Crown Holdings, Inc.

Good morning and welcome to Crown Holdings' third quarter 2022 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. Kevin Clodier, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you, Nicole, and good morning. With me on today's call is Tim Donoghue, President and Chief Executive Officer. If you do not already have the earnings release, it is available on our website at crowncorp.com. On this call, as in the earnings release, we will be making a number of forward-looking statements. Actual results could vary materially from such statements. Additional information concerning factors that could cause actual results to vary are contained in the press release and in our SEC filings, including form 10-K for 2021 and subsequent filings. The company recorded diluted earnings per share in the quarter of $1.06 compared to 79 cents in the prior year quarter. Adjusted earnings per share in the quarter were $1.46 compared to $2.03 in 2021. Net sales in the quarter were up 12% from the prior year, primarily due to pass-through of higher raw material costs and increased beverage can volumes. Segment income was $336 million in the quarter, $344 million at constant currency, compared to $379 million in the prior year, primarily due to higher energy prices in Europe the cost associated with higher inventory levels in Europe and Asia, partially offset by improved profitability in North American tin plate and can-making equipment businesses, and 6% global beverage volume growth. During the quarter, the company amended and extended its credit facility to August 2027. We raised an additional billion dollars in floating rate debt and used the proceeds to retire 885 million euros. Euro notes due in February 23 that carried a blended rate of 1.3%. The balance sheet remains strong with no significant near-term maturities until September 2024. As a result of the refinancing and higher rates, the company now projects net interest expense of 270 million for the year and $350 million if rates were in place for the entire year. As of September 30th, we repurchased 6.4 million shares of Crown common stock and spent $722 million of the current $3 billion board authorization. Since we reinitiated the share repurchase program in 2022, we've repurchased 15.3 million shares or $11 11% of the shares outstanding. For the balance of the year, we assume continued headwinds from the stronger U.S. dollar, higher European energy prices, slowing demand, and higher interest expense. The company currently expects fourth quarter adjusted earnings to be in the range of $1 to $1.10 per share, and full year adjusted earnings in the range of $6.60 to $6.70 a share. The current projected EBITDA, we currently project EBITDA to be approximately 1,770,000,000, capital spending of approximately 850,000,000, free cash flow of approximately 100,000,000. Free cash flow of 100,000,000 is considerably lower than our previous projection of 400,000,000. due to greater use of working capital, mainly driven by the timing of inventory purchases and higher interest paid due to rising rates. We expect leverage to be between three and a quarter and three and a half times, and we remain even more committed to maintaining a strong balance sheet in this rising rate environment. With that, I'll turn the call over to Tim.

Thank you, Kevin, and good morning to everyone. As reflected in last night's earnings release, performance in the third quarter and our outlook for the fourth quarter are both well below our previous guidance. As noted, while beverage can volumes were up 6% globally in the quarter, customer demand was lower than almost every market and product line compared to our prior expectations. We now estimate global beverage can volume growth of 4% for 2022, down from our prior estimates. Looking ahead to 2023, global beverage can volumes are expected to increase by 6% with growth expected in each of our operating segments. As a result of lower than expected third and fourth quarter beverage unit volumes, we now carry too much raw material inventory across our Asian and European operations at a time when the price of aluminum has declined approximately 10 to 15% from July and August averages. This higher cost material impacted our third quarter results in both Europe and Asia and will continue to have an impact in the fourth quarter. Hoping to avoid supply chain issues that we dealt with over the past two years and considering long delivery times, we ended up with more material than needed given the lower sales. The impact of the company is lower margin resulting from the pricing formula on the sell through a finished product later than anticipated versus when the material was purchased. These balances will be worked down in the fourth quarter. As Kevin discussed, we have reduced our 2022 capital spending to $850 million from $1 billion, mainly the result of unannounced projects being indefinitely postponed. Our two projects in the United States, Martinsville and Mesquite, are progressing well, and it is important that we have good startups to meet customer commitments and expected 10% North American volume growth in 2023. Mesquite improves our North American footprint, allowing us to more efficiently serve the southwestern United States. Today we serve this region from our plants in Ensenada, Mexico, Wyoming, and Washington State. The mesquite plant frees up volume from currently supplying plants for their own region and allows us to recapture volumes with previously supplied customers in the southwestern U.S. While we have no current plans for any future capacity expansion in the United States, We do believe that the North American market will continue to grow, perhaps more on the order of one to three percent, as supply chain issues for our customers continue to improve. Earlier this month, we began shipping commercial cans from the second line in Uberaba, Brazil, and expect to progress quickly through the learning curve. With all planned projects in Brazil now complete, we are well positioned for future growth, including the coming summer season and carnival in February. Turning to the operating segments, in America's beverage, unit volumes advanced 2% over the prior year, but this was well short of our earlier expectations. Brazil and Mexico, both up 8% to the prior year, were offset by North America, where volumes declined 6% in the quarter, led by a sharp decline in the month of September. While CMI no longer publishes quarterly shipment data, we would estimate that the North American market including lower imports, was down 4% both in the quarter and for the nine months to September. Previously, we estimated that our North American volumes would be up 5% to 6% for the year. We now revised that to a flat volume performance in 2022 for North America. We currently expect fourth quarter shipment growth in Brazil, leading to an overall flat volume performance for the year, which is a nice recovery from a soft first half. And for the segment in 23, we expect overall volume growth of 8%, including the aforementioned 10% growth in North America. Unit volumes in European beverage increased 3% in third quarter, with shipment growth noted in Italy, the Middle East, and the UK. And again, while volumes advanced versus the prior year, they were short of our earlier expectations. largely related to hyperinflationary conditions in Turkey and customer supply chain issues in the UK. The expected headwinds from energy and currency both accelerated during the third quarter, primarily as contracts used to hedge energy in earlier quarters rolled off. Volumes are expected to be modestly up in the fourth quarter and up low single digits in 2023 as we bring on more capacity in both Italy and Spain. And we do continue to make very good progress on contract renewals to restore margins to acceptable levels in Europe. Beverage can volumes in Asia Pacific advanced 26% in the third quarter, off a very easy comparison in the prior year, with strong growth noted in Thailand and Vietnam. And as similar to North America, volumes being up 26% to the prior year, they were certainly short of our earlier estimates. due primarily to economic softness across the region and COVID-related shutdowns and electricity restrictions in China. Sequentially, volumes were down 12% from the second quarter, and fourth quarter Asian results will continue to be impacted as we carry higher-priced raw materials through the fourth quarter. Volumes in the fourth quarter are expected to be modestly higher as growth in Southeast Asia will be tempered by China, and we expect about 5% to 6% growth next year. Adjusting for currency, performance, and transit was largely in line with the prior year third quarter. Inflation-related selling price initiatives and cost reductions largely offset a 6% blended volume decline. Price and cost reductions are expected to benefit again in the fourth quarter, and similar to the third quarter, will be offset by volume and currency. We do expect income improvement in this segment in 2023. as inflation recovery and cost reduction will outweigh economic-related volume softness. Performance across North American tin plate and can-making equipment continued to be firm compared to the prior year, as we continued to sell more self-made two-piece food cans. Aerosol sales unit volumes were down 20% in the third quarter, resulting in lower-than-expected overall performance. Known for their convenience in dispensing products, Aerosol cans are economically sensitive, and demand softness is expected to continue into the fourth quarter. Segment results in 2023 will be down compared to 2022. The result of continued economic softness in aerosol cans and the year-over-year impact of inventory benefits realized in 2022. So in summary, a disappointing third quarter performance and fourth quarter outlook. When we last spoke to you in mid-July, we expected the impacts from energy and currency to be steeper in the second half. What we did not foresee, however, was such a sudden and sharp decline in global demand for beverage cans, nor such a sharp increase in interest rates. While we remain cautious as to the effects on demand from continued inflation and higher interest rates, we currently expect volume growth in each of our global beverage can markets next year. And this volume growth combined with contractual inflation recovery is expected to more than offset unfavorable currency and the effects of the 2022 inventory benefits, leading to opportunity for significant EBITDA improvement in 2023. And below the line, the company will face headwinds, as Kevin alluded to, from higher interest expense as well as increased retirement expense. With that, Nicole, I think we're now ready to take questions.