Crown Holdings, Inc.

Good morning and welcome to Crown Holdings' first quarter 2020 conference call. Your lines have been placed on a listen-only mode until the question and answer session. Please be advised that this conference is being recorded. I would now like to turn the call over to Mr. Thomas Kelly, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you, Kath, and good morning. With me on today's call is Tim Donahue, President and Chief Executive Officer. On this call, as in the earnings release, we will be making a number of forward-looking statements. Actual results could vary materially from such statements. Additional information concerning factors that could cause actual results to vary is contained in the press release and in our SEC filings, including in our Form 10-K for 2019 and subsequent filings. Earnings for the quarter were $0.65 per share compared to $0.77 in the prior year quarter. Comparable earnings per share were $1.13 in the quarter versus $1.05 in 2019. Net sales in the quarter were flat versus prior year as increased beverage can volumes were offset by $40 million of unfavorable currency translation and the pass-through of lower raw material costs. Segment income of $298 million in the quarter was below prior year as the global tin plate businesses, as expected, were negatively impacted by $34 million related to the carryover of higher price steel from the year-end 2019 inventory. At the end of the quarter, the company had over $1.5 billion in liquidity between cash balances and borrowing capacity under its revolving credit facility. The net leverage ratio of 4.5 times was well within the covenant requirement of 5.75 times. As discussed in the release, we are withdrawing our previous financial guidance. With respect to free cash flow, we do have some discretion with capital spending and in certain other areas, and our goal is a number approximating our original guidance of $600 million, although that is dependent on the duration of the social distancing measures. With that, I'll turn the call over to Tim.

Thank you, Tom. Good morning to everybody, and thank you for joining us on today's call. Our best wishes for the health and safety go out to you and your families. Before reviewing the operating segments, I want to thank all of our fellow employees for their dedication during these trying times. Your efforts ensure that our customers in the food, beverage, and transportation industries are able to deliver their products and services that are vital to our customers and ultimately consumers around the world. To our factory employees who day in and day out manufacture the products that are so critical to the global food supply and transportation support systems, not only do we appreciate your skills and efforts, you are an inspiration to all of your fellow employees. You know, when I first joined the company, someone once said to me, there is hard work and then there is work on a can line. And any of you who ever spent time at a can plant certainly understand that. So when you take really hard work combined with the fear that many feel during this pandemic, a company can only perform with great people. And at Crown, we have great people. The health and safety of our employees, their families, our customers and suppliers remain our primary concern. In early February, under the leadership of our Chief Operating Officer, Jerry Gifford, we established a coronavirus, now COVID-19, task force. Among many measures, the task force implemented visitor and travel restrictions, required pre-entry temperature checks for all employees and visitors at each facility, developed social distancing and sanitization processes, enabled employees to work from home where possible, and developed an action plan when the company becomes aware that an employee may have been exposed to, exhibits symptoms of, or has a confirmed diagnosis of the COVID-19 virus. Like many companies, Crown is doing its part to ensure the supply of necessary equipment to help in the fight against the virus. CMB Engineering, our beverage can equipment business in the UK, is participating in a British National Health Service program to build ventilators needed in that country. We have partnered with a ventilator manufacturer to help in the production of parts for portable ventilators, with 350 units shipped already and an additional 5,500 to follow. Additionally, our transit packaging division has been utilizing its 3D printing capabilities to provide critical PPE to first responders in Monterrey, Mexico, and in multiple locations to employees throughout the company. While first quarter performance was strong despite the initial pressures from social distancing measures, the uncertainty surrounding the severity and duration of the virus precludes us from projecting financial results with any reasonable confidence. Therefore, we have withdrawn our previously issued guidance for the year. We will do our best to tell you what we see in each of the businesses currently, but the dynamic nature of the crisis makes it challenging beyond that. Our primary points of focus remain ensuring employee safety, meeting customer demand, and ensuring adequate liquidity to operate and grow the company, all of which we believe lead to enhanced and sustained shareholder value. We remind you that the pass-through of lower raw material costs, that is tinplate steel down mid-single digits and delivered aluminum down more than 10% from last year, will offset unit volume growth on the revenue line. Additionally, and as Tom just discussed, first quarter segment income was negatively impacted by $34 million, or 19 cents per share, as we carried higher priced tinplate inventories into 2020 from 19. Turning to the segments. In America's beverage, overall unit volumes advanced 15% in the quarter, with North America up 16%. North American shipments accelerated in March, and demand remains very strong in April. We expect the North American market will remain sold out in 2020. As previously discussed, the third line in Toronto began commercial shipments in late January. While the startup of the third line in Nichols is now delayed until early June, a result of the virus pandemic. During the quarter, we announced and broke ground on a new state of the art beverage can facility in Bowling Green, Kentucky, commercial startup scheduled for late Q2 2021. In Brazil, can sales were up 9% in the quarter. However, shipments were down 8% in the month of March, and we expect April and the full second quarter to be well below that. With rising unemployment and declining incomes, Brazilian consumers are reshaping their spending behavior and beer demand has softened considerably. Beer consumption is a social activity and nowhere is this more prevalent than in Brazil where 70% of beer sales occur in the food service channel. Our base scenario is for sharp demand contraction in Q2 followed by some improvement in the third and fourth quarters. Unit volumes in European beverage increased 5% in the first quarter, despite both can lines and the Seville plant being down for conversion. Gains were realized across most operations in the quarter, although we began to see a slowdown in demand in the month of March, notably in Italy, Turkey, and the UK. The situation we expect will continue through the second quarter. Sales unit volumes in European food were flat in the first quarter against a strong comparable 2019 first quarter, with the month of March increasing 1% over the prior year. While it's difficult to gauge the success of the annual food can campaign from first quarter demand, we do expect demand to accelerate in the second quarter. All signs point to strong can demand for the full year as fillers look to replenish depleted filled stocks. First quarter segment income was impacted by 18 million of higher-priced metal carried into 20 from 19. Shippens in Asia Pacific advanced 3% in the quarter, as 6% growth in Southeast Asia offset a 20% decline in China. The new plant in Nankai, Thailand, remains on schedule to begin commercial operations in the third quarter of this year. In the month of March, shipments in China were up 10% as that country began its initial recovery from COVID-19, while Southeast Asian shipments declined 5%. In the second quarter, we expect canned demand in China to return to normal levels and remain so through the balance of the year. However, we expect Southeast Asia will be significantly below the prior year's second quarter as the full impact of social distancing measures takes effect. We do expect demand will gradually improve from second quarter lows in the third and fourth quarters, but still be below the prior year. Sales and transit packaging declined 8% in the first quarter, with the pass-through of lower raw materials accounting for 2.5%, lower overall volumes 3.5%, and currency 2%. Trends in the month of March were similar to the full quarter. To date, the business has performed well with plastic strap and protective, offsetting much of the volume decline in the equipment and tool businesses. We do expect lower demand from some of the industries we serve for some period of time, and we are taking actions to better align our transit cost structure to the current situation. Demand was firm in the non-reported tin plate businesses, with North American food shipments up 5% in the first quarter. The outlook is for continued strong demand for the end of the year. First quarter income in these businesses was impacted by 16 million of higher priced tin plate inventories carried over from 19. In summary, it's going to be a challenging year for all of us. In addition to our people, we derive strength from our product and geographic diversity operating all but two of our 239 factories across 47 countries. Crown has been a truly global company for more than 100 years of its near 130-year history, surviving two world wars during that time. As I heard someone say the other day, the only thing that is certain is uncertainty. However, we continue to operate and deliver products to essential businesses, generate significant cash, and have a very manageable debt maturity profile and adequate liquidity to continue to execute our long-term strategy. And with that, Cath, we're now ready to take questions.

Thank you. We will now begin the question and answer session. For other participants, if you would like to ask a question, please press star, follow button number one on your phone, and mute your phone and recording clearly when prompted. Your name is required to introduce your question. To cancel your request, press star, follow button number two. One moment, please, for incoming questions. Our first question is from Anthony Pitagnari of Citi. Your line is now open.

Good morning, and great to hear everyone's voice. Tim, is it possible to quantify or estimate how much of your BevCans you think end up in on-premise or food service channels? You talked about Brazil. Just wondering if you had thoughts on the global exposure there. And generally, any comments on how you've seen on-premise demand maybe translate to at home, especially North America?

Yeah, so I think I talked about Brazil. I think that, to a lesser extent, the same characteristics apply to countries like Mexico and the countries throughout Southeast Asia. We will experience a demand slowdown from Mexican customers, but those cans can still be manufactured And we'll ship them into North America, into the United States, just because the demand in the US is so strong. So we don't expect significant can volume loss out of our Mexican facilities, because we'll move those to the US. As I did say in the prepared remarks, we do expect demand in Southeast Asia to be weaker in Q2 because of what you would describe, as I described with Brazil, food service channels all but being shut down. As you look at the European market, the on-premise market, restaurants, hotels, bars, typically glass and or fountain. I think we're probably going to see a little bit of slowdown in Europe only because the pandemic hit. really exacerbated in several countries there. So we will see some beverage cans slow down in the European market. For the most part, in the United States, anything that's on premise is fountain in the soft drink scenario. And then in beer and spirits, mainly glass, but cans are beginning to make much greater inroads, as we've discussed before. The market exceptionally strong in the U.S. across a number of products, as we've talked to you before, and currently what we see right now is just an explosion in the carbonated and carbonated flavored water categories. So I think we fully expect North America to remain oversold through the balance of this year.

Okay, that's very helpful. And then in transit, you indicated March demand was similar to the full quarter. Just wondering if there was any early reads on April. And then, you know, as you look across geographies and categories, are there any segments that are holding up better within transit than others? Do you view the business as sort of stable? Is it maybe deteriorating into 2Q, which I guess would have been my expectation? Just any kind of further thoughts there?

We're only two weeks into April. The good fortune of going early is that we only have two weeks that we have to explain to you. The bad fortune is we only have two weeks of knowledge. We only have two weeks of knowledge. So far in April, I would say the trends in the first two weeks of April are similar to March in the first quarter. However, we do expect some softening in the business. I think Asia Pacific notably will be softer primarily because the business is largely a business operated out of India, and it's largely a steel industry support business, and that will be certainly impacted. The other businesses are actually holding up quite well. I'd say plastic strap protective holding up extremely well. You know, a lot of that product is used for consumer companies. They're doing well, as you know. We will see steel straps soften a little bit, especially in end markets like steel and autos, white goods, lumber, construction, brick, block, things like that. But most of the other markets we serve are doing well. Equipment and tools, you know, I expect equipment and tools to soften, although for the first two weeks of If April, it's holding up well. But make no doubt, we expect a contraction in second quarter performance in Cignode, although for the first two weeks we haven't seen it yet.

Okay, that's helpful. I'll turn it over.

Thank you. Thank you. Our next question is from Gancham Punjabi of RW Baird. Your line is now open.

Thanks so much. Good morning, everybody.

Morning.

Good morning. hey tim can you just give us some more color on european beverage i think you mentioned that you know a couple of the countries italy and uk were slower in march uh just give us some more context did you see an initial acceleration as the virus hit those countries and then you saw a decline after that in the month of march and if so um you know why wouldn't some of that occur in the u.s as well that was basically a little bit behind uh for example italy what do you think is going on well i think i i don't think there's i don't think

Just real quick, whether it's beverage or food, I don't think the level of pantry loading occurs in Europe as it does in the US for a number of reasons and a real simple reason. They don't have the storage space to store the stuff like we do in the US. They don't have garages and big kitchens and big pantries like we do. I think that the impact of the virus in certain communities in Europe is even more significant than, let's say, New York City. So certainly in the United States, the one community that's had a real challenge with the virus has been New York City, and maybe some others will approach that. But there are regions in Europe, whether it's in the Milan-Parma region of Italy or around Lyon or Paris, in the UK in certain spots, and throughout Spain that have been particularly hard hit. And I do think that one of the things we have done well in the U.S., there is a social safety net that's been employed by the Congress to help. In many countries around the world, you're not seeing this. So, you know, Ganshama, a policy of mass unemployment was never going to be good for consumption, right? So you should expect consumption to decline dramatically. in most areas of the world where you're going to see mass unemployment. I think the difference in the United States with beverage cans is the market was oversold coming into the year, and we don't see any letup in that market currently. I expect social distancing and shutdowns to be in place for a considerable period of time here. and people still consume, people still need to eat and drink, and they'll find different things to eat and drink, but the can works really well at home. So I don't expect that to change in the U.S., whereas in Europe, you know, situation's a little different. Disposable income, much different in parts of Europe and Europe. You know, most of us from America, we look at Europe and we think about Europe as London, Paris, Zurich, Madrid. You get outside to big cities in Europe and into the rural areas of Europe, people are generally poor other than countries like Germany and the Netherlands. I mean, it's not the same level of wealth that we're accustomed to in the United States. So unemployment really hits consumption quite hard in those areas.

Okay, and then just for my second question, you know, back to the U.S., are there, just from a high-level standpoint, are there any big shifts that you're seeing that are material? You know, we keep hearing from CPG companies about narrowing down their SKUs, for example, delaying new products. You know, how is that impacting specialty versus the traditional beverage can sizes in terms of what you've seen so far? Thanks so much.

Well, I don't think we've seen a difference in sizes, Ganshan, but what we've seen is a difference in labels. And so if a... If a large beverage can producer had 40 different labels that we generally run for them, we might be down to running four labels from them. So we can get maximum output, and they can get maximum output in the filling lines. So that's what we're seeing.

And specialty cans versus traditional?

I think specialty and traditional, we're seeing the same general mix. Thanks so much. Thank you.

Thank you. Our next question is from . Your line is now open.

Hi. Good morning. Thanks for taking my question. I wanted to start with Mexico and just see if you could just summarize kind of your understanding of what the situation is there currently and then any challenges you would expect in transferring the cans to the U.S. or transporting them to the U.S.

Initially, the Mexican government deemed beer a non-essential industry. They have reversed that. There is a significant overloading of product in the channel right now as the Mexican consumer, similar to the Brazilian consumer, is strained financially and will look to buy food staples like rice and beans and other products as opposed to beer and soft drinks. and generally beer and soft drinks in a can are a little bit more expensive to the consumer than returnable glass in markets like Mexico, Brazil, and other markets like that. So we will start to see the Mexican beer production begin to take up with the Mexican producers for Mexican demand. However, as we've explained to you, and I think you've heard from others, North American demand is exceptionally strong and fortunately it's not very difficult to get cans across the border. It takes a little bit more time right now, but we are able to produce the specifications, that is the labels and the internal lacquers are consistent from Mexico to the United States, so we're qualified from all our Mexican locations. to our customers in the U.S., and we're able to move cans readily from Mexico into the U.S.

Okay, thanks. And then my second question, if you kind of focus on the areas where you are seeing a little bit of weakness or expecting like you might for some time, like in Brazil, how do you manage your production schedules in this environment, and do you continue to produce at the same level in case you have any COVID risk? At the facilities, do you have inventory? Do you shut things down sooner rather than later? I'm just trying to understand, just given this is kind of an unprecedented situation.

Yeah, so let's be clear, Debbie. If I didn't say it, I thought I did say it. Looking back at my notes now, I thought I didn't describe a little contraction in Brazil. I think I described it as a sharp contraction, so let's make no mistake about it. There is a severe consumption decline in Brazil. We are not making cans for the sake of making cans to absorb cost. If we have nine can lines, I think, in Brazil, we might be running two of them right now. We're not going to build inventory just for the sake of building inventory. Fortunately, the spring and summer months are a low season for us in Brazil, and it begins to pick up again in Q3. We will curtail operations. We will utilize what we're allowed to utilize under Brazilian labor law to minimize our cost. Employees will take vacation before they're temporarily laid off, and then we'll look to bring them back in the summer or later months as demand picks up.

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

Thank you.

Thank you. Our next question is from George Safis of Bank of America. Your line is now open.

Thanks. Hi, everyone. Good morning. Thanks for all you're doing and everybody at Crown is doing for COVID, Tim, Tom. I wanted to switch gears a bit and talk a bit about transit packaging. I think you mentioned, if I heard it correctly, that you're taking some additional actions. I guess my interpretation was to manage costs and margin relative to Obviously, the revenue uncertainties. Could you talk a bit further about that? And then a couple of follow-ons.

Yeah, so, George, I think you're aware because you attended the show in Vegas last year. We have an ongoing process to reduce costs, specifically in the G&A categories. We're looking at how we go to market across a number of industries and products across And we've combined the management of the protective and the industrial businesses under one platform as opposed to two separate platforms. So that's number one. Number two, and that's been ongoing and will continue. Number two, as we see demand soften, which we expect to see, as I described earlier, in certain of the end markets we supply, as you would expect, We will obviously furlough first temporarily employees, and then we'll look to furlough or have employees take vacation first before they're furloughed to minimize cost. You know, it's not something you want to do, but for the health of the entire franchise, it's necessary, and that's what we're doing.

No, of course, I guess, and maybe you can't comment, but is there a way to size what shock absorber you have to earnings from these types of actions over the course of the year, or is that still indeterminate at this juncture, or at least not possible to talk about on this kind of forum?

Yeah, I prefer not to talk about it in this forum, but I think that – You know, I will say the following. I think, you know, the concern that most people have with Cignode is when they look back at the financial crisis of 08 and 09 and they look at the EBITDA contraction we had in that period for the full year, it was something like 40% to 50%. And I don't think we're going to experience anything near that contraction level 19 to 20. The business, as we've described to you, is far different today than it was then. However, there will be a significant contraction. Now, is that 10%, 20%? I don't know, but we'll see where it comes out to.

Okay. And, you know, just because you'd mentioned the press release, can you comment at all on where the portfolio review stands from our vantage point? Something like COVID and the recession we're likely entering would probably be make this somewhat less able to be pursued, but any thoughts you had on that would be helpful. And then one last question.

Sure. So I think, you know, the review is ongoing. You know, we still have everybody at corporate doing the work from home that they could do. There are things, there's a lot of work that can be done behind the scenes, whether or not we believe we're going to have a marketplace in which a process or several processes could be explored, so that review is ongoing. I think the fortunate thing, we've talked about it before, we have businesses that require very little capital that generate a lot of cash flow, and in a market like this, cash flow is exceptionally important, and we can talk about a lot of things, and there are going to be a lot of companies that talk about a lot of things, but we're fortunate we have cash flow, we have liquidity, and we have a very stable capital structure. And so we're going to run the business to protect the franchise and continue to grow the business where we see opportunities. But behind the scenes, we are doing work. And if and when the situation allows for, you know, the exploration of value for some of those businesses, we'll be ready to employ the work that we're doing currently in that environment.

Hey, Tim, thanks for that. My last one, and I'll turn it over. And if you mentioned it, I missed it, and I apologize. Can you comment on what the volume run rate for beverage cans is in Europe entering April, recognizing a lot can change? And are you seeing any signs from your customers in Europe or perhaps elsewhere that they care a little bit less about sustainability in an environment where people are obviously worried more about paychecks and their own well-being? Thanks, and good luck in the quarter.

You asked about Europe, George? Mm-hmm.

Europe, and then more, you know, run rates in Europe, and then more broadly, do customers and consumers care less about sustainability when they're worried about trying to get food on the table?

Yeah, so, I mean, you know, for the quarter, we were up double digits. For the month of March, we were up 2.5%. So, as I said, we saw contraction in several markets, Turkey, Italy, UK, and I expect we'll see more in April. I think April and the second quarter, we're going to be down 2%. When I look at our production numbers, production numbers are probably down, because we're trying to match the demand, we're probably down on the order of 12 percent, 12 to 15 percent production, and that's just a reflection of the demand that we're looking at, not a reflection of government forced closures or absenteeism. in both food and beverage in Europe, significant absenteeism in some of the factories, but that is beginning to subside. And absenteeism on balance is starting to decline and approach more historical levels right now. So the factories, you know, Jerry and I, we talk about this probably two or three times a day, all things considered, the factories are running phenomenally. The workforces that we have globally are just doing a tremendous job in the face of of the fear they face. So, actually, we feel pretty good about that, but this is a demand issue, and so demand is slowing.

Okay. I'll turn it over. Thank you. Thanks, George.

Thank you. Our next question is from Mike Leathead of Barclays. Your line is now open.

Thanks. Good morning, guys. I guess first question on cash flow and working capital, I guess 1Q looked like a fairly typical seasonal working capital build, but obviously the sales outlook has changed a bit since the year started. So can you maybe just help us with how we should think about the seasonal unwind that you'd expect this year? Obviously, it's still a fluid target, but just in your base model, how do you think about getting that cash back throughout the year?

Yeah, so I think Tom talked that, you know, we're going to do everything we can to stick to the original cash flow guidance we gave you. It'll really depend on the duration of these social distancing measures. You know, in our base scenario, we've extended what we believe the measures will be by the various governments around the world through much or close to the end of the second quarter. We are expecting some easing of that in third quarter and fourth quarter. So, clearly, there is going to be, as we've described, demand shortfalls across the business globally and largely across most of the international beverage can businesses. And with that, you would expect EBIT to come down in the global beverage businesses and cash flow to come down accordingly. We believe strongly that we have, within our discretion, whether it's in the CapEx line or in some of the various cost lines, the ability to offset much of that. So cash flow, we feel comfortable that we can still generate significant cash flow this year, and we'll see what the number actually is. In terms of the seasonal build, I think probably you're going to see a smaller build in Q2 and a smaller recovery in Q4, but probably still comes out to, on balance, a pretty fair number by the end of the year.

Got it. That's helpful. And then just returning to America's beverage, Tim, I understand what you're saying about the cultural differences in consumption between regions, and that's helpful. I guess with North American volumes up 16%, I can't imagine people are sustainably drinking 15% more beer or soda or whatever. So I guess how do you think about pantry loading or pre-buy or other factors like that?

Yeah, so Mike, just keep in mind, the first quarter is a smaller quarter, much like the fourth quarter. And so the percentage gains that we'll experience in the first and fourth quarter are going to be greater than the second and third and certainly greater than the full year. But I do think at some point last year, whether it was in October or February, describing the third and fourth quarters, as we looked at it, 2020 we we all but guaranteed you that we would have 10% growth this year and we knew where we felt comfortable that we would see growth like that because of the new capacity coming online in Toronto and in Nichols with the third line so I still I don't believe we're going to have 16 growth 16% growth for the full year but I think I think we're likely to see from US manufactured cans numbers close to that 10%. I don't see any reason why we're not going to experience that. I do think we'll have an outsized proportion of the growth this year just because it was the year where we brought capacity on versus the year where others brought capacity on, and that kind of bounces around from year to year depending on who brings on capacity. But the market's going to be very firm. I don't think that people are consuming 16% more product, but what they're not consuming is fountain soda in restaurants. And they're not buying larger size PET products which go flat in their pantry. They're buying something that stores well in the pantry. And I do believe that when it's in the house, it gets consumed. So my children are home from school. Everybody's children are home from school. Everybody's in the house. One thing you know about children is they think nothing about going into the pantry and grabbing what they want when they want it. So stuff is being consumed. And I expect North America is going to continue to be extremely robust throughout the balance of this year.

Got it. Okay. Thank you.

Thank you, Mike.

Thank you. Our next question is from Aaron Ritz-Wanassen of RBC Capital Markets. Your line is now open.

Great. Thanks for taking my question. Good morning, and thanks for all you're doing as well. I guess my first question was on the guidance. Obviously, a lot of things are moving and changing right now, but if we were to bucket it out into, say, price, cost, volume, and other, and FX, I would imagine that volume is the main area of uncertainty, especially in Europe and Asia Pacific. Is that right for beverage cans?

Well, and Brazil, right? Right. I mean, Brazil is probably going to be the – Brazil and Southeast Asia are the hardest hit that we see, only because of the – as we described earlier, the prevalence or the predominant nature of consumption of beer in those markets is in the food service channels. So I would say currency, you know, what did we have in the first quarter? Currency was a handful or $4 million on segment income and As we said last year, we expected the impact of that to be largely muted compared to prior years. We'll see how the dollar bounces around versus foreign currencies, but not a big thing. Price, we kind of know where price is. As we enter the year, we know where our price is. So the big moving factor compared to the early February conversation we had with you is volume. I'm trying not to speculate because I don't like to talk about what we don't know. We tried to tell you everything we know for the quarter of the month of March and what we're seeing right now, but it's largely volume. North America is going to be exceptionally strong in beverage. Food, globally food and aerosol cans are going to hold up well. Metal vacuum closures for products like baby food and adult nutritionals and condiments are going to hold up very well. Some of the transit businesses will hold up very well. Some will be weak. And then beverage in markets like Brazil, Southeast Asia, and some parts of Europe will be weaker. But it's volume right now. That's the uncertainty.

And just from a kind of operational standpoint, do you expect to kind of – you know, announce maybe a larger cost reduction program, or is there kind of ongoing productivity that you target within your system every year, or how should we think about, you know, that opportunity?

Well, you know, we're not expecting this to be a, you know, an 18-month problem. At some point, you know, social distancing measures are going to be eased or lifted across many of these geographies. We'll see the global population, how willing they are to get back into restaurants, bars, and sporting events and become in close contact with other human beings in the face of any fear they may still have with regard to this or any other virus in the future. But at some point, we're going to get back to normal life here. And so the one thing we need to do is be prepared to support our customer base globally as they go back to those markets in full force to support consumer demand. I will tell you that manufacturing beverage cans is not a simple process. You fellows have walked through beverage can plants and It is highly automated. It looks highly automated to you. But make no mistake, the fellows that work on those lines have real skills, whether it's on the front end or on the decorator. And we are very hesitant to let those people go, understanding that if you want to run a factory efficiently and have high productivity, you need skilled workers. And we appreciate our workers. They are very skilled. We've invested a lot of time to train them, and we're not about to let them go. So there are some things we can do, but the equipment is in place. And beyond that, much of what you're describing would be headcount reduction, and that's something you can't afford to do in a business that requires high skills. So we will look to do as much as we can, but we need to keep the people prepared and keep the factories maintained, sanitized, and prepared to support the customers when the customers come back with their demand requirements.

Understood. And then just on that point, though, so if you look longer term, you guys have a lot of investments planned for this year and next year. Could you just elaborate, I guess, on your plans there? Should we expect any delays or changes to your expansion plans regionally? Any thoughts on that? Thanks.

So I think the growth capital Within the $600 million capital number we gave you previously, the growth capital that was inside that, we're going to continue to spend that growth capital. We are delayed at Nichols on the third line only because of the pandemic. Some of the OEM engineers and other technicians either were not able to get to the site as their countries or New York put specific lockdowns in place, and we're working our way through that. The conversion in Seville, We were scheduled to complete the conversion and bring both lines up from steel to aluminum in early April. That's also been delayed. We probably don't get that done until sometime in early June as well, and that's just a function of engineers returning to their home country and or other engineers not being able to get everything done without all the engineers that are there. But we are full steam ahead. on all the expansion projects. Where we have discretion beyond the expansion, we will reduce capital this year on other discretionary items, and some of those may be cost reduction, but that's just a function of we can always get the cost reduction next year. We'll try to preserve cash this year, and we can do that next year.

Thanks.

Thank you.

Thank you. Our next question is from Mark Lillby of Bank of Montreal. Please go ahead.

Good morning, Tim. Good morning, Tim. Good morning. Tim, is it possible to put a little more detail around the inventory headwinds in Europe and non-reportable? It seems like a larger amount than I can recall. And then also whether there's any kind of carryover into the second quarter?

I think I probably said it was going to be about $0.20. Back when we had the fourth quarter call, I thought it was going to be about $0.20. It turned out to be $0.19. A little higher than we would have liked and a little higher than historically, Mark, when this has happened one way or the other, up or down, and that only because the season in Europe was so poor last year and we came into the year with a lot more inventory this year with a lot more inventory from the prior year than we otherwise would have. And I'd say most of it's now gone. Maybe there's a couple million dollars in European food that bleeds into the second quarter, but no more than that.

Okay, and also just kind of staying with Europe, I noticed there was about $9 million for some restructuring in European food, and I wondered what that involved and if there's more to come.

No, Mark, it wasn't. focused on any one particular area. Some of that was in European food, and some was in transit arising from the restructuring that Tim talked about where we're putting the protective businesses in with the industrial now.

Okay. And then, Tim, down in Mexico, you talked about sort of the ability to export kind of cans from Mexico into the U.S. I wondered about the potential hit to the glass business down there.

Yep, great question. So glass will be certainly impacted. A little bit more difficult to move that much glass. So we have one furnace in Chihuahua State, which is pretty close to the U.S. border. The other facility is about two hours by truck west of Vera Cruz, so very difficult not very difficult, anything's possible, but very expensive to get glass from there to the U.S. and certainly wouldn't move in that direction unless it was required to the U.S. and it's probably not required. Cans are much easier to move and the consumer now consuming more at home than in bars and restaurants will use cans more than glass. So I think we probably expect you know, on the canned side in Mexico, we'll run the factories at, you know, if I was to try to give you a number off the top of my head, maybe productivity is 95% of budget on the canned side, and on the glass side, it might only be 70% of budget. But I do think that when the fillers come back up in Mexico, it'll be largely skewed towards glass, only because glass and returnable are much cheaper to the consumer, ultimately, who's looking to preserve as much of their their cash on the home front as possible. So we'll see that come back a little quicker in Mexico than canned consumption in Mexico.

Okay. Last one I had was just, Tom Kelly, I wonder if it's possible to get a sense in America's beverage about how much there was in terms of startup costs during the first quarter and what we might expect during the second quarter.

Mark, you know, One of those things, you know, you have a, depending on the business, some of the businesses have a real good quarter, some of them don't, and some of them have average quarters. That business had a really good quarter, so it's kind of one of those things we didn't go looking for, to be honest with you. I don't have that right now. Okay. All right. Sounds good.

Good luck in the balance of the year, Tim.

Thank you, Mark.

Thank you. Our next question is Adam Josephson of KeyBank. Your line is now open.

Tim and Tom, good morning. Morning, Adam. I hope you and your families are well and safe.

Thank you, and you as well.

Thanks, Tim. Just on back to volume for a moment, so I think you talked, Tim, about North America being up, call it 10-ish for the balance of the year, just given the capacity you're putting in and given how strong demand is in the U.S. and Canada. Can you give us any order of magnitude on the opposite side for Brazil and and Southeast Asia as you're looking at it, appreciating that you're not giving guidance here, and it's a fast-moving situation. And just relatedly, my recollection is that Southeast Asia and Brazil are two of your higher margin regions in the world. So I'm just wondering what kind of mix or margin impact you're thinking there could be in the next quarter or two as you have North America growing, and that's obviously not at nearly the same margin level, I assume, that Brazil and Southeast Asia are.

Yeah, you know, in North America, the margins are improving. And, you know, we talked about this. I'll answer your question. You're going to give me the opportunity to say something. Sure. We talked about this in February in response, I think, to somebody's question. Maybe it was Gansham or somebody else. We were not pleased with the – with the margin profile in Europe, but where we saw demand and better margin profiles, such as North America, we're quite prepared now to make investments where we haven't made investments in the past. So the margins are improving in North America. But you are right that both Brazil and Southeast Asia are some of the better margin businesses we have globally. I don't really want to give you – you know, I kind of have a number – that I'm looking at here, but I don't have enough confidence in the number to give it to you in terms of demand contraction, but it will be significant. Just keep that in mind. It will be significant. Now, having said that, we have a 50% interest in Brazil, so whatever we lose at the segment income line, we cut in half. The two big markets we participate in in Southeast Asia, we participate in a number of markets, but the two big markets for us are Vietnam and Cambodia. And in both of those markets, we have significant minority partners as well. So the impact at segment income or EBITDA is one number, but then it's obviously muted at the net income line and earnings per share line because of the declining impact on minority interests. And then ultimately, the cash that we pay in dividends to the minorities will be smaller next year, only because the results this year are expected to be smaller in those locations. So a significant impact in both of those areas, but muted by the fact that we share that with minority partners.

Yeah, no, I totally got it, Tim. Two others, one on just 2Q and appreciating that your visibility, like everyone else's, is pretty limited. But when you think about segments that could be down year on year in 2Q, are you thinking, transit is likely to be down the most, and then kind of where would you rank them? European beverage, America's beverage because of the Brazil situation, Asia-Pac because of the Southeast Asia situation, and then obviously transit packaging because of the industrial economy. Any sense of that?

Well, I think European food and the non-reportables are likely to be flat to up. I think the beverage businesses, boy, if I had to rank them, you know, I think you could take America's Beverage because it's got Brazil in there. America's Beverage, Asia, and Transit are all down similar numbers. European Beverage down a little bit less than America's Beverage. But, you know, I'm guessing here, right?

No, no, sure. I totally understand. I appreciate that. Thank you. One last one on the buyback in the quarter. Can you just talk about when you bought back shares and kind of what your thought process was and if you're planning on doing any more for the balance of the year?

Yeah, well, you know, before I think we or anybody else, maybe you guys all understood it before, we really understood how deep this pandemic was going to cause concerns or contraction in demand. We thought... We thought we might use the opportunity to buy some shares at numbers that were a lot lower than we believe where the shares should trade. I think we got the board to authorize $250 million. We did set different levels at where we wanted to buy. The stock never got low enough other than I think we bought $50 million worth of stock at an average price of about $48. But we're not going to be buying back any more shares this year. I think we and most other companies are going to look to preserve liquidity until we understand the duration of this pandemic.

Thanks, Tim, and stay well.

You too.

Thank you. Our next question is from Brian McGuire of Goldman Sachs. Your line is now open.

Hey, good morning, guys. Thanks for all the detail. Tim, you've been through a lot of different business cycles and a lot of different recessions. I just wondered if you could kind of, you know, give some thoughts on how you see this one being different than, say, prior ones like 08-09 or 01-02 or some of the ones in the early 90s. And on a related note, you know, do you expect that the recovery from this one will look any different than we would have seen in those recessions? In other words, do you think, like, coming out of this, consumer behaviors might be permanently altered? Yeah. in a way that could be either positive or negative for beverage cans or food cans?

Well, Brian, I'd like to thank you for pointing out how old I am since I've been through all these cycles. No, seriously. I think 08-09, we look back at 08-09, and certainly in the transit business and some of our other businesses, the recovery was V-shaped. It was pretty quick. And that was a financial crisis that, where you guys at the banks took the brunt because you were blamed for doing whatever, whether that was right or wrong. I don't think anybody's blaming anybody this time around. This is something that's nobody's fault, kind of out of everybody's control. So in regards to that, we're kind of all in this together this time, as opposed to people wanting to point their fingers at one industry. That doesn't really answer your question, does it? 90-91... It was more of a U-shaped recovery. It took a couple years. 2000, 2001, whether it was a dot-com bubble burst and some other challenges, overvalued assets, certainly wasn't V-shaped, but it was a little bit longer than that. With this one here, I think when things come back, it's going to be uneven across businesses and across sectors. I think some are going to bounce back quite rapidly, and I think some are going to take a little longer. I do believe that, for example, if we looked at our transit businesses, that when things start to ease, we're going to see construction come back in a V-shaped manner only because nothing is being done now, and there are things that need to be done from a maintenance standpoint, and the unions need to get back to work. But there are going to be other sectors that are going to be a little slower to recover. I really am having a hard time. It's consumer confidence. This isn't consumer confidence in when they want to spend money. This is more confidence in when they want to all get together and congregate and socialize with each other, whether that's at a baseball game, whether that's at a bar, or an NFL stadium. That'll be something we're going to see. Does the U.S. football fan want to get together with 60,000 of his crazy friends, drink in the parking lot, and then go and high-five each other and rub shoulders with each other? And that will be very telling. But I don't really have a good answer, Brian. You know, I'm not smart enough. Other than I do know that there are a lot of people that are very concerned right now, and some people are more concerned than others. So I don't know. I'm sorry. I don't have the answer for you.

Yeah, that's fair. Definitely unprecedented sort of a time. I guess one last question, just related to the inventory question somebody asked earlier, it seems like the first quarter, January, February, even much of March, we were running full out. The industry globally seemed to be doing amazingly well with expectations for good volume growth this year. And then in much of the world, it looks like we hit a brick wall there towards the end of March and into April. and the kind of production numbers you're talking about for your own business in April seem down significantly. So just wondering if you could assess what the channel inventory might look like in BetCan specifically and whether maybe people didn't have too much in the inventory in Southeast Asia and Brazil heading into this, and so there might be some inventory correction period needed in 2Q beyond just the actual level of demand destruction down there.

As a matter of practice, our customers don't keep any empty inventory. Certainly they fill inventory and they try to get it out to the channels and have it consumed as quick as possible. I can tell you in North America, I went to a supermarket and I went to one of the larger multi-channel retailers yesterday and I was looking to buy some sparkling water and it was pretty sparse, that's all I can tell you, in both locations, which would tell me that they're having problems keeping stores stocked in North America. But as we've said a few times on this call, beer specifically, the channels are stuffed in Brazil, Mexico, Southeast Asia. The consumer in those markets is whether they are concerned or they have no money or they're conserving the money they have for things that are certainly, let's just be frank, more important to them in terms of feeding their families and protecting their families. They're spending their money elsewhere right now. And we're not having, as we said, they're not having the opportunity to congregate in social settings and consume as they have in the past. So I would say that the channels are full and that's why In large part, the beer companies have curtailed their production, and as they curtail production, they don't need packages.

Got it. That makes sense. Appreciate the caller. Stay safe, everyone. Thank you.

Thank you. Our next question is from Gabe Hady of Wheels Fargo. Your line is now open.

Good morning, gentlemen. Tim, thanks for the well wishes, and same to everyone at Crown and your family. Thank you. One thing I wanted to ask about, I've read a few articles talking about migrant workers and their inability to cross borders and their importance in the planting season for European food. And you mentioned coming off of two poor harvests and crop yields, two consecutive years it is. I was just curious if you've heard anything from your customers in that regard in terms of plantings.

Well, Gabe, I'm glad to see somebody else out there is reading like I am. We've heard this from the customers. As the pandemic started to spread rapidly in late January, early February throughout Europe, we talked with a number of customers and asked them what they thought their requirements would be for the Q3 harvest and would they be planting more. Their initial response was that they had two challenges. A, getting seed from the United States. They had already contracted for the seed that they thought they needed for the year. And B, their ability to get workers to come into countries like Spain and France where the virus was initially extremely damaging and migrant workers, A, either not being able to cross country lines or B, not willing to come into countries like France and Spain because of the virus. So I don't believe they're going to plant any more than they initially budgeted to plant. So we're still going to have a firm year. We believe we're going to be up on last year, but it's not going to be a year where they have the opportunity to harvest 10% more product than they thought they would because of the reasons I just mentioned.

All right, thank you. And then I guess a similar question in North American food. Can you remind us, because it's now obviously non-reportable, your mix there, because we're looking at Nielsen data that suggests canned vegetable sales up 100-plus percent, but those were packed last year, so that doesn't necessarily benefit you this year. I'm just curious on the product mix or end market mix for your North American food can business.

Yeah, so we're – We're real big in vegetables, soups, and pet food. Pet food's an interesting one, right? People will feed their dog or their cat before they'll feed themselves. It's been very strong, as have soups. I think vegetables are up a little bit. But I don't want to say we're a third, a third, a third. We're probably 40% vegetables, 25% pets, and that's mainly cats. and soups, all flowing very well, and we expect it will continue to flow through the balance of the year. The balance of the products are fruits and some other dairies and some things like that, but it's primarily the three end markets. A little bit of fish in North America, not as much as Europe.

Right. Thank you, Tim. And one last one, Tom. I think you guys have got an interest expense to be roughly $330,000. with moving interest rates. It was lower than my model this quarter. Is it something around 300 now with new rates, or do we have a few there?

Yeah, Gabe, I think 300 is in the ballpark with the lower rates, and our working capital build hasn't been as large as it was last year, so the debt balances are down a little as well.

Great. Thank you, guys. Good luck.

Thanks, Gabe. Thank you. Our last question is from Neil Kumar of Morgan Stanley. Your line is now open.

Great. Thanks for taking my question. Given the decline that we've seen in oil prices, how would you view the cost economics of PET versus aluminum cans currently? And in general, do you expect the current environment to perhaps delay sustainability-driven decisions by customers to switch substrates to aluminum?

Well, I think certainly the decline in oil over the medium term will benefit the cost competitiveness of the PET package versus cans. Having said that, though, specifically in North America, as the consumer stays at home longer, is consuming more at home, and remains concerned with the likelihood or the possibility that the shelter in place orders will remain in effect for some period of time. We believe they're going to continue to load up on cans because cans store better and maintain the integrity of the product inside much better for a duration of time than a PET bottle, which gas leaks in and leaks out. So I don't think anybody right now is making decisions long term on sustainability. because of the virus or oil, I think we're all, our first item of business is to ensure and maintain the health and safety of our employees and the customers and the consumers that we deliver product to. So it's probably more along the social lines than the environmental line. I think that we'll continue to have the discussion. We believe, as you've heard us and others say, that the can is by far the the most environmentally sustainable product out there. But I think right now it's all hands on deck for the can manufacturers and the manufacturers of PET and other plastic products, whether they be in food or other consumer staples to support their customers and ultimately the retailers and the consumers around the world.

Great. That's helpful context. And then just one other question. In terms of some of the new capacity for beverage cans you're bringing on, can you just give us a sense of how your customer commitments are structured in terms of volumes? Is there any take-or-pay arrangements that you have in place?

Something we're not going to talk about on this call.

All right. Thank you.

Thank you. Okay, I think, Kath, that ends it. So thank you very much. That will conclude the call today. We'll speak with you again in July. Thanks for joining us.

And that concludes today's conference. Thank you for your participation. You may now disconnect.