Crown Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2024

There are 11 speakers on the call.

Operator

Good morning, and welcome to Crown Holdings 4th 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.

Operator

I would now like to turn the call over to Mr. Kevin Clotier, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Speaker 1

Thank you, Bill, and good morning. With me on today's call is Tim Donahue, President and Chief Executive Officer. If you don't already have, the earnings release is available on our website at crowncorp.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 and in our SEC filings, including our Form 10 ks for 2022 and subsequent filings. Earnings for the quarter were $0.27 per share compared to $0.74 per share in the prior year quarter. Adjusted earnings were $1.24 compared to $1.17 in the prior year quarter. Net sales in the quarter benefited from 5% higher volumes in North American Beverage, which were offset by the pass through of lower raw material cost and lower volumes across most other businesses. Segment income was $382,000,000 in the quarter compared to $292,000,000 in the prior year, reflecting higher beverage can volumes in Americas Beverage, The contractual recovery of prior year's inflationary cost in European Beverage more than offsetting the under absorption of fixed cost.

Speaker 1

During the quarter, the company decided to optimize its footprint in certain markets and close a beverage can plant in Batesville, Mississippi, an aerosols plant in Decatur, Illinois, beverage can plants in Ho Chi Minh City, Vietnam and Singapore. These actions were necessary to align supply and demand and will lead to greater utilization, operational efficiencies and fixed cost absorption. For the year, the company delivered record adjusted EBITDA of 1,882,000,000 an 8% improvement compared to the $1,744,000,000 in 2022. The improvement was driven by a 4% overall volume growth in Americas Beverage, the contractual recovery our prior year's inflationary cost in European Beverage and cost saving initiatives in Transit Packaging. The company achieved $661,000,000 of free cash flow in 2023, driven by record EBITDA, exceptional working capital management that also included the reduction of approximately $200,000,000 in off balance sheet factoring and a continued disciplined approach to capital spending.

Speaker 1

For 2024, we see EBITDA In line with the 2023 record performance as continued strong performance in North American Beverage and Transit Packaging were offset by lower results in the can making equipment and aerosol businesses due to lower demand. As stated in the earnings release, 1st quarter adjusted earnings per diluted shares are projected to be in a range of $0.90 to 1 dollars with the full year projected to be $5.80 in the range of $5.80 to $6.20 per share. The adjusted earnings guidance includes net interest expense of 380,000,000 It assumes average common shares outstanding of approximately 120,000,000 shares with an exchange rate at current levels with the euro at 1 point 1.08 to the dollar full year tax rate of approximately 25 percent depreciation of approximately 320,000,000 Non controlling interest to be in the range of $130,000,000 and dividends to non controlling interest are expected to be approximately 110,000,000 We currently estimate 2024 full year adjusted free cash flow to be in the range of $700,000,000 to $750,000,000 with no more than $500,000,000 in capital spending. At the end of 2024, we would expect net leverage to be at the lower end of our targeted leverage range of 3.0 times 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 everyone. As reflected in last night's earnings release and as Kevin just reviewed, operating performance in the Q4 was well ahead of the prior year's Q4. Beverage can volumes remain strong in North America and Brazil, offsetting demand weakness in Europe and Asia. Cash flow performance was well above the prior year and earlier expectations as we significantly adjusted production schedules to drive down working capital. As has been the case throughout the year, below the line items that is interest expense, pension and equity earnings were all negative to prior year.

Speaker 2

In total, earnings ahead of last year, but short of prior expectations due mainly to a higher tax rate and lower equity earnings. As Kevin noted, a record EBITDA performance for the company in 2023 with double digit segment percentage gains found among the 3 largest businesses Americas and European Beverage and Transit Packaging more than offsetting headwinds faced from the 2022 steel repricing and weak aerosol can demand. Also as Kevin noted, during the Q4, we made the decision to close five facilities globally based on our installed capacity including newer facilities which continue to progress through learning curve and our view of future market growth and demand. Difficult decisions, but necessary to adjust our cost structure with expected future demand. Looking ahead to 2024, in Americas Beverage, we expect another year of volume growth in North America and Brazil, Although that will be somewhat offset by the glass business in Mexico, after 2 strong years of returnable glass shipments, We project a mix change to more one way glass combined with the timing lag for our glass PPI adjustment.

Speaker 2

In Europe shipments were down mid teens in the 4th quarter with our shortfall compared to the market being the result of our weighting more towards Southern Europe versus Northern Europe. We do expect a flatter demand environment in 2024 and projected income in the segment will return to 2021 levels. As provided in last night's release, We recast European corporate costs from corporate and other to the European beverage segment. Post the sale of the European tinplate business and completion of all associated service agreements, all remaining costs relate to the European Beverage business. And as you can deduce from the table, it is $5,000,000 to $6,000,000 per quarter, totaling $21,000,000 for 20.22 and $22,000,000 for 2023.

Speaker 2

Volume softness was noted across each Asian country we operate in as the region continues to struggle with the of inflation, which have led to higher base cost levels against declining consumer purchasing power. 2024, income is projected to be in line with 2023 as cost reductions offset continuing demand weakness. Transit Packaging realized the benefits of significant cost savings in 2023 leading to their highest ever income performance Despite a muted industrial backdrop, free cash in the segment was again strong with more than $300,000,000 being generated on an unlevered basis. Income growth is again forecast for the segment in 2024, albeit weighted towards the back half of the year. And the business has a cost structure that positions well for further growth when industrial activity accelerates in the future.

Speaker 2

Across our non reportable businesses, income is forecast to be down in 2024 versus 2023, The result of continuing weak aerosol can demand and a significant slowdown in orders for new beverage can manufacturing equipment. As you may recall, in the Q1 of 2023, we initiated a downsizing of the beverage equipment business in response to slowing demand for can manufacturing equipment. The North American food business with income above pre pandemic levels is well capitalized and continues to experience growth in the pet food category. Operationally, 2023 was a strong year With segment income up more than $100,000,000 we generated significant free cash flow with deleveraging on plan to the lower end of our targeted range. The higher interest rate environment led to significant headwinds below the line in the form of higher interest and pension costs and lower equity earnings.

Speaker 2

We did take significant action right size production capacity in both the U. S. And Asia given our view of market demand, which will lead to higher utilizations near term while allowing for the company to meet future demand growth as new plants progress through learning curve. Looking ahead to 2024, segment income is projected to be in line with 2023 As continued growth in beverage and transit will offset headwinds in aerosols and equipment. We remain focused on operational improvements, generating cash from the businesses and further strengthening the balance sheet, positioning the company well for future growth.

Speaker 2

Before we open the call to questions, We just ask that you limit yourselves to 2 questions so that everybody has an opportunity in the time allotted. And with that, Bill, We are now ready to open the call to questions.

Operator

Thank you. We will now begin the question and answer session. We have the first question coming from the line of George Staphos of Bank of America. Your line is now open.

Speaker 3

Thanks, everyone. Good morning. Tim, thanks for the details. Same to you, Kevin.

Speaker 2

George, can you speak up a little?

Speaker 3

Yes, sure. Can you hear me okay now?

Speaker 2

Yes.

Speaker 3

Okay. Sorry about that. Again, thanks for all the details. My two questions. First of all, Is there any carryover into 2024 from higher inventory that you need to still work down and or any kind of inventory charge on steel?

Speaker 3

That's question number 1. Question number 2, Tim, obviously, quarters come and go. Sometimes some segments do better than others. As you look at the non beverage segments, what makes you still comfortable with the portfolio as it's aligned? And why do you think the 10 plate businesses, machinery and transit can be drivers of earnings as you're seeing in America's beverage or We may be rethinking things as we sit here today.

Speaker 3

Thank you and good luck in the quarter.

Speaker 2

Sure, George. So the answer to the first question, no, no carryover. Inventories pretty much in line with where we think the business is going to go going forward in the tinplate businesses. To your second question, listen, I think the answer is any business is for sale under the right terms and conditions. But we're not in the market to give our businesses away in the hopes of driving some short term multiple gain just so the private equity guys can make money because we sold a business at below where its value where the true value is.

Speaker 2

These businesses all generate Pretty substantial cash. I mean, pretty difficult I have a difficult time understanding how we create more value by getting smaller. We sold a business a couple of years ago, a very large business. We got a very good price, especially historically when you consider where a food can business Trades didn't move the needle on valuation. So I have a hard time understanding that.

Speaker 2

Now specifically to the businesses you mentioned, Listen, Transit's an excellent business. We don't spend a lot of time talking about it because you folks don't want to talk about it. But this is a business with low to mid teens margins that requires almost No capital investment. I wish I had 5 more businesses like this where I didn't have to invest any money and all it did was send me cash every day. Pretty stable business.

Speaker 2

Some of the end markets, as we've said before, might not be as stable or they might fluctuate more than other businesses, but our business servicing a variety of end markets is remarkably stable with the exception Of the COVID year, the tinplate businesses, the food businesses, as we said, well capitalized, doing quite well, Income above pre pandemic levels, aerosol, well, It is an expensive way to dispense products. There are some things happening in the aerosol market. I would say that Some of the large CPGs despite their claims to meet their environmental goals, if you were to go into A market you'd see that a lot of air fresheners now are in all plastic. They're not in metal anymore. They're not in aluminum and or steel.

Speaker 2

So It is a changing business. We're going to right size the business for what we expect future demand to be and we'll see where it goes from there. The beverage can equipment business, it's been an excellent business for us for a number of years. I would project that this year and next year that it's predominantly a service and parts business that there is there are few new machine orders or new lines being globally with the exception of China. And so we'll hold on.

Speaker 2

We've right sized the business. We'll see what other end markets that our skilled technicians and mechanics can service besides beverage can equipment. But This is a charge we took in the Q1 last year, George, and I won't say which analyst, but one of you analysts called me afterwards and said, this is kind of the canary in the coal mine. You talked about your beverage can equipment business taking a big charge because of reduced expected demand and nobody brought up the question as if nobody wanted to understand what was going on with expected future growth in beverage. And So I'll leave that answer to a future question, but that's my long winded answer to your question, George.

Speaker 2

I apologize for being so long.

Speaker 3

No, Tim, not at all. We appreciate the thoughts. We'll turn it over. And thanks and good luck in the quarter.

Speaker 4

Thank you.

Operator

Thank you. We will move now to the next question coming from the line of Phil Ng of Jefferies. Your line is now open.

Speaker 5

Hey guys. 1Q earnings EPS is a big step down. And if I look at your full year guidance, it seems to be more front end loaded in terms of headwinds. Tim, can you kind of flush out some of the things that might be Weighing on your results in the early parts of the year versus hopefully

Speaker 1

later part of

Speaker 5

the year, maybe any other good guys that could kind of kick in?

Speaker 2

Yes. I think that again, our guidance versus your estimates, these were your estimates, not ours. And I understand your estimate for Q1 was trying to somewhat move from what we reported in the Q1 of 2023 back towards the Q1 of 2022 and we're going the opposite direction. I would say that European Beverage, probably a bit weaker in Q1 than we would have or you would have anticipated and that's largely the result of Q1 being a smaller quarter. And while we do expect the European market to pick up in 2024, we would expect that to be more back more summer weighted, not Q1.

Speaker 2

And then the other segments, we had A very strong result in the equipment business in Q1 last year. And I'll bet you If I had numbers in front of me, I'll bet you our equipment business is probably down on the order of $10,000,000 to $12,000,000 alone Q1, 2024 versus Q1, 2023. And then, aerosol probably makes up another handful of the shortfall. So they would be the 3 buckets.

Speaker 5

Okay.

Operator

And then can you give us

Speaker 5

a little more color on what's going on in Europe? Certainly, it's well telegraphed Europe's been soft.

Speaker 6

Where are

Speaker 5

things right now? I mean, is inventory already flushed out in Europe? Are you starting to see any green shoots in terms of order patterns with your customers in Europe? And then I guess one follow on. On the D and A side, you guys talked about Potentially a 36 tail tailwind.

Speaker 5

Is that in the guide already or that's something that

Speaker 2

No, it's in the guide already.

Speaker 6

Okay. It's in

Speaker 5

the guidance. So I think

Speaker 2

in Europe, as I said in the prepared remarks, we're much stronger in Southern Europe than we are in Northern Europe. So if you want to think about Spain, Italy, Greece and those markets were significantly weaker than the Northern European markets. We actually did quite well in the Middle East and Turkey, but our weakness was in the Southern Continental European Countries. I think that there are some things in the European market that are certainly different From a retail perspective and a customer promotion perspective than what we see in North America. And But I do think Europe's a market that will grow this year.

Speaker 2

It's a market that might be down 1 year, but it doesn't stay down for long. It generally if we have a down year in Europe, we generally bounce back pretty quick within a year, not much more than a year. So I do expect Europe, Although weak Q1 we're projecting to be weak. I do expect some strength beginning in Q2 and forward.

Speaker 5

Have you seen order patterns and inventory get flushed on the channel at this point like orders pick up or still too early to call?

Speaker 2

No, I think it's still too early for

Speaker 5

Okay. Appreciate the color, Tim.

Speaker 2

You're welcome.

Operator

Thank you. We will now move to the next question coming from the line of Mike Roxanne of Truist Securities. Your line is now open.

Speaker 7

Thank you, Tim, Kevin and Tom for taking my questions. Just wanted to follow-up on the last one that have been asked about your, especially as it relates to some of the retailers. The Caniforce said it would stop selling Pepsi and 7UP given unacceptable price increases. We've been hearing that other retailers are doing the same. Has that impacted demand in Europe?

Speaker 7

And do you or if it hasn't, do you expect it to impact demand in Europe if We can't do reach between these retailers and the CPGs.

Speaker 2

Well, I think what's impacting demand in Europe is The pressure on the consumer from all the other things that they're faced with energy and all their other costs, I don't think The expulsion of one particular brand from a large retail chain affects us because it's just replaced with other products on the shelves. Part of the issue in Europe is that this has more to do with government control around inflation than it does with the And so the retailer, in my view, I think the retailer is looking to avoid government problem by putting the blame on the big Soft drink company, I think if you were to if somebody was to walk through the store, you would see that that particular soft drink company, What they're charging for beverages is not the highest charge for beverages on the shelf, but they do have other products perhaps in the retail store and they're being punished across their entire portfolio be it snacks and soft drinks whereas their soft drink pricing is not the highest in the store. So I think but this has more to do with overreaching Government regulation in that central banks around the world have created a problem for all of us, Specifically consumers on the lower end of the scale and they're trying to paint somebody else as the bad guy and they first point their finger at the retailer and then the retailer points their finger at the CPG.

Speaker 2

So this will sort itself out in time. But specifically the expulsion again, I'll say it again, the expulsion of one product does not impact demand. It's just replaced with another product. What impacts demand is significant inflation across a variety of cost buckets for the consumer, notably energy.

Speaker 7

Got it. Thank you, Tim. And just one quick follow-up. On North America, how much additional runway do you think you have with respect to It's something that has benefited the company in recent years. Do you think a lot of those share gains versus some of your peers are now on you?

Speaker 7

Or do you still think there's some road

Speaker 2

I would say that we've not been well, let me say it this way. I think You should be able to appreciate from the margins we have versus others' margins that we've tried to grow our business in a responsible way in the marketplace. That is to say that the share gains we've experienced were more likely the result of higher Aspirations by others which were not fulfilled and or customers wanting to rebalance. I do think that by the end of I think by the end of 2024 from where we sit, We think the market vis a vis customers and suppliers is probably set it's going to be for the next couple of years. It'd be difficult for me to understand significant share moves beyond that unless somebody does something extremely foolish.

Speaker 7

Got it. Thank you very much and good luck in 2024.

Speaker 2

Thank you.

Operator

Thank you. We will move now to the next question coming from the line of Ghansham Panjabi of R. W. Baird. Your line is now open.

Speaker 8

Hey guys, good morning. Maybe we could first start off with an EPS bridge, if you could, off of the $586,000,000 in earnings for 2023, you have a lot going on, right? Cost savings, change in useful lives for the asset, last issue you called out and non reportable. Can you sort of dimensionalize those impacts on the EPS bridge?

Speaker 2

Yes. So what do we have? We got $0.30 coming from roughly $0.28 to $0.30 coming from the depreciation change. You've got higher depreciation year on year just from prior year's capital investment. So I wouldn't say it's a wash, but it's probably 2 thirds of the depreciation changes offset by higher depreciation from prior year's capital investment.

Speaker 2

You got the benefits of restructuring. And then you've got pretty sizable headwinds if you combine equipment aerosols And I beg you if you took the equipment business that could be down John Chum, year on year that could be down on the order of $40,000,000 aerosols and Mexican Mix more one way glass versus returnable and the PPI lag. We're on a 1 year lag basis for PPI in Mexico. So as utility prices go up and down, we either get it and pay it the next year or pay it this year and get it next year and We're in the cycle where we'll get it next year. But I would say if you took the equipment business aerosol in Mexico, you're looking at Combined $80,000,000 across those three buckets, offset by volume gains and some restructuring gains.

Speaker 8

And the cost savings associated with restructuring, What is that number?

Speaker 2

Yes. I mean think about this year, by the time we get everything done, think about like $15,000,000 and we get more next year. Generally, these are 1 year paybacks. The 2 plants in Asia were Older plants built in the early 90s by a company we acquired, they were built the one was built in a market it should have never been built in. These were initially built as slow speed lines.

Speaker 2

We've sped them up to medium speed lines. But In today's marketplace, they can't compete with a high speed line factory. So the savings there are not as great as you would otherwise imagine because weren't very expensive to begin with. You got to remember, you go to a you take an old plant out, there's no depreciation on it. So you don't get the depreciation savings.

Speaker 8

Yes, understood. And then on North America, with the shutdown in Mississippi, is that Just sort of a one off sort of adjustment or is this something that's part of a more holistic approach towards optimizing your footprint in North America? And then just the last Question just to clarify. On the off balance sheet financing unwind, I think it was $200,000,000 in 2023. Is there is that going to be an incremental headwind in 2024 as well?

Speaker 8

And if so, how much?

Speaker 2

Yes. It will not be a headwind in 2023, we took the opportunity to reduce the off balance sheet finance. It's just financing of another form Ghansham. We're just trying to optimize The cost of financing, we generated probably on the order of $300,000,000 to $350,000,000 of working capital source of cash. So we offset it by buying that down off balance sheet.

Speaker 2

The closure of Batesville, I described that to you as one off. Post the closure of Batesville, our utilization rates are mid-90s. I'll bet you the industry is 90% to 92% right now and we're probably 94% to 96%. So we're in pretty good balance in North America.

Speaker 8

Thanks so much.

Speaker 2

You're welcome.

Operator

Thank you. We will move now to the next question coming from the line of Adam Samuelson of Goldman Sachs. Your line is now open.

Speaker 9

Yes, thank you. Good morning, everyone.

Speaker 1

Good morning.

Speaker 2

Good

Speaker 9

morning. First question maybe If we could unpack the outlook on transit, specifically and as we think about The outlook for the year, just I know you talked about income growth, but can you talk about these top line volume price mix assumptions against that? Is there any kind of carryover savings from the restructuring actions? Are those effectively annualized at this point? And just How should we think about incremental kind of margins from here, if demand did actually improve?

Speaker 2

Yes. So I think we described the business to you all when we acquired it in 2018 as a GDP like business. So in the absence of a large capital plan organic or inorganic, This business is going to grow with GDP. And as you know, the industrial activity is down. We've been able to offset that With cost reductions over the last couple of years, I'd tell you that it's a little difficult to describe volume to you, but I can give you volume dollars.

Speaker 2

Our volume dollars in Q4 were down on the order of 3.5% and for the full year we're down on the order of 8.5%. That's volume dollars. But obviously as you could tell by the income results that was significantly offset by cost reduction activities and better price cost management. So We would expect that first half of this year again volume dollars to be a headwind. We'll continue to offset that a bit with cost, But the income growth that we're looking to experience in transit weighted more towards Qs 34 than the first half of the year.

Speaker 2

But again, A pretty I know you guys are tired of hearing because you don't like the business, but it's a solid business that generates low to mid teens returns No capital.

Speaker 9

Okay. That's helpful color. And then just going over to the Americas Beverage, You've lumped the PPI headwind on Mexico Glass with the other non reportables, but the whole segment is up inclusive of what I Presumed to be what a $25,000,000 $30,000,000 or so headwind in Mexico. So just help us think about the volume assumption Embedded?

Speaker 2

No, I think America's beverage, you've got growth in North America and Brazil, and I'd say it's Mostly offset by the headwind in Mexico. So I think that the segment is largely flat year on year, given the Mexican headwind.

Speaker 9

Got it. And what's the volumes for volume assumption for Americas North America and Brazil within that?

Speaker 2

So I think that we project the market in North America to be flat to up 1%. And just to remind ourselves, we believe the market was down on the order of 5% in 2022 and it was down on or was up about 1% in 2023. We don't see why 24% is up any more than 1%, so flat to 1%. And in that kind of market, We're currently projecting we'd be up 4% to 5%. Having said that, obviously January off to a rocketing start, But it's 1 month and it's a small month, so we don't get too excited about it.

Speaker 2

Brazil, Again, I'd suggest to you that we think the market and ourselves up in the 2% to 3% range.

Speaker 9

Got it. That's all very helpful. I'll pass it on. Thank you.

Speaker 2

You're welcome.

Operator

Thank We will move now to the next question coming from the line of Aaron Viswanathan of RBC Capital Markets. Your line is now open.

Speaker 10

Great. Thanks for taking my question. Hope you guys are well. So first question, on the EBITDA line, it looks like If you annualize kind of the reduction in depreciation that you're expecting, that's about $48,000,000 or $50,000,000 And then we kind of walk through your guidance of the $5.80 to $6.20 We're coming out with EBITDA of around $1,820,000,000 or so $1,801,000,000 in that range. I guess, is that right?

Speaker 10

And then That would also imply kind of down segment EBIT in the Americas. So I just wanted to clarify those kinds of questions. Thanks.

Speaker 2

Ask the second question again.

Speaker 10

Sorry, go ahead.

Speaker 2

I'll answer the EBITDA question. You got to ask me the second question again. So if we had $1,882,000 of EBITDA in 2023,000,000 the number you just quoted far too low. We're within $10,000,000 to $15,000,000 of that number in 2024. So think about $18.60 to 18.70.

Speaker 7

So

Speaker 2

you're well off that number. And then what was your second question?

Speaker 10

Yes. The second question was, What are you expecting for segment EBIT in the Americas? It does appear that maybe that would be flat to down or are you still expecting growth there?

Speaker 2

No, no. So I think what I just answered to Adam's question, we said flat year on year and that's growth in North America and Brazil offset by glass in Mexico. Okay.

Speaker 10

And then if I could just squeeze in one last one, sorry. So then when you think about the other businesses, it is a little surprising that there is so much volatility. And I know you that there is so much volatility and I know you've been asked this before, but would you consider there any way that you could maybe shift a little bit more into the aluminum aerosol business? Or is that not necessarily a good use of capital? Thanks.

Speaker 2

Well, I think we could consider doing anything. I don't particularly like the economics of aluminum aerosol, Really expensive and it doesn't provide you with The incremental growth opportunities that you see in D and I beverage can. So the impact extruded aluminum aerosol can Generally one line gives you the output of X number of units and there's really no way to add equipment to it to increase those X units to Y units on that one line. If you want more units, you need to add more lines. So For me, it's an expensive business.

Speaker 2

Okay, if you're already in it, like a lot of businesses, if you're already in it, You can talk yourself into spending more money. It's really difficult to talk yourself into getting into that business. There are better uses of capital.

Speaker 6

Okay, thanks. I'll turn it over.

Operator

Yes. Thank you. We will move now to the next question coming from the line of Anthony Pettinari of Citigroup. Your line is now open.

Speaker 7

Hi, good morning. I was wondering if you could talk a little bit about competitive intensity in Asia and just when you might be able to get back to kind of mid single digit bus growth, it seems like that region was growing for several years and a lot of capacity was added. Are you seeing foreign entrants from China or Japan kind of impacting competitive intensity within the region or just how you sort of characterize the environment?

Speaker 2

Good question. The first thing I would say is that the real headwind That you face last year and looking into this year is just the consumer is weak. And it's a much weaker consumer to start with than we're used to in Western Europe or North America. And So what would really help is if we had volume growth obviously and for that we need some kind of economic stimulus in the region. Now there obviously there has been a significant amount of capacity installed mostly in China We're very small.

Speaker 2

There has been some incremental capacity installed in Southeast Asia, but Not to the level that would give you concern if there was adequate growth in the market and adequate growth being decided you defined as mid single digits, which should be achievable in a market like Southeast Asia With a consumer that's continuing to experience more purchasing power, albeit over the last year and a half, last two years, they've had declining purchasing power. So that's the real challenge at this point.

Speaker 7

Okay. That's helpful. And then just following up on, I think it was Ghansham's question. I think you identified Mexico Can making machinery and aerosol as an $80,000,000 headwind potentially, if I got that right for those three things?

Speaker 2

Rough number, yes.

Speaker 7

Yes. It's obviously too early to think about 25%. But just from a big picture perspective, You'd expect Mexico to kind of come back on that pass through in 2025, if I characterize that correctly. For aerosol and can making machinery, do you think we're at a trough? I mean, do you think it gets better as the year goes on?

Speaker 7

Like just how would you characterize where those businesses are kind of within their earnings cycle and the potential for Maybe some kind of recovery in 2025 or not?

Speaker 2

So Mexico, as you stated, comes back next year, no doubt. Can Making Equipment business, as I said earlier, we are this year will be a service and parts business for previous equipment sold and installed. So there won't be a headwind next year from less machines sold because there will be no Minimal machines sold this year. So that probably that business will come back in the future, but it's probably 26 and after. I don't forecast based on where we see global growth rates for beverage cans outside of China, I don't see the need for more beverage can equipment in any market.

Speaker 2

But we do expect There will be enough growth that there will be further lines installed in the future, but that's a 26.5 phenomenon. Aerosols, As I said there are some things happening in the aerosol business. I think that there's some substrate change To plastic, I would say the business is I don't see the business getting any worse, but it could be a year or 2 before it gets We need some demand pickup in that business and certainly with demand pickup perhaps some better behavior by some of the others in the marketplace.

Speaker 7

Okay. That's helpful. I'll turn it over.

Operator

Thank you. We will move now to the next question coming from the line of Gabe Hajde of Wells Fargo Securities. Your line is now open.

Speaker 6

Ken, Kevin, Tom, good morning.

Speaker 2

Good morning, Gabe. Good morning, Dave.

Speaker 6

Ken, bear with me here. I wanted to ask a question about Americas bev, And it's always tough to pick a starting point both. If I look at sort of pre pandemic segment profit, You're up, I don't know, maybe $450,000,000 I think there's roughly maybe 13,000,000,000 units more sold. So maybe that gave you $200,000,000 to $225,000,000 So there's another $225,000,000 or so of favorable mix and price in there. So I'm just curious sort of replicating the competitive intensity question in North America.

Speaker 6

You talked about your system being mid-90s utilized

Speaker 7

and the

Speaker 6

rest of the market maybe low-90s. So as we go into the middle of the decade and forward, Do you feel like that improved profitability is sustainable? And then a similar question in Europe, but a little bit different in the sense that whenever conflict in the Middle East, sometimes some of those cans find their way into Eastern Europe and then Eastern Europe ships into Western Europe. Is there any fear of that and risk to your 2024 outlook as it relates to Europe? Thanks.

Speaker 2

No, I think to answer the second part of your question, the Middle East has remained, despite the conflict has remained Very firm. I think the perhaps the labels are different, but the volume is similar to higher. So we don't see that challenge that you just described. So North America, I think that there's no reason why we can't As an industry, remain disciplined at utilization rates in the low to mid-90s levels. These are Very high utilization rate.

Speaker 2

So in the absence as I said earlier in the absence of somebody doing something foolish, We don't see significant share shifts beyond 2024.

Speaker 6

Okay. And then I'm going to try to sneak in 2 last ones. If I take your comments on the equipment business and the sort of flat to up 1% growth in North America. Does that suggest that sort of your medium term outlook in terms of like, hey, Our bev equipment business is sort of at a normalized spot and that's how we should think about growth. And then are you telling us that $15,000,000 of total restructuring savings from the 5 plant consolidation efforts?

Speaker 6

Or did I mishear What you're trying to tell us?

Speaker 10

Thank you.

Speaker 2

$15,000,000 this year with more to come next year. I mean, obviously, you announced them, it takes you some time to get the plant closed and realize the benefits through the remaining system. No, I think on the beverage can equipment business, I wouldn't say this is normal run rate. I would say this is a low point considering that we don't project any machine sales this year or next year. Clearly, when machine sales return, the profits go back up.

Speaker 2

So I don't think this is the normal. I do think That it's hard to project as we sit here today after the last two years That the market for North American beverage will grow any more than 0% to 1%. I know some others have higher growth aspirations for the market than that, but We're going to grow more than that this year, but I don't see the market growing more than that. As you know, the customers have A new value over volume model, it's hard for me to understand how much more volume they would need to sell to offset price loss if they do significant promotions. And I'm sure they're much smarter about that and they target their promotions in a way that I wouldn't understand market by market.

Speaker 2

But you'd have to sell an incredibly, incredible amounts of volume more than you're projecting now to offset the price that they've realized. So if a 12 pack used to be $3 Gabe, that's $6 for a case versus $18 for a case now not promoted. And even promoted, if you're talking about buy 2 get 1, that's $12 a case. So Significant price inflation that they put into the market, hard to understand how they can reverse that and keep profits moving in the right direction for them. I understand for them that like all business, You always say volume covers all sins.

Speaker 2

Well, I don't think they want to create the sin of underpricing their product anymore. So I think that 0% to 1% for the market is probably a fair assessment as we sit here today.

Speaker 6

As always, thank you.

Speaker 2

You're welcome.

Operator

Thank you. We will move on to the next question From the line of Edlain Rodriguez of Mizuho. Your line is now open.

Speaker 4

Thank you. Good morning, guys. Two quick ones for me. 1, on European Beverage, what do you think is driving the softness we're seeing right now? And what will drive a rebound in the second half as you expected?

Speaker 4

And then the second one, you've talked about rightsizing the aerosol business, But how long do you think it will take you to get to where you want to be in there?

Speaker 2

Second question. Listen, I think we announced the closure of Decatur. I think we're in a much better position after the Decatur closure. Now we're Now you're back to you have the capacity you need, a little more volume would help. And I think as I said earlier, a little more volume Perhaps brings about a little bit better behavior across the industry.

Speaker 2

I'll leave it at that. On Europe, As I said earlier, the challenge and you probably heard others say as well, the challenge that we have right now is the consumer is under incredible pressure across Europe. If you were to look at any index measure of Economic activity or consumer confidence, it's pretty low across Europe right now. But I do think, as I said earlier, we've had periods before where In the can business where Europe has been down, it never stays down for long. So I do think by the summer months here, as we get into the summer months, we'll start to see a pickup late in the Q2 through the summer.

Speaker 4

Okay. Thank you very much.

Speaker 2

You're welcome.

Operator

We have the last person to ask the question coming from the line of George Staphos of Bank of America. Your line is now open.

Speaker 3

Hey guys, thanks for taking the follow on. I just want to make sure factually the restructuring savings we're talking about this year, it's a $1,500,000 not a 5 $1,000,000 And what would you say the carryover is into 2025 recognizing it's only February of 2024? And then secondly, Tim, if you had a figure For European beverage can growth for this year, if you mentioned I had missed it, what is that figure? And with that, I'll turn it over. Thank you.

Speaker 2

Yes. Thanks, George. So I think 1.5 this year and perhaps another 1.5 next year. Keeping in mind, these are all old plants. So there is no depreciation, right?

Speaker 2

So you don't get the depreciation savings that you see from a plant that's not 30 plus years old. For Europe, we're expecting a flatter, so 0% to 1% volume environment for Crown in 2024. I think the market up on the order of 2% to 3%.

Speaker 3

Hey, Tim, I'll double dip here one last one. And I recognize it's a small business in relation to the entirety of Crown. But as you talked about the aerosol business in North America and globally and we've obviously followed it for Crown for a number of years, it doesn't sound like Things are going to get measurably better from a secular basis longer term. So Yes, you've rightsized it. Yes, maybe you get some volume growth, but it doesn't sound like it's a real driver for you going forward.

Speaker 3

Is it something that you could ultimately parse From the rest of template or is it so integrated that it's really hard to do and so it stays as long as you're in the North American template, which you still seem to like? Thank you and good luck in the quarter.

Speaker 2

Yes, good question. So listen, I think you're right. It doesn't get measurably better in the future, but it doesn't get any worse from where we're at we're projecting in 2024. Yes, it is integrated. As you think about the and I know George, you know this as well as anybody, The process to cut, coat and print sheet across aerosols and food very integrated.

Speaker 2

You could carve it out, but it Probably leads to more dissynergies than it's worth. And again, as I said earlier, the prospect of Selling any business is always on the table, but you have to think about how you're going to replace the cash flow If you sell any one or a combination of businesses, specifically North American template, we still generate a sizable amount of free cash flow Across these businesses on an annual basis, as you consider, we don't spend any capital in these businesses. And I think I addressed earlier Why we're not interested to spend any capital in the aluminum aerosol business. So we run these those businesses we specifically run for cash And we'll continue to run them for cash until something else breaks, but they are cash positive.

Speaker 3

Understood. No, I appreciate the color, Tim. Thank you very much.

Speaker 2

Thanks, George. So, Bill, I think you said that, that was the last question. So, We thank everybody for joining us and we'll speak to you again in April after the completion of the Q1. Thanks very much. Bye now.

Operator

Thank you. And that concludes today's conference. Thank you so much everyone for joining. You may now disconnect and have a great day.

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Earnings Conference Call
Crown Q4 2023
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