Crown Holdings, Inc.

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

Thank you, Louie, and good morning. 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 $0.94 per share compared to $1.02 in the prior year quarter. Comparable earnings per share were $1.33 in the quarter compared to $1.46 in 2019. Net sales in the quarter were down from the prior year due to the impact of the coronavirus pandemic on unit volumes, the pass-through of lower material costs, and $73 million of unfavorable currency translations. Segment income of $322 million in the quarter was below prior year due to the impact of the pandemic on sales and operations and $11 million of unfavorable currency translation. At the end of the quarter, the company had over $1.8 billion in liquidity between its cash balances and borrowing capacity under the revolving credit facility, and the net leverage ratio of 4.7 times was well within the covenant requirement of 5.75 times. As outlined in the release, we currently estimate third-quarter adjusted earnings of between $1.50 and $1.60 per share and full-year adjusted earnings of between $5.10 and $5.25 per share. These estimates assume exchange rates remain at their current levels and a full-year tax rate of approximately 26 percent. We currently estimate 2020 full-year adjusted free cash flow of approximately $475 million with approximately $600 million in capital spending. And with that, I'll turn the call over to Tim.

Thank you, Tom. Good morning to everyone. Our continued best wishes for the health and safety to all of you and your families. Before reviewing the operating segments, I want to again take a moment to thank You are needed, you are critical, and you are essential to ensure that the global food supply and transportation support systems that so many take for granted operate without interruption. We know that many of you have been directly impacted by the virus, and we continue to take measures and ask you to follow strict From the beginning, our primary concerns have been the health and safety of our employees, their families, our customers and suppliers, and ensuring the liquidity of the company in order to maintain operations and support the essential needs of our customers. Again, thanks to all of you. When we last spoke to you in April, we described what we believed was going to be a challenging second quarter. In late March, early April, significant demand contraction was evident in our non-North American beverage can businesses. Fortunately, demand in those markets has snapped back and a few weeks earlier than expected. The challenge now is meeting the outsized requirements of our customers as they look to rebuild their supply chains after several weeks of mandated shutdowns. From now until the end of the year, and in almost every market where we produce, cans will be in short supply. the addition of two new beverage can production lines in North America. These projects originally scheduled to commence in 2021 have been accelerated into 2020, and as such, our capital requirements have increased back to the original $600 million estimate we provided to you in February. In America's beverage, overall unit volumes declined 3% as strong demand in North America was not enough to offset early quarter weakness in Latin America. Our North American shipments were up 16% as we utilized open Latin American capacity to fulfill U.S. customer demand. Beginning in mid-May, customers in Latin America returned to full operations with demand now far outstripping production capacity. We fully expect the TANs available to support North America in 2020 will not be available in 2021 as those Latin markets return to normal demand patterns and as such have brought forward our plans for the second line in Bowling Green as well as the third line in Olympia, Washington. And while the second quarter was short of the same 2019 period, we expect the second half of 2020 will show growth versus 2019. European beverage, down 38% to the prior year at segment income, reflects demand weakness across all operations except for Saudi Arabia and the U.K. The demand slowdown we began to see in March resulted in overall volumes being down 12% in the quarter, as our operations in southern Europe, that is Greece, Italy, Spain, and Turkey, all suffered from low economic activity, lower expected tourism, and lower consumption during the quarter. Currently, customer activity is strong, and as is the case in Latin America, demand is far more than production capacity. The supply chain and the can is Because of this, we do not have the ability to make up months of demand in a shorter time period. Frustrating for Crown and many of our customers, but perhaps if we are ever faced with such severe demand contraction with the possibility of such a sharp recovery, that we and our customers will find a way to fairly distribute carrying costs so that inventories are available when needed. Our engineers were able to complete the conversion of our beverage can plant in Seville to aluminum, adding much needed capacity to the system. We expect the third and fourth quarters to outpace the prior year respective quarters. Sales unit volumes in European food advanced 10% during the quarter compared to a soft 2019 period. Initial plantings were low this year due to customer concerns over a shortage of necessary harvest labor. However, we are three weeks into July, and demand remains very strong, the weather looks good, and all signs currently point to good third quarter crop yields. Build inventories are expected to be very low from the 2020 season, and when combined with what our customers believe to be a more permanent consumer return to the food can, We expect full-year segment earnings to be slightly ahead of the 2019 level, implying that we will more than make up for the headwind of first quarter inventory carrying costs. Sales unit volumes in Asia Pacific declined 7% in the second quarter. Shipments in China were up 11% and reflect that country's apparent pandemic recovery. while Southeast Asia, with volumes down 10%, struggled in April and May as alcohol sales were prohibited across many locales to curb the spread of the virus. We expect gradual improvement in the third and fourth quarter as demand picks up across the region. Commissioning of the new beverage can plant in Nankai, Thailand, was completed within the last two weeks, and we are currently in customer qualification. Demand for consumables, that is strap and film, began to show recovery in June, although our higher margin equipment businesses are still impacted by an inability to access customer sites in many cases. We expect income improvement in the back half of the year versus the second quarter, with significant income improvement expected in 2021. Demand was firm in our North American food business, almost fully offsetting weakness in global aerosols. In summary, it was not the quarter we envisioned at the beginning of the year. However, our teams did an outstanding job maintaining productivity and efficiencies in such a challenging environment. As Tom noted, we've reinstated guidance for the third quarter and full year based on what we see currently. Despite the pandemic, we came within 5% of last year's currency-adjusted second quarter earnings performance, and we currently expect full-year adjusted earnings this year, and with significant liquidity, we continue to invest in capital projects where we see opportunities for growth and productivity improvement. And with that, Louie, we are now ready to open the call to questions.

Certainly. We will now begin the question and answer session. If you would like to ask your questions, you may press star followed by the number one. Please unmute your phone and record your name and company name slowly and clearly when prompted. Your name is required to introduce your questions. To cancel your request, you may press star followed by the number two. One moment, please, as we wait for questions to queue up. Our first question comes from the line of George Staffos from Bank of America.

Hi, everyone. Good morning. How are you doing? Thanks for all the details, Tim, and thanks for all you're doing on COVID. I'll ask three questions. First of all, can you talk a little bit further on your comment on ways to distribute carrying costs in Europe, what you were getting there, and what the implications could be later this year and really over the next couple of years, and then add a couple of follow-ons.

Yeah, George, I think it's not specific to just Europe. It applies to Latin America as well. It applies to anywhere in the world. So I think, you know, we had a situation where, and we discussed this briefly on the April call. Somebody asked on the April call if we were still making cans and putting them in the inventory, and the response is no, we're not. And the reason is that we can't afford the extra carrying cost. You know the margins in our business, George. They're nowhere near the margins of our consumer product customers. And so they are currently frustrated that they can't get all the cans they need to refill their supply chains after telling us that they didn't need anything for three to six weeks. And we're frustrated. We're not in the business of telling customers no. You know, you go to a store, George, to buy a tie. If you can't find the tie you want, they try to sell you a different shirt so they can match the tie to that shirt. They're not in the business of telling you no. So it's very frustrating. Having said that, the comment is nothing more than it's a comment. If you want cans available when you want them, understanding you want an efficient supply chain, you've got an efficient supply chain. However, the downside of an efficient supply chain is when something like this happens and you tell us to turn off and then we start turning back on, we can't make up I don't want to go into any more than that, but the margins in their business, when they're selling product for $15 to $30 a case, they can far more afford carrying costs for warehousing of cans than we can. That's all the comment was for.

I understand, Tim. Would this be something that you could adjust for if there was mutual agreement Within the year, would it need to be something that would be more formal and therefore would have to be instituted as contracts rolled over? And then, you know, kind of my last, you know, question, can you talk a little bit about Sig Note, how it's performed? And, again, I mean, this has been just an unprecedented period. It hasn't been a normal recession. But has it performed as you would have expected both in terms of, The takeaway within the end markets and the operational leveraging, deleveraging, and for that matter specifically on working capital, again, this has been sort of a lightning round recession, but if we go back to the 18 analyst day, there was a view from the company that one of the benefits here would be you'd be able to, if you were in a recession, squeeze working capital, generate cash from the downturn. Are you actually being able to do that? Again, given this period we've been in. Thank you, guys.

So I think to answer your first question, George, the way to build inventory and fairly distribute carrying costs, if you will, that does not need to be handled within a contract. That can be handled on a one-off bespoke basis with customers as they foresee the need for CAN. So we will have customers, no doubt, who would be willing to do that will have other customers that are so fixated on, you know, costs that they forget they need to get product on the shelf. So that's just going to be an ongoing discussion. But there's nothing to say that that can't be done mid-season. That's just good business practice. On Cigno... So first on the order of working capital, you'll remember last year we squeezed an incredible amount of working capital out of the SIG node, which was quite beneficial not only to the balance sheet last year, but more so to reset how we're going to operate the business going forward. You're right, this pandemic is a little different than most we've ever seen. In other recessions, kind of everybody goes down together. In this recession, we've had entire steel industry, appliances, just shut down. I mean, no activity whatsoever. And so that's a little different. And so, you know, fortunately for Cigno, they're providing products across a wide variety of industries. They've got a number of industries they're still serving, but a number of industries that are shut down and are beginning to slowly open.

So I would say, you know, all in all, certainly we're not pleased with the results of any of the businesses we've had because they're all down.

We understand that the managers and the employees are doing exceptional work across the entire company to try to make the best of it. Probably, I would say, you know, if you told me this was going to happen and I was going to lose 30 or 40 or 50 percent of the industries I'm supplying for a few months, I'd have thought that the Signode results would have been far worse. But they're doing okay on price, and they're doing pretty well on cost reductions in the face of this. but it's a volume game for them. And their material margin, you know, the margin after direct material cost is quite high. So it's a flow-through business. So when the volume comes back, as we fully expect it will next year into 22, we fully expect to get it all back.

Thank you, Tim.

Thank you, George.

Thank you. Our next question comes from the line of Mike Leathead from Boardcase. Your line is now open.

Great, thanks, and good morning, guys. Good morning. Question first on the free cash flow update. I guess, can you help us with how much incremental capex you're baking into this guidance associated with your new announcements this morning versus maybe a weaker operating cash flow outlook?

Yeah, so the first thing I'll say, Mike, I guess – We have to apologize because perhaps we weren't clear enough to all of you in April. So in April, we suggested to you that even in the face of the pandemic and given the severe cutback in beverage can demand across a number of businesses that we have around the world, be it Southeast Asia, Latin America, Europe, that with some adjustments to capital that we thought we could get close to the original 6%. free cash flow number. And so perhaps we should have been a bit more specific around what we were thinking in terms of cutting capital at that time. And I guess because we were not, you all did not fully reduce capital expenditures to offset the operating income loss so the cash flow could get back to that number. And so as we go back to A full $600 million. I will tell you that as we sit here today, that $600 million is at least $100 million higher than we were envisioning when we spoke to you in April. And as I say, I apologize. Perhaps we weren't clear enough. But given the uncertainty and the lack of visibility. that we all had at the early stages of the pandemic, and our concern with liquidity, we were fully expecting to cut more out of capital and delay projects then than we are now. So I would tell you that maybe at least $100 million of that is capital. The other $25 million will be working capital, and as you'll appreciate, Businesses in Brazil and Southeast Asia are quite large, and they're quite large in the January-February timeframe as they get near their holiday seasons of Carnival and Chinese New Year. So the inventory builds are expected to be exceptionally strong this year as peoples in those countries return towards more celebrations and gatherings, hopefully, as we get past this virus.

Got it. That's really helpful, Culler. And then just on some of the operational flexibility in America's beverage this year, could you maybe just give us a rough sense of how much you've had to ship from Latin America to the U.S. this year and how much your new additions next year should add roughly? I'm just trying to get a sense of how much is being replaced in North America versus kind of true incremental capacity there.

I'm going to be a little careful here. So the CMI, Earl, came out and felt the need to describe to its recipients that the industry in North America was going to import 2 billion or at least 2 billion units into the United States to cover demand, outsize demand again this year. And that 2 billion units is not included in the numbers they forecast. So if in the first quarter the industry was up 8%, in the second quarter we were up 3%, produced in North America. So, in fact, the growth rates are considerably higher than the number you're seeing. As it relates to Crown, I'm a little surprised that CMI says 2 billion cans because we're not 50% of the market, and we'd be at least 50% of that number. So we will... So what have we done recently here? We started the third line in Toronto back early in the first quarter. Towards the end of the second quarter, the third line in Nichols came up. They'll be going through learning curve this year, but hopefully are well through their learning curve and are much closer to full production levels next year. and then we bring up Bowling Green, the first line, in the second quarter, and we'll get some capacity on the second line in Olympia later in the year. So there will be significant capacity that Crown brings into the system next year to offset what we brought in from Latin America. Having said that, Our view as we sit here today is that that still will not be enough, given the trends we're seeing in the beverage industry in North America with spiked seltzers, sparkling waters, and stay at home. And I believe, just as in Europe, I made the comment in Europe on European food. You know, what our European food customers believe is that there is a more permanent return to eating food cans at home because of the pandemic. And I think we're going to see more of that in North America as well for some time as well. So I think we're going to see extremely strong demand in beverage cans globally and especially in the United States.

Great. Thanks, Ben.

You're welcome.

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

Hey, good morning, guys. And congrats on the good results in a really tough quarter. I just wanted to ask about the margins and the performance in Europe, you know, the volume weakness. Obviously, there was some fixed cost absorption on that, but the margin at, I think, 11.2% or so was quite a bit lower than it's ever been in the second quarter. I was wondering if there were some impacts from the startup of the conversion in Spain that might have impacted it there, and... what we might expect from a more normal margin in that business in a seasonal quarter like 2Q?

So, you know, there might be some impact from the startup in Spain, but it all revolves around 12% volume decline. And it's a volume business because fixed costs are so high, especially – Recently in the beverage can industry, across the industry, as we all have been modernizing, we're installing new plants, new lines, modernizing. There's been a lot of capital spent recently, so that's all flowing through to operating income because the depreciation is reflected in that. The EBITDA numbers wouldn't look as drastic as that. But it hits volume, and I'm a bit hesitant to say what it should look like. I would like to be able to tell you, as I sit here today, that in a normal volume quarter it should look any worse than what it's looked like in the past. Now, having said that, you'll remember I probably have stated that we've not been exceptionally pleased with the margin profile in European beverage. And so European beverage margins do need to improve over time. So the combination of returning volumes and then an environment where the market continues what I would like for all of us to believe is that the margin should be better than we've seen historically in the second quarter. We'll see if we get there.

Okay, I just wanted to follow up on the free cash flow comment from Michael's question. So I take it that the 475 of free cash flow implies, I think you were saying kind of $100 million higher CapEx or maybe $125 million higher CapEx than what you were contemplating three months ago, and that's due to the need for more capacity, given the strong demand you're seeing, and that it sounds like maybe a $25 million swing on working capital. So is that kind of $125 million, most of the delta between where what you would have thought, you know, you could have hit maybe close to $600 million before, and now it's $475 million. It's really just kind of pulling forward some investments. You know, it's a working capital swings. I just want to clarify. Is that about it?

Yeah, that's exactly it. I guess, you know, the original pre-COVID in February, the original estimate was $600 million, but $600 million of capital. So we're back to $600 million of capital. We've got about $25 million more working capital now, we think, at the end of the year, due to Brazil, Vietnam, Southeast Asia. And then the balance is just the flow-through of lower operating income. I mean, I think our original guidance was, you know, the midpoint of our original guidance was probably 30 cents or 35 cents higher than the midpoint of our guidance now. Well, if you take 35 cents and you work back up the income statement, you get to a pretty big number at operating income. So that's the delta.

Got it. Appreciate it. Thanks again. Thank you.

Thank you. Our next question comes from the line of Ganshan Punjabi from Baird. Your line is now open.

Hey, guys. Good morning. Hey, so, Tim, you know, going back to your prepared comments and your characterization about the back half, you know, or at least exit run rates coming out of the second quarter, is it fair to assume that 3Q will be the quarter where global beverage can volumes start to inflect higher again? It was down, I think, 5% in 2Q.

We're going to be, on a global basis, we're going to be positive in the third quarter, Gancham. And I expect that every market will be higher than last year. I think some of the Southeast Asian countries were still, the recovery is a little slow, but on a global basis, we'll be higher. the rate of growth perhaps is not as great as we've had in prior, let's say, first and fourth quarters, only because of the available capacity we have. So the growth rates in the second and third quarter are always going to be a little bit lower than growth rates in the first and fourth when demand is high because there's more capacity available in queues one and four than there is in two and three.

Got it. That's helpful. And then, you know, going back to North America, you know, there's a lot going on, you know, with Bowling Green and Olympia, the line additions versus in addition to what you've already announced. For North America specifically, as it relates to your production footprint for this year, where do you think you'll exit in terms of units? What's your best guess for 2021 at this point? And then, you know, just a high-level question as it relates to the fundamentals. I mean, obviously, North American beverage fundamentals were good to begin with. and now you have the additional kicker, if you will, for home consumption due to COVID. Will there be a normalization period, do you think, coming out of the current situation? I'm just asking because you're adding capacity, and then there's a new entrant potentially with CADPAC.

Yes. You know, the pre-COVID gun show, we were fairly bullish on the market. You know, we told you pre-COVID we thought we would be up 10%. just because of the capacity we were bringing on, and we knew it was needed. And we and others probably have been telling you that, you know, while the market's up 3% or 5%, the market could be up 5% or 8% if we had available capacity. So I don't know how much extra demand is related to COVID. You know, even without COVID, I think... new entrant uh we have one plant they're going to build in the northeast part of the united states we have uh we have a plant in new york and we have one in toronto um listen there are a lot of people that live uh you know between washington dc and toronto so uh and there's a fair amount of capacity there but there's a fair amount of demand and demand for new products be it spike cells juices, teas, you name it you know all the products so it's one location they'll probably have when they're fully up and running and they get through their learning curve which if they bring lines up in 2021 maybe by the end of 2022 they're fully through learning curve and by the end of 2022 what they're going to bring up in terms of capacity will be less than 3% of the market and they'll They'll be kind of, you know, located in one geography of the country. It's a big country, so it doesn't give me that much concern, to be quite honest.

And your capacity footprint in 2020 and 2021?

Oh, you know, I don't – you mean how many points of – how many cans are we going to have extra each year? Yes. We'll probably have a – You got me struggling here, but I'm going to guess we're probably going to sell about 2 billion more cans this year in North America from our North American capacity. That does not include what we're bringing in from other countries. And next year... It really depends on how quickly we get the lines up and running. But whatever we can make, you know we can sell. And it's just how quickly we can get through construction and customer qualification and get cans out the door. So it's a significant amount of capacity continuing to be added.

Thanks a lot, Tim. Thank you.

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

Great. Thanks. Good morning. Good morning. Just wanted to get back to that last comment. So if you think about maybe this year 2 billion cans in North America, next year maybe a billion and a half extra, would that, I guess, imply that you should be up double digits in the U.S. next year as well?

No. Well, I think the answer is I'd like to say yes, but I don't think a billion and a half is not 10% of our current capacity, right? It's a lower number. But I think a billion and a half is probably 6% of what our current capacity is. Are we going to do better than a billion and a half and get to two billion? I don't know. As I said, it depends how quickly we... extremely competent, whatever we can make, we're going to sell. So if we can make $2 billion more, we'll sell $2 billion more. If we can only make $1.5 billion more, we're only going to be able to sell $1.5 billion more.

And on that point, I guess, you know, you'd stated in the past that a lot of the new capacity is built on this firm customer commitment. So are you still seeing, you know, that kind of agreement? Is it kind of three- or five-year contracts? Maybe we can just discuss that a little bit. And then, again, you also mentioned maybe potentially bringing up the returns in Europe. I guess would those customer commitments and contracting process include potential for price increases in North America and Europe as well?

Well, I think we've And I think for the most part, our customers understand that, you know, as I made a comment earlier, right, a lot of these guys sell their product for $15 to $30 a case. You know, one to two cents per unit in a $15 to $30 per case sale price is not their problem. Their problem is if they can't get product and they can't get product on the shelf, they market share so um hopefully they they understand that better and i think they do because um you know customers right now understand especially during the growth phase we're in in north america be it pandemic related or not i don't think it really is i think it's a They know they need cans, so they're more than willing to contract right now to get cans. As for Europe, we have a sizable business in Europe, but we're only the third supplier, so pretty tough for us to force that step change in Europe.

Okay. And then I guess I just wanted to ask about Cignode as well. So... You know, how would you characterize Cignote, I guess? Do you believe Q2 results are kind of the bottom and have, you know, activity rates kind of inflected higher globally? And, you know, usually, I guess, I know it's a relatively short cycle business on the consumable side and the strapping side. So what are you seeing there? Are you seeing kind of it should give you some decent visibility into order patterns? I mean, are you seeing you know, resumption of higher activity levels across different geographies in Cignode?

Yeah, so we, I mean, as I said in the prepare remarks, we are starting to see strap and film, the order patterns for strap and film improve, and that'll continue. I think there's still some There's still some countries in Europe and perhaps in India where it's still a little slower than we'd like to see, but they're going to come back. I think that, as I said on the call, the challenge we have, the higher margin business, the equipment business, just like all of you are, let's say you're not welcome at your investor-customer Our engineers and installers are also not welcome at many customer sites. So an inability to access customer sites is making it difficult for us to continue to drive equipment sales. So that will return. As I said, I think that the third and fourth quarters, the income numbers in the third and fourth quarter will certainly be better than the second quarter. And, you know, obviously we fully expect 2021 to be significantly better than 2020.

And then lastly, if you can just provide any update on the strategic review. Is there anything else you can share with us there?

No, I think what I said in April, and I'll say it again, there's a lot of work that's done behind the scenes to prepare any business you might have for a review, and a review encompasses from the beginning to the end. So we continue to do that work. As you'll appreciate, there's not a lot going on in the M&A space right now, and we're not in the business of destroying value. We want the share price to be higher just like you do, but we're not in the business of destroying value for our shareholders. So we're going to operate the business as best we can, generate as much cash as we can, and we'll see what the future brings us.

Okay, thanks. Thank you.

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

Good morning, Tim. Hope you guys are doing well. I guess I wanted to dial in a little bit, Tim, on the commentary you made about Europe food. This is encouraging in my mind given kind of the past two years of challenging crop yields, et cetera. So if I look out into 2021, can you help us frame up maybe, you know, if volumes are up again, I don't know, mid-single digits or something like that, Again, I know there's a lot of uncertainty out there with what gets planted and if weather cooperates. And then also, I mean, are you seeing potential for the commercial environment to improve over there as well, such that margins start to march back to maybe where they've been in the past?

So I think we, based on what we're hearing from the customers, we fully expect them to plant more next year than this year. And whether that's 10%, 15%, or 20%, They were concerned they couldn't get labor because of border closure. So they underplanted. So they will significantly plant more next year. So that we believe will happen. We believe they're going to continue to can as much as they possibly can because they're going to come out of this year with very low-filled stocks. They're going to come through this pandemic. having, in a number of cases, missed opportunities to sell more because they didn't have available product, and they don't want to have that again. So I think demand is going to continue to be very strong, assuming the weather cooperates. I think that's the one variable I can't talk to, but let's just say we won't have a number of bad years in a row. This year looks like it's going to be really good. that strong and customers needing product, that they understand and we understand that the opportunity for appropriate margins to the entire supply chain are in front of us. And so they have a job to do, we have a job to do, and we'll need to do our job to see that we get compensated appropriately.

Thank you. And then Southeast Asia I found interesting. I guess you said China was up 11%. I think I know the answer to this, but does that change at all your sort of retrenchment strategy in that particular country? And then we've read some reports about a couple of new entrants in other Southeast Asian countries. Again, part of that might be a function of being a one or two supplier market, but anything change over there in the competitive landscape and or kind of that expectation for high single-digit growth absent pandemic disruptions?

No, I think China, nothing, I'm not sure we've ever told you what our strategy in China is, but our strategy is to get the best return for our shareholders, be that operating the business or selling the business, but they've recovered. They came out of the pandemic. They went into the pandemic and came out of the pandemic earlier than everybody else, so it doesn't change anything there. In Southeast Asia, There's a lot of growth, and people see opportunity. They're going to enter markets when they see opportunity, but I'm not overly concerned with the new entrants in the market. There's a lot to go around. Thank you. Thank you.

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

Hey, good morning, everyone. Good to hear demand snapping back across the board for bedpans. Can you give us a sense how to think about volumes in Southern Europe and Latin M in the second half and any costs involved in X that we need to account for in the surge in demand and impact on your profitability?

Costs in the resurge in demand?

That's right.

Hold on. Listen, I think... Firstly, we're going to be sold out for the balance of the year in Latin America. We're going to be oversold, and we're going to frustrate customers by telling them we don't have enough capacity for them, as I said earlier. That's just a function of there's only so much capacity to go around, but you don't make product for three to six weeks. But we're going to be sold out, and we're going to be up. I don't see any extra. And I think, you know, perhaps there's a little open capacity in Q4, as there always is. But we'll see. The market continues to grow there well, and I don't expect any incremental cost as well there.

Okay. So you should see pretty good operating leverage. That's great. In terms of the incremental capacity you announced in Kentucky and Washington, how much more can should we anticipate from these investments, and what type of CapEx we kind of assume for 2021? Sure.

I think it's a little early for us to start talking about 2021, but if the business continues to grow and we continue to see opportunities that we're seeing globally, it could well be that the capital number next year is similar to the capital number this year, but that's a function of what we continue to see in terms of opportunities. I think on the capacity side, in North America at least, we put a marker out there for a billion and a half more cans permitting processes and how quickly we finish the projects.

Got it. And just one last one on North America. I guess ultimately, you know, the market's sold out very tight, so that's really encouraging. But, you know, what kind of guideposts from our seat would you want us to look at to keep us comfortable as supply-demand is balanced? Do you need to see 3% growth in North America or just want to understand because you and your competitors are adding a fair amount of capacity in the next few years? Thanks a lot.

Well, so, I mean, it's going to be over 100 billion cans this year in the market. I think 12 months, trailing 12 months at the end of June were like 99.9 billion cans. And that does not include the 2 to 3 billion cans that are coming in from Latin America. And so on a trailing 12-month basis, I think we're up about 5%. going to have growth in the back half of the year. So let's say the market's, I don't know, 103, 104 billion cans, and you get another few percent growth in 2021, all of a sudden you're over 105, 106 billion cans. So even at 2%, that's about 2.5 billion cans. That's two to three can lines that are needed every year just to stay up with the growth. So So there's a lot to go around here, guys, as long as the market continues to grow. And there are products that people are consuming now, specifically the spiked seltzers, which are, I don't want to say they're entirely in cans, but I haven't seen anything not in a can. And they're replacing products in other substrates. So very good for the can market. Okay. Thanks a lot. That's really helpful, Colin. Thank you.

Thank you. Our next question comes from the line of Mark Wilde from Bank of Montreal. Your line is now open.

Morning, Tim. Good morning, Tom. Good morning, Mark.

Just one more on the CapEx, Tim. I'm just curious. In North America, you called out that the Olympia line was going to be a specialty line. Can you give us a sense on all of the other projects, how many of those lines are set up to be able to do specialty sizes? Well, I think as we said in the earnings release last night, every new project that you've seen us do this year, last year, and even the year before, they're all set up to produce multiple sizes, diameters and heights. Okay. What does that do, Tim, just to kind of the capital cost on a line? You know, it's marginally higher, but, you know, the equipment suppliers – of which we are one. There's a price for equipment, and so there's a little bit more tooling involved. I mean, you're not buying tooling for just one height or diameter. You're buying tooling to do different heights and diameters. So there's a little bit more, but it's not, it's marginal. Okay, and is there any impact on just sort of throughput or not really? There is initially until we all get accustomed to as you can imagine, and it's kind of like when you go into the hospital, Mark. If you've ever been in a hospital, they give you one of those little eight-ounce squat cans, and the reason they give you that can is so you don't spill it all over yourself in the hospital bed. So as you think about a tall, skinny can, we just need to do some things differently, and until the teams get used to doing that, yeah, there's a little bit of slowdown and throughput, but as we get more accustomed to that and as we experience in many markets around the world, be it Yeah, okay. All right, I wanted to turn then to Brazil and Mexico, and I wondered, is there any way to quantify what all of the volatility that, you know, brewers being out down in Mexico, the drop-off in Brazil, what that did to kind of second quarter results, and if you could maybe include not only the can operations, but what impact that might have had on the glass business down in Mexico? So, you know, I'm You know, if you look at our earnings release, and so in America's beverage, we were up, what, $21 million in segment income in the first quarter, and it looks like we were down $10 million in the second quarter. So, you know, you guys are the analysts, unless you model that, but that's not insignificant. European beverage, we're down $23 million in the second quarter. This is all volume, right? And... You know beverage. It's a volume business. The volume is back. When I say it's snapback, it's snapback. So we'll get that back. I think what we can't make up is the downtime that we had in the second quarter because we only have so much production capacity available at any point in time. So if we If there were two or three or four weeks where we weren't running certain lines, you're not going to make that up.

You cannot run the lines any faster than the maximum speed.

So that's kind of behind us, and we move forward, exiting the second quarter with really high demand, and we're flat out right now. On the glass side, glass is a little bit more impacted only because it's generally more on-premise than cans, but that is coming back right now as well. Okay. All right, then the last one for me, we've heard some reports that retailers down in South America are a little more reluctant to handle returnables in the midst of the pandemic. Are you seeing that, and do you think that has any impact on the demand for one-way packaging?

Well, it makes perfect sense that they don't want to handle anything more than once.

So it's why, when we look at Southeast Asia, why the can jumped over glass. Because the shopkeepers there have very small shops, and they don't want to waste any available space with returnables, empty returnables sitting there where they can have filled product that can be sold. So that makes perfect sense, and it makes perfect sense if you're worried about the virus that you don't want to handle it. Having said that, if our customers can't get enough cans and they can't fill enough product what they can and push into the distribution system what they can to satisfy consumer needs. So it makes sense what you say, but right now things are real tight in South America. I think they're going to push whatever they can if consumers want product. Okay. All right. Thanks, Tim. I'll turn it over. Good luck in the second half. Thank you.

Thank you. Our next question comes from the line of Anthony Patinari from Citi. Your line is now open.

Good morning. It sounds like you'll be sold out in North America, Europe, and LATAM maybe until the end of the year, and you see strong growth prospects for 2021 and beyond. Understanding you've outlined your CapEx prospects, program, is it fair to expect, you know, you may have to undertake additional CapEx projects over the next, you know, 12 to 18 months to meet this demand, or is there a way that we can think about sort of normalized CapEx, whether it's, you know, 600 or a different number for what seems like kind of a new normal for demand?

Well, you know, we only have to go back four or five years, and we were spent million this year, and I suggested earlier on this call that perhaps the number is even that great next year if we continue to see the growth. My hope is that when we sit here in February and we have this conversation with you, that I'm telling you 600 million. That'll mean that there's significant growth opportunities. We all want to grow. If you don't have growth... We have significant growth opportunities. So I don't know. I don't want to tell you what a normal number is. I'm hoping that the new normal number is something more like we're seeing now, which means that this growth pattern we're seeing is going to last for several years.

Got it. Got it. That's very helpful. And then, you know, in North America, we've obviously seen a resurgence of COVID cases here. You know, understanding on-premise is much smaller here than in LATAM or Southeast Asia, and this is obviously kind of happening in real time. Is this something that's impacting North American demand at all? Is it negative at the margin? Is it sort of neutral, or is it even positive with, you know, more people buying cans on the grocery channel and staying at home?

So I don't – please don't take this the wrong way. As it relates to North American beverage can demand, The market was always going to be oversold this year, and we were always going to be trying to find cans to serve the U.S. customers. I would say that fortunately for the U.S. customers, the pandemic happened, and there were more cans available from Latin America to come into the U.S. Otherwise, the U.S. would have been significantly undersupplied with or without the pandemic. Now, that comment is not meant to downplay the impact of the pandemic on any individual, any industry, any employee group. Listen, people have really struggled this year. I think our governments are struggling with how to handle this so that they minimize the impact on people. So please don't take that the wrong way. But the pandemic has no impact on the outsized demand we're experiencing. We were always going to have that this year.

got it understood and appreciate that. Thank you. Thank you.

Our next question comes from the line of Adam Josephson from KeyBank. Your line is now open.

Tim and Tom, good morning. Tim, just on food cans, you talked about your European customers being optimistic about the new normal post-COVID for demand. I'm just wondering if how, if at all, that affects how you're thinking about your food can businesses versus your beverage can businesses. You had the surge in North America pre-COVID, which you just talked about. And then you've seen these varying trends elsewhere. But food cans are clearly benefiting in a major way from COVID. And for all we know, it could last a while. We just don't know. And as you've said, food cans are a very good cash flow business, even better than beverage cans. So how do you think...

about food cans versus beverage cans in terms of being a long-term party or portfolio?

Well, the first thing I would say, Adam, is that I wouldn't describe food cans as a better cash flow business than beverage cans. I think beverage cans are as good or better than food cans when it comes to cash flow. The beverage can system right now requires more capital than the food can system does because more excess capacity that exists in the food can system, specifically on three-piece food cans. But if you weren't growing in beverage cans, you'd have tremendous cash flow coming out of beverage cans. So let's put that to the side. I think that there are a lot of people out there that have an opinion on what Crown should be doing with its portfolio. We've always said that we have a nice mix of growth businesses and we have a nice mix of cash flow businesses. Cash flow is never a problem until you don't have it. There are probably 250 CEOs in the Fortune 500 that would tell you they wish they had our cash flow problem right now. I read the pre-call notes that many of you put out. Some of you were disappointed with our reduced cash flow guidance. So it's never a problem until you don't have enough of it. So we're quite pleased that we have a lot of cash flow. Having said that, there is no doubt an increase in food can demand because of the pandemic, both in North America and Europe.

As I said on the earlier, our customers in Europe believe this is more permanent in terms of the consumer's demand for food cans. I don't know that to be the case right now in North America, but we'll see how it plays out. But it's an extremely attractive

active business, and we'll see where the review with the board takes us with regards to that business. But we are here to maximize value to shareholders.

Just along those lines, does the pandemic and the impact it's had on food can demand change at all how you're thinking about those businesses longer term?

No. I don't think so. I think it's still the same business we always viewed it to be. Now, if you tell me we're going to have COVID-20, COVID-21, and COVID-25, I hope we don't because that's going to be really painful for the global population. But if you tell me that's going to happen, then, yeah, that's going to change how you feel about the food can. We're never going to go back to restaurants, and we're never going to have barbecues with our friends. canned peas and canned corn, that's going to change how you feel about it. But I'm hopeful that that's not the case. So short of that, this is a relatively short period of time in all of our lives that's been very inconvenient for most of us. Some people have been extremely harshly affected by this. But for most of us, Adam, this is not June 6, 1944. We are not storming the beaches of D-Day. This is a short period of time of inconvenience. And we're all going to get through this. And when we come out the other side of this, we're back to running businesses and operating our lives normally. So in that regard, it doesn't change your long-term thinking about any business that you have.

Okay, got it. Just two others. Tom, just one on cash flow. Working capital beyond this year, you've done a tremendous job of taking out working capital. Over the past several years, I know this year will be a use because of inventory building, particularly toward year end. Are you thinking you've taken out most of the trade working capital that you'll be able to do, or do you think there's more to go perhaps next year? And then the dividends to minorities on the cash flow statement, are you still thinking about $70 million, Tom?

I think the big dollars have come out of working capital. We're in a period now where with the growth in beverage cans, we're actually using working capital. So let's assume that for the near term anyway. And dividends to minority, about $75 million for 2020. Thanks.

And just exit rates for webcam. I know I think in response to Gautam's question, you said global webcam volumes will be up. you think in 3Q, was your exit rate also up, you know, low single? You mean in globally? Yeah, global webcam volumes. If they're going to be up, call it low single in 3Q. Was that the rate at which you exited the second quarter as well?

I mean, Adam, we're sold out, right? I mean, we can't make any more cans. Nobody in the can industry can make any more cans. So we had a period in the second quarter globally in a number of markets, Latin America, Southeast Asia, Europe, specifically Southern Europe, where demand was impacted by the virus. That quickly came back in mid to late May across most of those markets. We are flat out, and we're going to be up in 3Q. Now, is the number going to be 2%, 3%, or 5%? I don't know, but we're going to be up, and the exit rates are extremely strong right now.

Terrific. Thanks so much, Tim. Thank you.

Thank you. Our last question comes from the line of Neil Kumar. From Morgan Stanley, your line is now open.

Hi. Thanks for taking my question. Another follow-up on your specialty can footprint, after you complete the Kentucky and Washington projects, can you just give us a sense of what kind of specialty can next will be in North America, and how does it compare to where you stand currently? I didn't understand the question.

Neil, can you just ask that question again?

Yeah, he's saying that after you complete the North American projects, we're adding new specially canned capacity. Can you just give us a sense of where your specially canned mix will stand in North America versus what it is currently?

Oh, so I'm sorry. So we are... Let's say we are high teens right now, 17%, 18%.

When we come out of these two projects, we'll be in the 22%, 23% range, something like that in North America.

Okay, that's helpful. And then just given the tightness you're seeing in the North American market, do you see any opportunities to kind of continue to improve pricing and maybe address other provisions in customer renegotiations going forward? Should we expect for margins to kind of continue to improve in North America, assuming demand remains this robust?

Well, you know, I think, as I said earlier, in answering somebody's call, I think we've been fairly successful the last couple of years, and, you know, the results in our America's beverage business show that. We're going to continue to have growth on the – on the volume side, which is going to fall right through to operating income. As we fully utilize assets 12 months a year and as we put more lines under a roof, we're going to expand margins because of the operating leverage you get with two or three lines under one roof as opposed to one line. Growing the specialty mix will do We talked earlier about fair distribution of costs, and our customers are also looking for us to do the most that we can to help them compete effectively with their competitors and with their retail customers. But we are always looking for opportunity to improve margins, and I think we've done some of that already, so I'll leave it at that. I don't want to talk too much more about that. Thank you. Thank you, Neil. So, Louie, I think you said that was the last question, so thank you. That concludes the call today, and we'll speak with you all again in October. Bye now.

Thank you. That ends today's conference. Thank you all for joining. You may now disconnect.