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spk00: Thank you for standing by. The conference will begin shortly. Until such time, you will hear music. Thank you and please continue to stand by. Thank you. Good morning and welcome to Crown Holdings' second quarter 2023 conference call. Your lines will be placed in the listen-only mode until the Q&A session of today's call. And please be advised that this call is being recorded. I would now like to turn it over to your host, Mr. Kevin Cloutier, Senior Vice President and Chief Financial Officer, so you may begin.
spk11: Thank you, Jackie, and good morning, everyone. With me on today's call is Tim Donahue, President and Chief Executive Officer. If you do not already have the earnings release, it is available on our website at crowncourt.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 the actual results to vary is contained in the press release and in our SEC filings, including in our Form 10-K for 2022 and subsequent filings. Second quarter, diluted earnings were $1.31 a share compared to $2.43 in the prior year. Second quarter, which included $0.60 per share net from the sale of our Kiwi business. Adjusted earnings per share were $1.68 per share in the quarter compared to $2.10 in 2022. Net sales in the quarter were down 11% from the prior year, reflecting higher sales unit volumes in America's beverage, offset by the pass-through of approximately $300 million of lower raw material costs, lower unit volumes in most other businesses, and $25 million from the impact of the stronger U.S. dollar. Segment income at $414 million in the quarter compared to $432 million in the prior year and reflects the benefit from contractual recovery of prior year inflationary cost increases in European beverage and cost reduction initiatives in transit packaging offset by lower overall net volumes. Operating cash flow was $293 million for the six months of 23 compared to $196 million in the prior year. The operating cash flow at this point of the year was the highest in the last 10 years, and the approximate 100 million improvement in operating cash flow reflects our efforts to reduce elevated inventory levels from year end. The results in the second quarter were as expected. We expect third quarter adjusted EPS to be in the range of $1.70 to $1.80 per share. We expect full year EBITDA to grow between 8% and 12%. We expect full year adjusted EPS to be in the range of $6.10 to $6.30 per share with higher transactional foreign exchange expense and lower equity earnings being the difference from our previous guidance. Our full year adjusted earnings include the following, which is in line with our previous guidance. Net interest expense of $400 million in 2023 compared to $270 million in 2022. A $0.40 of incremental non-cash pension and post-retirement cost. Average common share is outstanding to be approximately $120 million. And the full-year tax rate to be between 24% and 25%. Depreciation of approximately $345 million compared to $301 million in 2022. Non-controlling interest expense to be approximately $135 million. And dividends to non-controlling interest of approximately $120 million. Free cash flow is projected to be $500 million with capital spending of $900 million. We expect the majority of our free cash flow to go to debt reduction until we get within our targeted leverage ratio range of three to three and a half times levered. With that, I'll turn the call over to Tim.
spk08: Kevin, thank you, and good morning to everyone. Trends were similar to the first quarter, so our prepared remarks will be limited before we open the call to questions. As reflected in last night's earnings release and as Kevin just summarized, second quarter performance was in line with expectations as beverage in the Americas and Europe and transit packaging continue to perform well, offsetting below the line foreign exchange losses and lower equity earnings. Kevin also briefly noted our efforts to reduce raw and finished beverage inventories from year-end levels. the initial results of which are evident on the cash flow statement, and as important, inventory carrying risk that we experienced in the second half of 2022 has been mitigated this year. In America's beverage, unit volume growth was 1.5% in the quarter, with North America up 2.5% and Latin America flat versus the prior year. After a weak April, promotional activity in North America accelerated in May and June, and we remain optimistic about the prospects for improved volumes in the back half of the year. And while still very early in the third quarter, volumes to date in July are also strong versus the prior year. Based on customer commentary, we estimate that the North American market was down in the 3% to 5% range for both the second quarter and for the six-month period. Accordingly, we revised the volume growth assumption for the full year to approximately 7% given the market decline in the first half. Income performance was strong in the quarter with volume growth and the April 1st PPI increases almost fully offsetting Bowling Green insurance recoveries of $20 million in the 2022 second quarter and the impact of lower activity levels designed to bring down inventory levels. Construction on the Mesquite Nevada facility is nearing completion, with commercial startup scheduled for late August. Unit volumes in European beverage declined 5% in the second quarter, with weakness in Greece, Italy, and Spain, offsetting growth in France, Turkey, and the UK. More importantly, we have made significant progress in restoring investment-justifying margins to this segment, which you will continue to see in second-half performance. The construction of the Peterborough plant in the UK is nearing completion, with commercial shipments expected in August and October from lines 1 and 2, respectively. Similar to the first quarter, beverage can volumes in Asia Pacific declined double digits. We did see recovery in Cambodia, but Vietnam remains soft. The cumulative effects of inflation combined with slowing economies are contributing to lower consumption across Southeast Asia. We do expect second half income performance to improve over the prior year, albeit against easy comps, and be weighted more towards the fourth quarter. Transit packaging had another solid quarter with income up 20% over the prior year with margins improving across all product lines as reductions to overheads and SKUs combined with price cost management have more than offset the impact of lower volumes. With 2023 income performance expected to be the highest ever, The business is well positioned to deliver even more as industrial activity improves in future years. In summary, performance in the second quarter was on plan, a solid first half with improvement expected in most businesses in the second half, leading to significant year-over-year improvement in segment income and EBITDA in the third and fourth quarters. Turning to the balance sheet, at the midpoint of the year, leverage is just under four times. With improved EBITDA expected in the second half, again, against easy year-over-year comps, we expect to close 2023 leverage well within our stated range of three to three and a half times. And just before we open the call, we ask that you limit yourselves to two questions so that as many of you as possible will have an opportunity. And with that, Jackie, we are now ready to take questions, please.
spk00: Thank you. We will now begin the question and answer session. For participants, if you would like to ask a question, please press star followed by the number one. Please hand in your phone and record your name slowly and clearly when prompted. Your name is required to introduce your question. To cancel the request, you may press star and then the number two. Our first question is from George Staffas of Bank of America. Your line is open.
spk04: Yeah, hi. Good morning. This is actually Cashin sending in for George. We had conflicting calls this morning. So firstly, I guess, why do you expect volumes to ultimately recover here? And I guess, what are your customers telling you right now? And relatedly, is there anything or an underlying trend that worries them or you about the longer-term volume outlook from here?
spk08: Well, I mean, you're – what region are you asking the question about? And then I'll answer the question. I guess you're talking about North America? Yeah.
spk04: Yeah, I guess North America would be helpful, yeah.
spk08: Yeah, well, I mean, you're saying when's volume going to recover. I think for us, we were up 2.5%. The market was down. Listen, I think that April was exceptionally weak. We were down high single digits in April. We were up high single digits in May and June. We're up high single digits already in July. So, you know, I think the trend here, we have three solid months in a row. I think we're going to continue to see high single digits for the balance of the year. I think, as we've described previously, the market, the customers have a new model right now. The model is they're going to drive value for their constituents with price over volume, and it seems to be working for them. We don't control how they manage their business, nor should we really tell them how to manage their business. But they're all doing quite well, and listen, we can't complain. We're up, and we're going to continue to be up even more in the back half of the year. You know, I'm not sure it's a – I'm not sure being down 3% to 5% is the new normal in the business. I think you're going to see a flatter overall market in the second half of the year, and as I said, we'll be up.
spk04: Got it. Thank you for that. And just secondly, could you review just Europe, what your profit target is there for this year and for 24? Are you guys still on track to get back to 2021 levels in Europe by the end of 24?
spk08: Yeah. So as we said last year, I mean, as we said last A few calls ago, we thought we'd be 50% of the way back to 2024 this year. I think what we said on the last call is we'd be 75% of the way back this year. I think if you were to look at six months to date here in June 2023, it's probably very close to 2021 levels through six months, even with currency a touch weaker than where we were a couple of years ago. So we're well on our way back to 2021 levels. So I think the trend is, and the performance to date, and we feel really good about the second half of the year, we're not coming off of that estimate. We're going to be well on our way back this year, at least 75%. And really, as we sit here today, it's pretty early, but we're pretty confident in getting all the way back, if not even more, next year. Great. Thanks.
spk04: Thank you.
spk00: Thank you. Our next question is from Christopher Parkinson of Missoula. Your line is open.
spk12: Can we just dissect the second half, North America, specifically the U.S. volume growth outlook as well, just in terms of what you're thinking about, how your outlook changes with promotional activity in CSD, no promotional activity in CSD? as well as the momentum, which I believe you're benefiting from on the energy drink platform, as well as some pretty lucrative ready-to-drink ramps. So just any color on how the market should be thinking about your growth target would be very, very helpful. Thank you so much.
spk08: Yeah, so I think the first quarter was a little lighter than we expected, although we didn't have big numbers in the first quarter. April was a big disappointment, as I mentioned. And as I've said, May and June really quite strong, and July, we're only 20 days into it, but July also strong to date. We're looking at a back half of the year, especially with the new capacity coming up, back half of the year roughly 10% higher than the back half of last year, which if you recall, the back half of last year was also not very strong. So again, we We've mentioned against easy comps a few times here, and so that'll be one reason. But I think the business, well positioned, and I think we are starting to see more promotional activity, specifically around carbonated soft drinks. The teas, energy drinks, some of the other, I don't want to call them nutraceuticals, but enhanced waters, obviously growing rapidly, but on much smaller bases The only way you get these volume numbers is through carbonated soft drinks, alcohol to a lesser extent for us because we're not big in alcohol in the United States, and then sparkling water. So we are starting to see those promotions, perhaps a bit more limited than we'd like to see, but they are making promotions at this point.
spk12: Got it. And just for my second question, shifting down hemispheres, could you talk a little bit more about the Brazilian market? I mean, presumably there's going to be some easier comps, but at the same time, it still seems like the market's challenging and there are other dynamics, customer dynamics, which you mentioned on your last call, glass recycling trends, so on and so forth. Can you just give us the kind of updated thought process on that market, how you see it evolving in the second half, and probably more importantly, your view of it in the intermediate to long-term as we head into 2024 and onwards. Thank you.
spk08: You're welcome. Listen, I think we've said before we and others view the Brazilian market very favorably over a medium and long-term. We're not going to get overly excited about volume performance in a market in any one three- or six-month period. I think if you start looking at Periods of time, and whether you want to describe those periods of time of three to five years, any three to five year period you lop off and compare, you're going to see significant growth in that market. Obviously, the market is much larger today than it was in the past, so perhaps the growth percentages are not as large, but the volume growth is still as large or larger and remains significant for a beverage can business. In the context of when you need to have capacity to deliver growth of one or two billion units to the market, how many lines it takes and how much equipment it takes. I do think, again, the back half of the year, comps are a little easier in Brazil as we look at the back half of this year compared to last year. I don't think there's anything we're seeing. Brazil was up a little bit in the second quarter. We were up tremendously in the first quarter, although the first quarter of 22, again, was very weak, but up tremendously in the first quarter. Up a little bit, about three-quarters of a percent here in the second quarter, and I think we're expecting a fairly strong performance in Q4 as they go into their carnival season. I think the customer situation we described in Q1, the customer is in the bankruptcy process. The for want of a better term, their workout process. They are pulling cans. They're delivering cans. Their volumes are fairly strong right now. They're paying for those cans in a relatively short period of time. And I don't think they've seeded any market share in the near term. So we're very positive on Brazil right now.
spk12: Helpful color. Thank you.
spk08: Thank you.
spk00: Thank you. Once again, for participants, if you would like to ask a question, please press star followed by the number one. Our next question is from Mike Lita de Barclay. Your line is open.
spk13: Great. Thanks. Good morning, guys. First question on transit packaging. I think this is one of the best earnings quarters since you've acquired the business, and I assume demand isn't that great, so I assume it's mostly cost. So can you just give us some sort of thoughts around what you think this business's earnings potential is now or just kind of how much
spk08: Operating leverage it should have to a volume or economic improvement It's a good question I Listen I think you know if we look at volume on anything, you know volume in the second quarter probably down on the order of 12 or 13 percent now you got to understand that the business is very diverse and So some of the commodity lines might be down 15%. Tooling was flattish in the quarter, and you make more money in tooling than you make in the commodity lines. And as I said in the first quarter, think about a third of that volume decline being us walking away from customers and or SKUs, which were not very profitable. In fact, the business we walked away from had no impact on profitability. So we simplified the business and and done some other things around the cost structure by walking away from unprofitable lines. As you rightly point out, profit growth in the quarter and year to date, and as expected for the balance of the year, largely around cost, but also around good price cost management on how we're recovering. indexed hot-rolled steel and also paper, so the team doing a very good job. Now, with respect to the future, what is the leverage of the business as industrial activity returns? I'm not going to sit here and make a prediction, but I do think the cost structure of the business and the way the new management team is managing the business It gives us far greater confidence that we do have that leverage. And if we were to think about 5% or 10% volume growth with industrial activity returning, there's no reason to believe that that doesn't all fall to the bottom line. But I'm not prepared to step out and give you a huge number at this point. I don't think that would be appropriate right now. But we agree with you. There is leverage in the business as you look forward.
spk13: Fair enough. And then second, Tim, just in the release, you talk about using increased cash flow next year to pay down some debts and return cash to shareholders. Could you maybe just give us a bit more of your updated thoughts on where you think leverage ends this year and just where you still want to get to into next year?
spk08: So I think we'll, as I said, we'll be well within the range. You know, if you want a much closer number, I'd say we'll You know, depending on where the Euro finishes the year, because we do have Euro debt, and that translates the debt a little. But, you know, think about we'll end this year about 3.2, three and a quarter times. I think that's pretty – we feel pretty safe in saying that as we sit here today. We've always described our range as three to three and a half. I think we've said it on the last couple of calls. Just given where the financing markets are and the cost of debt – we probably would feel more comfortable, and we have heard from some of our larger shareholders, who would also feel more comfortable if we were at the lower end of that range or even slightly below the lower end of our range before we begin to return excess cash to shareholders. Now, having said that, next year capital expenditures no doubt will be far lower than they are this year, and free cash flow should be higher. So we should be able to achieve both of those, that is, bringing the leverage down to three or even slightly below three and contemplating returning the excess to shareholders at that point. But as I said on the last call, just given where borrowing rates are today, the differential in value accretion to shareholders between paying down debt and buying back stock is far narrower today than it has been over the last several years.
spk13: Makes sense. Thank you.
spk08: Thank you.
spk06: Jackie, do we have any more questions?
spk08: Have we lost the operator, Tom? Give us a moment. We'll see if we can find the operator for you.
spk06: Hello? Hello?
spk00: Our next question is from Michael Roxland from Truist Securities. Your line is open.
spk14: Thank you, Tim, Kevin, Tom, for taking my questions. Last call, you said you expected to see some type of recovery in Vietnam in 2Q and 3Q as well. I guess what's been driving the persistent weakness there?
spk08: Well, I think the economy has slowed tremendously there. I think, you know, if they If they had estimated GDP or, let me say it this way, GDP over the last several years has been running between 7% and 10%, and their estimate this year was for 6% or 7%. They're probably now estimating GDP in Vietnam closer to 1%, and a very stretched consumer. The introduction of some very strict drunk driving laws, and so I think our customers are, are trying to understand how they're going to deal with some of the changing dynamics in that marketplace. It'll come back. It's just they've got some excess inventory that – excess filled inventory that they carried over from Chinese New Year that didn't get fully absorbed in the February-March timeframe, and they're working through it. But, again, it's a big market. It's a growing market. And as I've said, when we talk about Brazil, we don't – we don't tend to get overly excited about investments we make in a market that we think has great future potential when there are volume disruptions in any three- or six-month period.
spk14: Got it. And then just quickly, I think in the last call you all mentioned you're seeing some customers defer or trying to defer purchase of cans closer to the summer to better manage their working capital and to try to minimize their own interest costs. Has there been any improvement of that? And that was referencing, obviously, I think the UK. Has there been any improvement in that?
spk08: So I think the reference there was Europe specifically, or Europe in general, the UK specifically, you're right. A little bit of improvement in the UK, but I think what I would say is that We've been exceptionally focused on improving margins in that region, and we are not chasing volume at lower margins. And that's probably how I should say it and leave it at that.
spk14: Got it. Thanks very much. Thank you.
spk00: Thank you. Our next question is from Gensham, Punjabi of Baird. Your line is open.
spk09: Good morning, everyone. Thank you, Operator. Hi, Gensham. Good morning, Tim. Could you perhaps, going back to the promotional question in North America, just sort of frame the level of activity you're seeing now versus maybe last year and what's typical just given the warmer months, et cetera, relative to history? Just trying to get a sense as to how sensitive your earnings outlook for the back half of the year would be to the expectation that promotional activity would be higher. What's the best way for us to think about that?
spk08: That's a good question. I'll answer the last part of that question last, because I'm going to try to think while I'm talking, which is always dangerous. You know, as we've described before in Gansham, you know this very well. You've covered the industry for a very long time. Promotional activity, specifically in carbonated soft drinks for the last 20 years, centered on the, let's call it the March to August, September time frame, and discounting ranging from 12-packs being offered at $4 for $10 or $5 for $10 to last year they almost didn't promote at all and they were charging $9 for a 12-pack in third and fourth quarter last year, almost no promotions whatsoever. This year the promotions we're seeing are buy one, get one on some of the sparkling water brands. So Think about sparkling water being offered at $6 a 12-pack, so you're getting two for six, which is like a $3 12-pack. That's not awful. On the carbonated soft drinks, they're still, you know, non-discounted pricing is still running, what, $8.79 to $9.29 a 12-pack, depending on where you are, and they're now offering buy two, get one free, so that comes out to, what, $6 a 12-pack, so... certainly higher than what we've seen historically. How much volume will they drive with that? They're going to drive more volume with that than if they don't discount, but that may be their new model. Their new model might be that their input costs have been elevated and they're not prepared to sell product at lower value, and their hope is probably that the consumer is going to get used to this And the consumer will get used to paying $6 a 12-pack as opposed to $2.50 for a 12-pack as they have in the past. And ultimately, volume will return at these higher price points. And so we have to be prepared as well within our system to deal with that. I think that we have seen a lot more consumer activity over the last several months, and we can see that from the amount of cans that our customers are taking. As I said, April was really weak. May was mid-single digits. June was high single digits. July, as I said, to date, high single digits. We are seeing some activity and we're seeing customers pull cans. To the point of how sensitive our earnings in the back half of the year is, if volume doesn't materialize, if I had a put a band on it. Well, Kevin gave you the range for EBITDA, 8% to 12%. I think we're comfortably in that range right now with our forecast. I think if the volume did not materialize, we'd be at the lower end of that range. That's probably the easiest way to say that. And that's a pretty big number. Maybe it's too big of a number to come down, but still within the range.
spk09: Okay, perfect. That's helpful. And then if we switch to Europe, I mean, there's a ton of indications that European consumer spending has weakened sequentially and so on this year in particular. What's the backdrop in terms of how your customers are responding to that dynamic? And are they making any adjustments as they look at the back half of the year? I assume tourism is a positive in Europe this summer, but it looks like the core consumer there is very, very weak.
spk08: Yeah, I think there's no doubt Europe's in a recession. You look at some of the purchasing manager indexes for the various countries, and they're well below 50. They're in the 42 to 44 range, which are exceptionally low, and these are some of the bigger economies there. And as you rightly point out, the core consumer, whether it's the U.K., France, exceptionally weak. I don't want to call them poor, but they are stretched economically. just to make ends meet, basic food supplies, energy. Having said that, the can is still a relatively economical way to deliver beverages or food or any other product, and the business is holding up well, I'm going to assume that we're down 5% in the quarter. I'm going to assume the market's not down as much as we are. We operate on the periphery of Europe. That is, we've described to you before, UK, Spain, Italy, Greece, Turkey, a couple plants in the middle, but we're not so big in the middle up through Germany and the Scandinavian countries. I would imagine that the market will do better than we did. And as I said earlier, we're not chasing volume right now. We're really focused on improving margins. So while the consumer is weak, and again, our customers are adjusting their buying patterns to deal with a weaker consumer, I don't think the market's as weak as you might think it is for beverage cans. I just think our strategy might be a little different than others right now, and we're focused on improving margins.
spk09: Got it. Thank you.
spk08: Thank you.
spk00: Thank you. Our next question is from Arun Rishwanathan of RBC Capital Markets. Your line is open.
spk03: Great. Thanks for taking my question. So I guess just back to the volume question, I guess, in North America. So if I heard you correctly, I think you said maybe you're up 2% to 3% in the quarter. And this year you're still seeing an overall down market. mainly driven by maybe some weakness on the alcohol side and some improvements on the CSD and water side. So as you look into next year, would you characterize the market so poised to get back to maybe a 2% to 4% growth rate? I know that you can't really tell the beverage companies what to do, but how do we kind of get back to that level of growth?
spk08: So I think the, again, really good question. I think the back half of this year, we probably have, especially in the fourth quarter, an easier comp this year than we had last year. So I think if we were down, and remember, these are my estimates. We don't have published data. When I estimated the quarter in six months down 3% to 5%, I'm really looking at what our customers have said publicly. And I think there's only one one larger CSD company that's reported so far, and they were in the 4% to 4.5% decline range. And I'm just going from other anecdotal comments or information that's out there. But I do feel kind of confident in that range of decline. I think we'll see that range of decline narrow in the back half of the year and perhaps be flat or even slightly up just because the Q4 numbers last year were not very good. You know, if we were, I think last year, Last quarter, Arun, we probably tried to guide you from two to four down to one to three in the future. And it doesn't have to be, listen, for a beverage can company to be successful, it doesn't have to be 3%. We can be exceptionally successful managing our business with 1%, 2% growth, especially off the much larger base that we have as an industry today than we've had in the past. You've got a couple things you always look at, share of stomach, and then when we think about share of stomach, how much of that share of stomach growth is going to come from substrate change from other substrates to the cans? I think we all agree, we all believe, and perhaps some of you agree, that the can is well-positioned environmentally from a substrate point of view. The question is... You know, how long before the consumer feels more confident to step back out there and spend a little bit more money on something that's a nice treat, a quite refreshing treat. And some of that has to do with consumer confidence. Some of that has to do with our customers' pricing. But the customers clearly have a model now that's very successful for them. But as I said, we don't have to be at 3% to 4% growth to be successful. We can be exceptionally successful at 1%. There are some market share shifts happening right now. Perhaps we're participating in a little bit of that, not as much as others, but I think responsibly we're going to have a pretty good year this year, and we're going to have a very good year next year. I don't know how else to say it right now. It's a little early to talk about next year, but as we sit here today, we feel pretty good about the next 18 months.
spk03: Okay, thanks for that. And yeah, no, I would agree that there's definitely a robust outlook, even at a, you know, low single digit growth rate. So I guess on on that note, right now, you know, you're guiding eight to 12% EBITDA growth for 2023. Is that really the target that you think is possible? I mean, given that you're able to achieve that with, you know, maybe more muted volume growth than you thought? I know some of it's coming from restructuring at transit and some other drivers are covering Europe. But should we expect kind of an 8% to 12% EBITDA growth rate as your internal targets and what you're trying to achieve on an annual basis? Because right now, you know, the consensus for next year is up maybe 5% or 6%, which may seem a little conservative. So I just want to get into that.
spk08: Yeah, well, listen, we – You know, if you were sitting in Kevin Clothier's office and if you looked at all the papers he's looking at, you'd see a number for EBITDA growth this year that's comfortably within the 8% to 12% range. The high end of our initial range was predicated on 10% growth in North American beverage, which revolved around a flat market. We've now revised that to 7%. But I would say that, and we've said it already, Both transit and European beverage are ahead of where we thought they'd be through six months. Pretty confident that they're going to remain ahead of initial plan for the full year, so that'll offset that, and we remain comfortably within that 8% to 12% range. Again, I think it's a little early to talk about next year. I don't know if I really want to say that I don't really want to comment on whether the number is 5% or 6% or 8% to 12% next year. It's a little early, but there are some things we're doing really well across most of the businesses. Let's just briefly talk about them, and there's always things that can go the other way. We have reset the cost profile in transit packaging. We've reset the way we sell product in transit packaging. and that business is exceptionally well positioned from a much lower cost base and a better manufacturing mindset to deal with lower volumes as they're doing this year and really benefit from a return to better industrial activity in the future. That's number one. Number two, as we've said, we have reestablished more appropriate margins that justify investment in our European beverage can business, and we're well on our way to getting back to the target that we've established. So those two businesses, they're doing quite well. And I think within the Americas beverage business, whether it's the United States, whether it's Mexico, whether it's Brazil, some of the businesses may move around, but in total these businesses are well positioned to continue to do well from a cost base and a manufacturing footprint that we believe is well-positioned to deliver value to us as we serve as customers. Asia is a little choppy now. I think we're still confident in the long-term view that Southeast Asia is going to be a growing market. There's always things that can go wrong. We don't know where currency is going to take us. We don't know if You know, the economy we're feeling right now is a bubble up and eventually will pop. We don't know that, but I don't really want to get in the next year. I can tell you that we've made a lot of changes to our industrial infrastructure and our cost profile, which will allow us to weather storms and really benefit as markets settle down and the consumers return to buying more product. Thanks.
spk00: Thank you. Our next question is from Phil Eng of Jefferies. Your line is open.
spk06: Phil?
spk08: All right, Jackie, we seem to have lost Phil for a moment. Do you have another question?
spk00: All right, thank you. Let me see. Looks like he also queued up. Let me just go ahead and try this other line. Hello, Phil. Can you hear us?
spk15: Yes, I can hear you. Can you hear me?
spk06: Yeah, we can hear you, Phil. Go ahead. Sorry.
spk15: Hey, Tim. Sorry about that. I missed parts of the call. Can you give us a little more color on Europe, how the startups and their capacity is coming along? Do you expect some contribution in the back-end? The reason why I asked is because your comments earlier sounded a little more cautious than certainly in the macro backdrops. We just want to get a little more flavor in terms of how you're thinking about the back end with some of that capacity coming on.
spk08: Yeah, you know, I think in response to Gansham's question, we talked about volumes in Europe and a fairly weak core consumer. Tourism is up this year in Europe, and potentially that's offsetting the weaker core consumer. but as I said, we've been exceptionally focused on driving margin recovery as opposed to chasing every last can, and we'll continue with that strategy. We need to earn appropriate margins before we consider investing further in a market like that. Now, having said that, we're going to... Well, the first thing I'd say is the back half of last year, the comps are ridiculously easy. Having said that, we're going to trounce the back half of last year. So the Q3, Q4 this year are going to be multiples of Q3, Q4 last year. So some of that will come from better price-cost management. Some of that comes from additional sales out of Italy and Spain as the new capacity comes up. And then we'll work our way through the startup costs in Peterborough as we wind down Braunstone and move it into Peterborough. So... The back half of this year in Europe is going to look nothing like last year. It's going to be multiples better than where we were last year.
spk15: Okay. So you feel pretty good about the capacity coming on at a timely backdrop, just given some of the macro challenges in Europe.
spk08: Well, listen, Phil, you know, when you make investments, you know you're making an investment for the long term. If you told me I was going to spend a couple hundred million dollars to build a beverage camp plant, And I was really worried about the next three months or six months. You would never do it. These are 50-year investments, and we believe in the product. We believe in the sustainability of the product. We ultimately believe in those countries and those regions we're investing in. And really importantly, we believe in our customers to market their products to consumers and our consumers to want those products. And that's how you make the investment. And as I said, I've said a number of times, I'm We're not going to get overly concerned in any three- or six-month period. These are long-term investments. I think we manage our cost profile exceptionally well that we can overcome short-term disruptions, but I'm not going to comment on what I think the consumer is going to do over three or six months, but I will tell you we feel good about the investments we've made and the future of the business.
spk15: Gotcha. Makes sense, Tim. And then from an Asia perspective, you kind of pointed out how, you know, the background's been choppy. The earnings profile's been pretty steady here. Can you give us a little perspective into how you're thinking about the back half and how that progression will look? It sounded like you were expecting some sort of a pickup in the fourth quarter.
spk08: Yeah, the only thing I'd correct you, you said the earnings profile's been steady. It has not been steady in Asia. We're down significantly, not only in Q2, but year-to-date. But I'm just talking about the quench, right, in the back half.
spk15: The last few quarters, it's been relatively steady from these drop levels.
spk08: I think Q3 will be similar to last year's Q3, and Q4 should be better than last year's Q4. But for the full year, we're going to be down a touch. We'll be down in Asia just only because Q2 came in much weaker than we thought it would. And, again, the back half of this year has easier comps than the back half of last year. But as I said, Q3 is similar to last year, Q4 better than last year.
spk15: Okay. All right. Thanks a lot. Appreciate the call. Thank you.
spk00: Thank you. Our next question is from Anthony Pitneri of Citi. Your line is open.
spk05: Good morning. This is actually Brian Bergmeier sitting in for Anthony. Thanks for taking the question. You know, you're talking about outperforming the U.S. can industry by like 10% on volume growth. You know, I think The first half has been a little bit below the 10% mark, which is maybe a little surprising given the weakness of U.S. beer. Do you think once Mesquite is online, that outperformance can expand in the second half? And then also, was the Mesquite startup delayed a little bit? Thanks.
spk08: So Mesquite has been delayed. We had initially hoped that we'd be up already now. We had some electrical component panels, etc., delays from suppliers, but we are targeting late August startup as we get components that we need. It's been a little disappointing. Most of the supply chain for these things are starting to ease, but there still are some issues out there. I think the growth we see in the back half of the year, some of it around the startup in Mesquite, some of it around the the acceleration of Martinsville through its learning curve, but largely around the promotional activity that we see our customers having begun to make in May, June, and here in July, and we expect to carry through the end of the third quarter as relates the business that we have under contract and the capacity that we have available to service that.
spk05: Got it. Thanks for the detail. Um, you know, last question for me, you know, we don't talk about non-reportable too much, you know, but it was a bit weaker than we expected in the quarter. Um, can you maybe remind us, you know, why non-reportable is kind of unwinding so much this year? And do you think maybe, uh, on an EBIT basis, we, we start to get back to the 2021 levels? Uh, thanks. I'll turn it over.
spk08: Well, the big, the big difference and you saw it in Q1 was the, uh, inventory carrying gains that we took from 21 into 22 at much higher tin plate prices. That doesn't recur this year. The other thing that's happening, and we've been pretty open about it, two things. One, aerosol can volumes for the entire North American market, and I'm assuming for Europe, although we're not in Europe any longer. But aerosol cans, exceptionally weak, double digits. And when I say double digits, I mean well over 10%. volume decline across most aerosol can products year on year which is a you know a preview of the economy if you we historically look back we we always say that as we as we follow our aerosol can volumes we can predict what the economy is going to look like over the next six or eight months so but but aerosol has been weak now for six or eight months and then secondly we we noted that To you, at the end of the first quarter, we took a headcount reduction charge in our global beverage can making equipment business. That business is now slower than it has been in the last several years as companies digest and start up much of the new capacity they've brought up. The equipment supply business is lower than it has been in the past. I don't have 21 in front of me. I'm not sure how far below 21 we are in the business year to date. I do think that as we look to the back half of this year, the back half of this year in total will look very similar to the back half of last year in that business.
spk05: Got it. Thanks for all the detail. You're welcome, Brian.
spk00: Thank you. Our next question is from Kyle White of Deutsche Bank. Your line is open.
spk10: Good morning. Thanks for taking the question. In the U.S., now that you have Martinsville ramping up and Mesquite about to start, are you happy with your current footprint in the U.S.? Is there room for improvement here to drive operating rates higher, or are they in a good spot just given the current demand backdrop?
spk08: Listen, I think we – I've got to be careful how I say this. I don't It's not my position to talk about what others do. I think we were always, how do I say this? We probably didn't announce as much capacity as all of you wanted us to two or three years ago. I would say that we were very measured in the capacity and the expansion that we announced and that we affected, and we're happy with our footprint, given a more measured approach to capacity expansion over the last couple of years as opposed to the market in total. I would say that where we sit today with our infrastructure in North America and where we see gains, market share gains, transpiring over the next 18 months throughout the industry that we're satisfied with our footprint geographically and size-wise. So remember, we're not just all making 12-ounce cans anymore. We all have a variety of sizes and different geographies, and I would say that we're quite satisfied with our platforms.
spk10: Got it. That makes sense. And then on transit, I think you said volumes in the quarter were down 12% to 13%, which is relatively expected given the global backdrop. Just curious how that progressed throughout the quarter. Are you seeing any deceleration in demand as you go into the second half? I know you'll start lapping some easier comps, but just curious how things are progressing going into the back half.
spk08: I know exactly where your question is because I agree with you. I would have expected... volumes to decline through the quarter and the second quarter and they didn't. I think our team in transit is really cautious going into the back half of the year on volume. I think, however, they're going to do better than that. The back half of the year, comps are a little easier. They're not as easy as some of the other businesses. The business is holding up better than your question implies. The business is holding up better than our fears, and it's probably holding up a little better right now through July than even the transit team had put forward, only because Kevin and I think they've been cautious. Now, they've probably been cautious, rightly so, because we don't really know what's going to happen, but the business is holding up better. You know, we've talked about it before. The business is really different than the business was 10 or 15 years ago. It's a much more diverse business, much more end markets that they serve, not so dependent upon the metals inventory. So some of the markets, as we've said before, some of the markets that we serve are certainly cyclical, but the business has been very stable just given the diversity of its customers. and market supply and customer supply. So I understand the point. We understand the point. We as well keep waiting for even a bigger slowdown, but it seems to be holding up very well. Got it. Thank you. I'll turn it over. Thank you.
spk00: Thank you. And the next question is from Gabe Hady of Wells Fargo Securities. Your line is open.
spk02: Tim, Kevin, Tom, good morning. Tim, there was a presentation out on the investor part of your website detailing out quite a bit of the cash flow characteristics of the transit business and maybe even I think the North American food can business and talking about some of the dynamics in there. I'm just curious. I know it's tough in this forum to maybe go into a lot of detail, but just maybe the intent of that presentation or what you're trying to let investors understand with that presentation. And then the cash flow characteristics of transit specifically, is there anything unique about it in terms of, I guess, repatriating that cash or where it generates a lot of its cash flow relative to the rest of your business?
spk08: Second part of the question, real easy. Almost no complications whatsoever in repatriating cash in transit, certainly far less than in other businesses. We don't have any significant, we might have one, I don't think we have any minority interest positions in transit, so all the cash is ours, and much of the business is in, you know, greater than 50% of the business is in the United States, and almost all of the business is in countries where we don't have any any restrictions whatsoever. I think that it's probably been a while since we had a fulsome investor presentation, so we just thought it would be helpful if we put one together, posted it on the website. Whether it's used in conferences or it's available to investors to peruse, so be it. The point about reminding ourselves and everybody else as to the cash flow characteristics of certain businesses You need cash to run a business. And I know everybody got real excited about, don't worry about cash flow. You're a growth company over the last several years. And, boy, you know, whenever I hear an investor say, don't worry about cash flow, it makes me wonder which pension plan is investing their money with that guy because that's a bad thing. Cash flow is always important. And so whether it's food and aerosol cans or transit packaging, these businesses – have well-established industrial footprints, which require very little capital to maintain and run and generate the cash that they generate. Food and aerosol from time to time, especially food, as the business has grown more from human food consumption to pet food. We've made some investments for pet food, and we're a very large supplier to the North American pet food market. and we do quite well there, and that's where the investment has been focused in food can. On transit, you know, we're talking about one and a half percent of sales in annual capital to maintain or marginally grow the business, and as we said when we acquired the business several years ago, the capital needs are not very great in that business, that any growth in that business would come from bolt-on acquisitions, so it's not a capital-intensive business. I think if you Somewhere in the annual report, we probably show long-lived assets for that business. The long-lived assets as a percentage of revenue is very low. It is a business that's more of a service business than our other businesses, but it's still manufacturing at heart. So, listen, cash flow is important. We think it's important that everybody understand where we generate the cash.
spk02: Understood. I think it's a good business.
spk08: And so I, you know, just... The only thing I'd say, Gabe, is that we have been growing the beverage can business over the last several years, so the cash flow in that business has been depressed, but obviously expecting significant step down in capital over the next couple years in that business, so that business is going to return to generating a lot of cash as well.
spk02: Okay. Second one, two-part, I apologize. One of the things that I'm sort of scratching my head on a little bit and we saw this play out obviously over the past, I don't pick a number, 24 months in terms of where inventories were at. But from your perspective, is there anything that you can tell us as it relates to your customer's inventory or maybe finished stock inventory? And the reason why I'm asking is because obviously there's, I don't want to say a disconnect, but a timing difference between sell-in and sell-through for the beverage can business, specifically talking about North America. So we're looking at you know, Nielsen data. And I appreciate, again, on the beer side, it's not as big for, for crown. Um, but it's seemingly, like I said, there's this growing chasm in there. And again, I know there's some share shifts, so anything that you can tell us in terms of where you think inventories might be, uh, for the system. And then the second part is obviously, uh, with some of the noise going around with, with North American, North American beer customer, um, Mexico has been the beneficiary. Can you talk about your ability to participate in that? I think Madeo has been called out as a pretty big winner, but just anything around Mexican beer.
spk08: So I would say specific to both North America and Europe, I don't believe our customers have any excess inventory on hand. You know, in North America, they almost carry no inventory. We deliver just in time. The cans roll in. 15-minute intervals, they go into the can washer, they fill them, and then they ship them out. The customers don't carry a lot of inventory. We have seen customer inventory in Southeast Asia, post-Chinese New Year, and even in Brazil a little bit, post-Carnival being a little higher than we've typically seen, and that might have led to lower demand from our customers as they work down their inventories in those regions. But As it relates to North America, there's no inventory issue at our customer level. On the beer situation, we do have a very big or very large Mexican beverage can business. We service a wide variety of customers, including beer. I would suggest that the beer customer that you're describing that ships into the United States is not one of our larger customers. It is a larger customer for somebody else.
spk02: Got it. Thank you. Good luck.
spk08: Thank you.
spk00: Thank you, speakers. At this time, we don't have any questions on queue.
spk08: Okay. Then, Jackie, thank you very much. I guess that concludes the call today. Thank all of you for joining us, and We'll look forward to speaking with you again in October. Bye now.
spk00: Thank you, everyone. That concludes today's call. Thank you for joining.
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