2

But the number one goal is to make sure we're prepared to satisfy and serve the customer summer months and I think we're there.

Speaker 6

Got it. Thank you. I'll turn it over.

Speaker 2

Thank you.

Operator

Thank you. The next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is now open.

Speaker 14

Great. Thanks for taking my question. I guess first question is just on volumes. When you think about, Say, 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 historical levels, say, 1% to 3% growth or is it 2% to 4% And considering it would be maybe 2% to 4%, do you expect that your volumes in 2024 would be kind of within that range? Or would you be down just given The tough 10% comp that you faced in 2024?

Speaker 14

Thanks.

Speaker 2

So starting with the premise that the market is flat this year and we're up 10. I think we'll also be up if the market I do agree with you that we're going to return to I've been More saying this than everybody else for the last couple of years that eventually we're going to go back to history, right. So I think We'd be quite happy with a $120,000,000,000 can market if it grew 1% to 3% every year. That's the business we're used to. We know how to run a business like that.

Speaker 2

We know how to keep our costs down to drive more value in a business like that. And it While it doesn't require well it's not exceptional growth, it 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.

Speaker 2

So we're okay with that. I think that Using your numbers, if we return to a 1% to 3% growth market in 2024, we'll also be up more than that in 2024 because of the 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.

Speaker 14

Okay. Thanks. And just also another longer Question on free cash flow then. So assuming that you are in a kind of more modest growth environment, 1% to 3% going forward, what does your CapEx Kind of revert to normalized. Does the 900,000,000 come down to say 700,000,000 and then

Speaker 2

We've already said in February and we reiterated it today That we believe CapEx next year is $500,000,000 And in a market with 1%, 2%, 3% 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 they are warranted. So $500,000,000 would be next year's number. And As we sit here today, I would expect $500,000,000 way too early to give you a number for 2025, but it's hard to understand how it would be more than that in 2025.

Speaker 14

Sure. But just to clarify that, that would imply that free cash flow is closer to 900,000,000 And plus, as you move forward, is that right?

Speaker 2

Well, all else being equal, yes. Perfect. All else being equal.

Speaker 1

Arun, the one thing to note, we have $100,000,000 of inflow in this year's number from Working capital. So clearly that's not something we'll get over here, but your number is not borrowed.

Speaker 14

Okay, got it. Thank you.

Speaker 2

Thank you.

Operator

Thank you. The next question comes from the line of Adam Swamycin from Goldman Sachs. Your line is now open.

Speaker 13

Yes, thank you. Good morning. And I wanted to maybe just follow-up on the last question on market growth. I think Previously, you talked about a potential for a mid single digit global market growth this year. Sounds like you might be airing 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?

Speaker 2

Yes. I think that given the challenges we see In one of the specific Asian markets, Cambodia and Asia getting off to a much slower start than we had initially anticipated, We probably bring our overall growth even if we hit, let's say, the U. S. Market is flat and we're up to 10%. Even if we hit 10% in North America, we're going to be closer to 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.

Speaker 13

Okay. That's helpful. And then maybe just following up in transit, you've obviously strong start to the year and cost driven Offsetting some of the volume and market issues that you talked about. How do we think about as you get through some of these Kind of more significant cost actions and they layer through the system this year. Backlog on the equipment side and Visibility to volumes kind of returning to growth in 2024, just what are you seeing in the forward leading indicators in that business to help think about The growth trajectories where some of the more significant cost actions aren't as big of a tailwind again?

Speaker 2

Yes. So as I said earlier, the business is far more diverse than 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'll have a cost structure now that I think we've got some proper management Manufacturing management techniques into the business, we've got a cost structure that's exceptionally competitive. And As the economy is going to make the turn at some point, whether that's early 'twenty four or mid 'twenty four, I'm not an economist, but Business exceptionally well positioned to benefit from the economic turn.

Speaker 2

And I think that One of the benefits we're seeing in that business right now is with things slowing down a little bit, 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. As I said earlier, we're for a business where we invest no money, we're exceptionally positive on the outlook for the business.

Speaker 13

Okay. I appreciate the color. I'll pass it

Speaker 3

on. Thank

Speaker 7

you. Thank you.

Operator

Thank you. The next question comes from the line of Jeff Zekauskas from JPMorgan, your line is now open.

Speaker 15

Thanks very much. Your accounts payable dropped $450,000,000 sequentially, which is unusual for the Q1. 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?

Speaker 2

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 Prepare inventories for the season, they cost less and then therefore the payable is less. And then the other thing, we've been working real hard To bring inventory levels down. So we're not ordering as much as we would have ordered last year.

Speaker 2

We're 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 purchases we're making far lower than we would have been making At this point last year and 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 to the end of this year, some of that will depend on pricing in the market for raw materials as well as our outlook For 2024, specifically Chinese New Year throughout Asia and Carnival In Brazil, as those markets are more weighted towards the winter our winter months than the typical Northern Hemisphere markets.

Speaker 15

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 it's a little bit lower, But given where raw materials are, that's where your payables and liabilities are running?

Speaker 2

Yes, I mean it might 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 into the 3rd 4th quarters last year as sales did not materialize and We're very focused on not carrying that risk anymore in the future. So we're going to be a little bit more cautious as to how much we carry.

Speaker 15

Great. Thank you so much.

Speaker 2

Thank you.

Operator

Thank you. The next question comes from the line of Clive Rickard from UBS. Your line is now open.

Speaker 11

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.

Speaker 11

But just to start off, I want to be a little bit more direct about the guidance And all the discussion that we've had around promotional activity, if that promotional activity does not materialize, Is the guidance range still achievable?

Speaker 2

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, there's probably like $70,000,000 of swing in there. And as I said earlier, Even with optimistic as opposed to extremely confident in promotional activity, even With that, with the outperformance against original target in Europe and Transit, it will more than offset Some of the internal caution we placed against what we see is perhaps less or delayed promotional activity from where we would have liked At the beginning of the year. So yes, the range is achievable.

Speaker 11

Yes, thanks for that. I just wanted to make sure that was clear. I mean, I sort of got some tidbits of

Speaker 2

conservatism, but it's pretty

Speaker 11

clear that promotional activity would represent But it's pretty clear that promotional activity would represent upside to kind of the plan for the balance of the year.

Speaker 2

Well, it would represent it may 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.

Speaker 5

Yes. Okay. All right. That's clear.

Speaker 11

I just wanted to be a little bit more direct and explicit about it. And then just looking 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. I'm just wondering, like 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 3 to 4 years or whether some of the investment that's required to absorb that capacity is being delayed Such that not on purpose necessarily, but it's just fading it fading your investment a little bit such that you would have a longer tail of growth to absorb some of the slack in the system that you're experiencing.

Speaker 2

No, I mean, 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 130,000,000,000 to 135,000,000,000 cans of capacity, maybe it's 128,000,000 or something. Our customers have more than enough Can filling capacity installed in their plants to absorb that. The can companies run 20 fourseven. Most of our customers do not run 20 fourseven, they run 5.2. Listen, if they had to dial up more ships, They could dial up more ships to fill more product.

Speaker 2

That's not the issue.

Speaker 11

Yes. Okay. All right. So it's really more of a market question Anything structural or investment? Yes.

Speaker 11

Yes. Got it. Thank you very much. Appreciate it.

Speaker 2

You're welcome. Thank you. Marcia, do you have any more questions or is that it?

Operator

That's all for the questions. Speakers, you may proceed.

Speaker 2

Yes. Thank you, Marcia. That I guess that will conclude the call today. Thank everybody for joining us and we'll talk to you again in July. Bye now.

Speaker 1

Thank you.

Operator

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.

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Crown Q1 2023
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