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spk12: Good morning and welcome to Crown Holdings' third quarter 2023 conference call. Your lines have been placed on a listening limit until a question and answer session. Please be advised that this conference is being recorded. I would now like to turn the call over to Mr. Clement Clothier, Senior Vice President and Chief Financial Officer. Sir, you may begin.
spk11: Thank you, Elmer. Good morning. With me on today's call is Ken 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 actual results to vary are contained in the press release and in our SEC filings, including our Form 10-K for 2022 and subsequent filings. Third quarter earnings were $1.33 a share, compared to $1.06 in the prior third quarter. Adjusted earnings per share were $1.73 per share in the quarter, compared to $1.46 in 2022. Net sales in the quarter were down 6% from prior year, as higher sales unit volumes in America's beverage and $60 million positive impact from foreign currency translation were offset by the pass-through of $187 million of lower raw material costs in lower unit volumes than most other businesses. Segment income at $430 million in the quarter compared to $336 million in the prior year and reflects the benefit of higher unit volumes in North America, the contractual recovery of prior year's inflationary cost increases in European beverage, and the cost reduction initiatives in transit packaging. Cash flow of $832 million for the first nine months of 23 compared to $134 million in the prior year, the result of better working capital management. Net leverage improved to three and a half times, a half-turn improvement from the second quarter, driven by higher third quarter operating income and better operating cash flow. Fourth quarter adjusted EPS is projected to be in the range of $1.40 to $1.50 per share with a full-year adjusted EPS of $6 to $6.10 per share. Our guidance includes the following. Net interest expense of approximately $390 million, a 47 incremental non-cash pension and post-retirement costs, average common shares outstanding of approximately $120 million, and full-year tax rate of approximately 24%. Depreciation of approximately $340 million compared to $301 million in 2022. Non-controlling interest expense to be approximately $135 million. Dividends and non-controlling interest approximately $120 million. After capital spending of $900 million, free cash flow is projected at $500 million, and we currently expect year-end leverage to be three and a quarter times. With that, I'll turn the call over to Timothy.
spk06: Thank you, Kevin, and good morning to everyone. Kevin just provided a sea of numbers, so I'll be brief, and then we'll open the call to questions. As reflected in last night's earnings release, and as Kevin just summarized, third quarter performance was in line with expectations as each of our three larger businesses, that is, America's Beverage, European Beverage, and Transit Packaging, all continued to perform well, offsetting softness in North American aerosols in Asia. For the quarter, total company segment income improved by 28% from a challenging prior year third quarter, and we expect similar improvement in the fourth quarter. Importantly, through nine months, and as Kevin just noted, free cash is $700 million ahead of the prior year nine-month period due to an improved working capital position with net leverage being reduced by a full one-half turn in the quarter. As Kevin noted, we estimate year-end net leverage to be around three and a quarter times after giving effect to the Helvetia packaging acquisition completed in early October. North American volumes advanced 12.6% in the third quarter, helping to advance income in the America's beverage segment by 25% over the prior year. Through nine months, unit volumes in North America are up more than 6% over the prior year, And while we are still early in the fourth quarter, demand remains firm, and we maintain our estimate of 7% growth for the full year. Earlier this month, commercial shipments commenced from Line 1 at the company's new plant in Mesquite, Nevada, with the startup of Line 2 scheduled before the end of the year. Post-pandemic economic conditions appear to be improving in Brazil, and we remain positive as we enter the busy summer selling season. Income performance in European beverage was up significantly over the prior year as inflationary pass-throughs helped the business recover margin from the challenging prior year third quarter. Our unit volumes in the quarter were down 5% across the segment as our regional mix, which is weighted more towards southern Europe, saw our volumes underperform a flattish market. More important than volumes, acceptable operating margins have been restored to the business. Unit volumes across Asia Pacific were down 9% with continued weakness in Vietnam as fillers across that country looked to adjust their filled goods inventory into weakening economic conditions. Volumes across Cambodia and China remained firm in the quarter. Income in transit packaging was up almost 20% in the quarter as continued positive price cost management combined with reduced overhead costs and higher equipment deliveries more than offset lower consumables volumes. A solid performance through nine months with income at 15% in net sales and tracking for another 30-strong full-year cash flow performance. With a more streamlined cost structure, the business is well-positioned to benefit further as industrial activity improves in the future. Performance across North American tin plate and can-making equipment continued to be impacted by very soft aerosol can demand, with aerosol volumes in the quarter off 15 percent to the prior year. So, in summary, and as we said earlier, third quarter performance was on plan, income up, leverage down, and our expectation is that fourth quarter EBITDA should improve by a similar percentage as the third quarter, delivering further debt and leverage reduction. And before we open the call to questions, we again would ask that you limit yourselves to two questions so that as many of you as possible will have an opportunity. And with that, Elmer, we are now ready to take questions, please.
spk12: Thank you, speakers. We will now begin our question and answer session. To our participants, if you would like to ask a question, please press star followed by the number one. Please mute your phones and record your names when prompted. Your names are required to introduce your questions. And to cancel your requests, please press star followed by the number two. Once again, please press star 1 to ask a question. Please record your names and your company names, by the way. When prompted and to cancel, please press star followed by the number 2. And our first question from the line from Mr. Mike Leithead from Barclays. The line is open. You may begin.
spk08: Great. Thanks. Good morning, guys. Good morning. Tim, I know the world is a bit uncertain right now, but can you maybe speak to any early thoughts about Crown's 2024 earnings potential or company-specific drivers?
spk06: Why don't we leave that until February? I think we're – I wouldn't say we're early in the budget process, but we're not yet complete. Still some things moving around, and I think that will be better served if we wait until we're complete the process.
spk08: fair enough and then just on north america you've sort of reaffirmed kind of your outlook for volumes for the full year can you speak to obviously you have your own company specific um tailwinds but just what your conversations with your customers are um demand etc just in the north america market today yeah so our uh our mix perhaps a little different than some of the others but uh
spk06: weighted more towards CSE, nutraceuticals, light energy drinks, carbonated water. Our customers continue to push cans. They see cans as an important element in their sustainability journey, and we're going to continue to benefit as long as they can continue to promote the can. So, you know, as we sit here today, I would say a very positive, on the volume outlook for Q4. And obviously, we've got a higher base. But, you know, the absolute number of can growth that we see in 24, probably similar to the absolute level of can growth we saw in 23. So, you know, significant can growth again.
spk08: Male Speaker 1 Great. Thank you.
spk06: Male Speaker 2 You're welcome.
spk12: Thank you. Next question is from the line of George Staphos from Bank of America. Your line is open. You may begin.
spk13: Yeah, hi. Good morning. This is actually Cash and Keeler on for George. We had conflicting calls this morning. So I guess just first on the revised guidance, you know, I guess what segments saw the biggest change in your forecast relative to prior expectations? Was that primarily Asia and aerosol? And I guess is it possible to, you know, put any numbers around, you know, changes in expectations there?
spk06: I think it's, as we said in the release, last night's release, and as both Kevin and I said in the prepared comments, it's the aerosol business in North America and also Asia, and offset somewhat by better performance in the Americas and in transit. But I think the order of magnitude, if you took those two businesses in the order of magnitude perhaps $15 to $20 million down for Qs 3 and 4 than what we would have saw when we talked to you back in July. Got it. Okay.
spk13: And then just quickly in terms of the Helvita acquisition, is there a way to think about the impact from an earnings or revenue standpoint from here?
spk06: Yeah, so, you know, it's a high-speed one-line plant with an end line You know, what I would tell you is we haven't talked about the value we paid for it. We paid around $125 million, and if you've been following what it costs to build a camp plant, especially a camp plant, a high-speed line with an end line, you'll quickly come to the conclusion that's a pretty good deal for the company at that level, significantly below what we and others are paying to build similar camp plants. We have the plant down right now only because we're into the fourth quarter and it's a little light slower and what we're doing is using this time to do some much needed preventative maintenance work and clean up the plant back to what we would consider crown standards and ensure that all of their KPIs, including efficiency and spoilage, will improve next year from where they're at. Depreciation, obviously, we've got to take a look and see what they were using for their depreciable lives. But think about it on the order of somewhere between $5 and $10 million segment income.
spk13: Great. Thanks. I'll turn it over. Thank you.
spk12: Thank you. Our next question is from the line of Arun Viswanathan from RBC Capital Markets. Your line is open. You may begin.
spk00: Great. Thanks for taking my question. I guess, yeah, so overall, North American volumes have been quite strong in line with your expectations. Obviously, you know, promotional activity does appear to be in line with your expectations as well. Maybe you could just comment on that. And then as it relates to Europe, looks like you are ahead a little bit on your profit recovery there. So how do you see that trending into next year? I guess specifically, do you expect low single-digit volume growth for North America and then expect maybe Europe to improve on the profitability that you've seen before, that $259 million in EBIT? Thanks.
spk06: Yeah, so Arun, stay on the call because I'm probably going to forget one of these questions. But the first thing I would say is that... As we said, North American volumes up 12.6%. That's against last year's third quarter where we were down 6%. Maybe the market was down 5% or 6% as well last year in the third quarter. And for a market that's as big and stable historically as North America, that's the worst quarter I can remember in my 30-plus years for the North American can market. Certainly we have other markets based on their – emerging status around the world that could be plus or minus big numbers. But a market as big and stable as North America, we never experienced anything like we did in the third quarter last year. So roughly half of the gain we had this year was a recovery from an extremely weak third quarter last year. And in the balance, really customers beginning to pick up their promotions perhaps as early as May, as we said on the second quarter call, and and pushing well into the third quarter, and as we sit here today in October, still promoting at much greater levels than we saw last year. So that's that. On Europe, yeah, I think we always told you that, I think we initially told you that we thought in 23 we'd be halfway back to our 21 income levels. We're probably going to be closer to 75% of the way back, to the 21 income level, and the goal is to be fully back to that 21 level through the end of next year, plus or minus a couple bucks for currency. Always hard to estimate what currency is going to do. Did I answer all your questions or not?
spk00: Yeah, that was great. If I could have one follow-up, just on capital return, you are seeing that inflection point on free cash flow next year with the lower CapEx. So how do you expect to kind of use those extra free cash flow dollars, would they be allocated more towards, you know, share repurchase potentially? Thanks.
spk06: Yeah, so historically, you know, the packaging industry, the can industry, we've used a method of generating a lot of cash flow in lower growth scenarios, generating a lot of cash, using that to pay down debt and buy back stock and pushing EPS growth, you know, 5% to 10% and 10% to 12% each year. I think increasingly we're hearing from many shareholders that, that given where interest rates are and where they're likely to go and where they're likely to stay for a prolonged period of time, they would prefer that leverage might necessarily need to be lower than our three to three and a half times. And so we'll continue to look at that in the face of upcoming maturities. And it's not just our maturities that we have coming due, but the entire high-yield bond landscape has maturities coming due and Most of those bonds will be refinanced at higher rates than we currently have on the balance sheet now. And I think if you do the math, it's not so clear that buying back stock is better than paying down debt at this point. So we are listening closely to many of our shareholders, especially our larger shareholders who are now calling for a little less leverage than we would have been more comfortable with in the past.
spk08: Thank you.
spk12: Thank you. Our next question is from Anthony Pettinari from Citi. Your line is open. You may begin.
spk03: Good morning. I'm wondering if you can talk about kind of operating rates maybe broadly by region. And you've given preliminary CapEx guidance for 24, 25. Assuming this CapEx guidance doesn't include, you know, big green fields, I'm just wondering if you could talk about, you know, where you think you may be able to grow volumes over the next couple of years, you know, without adding kind of big projects?
spk06: Yeah, listen, we can grow in every market without adding more capital. We brought up two large can plants in the United States this year, Virginia and Nevada, and clearly as they go through a learning curve and their productivity improves and more good saleable cans come out the back end of the line, we grow. I would say that operating rates in North America are fairly healthy. I would say that, you know, if the industry currently – I'm thinking about the second quarter, but the third quarter was a little stronger. You know, we've got to be around 90% to 91%, 92%. I don't think there's a supply-demand imbalance in North America. And I think as customers continue to push cans – We all have a little bit of spare capacity. We can fill that demand, and I don't think we're going to see a supply-demand imbalance in North America. Things are pretty healthy, and they're going to get healthier. I think in most other markets, there probably is a little bit of slack. That doesn't mean the markets are not healthy. I think, as we said in the prepared remarks, Brazil is starting to improve economically. Interest rates coming down a little bit. unemployment coming down a little, consumer spending starting to rise a little, albeit a little slower than we've seen in the past, but GDP turning positive. And so over the next several years, we and others are well-positioned to continue to meet the ongoing growth in the Brazilian market as we have for the last two decades. Obviously, the Vietnamese market has been exceptionally soft this year. I think the one number I could give you is that beer fillings – in Vietnam for nine months this year compared to last year, down about 25 percent. So, again, as that market recovers, we're well positioned to grow. And in Europe, we're bringing on a very large two-line TAM plant in the U.K. Now, not all of that is incremental capacity. Some of it replaces the other plant in the U.K. that we're moving out of, but certainly there is incremental capacity there, as well as the capacity that we added in Italy and Spain early this year, late last year. So we are well positioned to grow without having to spend any more than this $500 million number that we've talked about for the next couple or three years.
spk03: Okay, that's very helpful. And then just, you know, switching gears, can you help us understand kind of what's going on with aerosol and maybe the outlook moving forward? You know, if this is destocking, maybe where are we in that process? And just any additional color you can give on aerosol.
spk06: Yeah, so, I mean, as you said before, aerosol is more of an economically sensitive product. If you think about the aerosol can, it's a really convenient way to dispense product, a very clean and convenient way, albeit a little bit more expensive for the consumer. So things start to tighten up, the consumer starts to tighten their belt, they don't need to buy air freshener, they don't need to buy bug spray anymore. less and less men are shaving than ever shaved before, so they're not buying as much shave cream. Or they shave with a bar of soap. A little less comfortable, maybe a couple more nicks and cuts, but if you don't have to spend the money, you don't spend the money. You just blot your cut on your face, I guess. Now, having said that, that's one area. So economically, the market is down. I think everybody in the steel industry, Aerosol can market is down, and I would expect that the one other company that you'll talk to will probably tell you the same. There's also a slight move for some products from steel aerosol to aluminum aerosol. Historically, that's been more of, let's say, women's products. and let's say suntan lotions, slowly some of the other products are moving from steel to aluminum. But that's a slow move. It's more economic-related now than anything else.
spk03: Okay. That's very helpful. I'll turn it over.
spk06: Thank you.
spk12: Thank you. Our next question is from Gansham Punjabi from Baird. Your line is open. You may begin.
spk01: So I guess going back to the North American beverage for 3Q, you know, 12.6%, was that in line with your internal plan or was it better? And if so, what drove that? Was it promotional spending, you know, maybe a very hot summer, et cetera? And then what do you estimate the market itself in North America grew in the third quarter?
spk06: So, Gansham, I would say it was a touch better than what we anticipated. you know, we were, as we sat here in July, nobody believed us when we told you we were going to be up significantly in Q3. We, we kind of got a pretty good handle on it. We, we probably thought 11 to 11 and a half percent. So maybe we're a point or a point and a half higher than we thought we would be. And, and that's just more and increasing promotions, um, by a number of the soft, large carbonated soft drink companies, as well as some of the better known national and regional sparkling water brands. Um, As for the market, you know, we don't get data anymore from CMI, but I've got to believe, boy, it feels like at least for domestic producers we were up a few percent. And I guess if you think about the total market, if you were to include lower imports this year compared to last year, imports are almost nil at this point. maybe the market was flattish to up 1%. But for domestic producers, we have to be up a few percent. That would be my guess. I'm purely guessing.
spk01: Okay, that makes sense. And then you made some constructive comments on supply-demand, again, specific to North America. But there are new players. Your customers are dealing with persistency of inflation. The consumer is resetting purchasing patterns and being much more price-conscious, etc., As we kind of think about contract renewals for the industry going forward, should we expect a paradigm where maybe volumes are very lumpy between the different players as contracts come up for renewal? I'm just trying to think this out as it relates to the next couple of years, assuming we have the current operating environment we do over the next two years.
spk06: I think if we have the current operating environment, based on capacity installed today, and it doesn't appear – that anybody is putting any more capacity after the Mesquite project and perhaps one of the lines still to go into the Midwest by one of the new entrants. It does not, I don't know of any other capacity going into the market. So based on that installed capacity and the lack of imports that we're competing with now, let's just say that we've got a domestic market now served by the entire domestic manufacturing footprint and a market in which Our customers are promoting cans. They all have sustainability goals and sustainability agendas they promise to meet. They cannot meet their sustainability goals without the can. So based on that, that's why I feel that supply-demand is currently in pretty good shape and will only get better. Now, I can't talk for everybody, but for the most part, we don't have any contracts coming due until the end of 2020. maybe 26, so we're a couple years out. Now, incrementally, if there's growth and or volumes outside of existing contracts, then perhaps there's, as you want to say, a scramble for that growth. But I don't think there's any reason why, as we sit here today, looking out two, two-and-a-half years, we should be overly concerned. But anything's possible, Gancho. Understood.
spk05: Thank you.
spk06: Thank you.
spk12: Thank you. Our next question from the line of Gabe Hodgety from Wells Fargo. Your line is open.
spk05: Hold on a second.
spk06: Hey, Elmer, you've got a connection problem. Just be careful of that. Go ahead, Gabe.
spk09: Is that any better? You're better. Yes. Okay. Thank you. Um, I wanted to revisit Europe a little bit and ask about, um, I think you, you indicated market flat-ish. Um, I appreciate it's a regional market and it can vary by, by player. Um, I think there's, there's Chinese competitor that's adding a second plant there. It seems like it's customer specific at this point. Um, but maybe that would be the market where we might see a little bit more competitive activity because I think contracts are a It seems like you guys are pretty well set in the 24. You're speaking highly confidently about next year. I'm just curious, you know, kind of to revisit the question about utilization. Are there specific pockets or regions where, you know, kind of your antenna is in terms of competitive activity or anything like that?
spk06: Yeah, the first thing I'd say about the Chinese competitor, they built the first plant in Belgium in Customer-specific, they don't... Listen, they have advantages while they're in China. That is, whether they're getting government-sponsored aluminum reductions and or very cheap Chinese labor, they don't have that same advantage in Europe. They're in Belgium, they're paying Belgian labor rates, and they're either importing cheap Chinese metal in or they're buying European metal. So... You know, the challenges that you might foresee competing against the Chinese in China, not the same challenge competing against them in Europe or other markets. We at Crown are more weighted towards the perimeter, and that is the UK, Spain, Italy, Greece, Turkey, and certainly we have the one plant in France, and now with the Helvetia acquisition, we now have a presence in Germany and then one in Slovakia. So... I think that, you know, we were down a bit. The market probably flattish, maybe plus one, minus one. And that growth is probably weighted more towards northern or north central Europe where we're not as prevalent. But as I said, as we sit here today, there's no reason to believe we won't have another increase next year. Certainly not to the level we increased this year, but we get back to where we were in 21. We've got a capacity footprint with some new capacity, new high speed, very efficient lines to benefit the company well into the future. The sustainability story is alive and well in Europe as well. It's the same sustainability story as we have in North America, maybe even more so.
spk09: I should have asked this and I apologize. I'm going to try to squeeze in two more. I'm definitely opening myself up for a little bit of criticism here, but The first one, anything, I know you guys have operated there for a long time, Middle East, that you can comment on. I'm sure what's going on right now is a little bit disruptive, but just help us with that maybe a little bit. And then secondly, it's obviously gotten a lot of attention and headlines and, you know, we wrote about it. Anything from your customers or conversations that you're having in terms of, you know, obesity drugs and potential impact on sugary drinks?
spk06: The first one in the Middle East, we've seen no impact. We don't have any operations in Palestine or Israel. I'm not aware of us shipping any cans into Palestine. I don't even know if there's a filler in Palestine, to be honest. Israel, there are fillers. From time to time, we import cans in Israel, but it's a small amount. Our footprint in the Middle East is Saudi, Tunisia, North Africa, Saudi, the Emirates. in Dubai and in Jordan. So Jordan a little closer to that region, but to date Jordan's been insulated from the skirmish between Israel and Palestine, so no impact there. As relates Ozempic and Wegavy and these other drugs, I'm aware of the comment that the major large retailer made. I would have liked to have had a little more color on that before every hedge fund decided to jump off the boat at the same time. You know, when they say the clientele they have who's filling those drugs at the Walmart pharmacy is buying less food, I don't think they're buying less beer or soft drinks. They may be buying less macaroni and cheese, frozen pizza, and other fatty-type items that, from what I understand, the body doesn't want when you take these drugs. You still need some level of a treat, and... we've seen no impact. And I think if you were to talk to our large, our large multinational and even regional fillers of beverage products in the United States, they're going to tell you the same thing. No impact whatsoever. Um, remarkable to me that, uh, very low take up rate at this point projected, even if you want to project out to what some take up rate might be in the future. And, and, uh, some miraculous calorie reduction you think Americans are going to experience if they can afford the drug that goes out 10 or 11 years, you want to discount that back and try to ascribe to packaging and other companies. It's just remarkable that if it's had the move that we think it's had, it's remarkable to me that somebody's thought they can measure that. I don't see this as being an impact to our business or our customers' businesses for the foreseeable future. And that doesn't deal with the side effects that more and more are starting to be reported. So I'll leave it at that.
spk09: Thank you. Thank you.
spk12: Thank you. Our next question is from . Your line is up. Thank you. There we go.
spk07: Your capex, you think, will go down to $500 million next year. Is that a maintenance level, or is there a growth component? That is, what's the growth component in the $500 if there is one?
spk06: Yeah, so I would think about $250 to $300 as maintenance, and the balance is minor growth and or product replacement. And so that's always product replacement is a growth or maintenance. If you don't do it, you have negative growth. So And by product maintenance, let's say we go from standard cans to slim cans, et cetera, things like that. So think about 300 and 200. Okay, great.
spk07: And is it easy to forecast when Asia Pacific turns around?
spk06: I don't know, Jeff. You work for the biggest bank in the United States or the most well-capitalized bank in the United States. You've got to have people in your bank that are more attuned to Asian economics in any one of those countries than I am. The answer is, I don't mean to be a smartass, I apologize. But, you know, it's a region that's had tremendous growth for a number of industries, and specifically the beverage can industry as beer fillings have increased and increased. For incremental beer fillings, they've jumped past the bottle and gone right to the can. But again, if you've been to Asia and you've spent any time there, there is a growing Asian middle class, but their disposable income level is certainly less than ours, but a small treat. They like their beer and they like to gather, but I don't know if... You know, I don't know if I can project it. The population is extremely young. And so, you know, as you think about the next decade with a young population, the opportunity for growth is, for continued growth is there. But I can't sit here today and project for you when that's going to, when we expect Vietnam to recover. You know, I wouldn't expect it stays down for all of next year. Will it recover by this time next year? I don't know.
spk07: Thank you so much.
spk06: Thank you.
spk12: Thank you. Once again, for those who would like to ask a question on the phone, please press star followed by the number 1. Please mute your phones and record your names when prompted. Please record your names and company names. And to cancel your request, please press star followed by the number 2. And we have a question on the line from from Jeffrey. The line is open. You may begin.
spk10: Hey, Tim. I'm shocked it took half an hour to get a GLP-1 question so far, but I appreciate the insights you offer, Tim, on the subject matter.
spk06: Well, I just find it hard to believe that anybody who's watched consumption levels of food products by Americans, we actually believe that any drug is going to have a an impact on Americans' desires to eat the food they want to eat and drink and gather and have a good time. Maybe from time to time somebody wants to trim 10 pounds off, and maybe there are some people that really need to lose weight because of diabetes or something else. But listen, we're talking about a 120 billion can market. This is a speck on the market. This is remarkable to me that it's gotten this far.
spk10: Well, I guess more importantly, if I heard you correctly, Tim, you're expecting North America, your business, to be up 7%, and you're calling for a similar growth profile in 2024. So help us.
spk06: What I said was the absolute level of cans would be up by the same amount next year. The percentage would be down because the base is higher, right?
spk10: Okay. So can you help size up what that percent would imply then, I guess? And what's driving that? Are you assuming a flattish market or you're seeing share gains like you've seen this year as well?
spk06: We'll quantify it for you in February, early February, but I would tell you that there's share gain combined with we believe the market's going to continue to grow. We believe the customers are going to continue to promote cans in support of their sustainability efforts as well as You know, the unique features of the can, which, you know, for stackability, filling speeds, transport, et cetera, the can is just a remarkable product. There's certainly no doubt about that.
spk10: I mean, I guess the great thing is it sounds like you've locked up pricing, so you've got a good line to set there, too, as well. I guess pivoting to your two more economically sensitive businesses, and to be clear, you've managed transit exceptionally well this year. But from a volume standpoint and quoting and bidding activity, how has that progressed for aerosol and transit so far this year?
spk06: Well, aerosol is just across the board, aerosol is down. We've got some segments of our aerosol business. It's a small business, right? But you've got some segments of the business which are up, maybe automotive and some of the other DOT-sensitive products. But For the most part, air fresheners, bug sprays, shave creams, down across the board. Transit, listen, we've had a hard time getting the investor community and we've had a hard time getting the analyst community to appreciate the benefit of a business that generates revenue. You know, anywhere between 13% to 15%, 16% here in the third quarter requires almost no capital, has a cash conversion rate of 85% plus, and year in and year out delivers unlevered cash flow in excess of $300 million. Yeah, we've done a good job managing the business this year. The team is an exceptional team. It's an exceptional business. It's a very broad-based business supplying a variety of industries, I've said this before to anybody who wants to listen, but when you're on the highway, every time you see a truck go by, there's a 60% chance that there's a Signode product in the truck. Not a Signode-like product, an actual Signode product in that truck. So the transportation industry does not perform without Signode. And so it's a much more stable business. Yeah, it's economically sensitive. We don't spend a lot of capital, so our growth is somewhat limited to GDP. But even in a down market, we've got some products. The equipment and automation business is a very high-margin business. And in a down consumable market, we're still delivering equipment and automation for those customers who wish to take cost out of their process. So I'll leave it at that. I don't want to sound too defensive, but it's a very good business.
spk10: Tim, I asked the question incorrectly. I'm just trying to gauge, are you getting to the point where demand and your quoting activity is getting less bad and stabilizing for either aerosol or transit? Okay, I'm sorry.
spk06: You probably didn't ask the question poorly. I probably got a little overly defensive. But I would say that in aerosol, no. We've not seen quoting activity improve. In transit, had you asked me this question, At the beginning of September, I would have said no. It felt like the month of September was better in a few markets, especially in the equipment market. But I think that, you know, I have a budget, preliminary budget for transit. I actually feel better about the budget now than I did a couple of weeks ago. You know, the market can't stay down for too long. And as I said earlier, The transportation industry can't operate without Cignode. So we are going to see consumables come back, but in the near term we are starting to see a little better traction for equipment and automation. Appreciate the call. Yes.
spk12: Thank you. Next one is from Michael Roxland from True Securities. The line is open. You may begin. Thank you.
spk04: Yeah, hi, guys. This is actually Nico Pacini on for MicroAxle today. I was hoping you could just talk about the cadence of shipments in North America during the quarter from month to month.
spk06: I don't have it in front of me, but I can just off the top of my head, but I think if you go back to our July transcript, you'll see that we told you that April was exceptionally weak. We saw mid-single digit, maybe 6%, 7% growth in May and June, and then I I would tell you that each month in the third quarter got progressively better. We probably saw 8% to 9% July, August, and we had a really strong September leading to 12.5%, 12.6%. Perfect.
spk04: Thank you. And then a follow-up. You spoke on it briefly earlier about your startup in the U.K. Peterborough, you went to line one in August and was line two starting in October. Yes.
spk06: Yeah, that's been delayed. We're probably starting line one now, and line two will start in a month or two. We've had some electrical and other delays, components and contractor issues, so we're getting there.
spk04: Got it. Perfect. Thank you. That's it for me.
spk06: Thank you very much.
spk12: Thank you. Our next one is from Adam Samuelson from Goldman Sachs. The line is open. You may begin.
spk02: Yes, thank you. Good morning, everyone. There's been a lot of ground covered, but maybe coming back to Brazil and the demand environment there, obviously you're getting into their peak season. It does seem like a more favorable consumer backdrop there than in the last couple years going into their summer. Any kind of additional kind of color on what you're seeing from your customer base and order patterns there would be helpful.
spk06: Yeah, so what I would say, you know, it's interesting. Last year, third and fourth quarter, the market was actually fairly strong. I looked at volumes last year in the third quarter. I think we were up 6% or 7%. I think the fourth quarter, maybe we were up 8% or 9% or more. So we are, as opposed to an easy comp that we had in North America, we have – a firmer comp in Brazil, but the market seems to be settling. The one major customer is... I don't know if all the T's and the I's have been dotted in their reorganization process, but they're pretty close to completing their reorganization, and they're going to operate as a going concern, and we're well-positioned with them, not only in can supply, but in terms of... uh, coverage on, on our receivable balance and the assets they have in place. So we, we feel pretty good about that. So, uh, I think the market, the market should be firm and, and, um, you know, as I said earlier, the market's slow. And as you just said, the market's slowly recovering economically from the pandemic and, uh, Probably takes a couple of years, two, three years for the market to eat up the excess capacity that's in the market, but I think it's going to get continually healthier for the beverage can companies as we look forward.
spk02: Okay, that's helpful. And then just quickly for the fourth quarter, there's the illusion to some kind of production downtime in aerosol can in Asia and in transit. Any way to just quantify kind of the volume impact and or? any specific kind of unallocated overhead that will flow through the P&L as a result of that?
spk06: You've heard us talk briefly about our desire or allude to our desire to reduce working capital, generate more free cash flow, reduce leverage, reduce absolute levels of debt. Interest is not 2% anymore, right? It's 7% or whatever we're paying. So really critical that we get debt levels as low as possible, and that's why we made such an effort in Q3, and we're going to continue to do as much as we can in Q4, so we start the new year with a much better position balance sheet. But, you know, aerosol cans, shipments were down 15% in Q3, and that's after a pretty crappy Q3 last year, and it's been a fairly soft performance all year for the market, aerosol market. Transit, I would say volumes, equipment and all up, but consumables down in the order of mid to high single digits. We can adjust that without as much margin impact as you might otherwise think. But again, we don't need to carry more inventory than we need to carry. And then Asia, as I said, Vietnam, very weak. I don't know if I gave a... I don't know if I gave a number, but I'll bet you Vietnam was down on the order of 15% or 17% in volume in the quarter, and it is our largest market in Southeast Asia. So, you know, Cambodia, China a little firmer, but just trying to get the inventory where it belongs, and there will be. be a little careful how I talk about absorption. There may have been some absorption in the third quarter from this, and I think we're prepared to absorb or withstand any further absorption loss in Q4 to get the debt down as low as possible as we go forward. So I don't know. You know, you want to throw a number out there. It's just a number, you know, $10 million, $12 million, but... similar to the $15 million I threw out there earlier for the Asia and aerosol call-down from perhaps where we were in July when we last talked to you.
spk02: All right. Now, that's all very helpful. I appreciate it. I'll pass it on.
spk06: Thank you.
spk12: Thank you. If you don't have any further questions, I'd like to hand the floor back to our speakers.
spk06: Okay, Elmer. Thank you very much. That will conclude today's call. Look forward to speaking with you again in the new year, I think early February. Bye now.
spk12: Thank you, speakers. And that concludes today's conference. And thank you all for joining. You may now disconnect. Thank you very much.
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