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spk10: Good morning and welcome to Crown Holdings' first quarter 2021 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.
spk14: Thank you, Dale, and good morning. With me on today's call is Tim Donahue, President and Chief Executive Officer. If you don't already have the earnings release, it is available on our website at crowncorp.com. On this call, as in the 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 2020 and subsequent filings. Earnings for the quarter were $1.57 per share compared to $0.65 in the prior year quarter. Adjusted earnings per share increased to $1.83 in the quarter compared to $1.13 in 2020. Net sales in the quarter were up 12 percent from the prior year, primarily due to increased volumes across all segments, variable foreign currency translation, and the pass-through of higher material costs. Segment income improved to $433 million in the quarter compared to $298 million in the prior year, primarily due to higher sales unit volumes, favorable price-cost mix, and the non-recurrence of charges for tinplate carryover costs that we saw in 2020. As outlined in the release, we currently estimate second quarter 2021 adjusted earnings of between $1.70 and $1.80 per share. This estimate includes the results of the European tinplate business which will be reported as discontinued operations beginning with the second quarter results. We are maintaining our full year adjusted earnings guidance of $6.60 to $6.80 per share. Assuming the sale of the European tin plate business closes at the beginning of the third quarter, we expect that the earnings dilution impact over the balance of the year of about $0.50 per share will be offset by improved results in the remaining operations as compared to our original guidance. Our expected tax rate for the year remains at 24 to 25%. And with that, I'll turn the call over to Tim.
spk12: Thank you, Tom. Good morning, everyone. Thank you for joining us and our best wishes for the continued health and safety of you and your families. As reflected in last night's earnings release, the company is off to a very good start in 2021. Demand was strong across all major businesses, and despite the ongoing challenges posed by the pandemic and severe winter weather in the United States, the company continued to convert strong volume growth into record earnings. This performance could not have been possible without great people, and our global associates continue to perform extraordinarily in the face of the pandemic, ensuring that our customers receive high quality products and services in a safe and timely manner. And while it feels that we're turning the corner with widespread vaccinations now available, new strains and increased positivity rates in some jurisdictions remind us that we must remain vigilant in our adherence to recommended behaviors. Global demand continues to be very strong for the beverage can, and we are committed to deploy necessary capital to meet customer needs. As detailed in last night's release, we expect to commercialize 6 billion units of beverage can capacity in 2021, with further investments being made to bring on at least that much more in 2022. Before reviewing the operating segments, we thought it would be well to remind you that delivered aluminum in North America sits around $1.28 a pound versus $0.75 a pound last year at this time, so an increase of 70%. And as we contractually pass through the LME and the delivery premium, Reported revenues will reflect both volume increases and the higher aluminum costs this year. In America's beverage, demand remains strong across all of the markets we serve, with overall segment volumes up 9% in the first quarter. We expect that demand will continue to outweigh supply for the foreseeable future, and as described to you in February, we have eight production lines in various stages of construction to bring more supply to these markets during 2021 and 2022. While the CMI no longer publishes industry volumes, we can tell you that our North American volumes increased 12% in the first quarter compared to the same prior year period. Unit volumes in European beverage increased 6% in the first quarter, as growth across Northwest Europe and the Mediterranean offset softness in Saudi Arabia. Segment income reflects contribution from the volume growth and the two aluminum lines in Seville, Spain, which were down for conversion in last year's first quarter. Sales unit volumes in European food increased 6% in the first quarter as the business continues to benefit from strong consumer demand for packaged food. Segment income, which almost doubled the prior year amount, reflects the above-noted volume growth. Five million of favorable foreign exchange and the negative impact of tin plate carryover included in the prior year first quarter. As reported on April 8, 2021, the company entered into an agreement to sell its European tin plate businesses which includes European food. And as Tom said, we expect the sale to be completed in the third quarter, and beginning with the second quarter, results will be reflected in discontinued operations. Asia Pacific reported 8% volume growth in the first quarter, as both Southeast Asia, up 5%, and China, up more than 30%, continue to show recovery from the pandemic-related shutdowns. As described in February, activity levels are returning, However, we expect there will be virus related shutdowns and movement control orders from time to time across the region throughout 2021. Excluding foreign exchange results for transit packaging were in line with the prior year. With industrial demand surging. Activity remains extremely strong in transit and we expect the segment will post full year segment income growth of approximately 25% in 2021 over 2020. There will be a large outperformance in the second quarter against an easy comp with further gains through the end of the year. Other operations also reported strong results in the first quarter, led by North American Food and our beverage can making equipment businesses. In summary, a great start to 2021. With numerous projects completed last year and several more underway currently, we remain well positioned to continue to capture our share of global beverage can growth. Importantly, we continue to convert growth into expanded earnings and cash flow. As Tom discussed, our full-year guidance remains unchanged despite expected dilution from the sale of the European tinplate businesses. Better-than-expected first-quarter performance combined with continued strong demand across beverage and transit will allow us to earn through sale-related dilution and a rising commodity cost environment. And just before we open the call to questions, we ask you that you limit yourselves to two questions initially so that everyone will have a chance to ask their question. But always feel free to jump back into the queue. And with that, Dale, we're now ready to open the call to questions.
spk10: Thank you so much. Participants, we will now begin the question and answer session. If you'd like to ask a question, you may press star followed by the number one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. And if you want to cancel your request, you may press Start. One moment, speakers, as I get the name of the participants that queued up for questions. Our first question comes from the line of Gansham, Punjabi. Barry, your line is now open. You may proceed.
spk06: Thanks. Good morning, everybody. Hi, Gansham. Hey, so, you know, relative to the guidance for the first quarter you gave on February 10th, can you just kind of bridge as to what exactly drove the upside specific to the first quarter? And then also, you know, in terms of guidance for 2Q, Generally speaking, 2Q is a seasonally strong quarter. Just curious as to why the earnings number for the second quarter is not higher than what you delivered in the first quarter relative to history.
spk12: Okay. So, Gansham, it's throughout. I'll just read you off. You know, against what we might have budgeted for the first quarter, every operation in segment income was ahead. So, for example, South America was up – 15 million signal was up 10 million food North America up six European food up seven European beverage up you know 12 to 15 just across the board everybody up it was all volume and so as we look forward to the rest of the year we start trying to understand you know you always look at how could we have been off that much and how was the team off that much I will tell you that we We pushed the teams extremely hard to come with a budget this year that we believed was more realistic than perhaps what we saw in the third and fourth quarter last year because we had these big outperformances in the third and fourth quarter. And while it's nice to outperform, you don't want to miss by that much because you could always miss in the other direction, and that's a different conversation than we're having today. But all volume-related... And so as I said, as we start looking forward to the second quarter and to your question about the second quarter sequentially, why would it be lower? You know, we're trying to understand the two together. I think we certainly had some volume pulled ahead into Q1 from what we expected. And so as we sit here and look at the second quarter, you know, our second quarter guidance is higher than our budget for the second quarter as we re-look at the second quarter, but certainly lower than the first quarter. Obviously, as I said, volume pulled ahead. I think we're probably going to be more capacity constrained in the second and third quarters than we are in the first quarter. So your volume outperformance year on year in Q1 and Q4 has always the opportunity to be greater just because the denominator is smaller. And then just as we look at the balance of the year, You start looking at the commodity cost environment, and while we have pass-throughs for a number of specific commodities, a whole bunch of others go into a basket, the PPI basket, whether that's utilities, labor, coatings, and they're all up right now, especially in the coatings, the specialty chemical side. So we'll see how the second quarter progresses, but that's where we're at now.
spk06: Okay, got it. And then for my second question, you know, just on your pull-forward comment, was that specific to any region? And then second, related to that, you know, just Brazil, just given the virus proliferation, all the headlines that we see, et cetera, have you started to see any impact associated with that in terms of mobility and, you know, the impact on your business? And I know you're cycling through easy comms from last year, so it's very noisy, but what's the real-time view on Brazil?
spk12: So the second quarter, the comps will be easy for Mexico, Brazil, Southeast Asia, as you state, correct? As you know, the virus, not only Brazil, but the other country that doesn't get a lot of discussion here in the U.S. but is really bad right now is India. And so that will be another reason why perhaps we've taken just a, a different approach to the balance of the year. We don't know what's going to happen. We have yet to see in those two countries any real restrictions or movement control orders. We do have some movement control orders and restrictions in one or two of the Southeast Asian countries right now, but not in Brazil or India. Thanks so much. You're welcome.
spk10: Thank you for that. The next question comes from the line of my lead head, Barclay. Your line is now open. You may proceed.
spk16: Yeah, great. Thanks. Good morning, guys. First, on transit packaging, you highlighted in the release, I think, a number of structural cost improvements you've made. As we continue with this industrial recovery here, how should we think about the sensitivity of this business or the earnings leverage to an industrial upcycle, either in terms of incremental margins or however you guys think about it internally?
spk12: Well, I think, you know, as I said in the prepared remarks, we're going to see transit up, you know, I'm saying approximately 25. I think it's going to be at least 25% year-on-year, so that's about – you know, what is that, 65, 60 to $70 million of segment income improvement year on year, which, you know, that's EBITDA as well. Combination of a number of cost reductions we've done over the last couple of years and the recovery of industrial demand. I think that they did much better in the first quarter. Let's say that the, our ability to meet demand was much better in the first quarter than we budgeted. they like a lot of businesses globally not just the can business or the transit business but a lot of businesses globally challenges being availability of raw materials and then the time necessary to convert raw materials and or assemble equipment and so we had a softer budget for q1 based on those concerns but they were able to pull through that I think we feel very good about this year We'll see how long this industrial demand surge is. Is it just COVID related or is there something more to it with all the stimulus that's been put into the global economies? But the business has, in our view, tremendous upside with the platform as it exists today. And we feel very positive about the business. You know, one thing, it's not just in transit. We point out the cost we've taken out in transit, but You know, one of the other reasons for the significant outperformance over the last several quarters compared to prior year quarters is the tremendous amount of cost that our teams have taken out across all of our businesses, whether that's European food, European beverage, throughout the Americas, beverage businesses. So all of that, when you do that and then you get a little volume come back, it just falls straight through to the bottom line, and that's what we're seeing.
spk16: Great. That's super helpful. And then maybe just, After the recent European tin plate announcement, is the strategic review officially complete or would you look to potentially do something similar with other assets like your North American food business?
spk12: Well, you know, I don't know if a strategic review is ever complete. I think it's always incumbent upon the board and management to look at all the assets from time to time to determine what the best outcome is for the company long-term and for the company's long-term shareholders. And I'm delineating between traders and long-term shareholders but we have a we have a duty to shareholders first but we also have a duty to other constituents suppliers employees etc so we're always looking at that and um we feel we feel this was a you know this was a great business right you probably could tell from my comments over the last several quarters uh i really i really like this business i like the what the business can do for an overall organization in terms of its stability and its high cash flow generation. Having said that, we did receive what we believe was a full and fair cash price. We have a little stub we'll retain, and we'll move forward. But the remaining businesses we have are performing very well. We have a lot of capital we need to spend over the next couple of years to deploy new beverage can capacity. And the transit business and the North American tin plate businesses will supplement our capital needs with their cash flow until such time that the Board takes a different view.
spk16: Great. Thank you. Thank you.
spk10: Thank you for that. The next question comes from the line of Neil Kumar, Morgan Stanley. Your line is now open. You may proceed.
spk09: Great. Thank you. In terms of the European template sale, I was just curious what the rationale was for continuing to own a 20% stake in the business. And then I was just wondering if you can just offer any thoughts on how you're thinking about target leverage post the sale. I mean, in particular, the remaining 20% equity interest in European template will not show up in EBITDA. So how will you adjust your leverage target to account for the cash flow?
spk12: Well, I think, you know, we ended last year with 3.9 or 4, I think, One thing that was interesting, we get to the end of the first quarter here, and this is the first time I can remember in my career, Crenn, and unfortunately I've been around a long time now, that our leverage at the end of the first quarter is actually lower than what our leverage was three months earlier at the end of the year. And so there are a couple ways to reduce your leverage. The easiest way to reduce leverage is to increase earnings, and that's what we did. But I think going forward, understanding a new cash flow profile of the company, that we would say that we're comfortable in the three to three and a half times range, depending upon what we see for capital needs and other business conditions globally. The rationale for keeping the 20%, that was the best deal we believed we could make for shareholders. So keep in mind that you've got a private equity sponsor making a bid for a company, they've got to put equity up. And the less equity they have to put up, perhaps the greater price they can pay you for a business. So while it appears that the 20% cost us, you know, on the order of, what, about 125 million euros, I would tell you that the net of the increased purchase price we received versus what the price would have been had we not taken an equity stub, probably only cost us on the order of about 40 to 45 million euros. So it didn't cost us a lot to keep the stub because we got a greater overall enterprise value for the business by allowing the sponsor to have to put less equity up, if you understood what I said there.
spk09: Yeah, that's very helpful. And then just for my follow-up, you know, I think your prior expectations for North American growth for the full year was in the high single-digit, low double-digit range. Is that still the case? And is there a way to kind of break up that growth by beverage categories? How much of that's coming from hard seltzers, sparkling water, other emerging alcohol categories versus more mature categories like carbonated soft drinks or beer?
spk12: Well, I think what we said in February, we I'm trying to remember what we said. I think we said we'd be up about 10% in North America this year. I think we're up 12% in the first quarter, albeit, as I said earlier, it's easier to be up more in the first and fourth quarters than in the second and third just because you have more capacity available for a lower denominator. But I think we're still very comfortable with 10%. We'll bring the Bowling Green lines up this year. We'll bring Olympia up later in the year. Listen, I'm sure it's possible to To break that down by category, I haven't spent a whole lot of time trying to do that by category myself, only because we're making and selling everything we can make, and at some point it becomes less critical to understand what categories are growing that much as it is to try to meet your customer needs and not disappoint your customers, and that's where we're at now. As I said earlier, demand is going to far outweigh supply over the next year or two, at least over the next year or two, if not for the next three or four years. And we, like others, probably are most focused on trying to get as much capacity in place where we see the opportunity for us. And that also means not disclosing to you or others where we see our opportunity.
spk09: All right. Thank you.
spk17: Thank you.
spk10: The next question comes from the line of Adam Josephson, KeyBank. Your line's now open. You may proceed.
spk15: Thanks. Tim and Tom, good morning. Congrats on another really good quarter. Thank you. Tim or Tom, just one on the dilution and the guidance. So it's 50 cents dilutive in the second half. You beat your guidance by close to 50 cents in the first quarter. So it seems like you're effectively raising full year by the amount of the one QB. And I know you said to Gontram, there may have been some demand pull forward in the quarter, which is perhaps why your rest of your outlook is effectively unchanged. Is that kind of the right way to think about it? And do you, do you think there may be an element of conservative conservatism in there just given what's happened over the past three quarters?
spk12: Well, I, I hope you're right. Um, You know, you don't sound like the Prince of Darkness. You sound like Vasco da Gama right now, the great explorer. I'm not sure if I'm talking to Adam Josephson or not here. I'm sorry, Adam. I couldn't resist. Listen, I hope you're right. As I said also to Gansham, and I had four points written down here. Tom and I were talking about this, and I said the pull ahead, capacity constraints as you go forward, commodity costs, and I didn't say the virus in Brazil or in India, but Gansham reminded me of that, so... You know, there are a lot of things going on right now globally, and it's sourcing of raw materials, the cost of raw materials globally, not just affecting the can business or the tran business, but all businesses. And so we're trying to take an approach here that's a little bit measured. It would be really easy to get real excited about performance over the last couple of quarters and even here in the first quarter. We're running a business, and the first thing we've got to do is satisfy customer demand and meet the customer's needs. We understand you'd like to know everything. We would, too. There are a whole bunch of things that are going on. This is a really exciting time with the recovery in global economies, but there are some suppliers that are that are pushing price and squeezing and are also, I shouldn't say squeezing, but they're having similar demand surges in their businesses. So, you know, I don't know. It's where we're at right now. I think that, you know, I would characterize the outperformance in Q1 on the order of 40 to 45 cents, not 50. So there's a little bit of A little bit of outperformance in the remaining three quarters. I know we midpointed the second quarter guidance. Tom just gave you certainly above the original budget we had. And we'll just see what the back half of the year brings us.
spk15: Yep. No, I appreciate that. And just on your cash flow, look, I know you didn't give cash flow guidance this time, presumably because of the sale, but you were guiding to $500,000. three months ago with CapEx of 850. Can you update us, Tom, perhaps on what you're thinking in terms of CapEx working capital and consequently roughly what neighborhood you're thinking for free cash this year? Appreciate it. I know you didn't give guidance perhaps for a reason, but sorry, go ahead.
spk12: Yeah, so, you know, Adam, I think the cash flow for this year perhaps is not meaningful because depending on when we close the transaction, Tom gave you an arbitrary date of July 1st, but it could be July 15th or August, who knows when it's going to be. We think sometime in the third quarter. We just did that because it was an easy cutoff to give you some guidance for the balance of the year. But depending on when that happens, there will be working capital movements, plus and minus, which hit the cash flow statement, but the recovery of which goes against the purchase price. So it's almost not meaningful to cash flow. But I think what we could tell you, is that we believe capital for this year will be in the order of 900 million. We're gonna take capital up a little this year. Combination of accelerated project spending and also accelerated construction costs, steel, cement, drywall, lumber, you know, you're seeing it out there, right? All commodities are up, especially construction materials. But assuming, let's assume that we had sold the business, closed on the business December 31st, 2020, And if we said we were going to spend $900 million in capital, I would tell you that as we sit here, then we would have told you that free cash flow for the year would be in the order of $350 million, if that helps you.
spk15: That's perfect. Thank you, Tim. Best of luck.
spk12: Thank you.
spk10: Next question comes from the line of filling. Jeffries, your line is now open. You may proceed.
spk13: Hey, guys. Congrats on a very strong quarter. Good morning, Phil. You know, margins and earnings were particularly strong in Europe and America's BEV. I mean, you typically see margins build from here, but you did call out some pull-forward demand. So I'm trying to get a better handle on this. Price-cost is a big enough impact that you don't see your typical seasonal improvement in profitability in 2Q and 3Q. I'm just trying to flush that out a little bit more.
spk12: You're talking about percentage or absolute, Phil?
spk13: Percentages.
spk12: Yeah, so, you know, I mentioned in the prepared notes the aluminum cost is up 70%, right, delivered aluminum? Yep. So you've got the denominator effect as we have this much higher aluminum cost now that will be in effect, we see, for at least the second and third quarter. So, you know, on a one-for-one pass-through, you know, revenues are higher, but it doesn't affect reported or absolute margins, but the percentage margin is on a one-for-one pass-through comes down. So you just want to be a little careful about percentage margins in an increasing commodity cost environment that you're passing through.
spk13: What about profitability per can or however metric you think that's cleaner? Do you expect the seasonal improvement? Because you did call it a potential price-cost mismatch.
spk12: No, no. Listen, I think we're going to have profitability improvement just because we're going to get into the summer selling season. And the more we sell... you spread your fixed costs across greater volumes, and so you naturally get profitability improvement.
spk13: Got it. That's helpful. And then, Tim, when you talk about your outlook for demand, I guess the risk is certainly COVID in some of these markets like Brazil, Mexico, and even India, for that matter. But any concerns on the tougher comps with the nice uptick you saw in at-home consumption last year? I know when we look at the Nielsen data, you're starting to lap tougher comps and it's flipping negative, but, you know, I assume you got some good growth on new products, but any color on that front in terms of some of the puts and takes on, you know, potential offsets?
spk12: Yeah, so, yeah, well, first thing I'll say is we're seeing a real improvement in the virus in Mexico, so I wouldn't throw Mexico in the same category as Brazil and India. I think over time, It remains to be seen how long it's going to take for people to consume less at home and start consuming more outside the home. I think there's still a big percentage of the population that's worried about the virus, and rightly so. And so that'll take some time. But I think demand that we have for, especially in the beverage can business, and especially in the Western Hemisphere, for new products and for beer in Latin America and new product introductions, seltzers, et cetera, in North America is going to far outweigh any of that reversal of at-home consumption over the next couple of years.
spk13: Okay. Thanks a lot. Appreciate the call.
spk12: Thank you.
spk10: Thank you for that. The next question comes from the line of Mark Goldie, Bank of Morton. Good morning, Tim.
spk17: Good morning, Tom. Hi, Mark. Tim, I wondered, is it possible for you to give us any more color at this point in terms of, you know, prioritizing the use of proceeds from the 10-place transaction and also just thinking how you might kind of cadence that through the year?
spk12: Yeah, I want to be a little careful because, you know, we've got – you're going to pay off some debt and you're going to buy back some stock. And which tranches of debt and how much stock, obviously, we don't want to – we want to do it as efficiently as possible. So I don't really want to get into too much of that. I mean, I don't know. I think if you – I don't know. Tom, you got a view?
spk14: Yeah, I think you have to look at the leverage, and Tim said we'd be somewhere between three and 3.5 times at the end of the year. A big range, so probably close to the middle.
spk17: Okay. All right, and then for a follow-on, Tim, you know, there's a lot of goodwill toward the beverage can and the beverage can business right now, but I was reading the latest issue of the CanMaker the other day, And they were talking about the low U.S. recycling rate on aluminum cans kind of being the elephant in the room for the industry right now. And I'm just curious about your thoughts about how you improve that recycling rate, because I think we're at about 50% right now.
spk12: We are around 50%, which is certainly higher than plastic or glass recycling, right?
spk17: Yeah, to be sure.
spk12: And then keep in mind the Canmaker is a UK publication, and recycling rates are generally higher outside the United States, and certainly they are across Europe as well. So, you know, they're trying to point out, you know, in a society as wealthy as the United States, sometimes we take for granted items of value, and aluminum has value. So it's a relevant point that the Canmaker made. So, you know, we live in a disposable society, right? If your DVD player breaks, you don't get it fixed. You buy a new one because they only cost $29.99. So how do you fix it? Well, you can get real draconian. You can do it like Switzerland does, and you can have people go around and, you know, root through people's trash and see if they're properly separating every item and find them. I don't think that would be very popular in the United States and Pretty tough to find any politician who's going to want to take that on, but it has to come down to the consumer. And it's pretty hard to force it back on the producers or the customers of the producers. I mean, you're the guy buying the canned market and not properly disposing of it. You generally, not you specifically. So, you know, it's an education process, and so I'm not sure if there's a way to – to prepare an incentive program that would force consumers or incentivize consumers to want to recycle more. But we all know aluminum has great value, and it's really a shame for it to end up in the common waste stream as opposed to the recycling stream. I don't have the answer for you.
spk17: Yeah, well, one of your peers has talked about actually advocating for increased use of deposit laws, things like this. Do you guys have any view on that?
spk12: Well, I think certainly if you look at the deposit states, there is more recycling that occurs in the deposit states. Now, California, for example, has deposits. Is that higher rate of cans coming back into California from cans sold in California due to California sales, or is it people collecting cans in Arizona, New Mexico, Nevada? and bringing them into California to get the nickel. They didn't pay the nickel in their home state, but they brought it to California to get their nickel. I don't know, but there is no doubt that the rates are higher in states with deposits. I think the challenge is that our customer base understands that at the initiation of the deposit, there's likely to be a dip in demand and they don't want to face that dip in demand. I think once Once that dip in demand normalizes, then you're back to normal demand patterns. I would say that it would be unfair to put a deposit on aluminum cans and not put a deposit on everything. And that doesn't just mean you put a deposit on a PET plastic bottle, but you put a deposit on a PET bottle that's used for ketchup and mayonnaise and everything else. So I think, you know, PET bottles also have deposits, but that's generally only on beverage products. It probably should be deposits on everything. How much can the consumer withstand? Because then the consumer's got to try to find a way to get that back. But if you're really looking to control waste, you want to put a deposit on everything, not just on the product that has the most value.
spk17: Okay, I'll leave it at that. Good luck in the balance of the year, Tim. Thank you.
spk10: The next question comes from the line of George Staffis. Bank of America, your line is now open, you may proceed.
spk04: Hey guys, good morning. Good morning. Thank you for the details. Congratulations on the progress so far. My first question, I just want to try one more time to dig into some of the guidance assumptions that you have and then I've got a longer term question for you. In terms of what your guidance assumes for this year, Should we assume that in the 660 to 680, you're assuming debt pay down to the midpoint of that range and that the rest of your available cash goes to buyback? And within the P&L, where will the stub on European templates show up? Will you include it somehow in EBITDA, or will it be purely in equity earnings?
spk14: So the stub will be in equity earnings at 20%. As far as the leverage in the stock buyback, yeah, look, by the time we sell the business, or actually where we are today, and you start flowing through stock buybacks, that's not a meaningful contributor to the earnings growth this year. But for modeling, I think using the midpoint of that three to three and a half sounds about right.
spk04: Okay, Tom. And then thanks for that. And I guess my other question, if we take a step back, you know, Signode had, you know, very strong performance in the quarter. It looks like it's trending better than you expected for the year. In Southeast Asia and China, volumes were very, very strong. And I think you said China volumes were up 30%, obviously, versus a very easy comparison.
spk00: Yes.
spk04: What are the implications – if any, for the trend that you saw in the first quarter in the performance versus budget for capital allocation to those businesses. And do you see Signo, Tim, even more of a keeper these days given that performance within the portfolio? Or no, it's doing well, but you're going to be every bit as clinical about that business and its fit in the portfolio as you would have been six months and nine months ago And within China, given the performance you're seeing, what does that do to your supply demand around the rest of Southeast Asia and your willingness to put capital both into China and, frankly, the rest of the region, which looks to us to be very tight given our supply and demand work? Thanks, guys. Good luck in the quarter.
spk12: So I think the principal allocation of capital dollars in the company right now is in the beverage can business. There's minimal capital that we put into transit for specific projects. that supply industries where we see good growth, but the capital allocation of Cignote is fairly minimal considering the size of the business and the cash flow it generates. We have consistently commercialized new capacity across Asia, Southeast Asia, over the last several years. We had a plan come up last year. We'll have... A new plant and another line come up this year, so two lines with a new plant and plans for more, obviously. We have no current plans to expand capacity in China.
spk04: Okay, and that's because you've been there, done that. The growth is great, but it's difficult to earn a profit on a long-term basis given the amount of capacity. Would that be a fair summation? Amount of competition, I should say.
spk12: Yeah, among other factors, yes.
spk04: Okay. Thank you, guys.
spk12: Yeah. You're welcome.
spk10: The next question comes from the line of Anthony Paninari. Diddy, your line is now open. You may proceed.
spk07: Hi. This is actually Brian Bergmeier sitting in for Anthony. Following the style of European food, are there any EBIT impacts to non-reportable or corporate expense that we should be aware of? And are there any dis-synergies in separating the U.S. and the European food can businesses?
spk12: So, no dis-synergies separating European food can and retaining North American food can. There are, in the other Other segments are the non-reportables. The European aerosol business and the specialty packaging business probably on an annual basis has EBITDA of around $10, $12 million, something like that. So that'll come out over the balance of the year after it's sold or starting in the second quarter because it goes to discontinued ops. And I'm sorry, Brian, what was the other part of the question?
spk07: Does that impact a corporate expense?
spk12: Oh, yeah. So... There are, you know, what we're going to be left, we're going to have a European business now, which is beverage cans only. So as opposed to a very large $4 billion, $4.5 billion division, we're going to have a beverage can business. And the product itself is more homogenous. It's all one material. Sizes, while there are sizes, it's certainly not as diverse. As food cans and the manufacturing is a little bit more homogenous than food can manufacturing, so it'll require far less corporate overhead in Europe to manage the beverage business than it did to manage the division when it was, you know, a multi-product division. So that is already in the numbers that Tom has provided.
spk07: Got it. Thanks for the detail on that. And as my follow-up, is it possible to quantify the impact of the Winter storm in Texas on your America's Bev results in one queue. Were your facilities forced to take any downtime in one queue?
spk12: We have two big beverage camp plants in the Houston area in Texas, and they were down for a couple of days each. You know, if I had to quantify it, you know, pick a number like five million. But that's a guess, but probably not a bad guess.
spk07: Got it. Thank you.
spk12: You're welcome.
spk10: The next question comes from the line of Kyle White, Deutsche Bank. Your line is now open. You may proceed.
spk11: Hey, good morning. Hope everyone's doing well. We're seeing some more introduction of spiked seltzers into Europe and just curious what you're seeing on this front and what kind of growth expectations do you have in this beverage category in the region? And then also, are you seeing that this beverage category is primarily going into the canned over in Europe, or is it a much more even mix between cans and glass? Thank you.
spk12: I think just like you see in the United States, I think you're going to see as those products are introduced more and more into Europe, it will be more cans than glass or other materials. We'll see. how much growth we actually get in European beverage this year. We expect very good growth on the beer side. On the carbonated soft drink side, depending on jurisdiction and depending on the rollout of the vaccines, with the exception of the UK, it's going very slow on the rest of the continent. So we'll see what the summer tourist season looks like and outside dining, you know, on-premise outside dining looks like. That'll have some impact as to the full recovery of of the can and other substrates as it relates to carbonated soft drink. But it'll be a good season. It's just going to take a little longer than what you're going to see in North America.
spk11: Got it. And then you mentioned the inflation on aluminum, particularly in the U.S., in your prepared remarks, and understand that you passed it through from an earnings standpoint. But is this expected to have a large impact on your working capital in terms of the cash outflow this year?
spk12: It will have an impact on working capital during the year. I think, you know, as we're typically, with the exception of some Southeast Asian countries and Brazil where we have big fourth quarters, you know, we're a summer selling season business. So most of that is collected before you get to the end of the year. It will depend on how much inventory we believe we need to carry into next year depending on demand. But as everything is basically hand-to-mouth right now, We're selling what we can make. I don't expect us to have a whole lot of opportunity to build inventory. Let's put it that way. So some impact, but again, the working capital impact already built into the numbers Tom's provided.
spk11: All right. I'll hand it over. Thank you.
spk12: Thank you.
spk10: The next question comes from the line of Salvatore Tiano, Seaports Global. Your line is now open. You may proceed.
spk08: Yeah. Hi, everyone. So firstly, I want to ask about transit packaging. You mentioned that constant currency revenues were flat year on year, but industrial demand was really strong. So can you provide a little bit more color on what the markets or regions did better and what markets and regions outperformed and perhaps still declined year on year?
spk12: Yeah, so I think what I meant to say, if I said it wrong, I apologize. On a constant currency basis, I was talking about segment income or operating income. I think on a constant currency basis, sales were certainly up year on year. Very strong in Asia, very strong in Europe. I think volume's strong across everywhere, but on an income performance, strong in Asia, Europe, and the equipment and tools side, A little softer in the Americas. I think that's just the timing of passing through commodity costs, which we'll see come through here in April and May. So, you know, just a timing issue.
spk08: Okay, perfect. And I guess you already got a few questions about the buybacks versus debt paydowns. I would like to come back to that a little bit just to understand, you know, the dilution you said is going to be around 50 cents from the sale of European food this year, full year basis. So we're looking probably close to $1, assuming you don't reinvest against the proceeds. So what is the rationale, I guess, to not try to accelerate buybacks in order to minimize the dilution from what would be a pretty big chunk of your earnings being sold? you know, why not consider this scenario?
spk12: Just what leverage we believe we're comfortable having going forward with a smaller company and a lower earnings base and a lower cash flow base.
spk14: But as we said, we do intend to buy that stock. So it's just a matter of how much and when.
spk08: I guess, Tom, you were mentioning before the leverage of three to three and a half times, perhaps for modeling, we should think about the midpoints. why wouldn't it make sense for you to accelerate buybacks and perhaps make sure you're on the upper end of the leverage by your end, because otherwise the dilution will be material, and that's the best way to minimize it, it seems.
spk14: Again, it comes back to which leverage ratio we're comfortable at, and the range is 3 to 3.5, so we do have that option if we'd like to take advantage of it.
spk08: Okay, perfect. Thank you very much.
spk14: Thank you.
spk10: The next question comes from the line of Arun Viswanathan, RBC Capital Markets. Your line is now open. You may proceed.
spk01: Great. Thanks. Good morning and congrats on the very strong performance here. I guess, you know, first off, maybe I could just ask a question. You know, a lot of near-term questions have been asked, so maybe we can just ask a question about the next couple years. You noted that demand is going to far outstrip supply in beverage cans. You know, you're adding about 6 billion units this year, 15 billion units over the next couple years. What are some of the things you're hearing from your customers that kind of supports the statement that demand is going to far outstrip supply? And could you specifically address... you know, maybe trends around freshness, um, water alternatives, you know, most of the demand recently has been driven by, um, you know, potentially some new products on the seltzer side and, and on alcohol alternatives. So is it, is it kind of the water alternatives coming next? And then also is it new product development because, um, maybe some SKUs or the beverage companies favored high velocity SKUs this last year. And, uh, you know, do you, do you see more new product development, um, supporting that growth in the future?
spk12: I think there's always going to be new product development. I would not characterize our belief of continued strong demand to be new products, which we're not aware of yet. But it is true that much of the growth we've seen over the last couple of years has been seltzers and some water alternatives. I will say that during the pandemic, we've had a resurgence in growth, at least on the canned side, for carbonated soft drinks. And as I said earlier, I think that's going to take some time before we see people start to go back out to restaurants and consume more on-premise as opposed to in the home. So, you know, at this point, we've got customer forecasts for the next... you know, several years, and as we contract with those customers to try to meet their forecast over the next several years, that's where we kind of get our comfort in what we believe demand is likely to look like for the next couple of years. I don't really want to get into describing for you on a public call anything which somebody could determine specific to any one customer.
spk01: Okay, fair enough. And then, you know, similarly, I guess you guys have announced an investor event on May 27th. So is there anything you can provide as far as a preview as to what you'll discuss there? You know, maybe on financial strategy or at least the portfolio as you see it now. Maybe you could touch on those two and or maybe even CapEx as well. Thanks.
spk12: Well, I certainly think you'll get a full review of all the businesses we have remaining in the Portfolio X, the European template. You'll get a view as to where we see capital for the balance of this year and some of the projects we're working on. And I think it'll have been about at least a year and a half. Is it a year and a half or two and a half years since our last investor event? So it's probably time to do it and describe for you what the company looks like in percentage terms of revenues and EBITDA from the various businesses. And frankly, hopefully try to re-educate or begin the education process for some of you that are new to the story about transit packaging. So again, we understand it's not well understood by many in the analyst or investment community. And there are reasons for that. There is no public comp So just to, again, re-educate or begin the education process along that line of business.
spk01: Okay, guys. Thanks a lot.
spk12: Thank you.
spk10: The next question comes from the line of Gabe Hady, Wells Fargo Securities. Your line is now open. You may proceed.
spk02: Tim, Tom, good morning. Thanks for taking the question. Good morning, Gabe. As kind of previously stated, a lot of questions have been asked. I'm going to try to take another stab at the strategic review. And I don't think many investors would dispute kind of the financial profile of SigNode and the apparent more resilience in the face of a recessionary environment. But I do think some people kind of scratched their head having a consumer-based packaging business married up with an industrial operation. And I appreciate that you wouldn't want to market that business on trough earnings and perhaps depressed multiples. So I guess more directly, is the strategic review that you guys initiated back in November, is that complete? Or is there still kind of more work being done behind the scenes on any of the businesses?
spk12: Well, you know, as I said earlier, I don't think it's ever complete. I think the board and the management are always looking at all the assets in the portfolio to determine the best use. for the company's assets, and do you want to convert? Do you want to trade that for cash, or do you want to continue to operate it? I wouldn't call this an industrial business. I'd call this an industrial packaging business, so it is a packaging business. It's a different packaging business than beverage cans, but I would tell you that food cans is a different packaging business than beverage cans. There's nothing similar about food cans and beverage cans other than they're both cylinders, but their manufacturing processes are different. Customers are different. Market strategies are different. The seasons are different. The materials are different. So it's a different packaging business. Not unlike food and beverage cans are different packaging businesses.
spk02: Fair enough. All right. And then I guess on the hard seltzer point, maybe some folks are scratching their head in terms of are U.S. consumers really drinking that much more? Is it displacing other beverages, et cetera? And maybe this... as a delicate subject, not asking you to speak on behalf of your customer strategy, but it seems as if some of these hard seltzers might be being imported into other countries, similar to kind of a certain energy drink strategy 15, 20 years ago. So I'm curious if some of the growth that you're seeing in North America is some of that, in fact, perhaps earmarked for other parts of the world on some of these new product introductions.
spk12: I think the, If you're talking about cans that are sold in the United States that are then filled here and then exported, I think that's probably happening, but I think it's a pretty small number. I think there's no doubt that the pandemic has people drinking more at home than obviously on premise since most bars or many bars have been shut down. So, you know, as opposed to drinking draft beer or bottled beer, you're drinking canned beer at home. As opposed to drinking a gin and tonic or a vodka soda, you may be having a seltzer at home. I do think that when bars reopen, I think there's a segment of the consuming population that are going to continue to drink these spiked seltzers. And these spiked seltzers are served in cans, whether they're served in cans in your house or in a bar. So I think from that standpoint, I think we think the spiked seltzer phenomenon is here to stay for a while. There are obviously... As bars and restaurants reopen, consumption of canned beverages will be lost to other substrates or draft. But I think, as I said, it's going to happen in a phased way. I don't think we're going to see a big event. And I think that natural growth, it'll be kind of lost to natural growth. We're not going to feel any real volume turned down in our business from that.
spk02: Understood. Thank you.
spk12: Thank you.
spk10: The next question comes from the line of Adam Samuelson, Goldman Sachs. Your line is now open. You may proceed.
spk05: Yes, thank you. Good morning, everyone. Good morning. A lot of ground has been covered, but I wanted to come back to the operating profit margins in both America's beverage and European beverage in the quarter. I'm just thinking about especially in America is 14% revenue growth, 40% profit growth, kind of that incremental margin on, I think you said 9% volumes would seem very high for the normal incremental contribution margin we would think in your business. And just help us think about just the price mix, cost reduction, just try to think about the drivers of the significant operating leverage you saw in America's beverage and Same story, again, in European beverage, too.
spk12: Just trying to make sure I'm... Last year, we installed third production lines in two of the facilities, one in New York, one in Toronto. As you might imagine, you put the second or third line into a plant, the contribution is certainly much greater than a one-line plant, and even more so when you spread costs out from a two-line plant to a three-line plant. And as I said earlier, we've been reducing costs throughout the entire system every year, as all the can companies do. It's incumbent upon us to reduce our costs to provide the lowest cost option to our customers. So that just feeds through. A big thing in Europe year on year is we have a big beverage can plant in Seville, Spain. It was not in operation last year at all in the first quarter. We were converting the lines from steel to aluminum. So that plant is now back in production, and you couple that with volume growth not only in Spain and throughout the Mediterranean, but also in France and the U.K. And, you know, when you cut costs and then you have volume come through, it really does fall to the bottom line. It's not much more complicated than that.
spk05: Okay, that's helpful. Just one quick follow-up, just North America, you talked about 12% volume growth. Were import levels in the first quarter similar to what you experienced in 2020? Are you seeing that start to get backfilled with domestic capacity?
spk12: Are we still running kind of a similar level short versus... So we did not really begin importing cans into the U.S. until the second quarter last year when the Mexican and Brazilian businesses were, you know, the beer industry was shut down in those countries for a period of time during the second and third quarter. There were some imports into the U.S., for Crown at least, in the first quarter, but not very large. There will be imports this year into the U.S. from other regions, but significantly lower than we had last year.
spk05: Okay, great. Thank you very much. I'll pass it on.
spk12: Thank you.
spk10: Next question comes from the line of Jeff Zekoskis. JP Morgan, your line is now open. You may proceed.
spk03: Thanks very much. What were the after-tax proceeds of the tin plate sales, of the tin plate business, and what other revenue subtractions need to be made in the other segments outside of European food to correct for the divestiture?
spk12: Oh, boy. The revenue off the top of my head I don't have.
spk14: It's about 200 million in aerosol and... No, no, no, no, no. Is it really? Yeah. For a full year? Yeah. Yeah. Yeah. And then promotion of less than 100, right? On the after-tax proceeds, we talked about a billion nine euro in the release pre-tax. The tax on that should be less than $100 million. Less than 100.
spk03: And then for my follow-up, thank you for that. Other competitors have announced very, very large capacity additions. Have those announcements in any way changed your strategy or made you think differently about the longer-term tightness of the beverage can industry?
spk12: Not at this time.
spk03: Okay, great. Thank you so much. Thank you.
spk10: As of now, we don't have any questions in queue. Speakers, you may proceed.
spk12: Thank you, Dale. So that concludes the call today. We'll speak with everybody again in May during the virtual investor event. Thank you. Bye now.
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