Crown Holdings, Inc. (CCK) Earnings Call Transcript & Summary

Good morning, and welcome to Crown Holdings First Quarter 2023 Conference Call. [Operator Instructions] Please be advised this conference is being recorded. I would now like to turn the call over to Mr. Kevin Clothier, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you, Marcia, and good morning. 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 crowncork.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 is contained in the press release, in our SEC filings and our Form 10-K for 2022 and subsequent filings. First quarter earnings were $0.85 a share compared to $1.74 a share in the prior first quarter. Adjusted earnings per share were $1.20 in the quarter compared to $2.01 in 2022. Net sales in the quarter were down 6% from the prior year reflecting higher unit sales volumes in Americas Beverage, offset by lower unit volumes in most other businesses. The pass-through of approximately $100 million of lower raw material costs and $36 million from the impact of a stronger U.S. dollar. Segment income at $320 million in the quarter compared to $383 million in the prior year, and reflects the benefit of contractual recovery of prior year's inflationary cost increases in European beverage, cost reduction initiatives in transit packaging offset by $60 million of year-over-year steel repricing in North American tinplate businesses. That is $48 million of gains in Q1 of 2022 versus $12 million of losses in Q1 of 2023. We have better than expected first quarter and we remain optimistic for 2023. We reaffirm full year guidance as follows. We expect EBITDA to grow 8% to 12%, and we expect full year adjusted EPS to be in the range of $6.20 and $6.40. Second quarter adjusted EPS is expected to be in a range of $1.60 and to $1.70 per share. Our full year adjusted even guidance includes the following, which remains unchanged from our previous guidance. Net interest expense of $400 million in 2023 compared to $270 million in 2022. $0.40 of incremental noncash pension and postretirement costs, average common shares outstanding to be approximately 120 million and the full year tax rate to be between 24% and 25%. Depreciation of approximately $350 million compared to $301 million in 2022. Noncontrolling interest to be approximately $140 million, and dividends to noncontrolling interest are expected to be around $110 million. Free cash flow is projected to be $500 million with capital spending of $900 million. We expect the majority of free cash flow to go to debt reduction until we get within our target leverage ratio range of 3 to 3.5x. With that, I'll turn the call over to Tim.

Thank you, Kevin, and good morning to everybody. I'll be brief, and then we'll open the call for questions. As reflected in last night's earnings release, and as Kevin just summarized, first quarter performance was better than expected on the back of stronger results in European Beverage and Transit Packaging. Compared to the prior year, net results were impacted by prior year steel repricing and higher interest and retirement benefit expenses. Global beverage can volumes were down 2.5% to the prior year and reflect the impact of an inflation-weary consumer as well as economic slowdowns in some markets. From 2019 through the end of 2023, we will have added more than 25 billion units or 30-plus percent of annualized beverage can capacity globally, from which to serve local and regional customers. Our Americas and European beverage can platforms are well positioned to continue to serve our customers' diverse and growing needs. As discussed with you in February, and as Kevin just reiterated, we expect capital expenditures to approximate $500 million in 2024 with resulting incremental cash flows being used to delever and return cash to shareholders. In Americas Beverage, unit volume growth was 6% in the quarter, with North America up 4% and Brazil up 23% off an easy comp from Q1 of 2022. While promotional activity was lighter than anticipated in North America, we remain optimistic that summer selling season promotions will begin during the second quarter. We estimate the North American market was down 2% during the quarter with the entirety of the decline found in imported cans, that is domestic producers were flat in total. Importantly, from April 1, the formulaic PPI increases are reflected in our selling prices, beginning the recovery of cost increases experienced over the past year. During the quarter, the second line at our new plant in Martinsville, Virginia, began commercial shipments, and we expect the first line in Mesquite, Nevada to commence shipments in July, followed by the second line in October. During the first quarter, our Brazilian beverage can customers filed for bankruptcy protection, and we have adjusted our Brazilian sales outlook for the balance of the year to reflect this specific customer situation. We believe the registered collateral provides adequate security for our receivable balance. Income in the segment is still expected to improve meaningfully for the full year. And as discussed previously, will be weighted towards the back half. Unit volumes in European Beverage declined high single digits during the quarter, with notable weakness experienced in Spain, Turkey and the U.K., primarily due to the impact of the earthquake in Turkey, retail price increases as well as customers managing their working capital by deferring their purchase of cans closer to the summer selling season. Importantly, our efforts to restore margin with more appropriate contractual recovery mechanisms are underway, with the first quarter registering notable sequential improvement from the second half of 2022. We expect the business to continue to perform well with improvement expected year-over-year in each of the remaining 3 quarters of the year. Beverage can volumes in Asia Pacific declined double digits, with declines noted in almost each market. The impact of higher retail prices, inflation in general, and slowing economies all contributed to lower overall demand. We do expect the segment's income to approach prior year levels, albeit weighted towards the back half of the year. Income in Transit Packaging improved almost 30% over the prior year as benefits from the overhead reduction program initiated last year, coupled with the mix benefit of selective pruning of lower-margin SKUs and accounts more than offset like-for-like volume declines. Margins were improved across commodity product lines and in equipment. As expected, headwinds from prior year inventory repricing gains, coupled with weak aerosol demand offset the benefit of higher food can sales driving income and other well below the prior year. During the quarter, we made provision to rightsize head counts in our U.K. can-making equipment business to reflect lower expected activity. So in summary, a solid start to the year and overall ahead of plan. Looking ahead, we expect the second quarter will continue to reflect improving results in European Beverage in transit with Americas Beverage beginning to show improvement by the third quarter. It's still early in the year, so we maintain our earlier guidance range of 8% to 12% EBITDA growth despite the outperformance in the first quarter. And with that, Marcia, I think we are now ready to take questions.

[Operator Instructions] We have the first question coming from the line of Christopher Parkinson from Mizuho.

Can you just hit a little bit more on your specific performance in North America? I appreciate the market-driven remarks. But in terms of just what you're seeing in various substrates across energy, seltzer, nonalcoholic to be clear, CSD versus beer, and as well as the ready-to-drink launches. If you could just break things down and articulate how you see those substrates developing throughout the year? And what that means for Crown, specifically? That would be greatly appreciated.

So I think that in North America, specifically, we're not very big in beer. We have a significant craft beer presence in Canada, but in the United States, not very big in beer. We do supply some beer. So I'm going to stay away from beer for the time being. I think you're going to continue to see ready-to-drink energy drinks. Those new launches, those new lines continue to grow, albeit of smaller bases than the bigger products that move volume. So for example, carbonated soft drink teas, sparkling water. I think we'll see sparkling water do okay. Carbonated soft drinks, I think, is going to be largely centered around the level of promotional activity we see over the balance of the year. And as Kevin said, we remain optimistic and albeit a little ahead of our earlier forecast here in Q1, but not adjusting our full year estimate only because until we see some sign of larger promotional activity, it's really hard to step up -- step out and adjust the full year. We'll get a chance to do that again in July if we need to. But I think everything revolves around CSD promotions, and we better start seeing that by the middle of May before the Memorial Day holiday and straight through to the middle of June ahead of the July 4th holiday.

That's helpful. And just turning over to the Asian market. One of, what I presume to be one of your regional customers, has been citing the fact that underlying demand growth has been very, very healthy, but obviously, there's a bit of a destock going on between the fourth quarter and the first quarter. So if you could just hit on the underlying demand trends in that marketplace. What that meant for the first quarter versus what it means for the remainder of the year would also be incredibly helpful?

Yes. So I think we have 2 different issues in Asia. One, as we described for you in February, the Cambodian market is exceptionally weak. A big part of their economy relates to the textile industry, with exports to Europe and elsewhere around the world, and that industry is struggling. And as the Cambodian consumer, and certain industries in Cambodia struggle, can sales are down. . The issue you referred to, with the one customer you're referring to has to do with the inventory, the filled good inventory that was built ahead of Chinese New Year. The sell-through at Chinese New Year was not as strong as they and others had hoped. So there still is a fair amount of filled inventory in the system that has to be cleared out. The slowness of the Chinese New Year and the wedding season in certain countries in Asia, largely a result of a stressed consumer. And so we'll see where that takes us. But I think we will see -- as we get into the back half of the second quarter into the third quarter, we'll start to see some recovery in most of those markets, specifically Vietnam.

We have the next question coming from the line of Ghansham Panjabi from Baird.

I guess, first off, maybe you can give us a sense as to beverage can volumes in Europe as an industry. I know you broke that out for yourself, your geographic mix is a little bit different with Turkey, et cetera. So just give us some color in Continental Europe in terms of what you've seen. And then some of your customers that have been reporting have pointed towards the consumer there just being increasingly cautious in terms of spending and so on and so forth, trading down, et cetera. How do you see the year unfolding for that region for you?

So I think I agree with everything you just said, Ghansham. I think beer has been exceptionally weak to start the year in Europe. Let's put the earthquake in Turkey aside. Let's just deal with the balance of Europe. And for the most part, we're on the perimeter. We're not really up through the center of the heart of Europe. So when we say the perimeter, we mean U.K., Spain, Italy, Greece, et cetera. So -- but beer has been exceptionally weak. I think the consumer, specifically the U.K. consumer, is struggling with food inflation the rate of inflation and the size of inflation over the last couple of years for food in the U.K. is exceptionally high. And then lastly, as I pointed out, we are seeing customers trying to defer their purchases of cans as long as they can closer to the summer to manage their own working capital and their own interest costs. But so putting all that aside, I do think we're going to have a reasonable summer. We'll cycle through this working capital issue, and we'll have a reasonable summer. We'll see if we have enough -- if they try to buy all the cans in the summer that they should have bought some in February, March and April, they wait to buy them all. We'll see if we have enough hands for all of them, but it should be a reasonable summer through the end of the third quarter. We're going to do -- let's be clear. The most important thing that we were looking to accomplish this year in Europe was to adjust the contracts to appropriately recover our costs and derisk our position in the contract. We don't sell to the consumer. We do not have any pricing power with the consumer. We need to get it from our customers or we don't get it. And I think we've accomplished that. So the first goal is to make money. Well, the first goal is obviously to serve your customers. The second goal is to make money. And if we don't make money, we're not going to be good with the first goal. So I think we've accomplished adjusting the contracts. We're going to have a good year despite whatever the volume happens here.

Okay. Got it. And then for my second question, going back to North America. I mean, obviously, 1Q is a very small quarter. There's a lot of complexity on the horizon, et cetera, as it relates to the outlook for the consumer in the U.S. Are customers -- have they rebased our expectations for volumes just based on your conversations with them for 2023 relative to initial plan? Or did they see the year sort of unfolding pretty much in line at this point?

Yes. So I think if they were being honest, they may tell us that they oversourced cans among Crown and the other can suppliers. I think we kind of feel we know where they're at. But again, it's largely dependent upon promotions, right? We've seen some promotions but few and far between and not at levels, which drive the consumer to stock up on cans and consume more of the products that our customers are selling. So they are -- as they were last year, they are -- I don't know if they're satisfied, but they're reporting lower volumes and higher profits, and that's a formula that works. So we understand that. We understood it as the year unfolded last year, we understood it better, and we understand it from where we're at today. So we have to deal with that changing dynamic in our end markets.

The next question comes from the line of Mike Leithead from Barclays.

Great. First question, Tim, just 2 real quick on North American beverage. First, can you just talk about what gives you confidence in the summer promotional activity hopefully occurring in this year versus not really occurring last year? And second, do you still expect to be up 10% in North America this year?

Well, I think what we said, Mike, was that if the market is flat, we will be up 10%. And I think we were pretty clear that if the market is down, we probably don't make 10%. If the market's up, we're probably a little better than 10%. So let's see where the market takes us. We were always more heavily weighted in volume growth towards the second and third quarters as more capacity came up. So I don't think we're behind our original expectations with 4% in Q1. Although we're going to need to see some promotions to drive more sales at the retail level.

And your confidence in promotional activity, or maybe it's from customer conversation......

I'm not confident because they have their own business model, and it's not for me to describe where -- well, I can describe, I guess, I don't really understand it as well as they do. They understand their business model better than I do and what they understand better than I do is the consumer. So I wouldn't say I'm confident, I'm optimistic that they will look to drive more volume. But there's -- somewhere in between those 2 words, there's a difference, optimistic and confidence.

The next question comes from the line of George Staphos from Bank of America.

This is actually [ Kash ] sitting in for George this morning. Just going off some of the prior questions. I guess, is there a way to discuss the exit rate on volume and margin coming out of 1Q, particularly in the regions where you have some pricing resets?

Yes. So I think if we look at North America, January and February were better than March. And as we sit here today in April, April is not very strong either. So that's why I said earlier, we're going to need to see some promotions as we get to the first couple of weeks of May through the first couple of weeks of June. I think Europe is starting to -- exceptionally weak in January, February, looked better in March, and I think we expect Europe to be a little better as we -- each month as we go through. Brazil, they're going into their winter months. So you would naturally expect Brazil to be a little softer. But we had a -- the market in Brazil in Q1 and '22 was down like 25%. So it was an easy comp. So -- and then the markets in Asia are all different. I think, as I said earlier, we'll -- with the exception of Cambodia, we expect most of the markets to regain some strength towards the end of the second quarter.

Got it. Appreciate that color. And then just, I guess, given you exceeded the top end of your guidance for the first quarter, I mean, ultimately, why are you keeping kind of the full year EPS guide here? And what ultimately gives you confidence on that?

Well, I think you put a forecast together for the full year, there's a lot of moving parts, and we're more than just 1 business in 1 geography, right? We have a number of businesses which we believe serve the company and the shareholders well in terms of balancing out risk and generating significant cash flow as opposed to being too reliant on 1 product, which may be too up or too down in any 1 period. Having said that, we've just spent the last 20 minutes discussing our expectation, now our confidence level in promotional activity in the largest market we're in, and a little early in the year to really step out and raise the forecast. So as I said, until we see some indication of larger promotional activity in the North American market, just too early to adjust the forecast. We'll get a chance to do that again in July if we have to.

The next question comes from the line of Phil Ng from Jefferies.

Tim, sorry, I missed the part of the first part of the call, I had some technical issues. But did you give us an update on your outlook for volumes for the various markets for 2023? You sound optimistic, but obviously, volumes are a little softer to start the year. How do you manage that risk? I know 3Q last year was a big surprise in terms of how demand kind of fell off and you had excess inventory and costs. Like how are you kind of better managing that in a very choppy demand backdrop?

Yes. Listen, Phil, the first thing I'll say, not to be defensive, but I may be defensive. Volume in the third quarter fell off, but it fell off for the entire industry, not just for Crown, right? And I don't think we're the only...

100% agree.

We aren't the only guys to misunderstand that. Having said that, if I sound optimistic -- okay. Optimistic is, as we said earlier, optimistic is different than confident. I'm optimistic because it's -- it'd be very difficult to run a business if you weren't optimistic. They're so many good people in the organization working too hard and doing too many good things. And our customers are some really good people that are promoting their products and doing some really good things. So you always remain optimistic that we're going to find the right formula between price and volume, and we're going to drive more volume, which benefits our business. And the customers are going to find a way to mix the price and volume to drive their business. And -- but the year is not without risk. As we just said to the last question, why haven't we raised guidance? Well, because the year is not without risk. But I think -- as I said, I think we expect -- in Asia, we expect the market to turn the corner late in the second quarter into the third quarter. I think Brazil -- fortunately for us, the customer bankruptcy that occurred happened at the end of March. So they'll have the winter months that are typically the slower selling months to work through their issues, their prepetition and get everything resolved before they get into the heavier requirements that they may have in late in the third quarter, fourth quarter ahead of Carnival. So that's helpful in Brazil. And I think we have a pretty well-balanced portfolio in Brazil. We have a variety of customers. We're not weighted towards 1 customer. So we're still confident in Brazil. We're going to have a year-over-year increase in Brazil. Europe, I think we're going to start to see volumes firm up. It was exceptionally weak in January and February. It got a little better in March, but albeit still down. But I think you're going to start to see customers pulling more volume, and we'll get into the summer tourism season, and we should do quite well. North -- brings us back to North America, which is the one that you all care so much about and focus on so much. Listen, I said earlier, we're -- in a flat market, we're up 10%. I could -- I drive a pretty old car, but I'll bet my car on that. But if the market is not flat, we're not going to be up 10%. And so we'll see where the market takes us. We're going to do better than the market, but that doesn't give me any great comfort. I'd like to see some promotional activity. So we'll see. I think it's just too early to say what the fillers are going to do with promotions, we'll know better in a few weeks.

Okay. That's really helpful. And then from a cost standpoint, you called out [ $60 million ] still headwind in 1Q. Is that largely flushed out by 2Q? And I know late last year, you had some high-cost inventory in the international markets for [indiscernible]. I just want to make sure if that's flushed out at this point in the year as well.

Yes. So I mean, obviously, anything that was left in Europe got flush through with the repricing of contracts, and you saw those numbers looking better than Q3 and Q4 last year. Asia probably had a handful in the first quarter, but that's done. And then we still probably have a handful in the other businesses, the North American tinplate businesses, which will come through here in the second quarter, and that will be behind us.

The next question comes from the line of Gabe Hajde from Wells Fargo Securities.

I wanted to dial in to Brazil, I guess, first. You mentioned up 23% versus down 25% last year. So let's call it, you're kind of back to flat base.

Well, I said the market was down 25%. I think we were down 20% last year, up 23% this year. So more or less in line with 2 years ago. You're right.

Okay. And we have this customer issue down there. It seems like most of your customers are still pushing a decent amount of price, at least from what we can ascertain and the consumer is a little bit pressured. But I wasn't clear, Tim, about your expectations, I guess, for the market down there. Do you see that evolving? And I appreciate that we're really talking about September, October summer selling season and what your customers choose to do. But is it possible that we have 2 years of -- 2 consecutive years of down demand in Brazil for and...

Anything's possible. I mean you're in an environment where unemployment and inflation are high and interest rates are high, and anything is possible. I think our estimate for Brazil is they're up a couple of percentage points for the full year, which means sequentially as we go through the year here, they'll come off the large increase in Q1 and be a little lower. Now I think we were up much more than the market in Q1, and that has to do with mix of customers versus specifically being weighted to 1 or 2 customers as some of the others were. But I think in total, we still expect to be up in Brazil. The market will be up a couple of percent, 2% to 3% in our view at this point. We should be up more than that. But anything is possible, Gabe. I mean it's a growing market, and it's a big market. We and others have done exceptionally well over time there, and we remain invested. And we continue to expect that market will do well in the future.

Understood. But is there anything you need to -- Crown's system, again, depending on whatever the outcome is with this 1 specific customer that would make you advantage or disadvantage to service other customers down in Brazil to capture that growth.

Listen, I think most of the business in Brazil is under contract. I don't really want to describe the other guys, but what I said is we have an exceptionally well-balanced customer portfolio in Brazil. So to the extent that if the customer who filed bankruptcy, loses a little bit of volume and it gets picked up by others, we'll get some share of the -- that the others pick up. So we'll lose some share of what the bankrupt customer loses in the marketplace, and we'll pick up some share of what the others pick up. So I don't -- there is -- in our forecast, as I said in the prepared remarks, we did adjust our full year sales forecast in Brazil and income accordingly to account for the customer bankruptcy and for what we believe is a reasonable time to work -- for them to work through their issues. We'll lose some, and we'll pick them up. As it relates specifically to that customer pluses and minus, maybe we're a little bit on the minus side, but we still expect to be up more than the market for the year.

Okay. On Transit, you talked about having other diversified businesses. You guys crossed it relative to our model. The $60 million of cost out that you talked about, you're still on track for that apparently or are you ahead of that pace a little bit here to start the year? And then could you be a little more specific on the volumes? I think you talked about pruning some lower margin business and something to the effect of volumes were down commensurate [indiscernible].

So I think -- I don't know if we said it, we probably realized $10 million or $12 million of the $60 million last year. We'll get -- let's say, we get another $40 million this year and maybe there's a little bit $5 million or so spills into next year, but we are well ahead of our target to get the full $60 million. And that's going exceptionally well. And combined with that, we went through a process to reorganize those products, which we believe were the products we wanted to sell versus just trying to make everything for everybody. And so I think if volumes were down 10% to 12%. In Q1, I'd say 1/3 of that was due to pruning of customers and SKUs and 2/3 of that was market.

The next question comes from the line of Anthony Pettinari from Citi Group.

It's actually Bryan Burgmeier filling in for Anthony. Maybe just big picture, it seems like the theme of this call has been volume is a little bit worse than expected. You called out the customer issue in Brazil. Maybe what are some of the better-than-expected items that have allowed you to reiterate the guide for the full year. Is it solely the 1Q be? Is there maybe a little bit of upside to Europe? If you can just maybe hit out some of those big picture things that allow you to keep the guidance.

Yes. So Bryan, that's a good question. And whether in the prepared remarks or to this point in the call, if we haven't made this clear, I apologize. But we are doing much better in Europe in Transit, not only in the first quarter, but our outlook for the full year for Europe in Transit better than we initially anticipated when we put the budget together and communicated to you in February. We've obviously adjusted, as I said earlier, our sales forecast for Brazil, and a bigger slowdown in Asia than we expected. And so they are offsets as well as we've made a little hedge in our internal guidance as it relates promotional activity here in North America. So -- but I would say the -- all of the negatives are -- Kevin doesn't give us off COVID, we'll be talking to you again in July. But Kevin is doing his best to try to kill us here. I apologize for that. All of that, all of the three negatives that I described more than offset by the improved results that we see continuing in Europe in Transit over the original forecast.

Got it. That's really helpful. And maybe just zooming in on Europe a little bit. You mentioned volumes have been firming up. I think on the last call, you said margins for '23 could get back to half of the '21 level? Is there a new target that we should have in mind? Is it maybe just too early in the year to update that?

No, it's not too early, and I knew somebody was going to bring this up. And so why don't we say -- instead of halfway back, why don't we say 75% of the way back. We're going to do a lot better in Europe than we initially anticipated. . The team did an exceptional job. So again, as I said earlier -- and not to sound whatever it sounds like, but the goal is to -- we've got to make money, right? The goal is to make money. And the only way to do that is to properly price. So I think the team did an excellent job redoing the contracts and it's important that they were redone. We're putting a lot of money into the system into Europe and into the Americas to support our customers' growing needs in the future. We need to make sure we're healthy enough to do that in the future. And I think the team did an excellent job.

The next question comes from the line of Mike Roxland from Truist Securities.

Just one quick question, Tim, for you. Can you mind talking about the competitive landscape? And have you seen any increased pricing actions, maybe discounting maybe from some of your larger private peers, particularly as their balance sheets have become increasingly stretched?

Well, I think you're specifically talking about one competitor only, although you could consider the other one a private company as well, even though they're public. I think the one company is used to operating with leverage. The other one, the more private one that you're alluding to, is used to operating with far less leverage, and they've communicated that they want to get their leverage down. So many -- as we said to you in February -- I believe we said to you in February, so many of the contracts -- so much of the business is under contract for the next several years. We don't see large pricing risk over the next couple of years, albeit the marginal business is obviously going to become more competitive as the market is a little bit slower than it was 2 years ago. So we'll just see where that takes us.

Got you. And can you -- any way to quantify, like when you say the marginal business become more competitive. How much of your book roughly is that marginal business? Or just broadly up percent just to get a sense of so much -- is 85%, 90% of the contract and 10% qualifies marginal that could become more competitive?

Yes. I think there -- that's not too -- without getting too specific, that's not too unreasonable.

Okay. Got you. Appreciate that. And just one quick follow-up on the bankruptcy issue in Brazil. Just can you provide some more color on that customer? And what gives you the confidence that you should be able to recoup most of the receivables that you have outstanding with them?

So we have registered collateral in one of their large new breweries, land and building. So I don't really want to talk about what the customer is going to do. They haven't filed their plan yet. But a variety of things can happen when they file their plan. They can try to run the business as is going concern. They can sell 1 or 2 breweries. They can sell the whole company. There's a variety of things they can do. We believe that large new brewery where we have collateral is a brewery that they or somebody else will be more than happy to run and make beer in. So our hope is that they remain an independent-going concern, and we have a broader customer base that we continue to supply in the market. We'll see where it goes. But I think from a collateral standpoint, as I said, we have comfort where we sit right now.

The next question comes from the line of Angel Castillo from Morgan Stanley.

I just wanted to follow up on the strength that you're seeing in Transit. In particular, you updated on what you're seeing now in Europe and how that -- maybe has impacted your outlook for Transit, I think you talked about mid- to single-digit improvement year-over-year. in terms of earnings. Could you just update us on what that kind of looks like based on the strength that you're seeing for 2023?

You're talking about Transit in total or specific to Europe?

Transit in total. Sorry.

Okay. I'm sorry. The only thing I was going to say is Europe is a smaller part of the business. But I think currently, what we're seeing is commodity volumes a little softer. I think we still expect commodity volumes to pick up off of easier comps when we get to Q3 and Q4. Equipment volumes currently pretty strong. The order book is still really healthy, more than 1 year sales in the backlog. The tools are a little soft right now, but we expect that to pick up. So that's the volume picture. I think the more important thing is we are well ahead of plan, as I said earlier, on the cost out. And from a material margin standpoint, we're managing very well raw material inputs and pricing to the customer. And so the business, Angel, I'm glad you brought it up, because the business largely described by many as cyclical. Some of the end markets it supplies are no doubt cyclical. This business is so diverse. It's remarkably stable. And with the exception of the COVID year in 2020, if you adjust for currency, with almost no capital invested each year or this business have been remarkably stable since we acquired it. And this year, we'll do quite well. My sense is that if you adjust for currency and the divestiture of the business that we had last year that by the end of this year, we're up 10% over what the income was 2 years ago. So it's -- that's adjusted for currency. So obviously, currency has an impact. But I think the business is stable, and the cash flows that it generates are remarkable for the level of capital required to be invested. So it is a contributor to the company. It's a contributor to delevering, a contributor to return of cash to shareholders. So I think we're really positive on where the business sits today. We've got a new management team since last year in the third quarter. And a lot of changes, and I think there's even more improvement that we can make in the business.

Very helpful. And then I just wanted to touch on [indiscernible] allocation, given the amount of uncertainty and how much maybe edges on what happens in time half, I recognize there may be some limitations as to what you can say. But I think in the past, you've talked about leverage and perhaps returning cash to shareholders once you get into that 3 to 3.5x kind of net leverage range. Given the uncertainty, would you want to be more solidly kind of at the lower end of that? Or once we reach the 3.5 turns, should we anticipate that free cash flow will start to flow through to buybacks and returning cash to shareholders? How are you kind of thinking about that from a risk standpoint?

I think given where the financing markets are generally. And that means the rate of what it's going to cost us to refinance, coupled with an incredible number of issuers that have to refinance over the next couple of years that we'd be well served to be towards the lower end of that range that we previously discussed. So I think Kevin made it -- said in his prepared remarks that we're going to apply cash generated this year with delevering, and we'll pick up next year and see where we go. We do have a bond that comes due in September of '24. Having said that, we can meet that with internal cash flow. But when you think about the refinancing towers that we and others have over the next couple of years, and it would be prudent to be at the lower end of that range. Now that's one answer. The other answer is that based on where interest rates are today, the accretion dilution analysis is much closer on paying down debt versus buying back stock than it has been in the past when rates were well below historical norms.

The next question comes from the line of Kyle White from Deutsche Bank.

I think last quarter, the beverage cans business, you were cycling through some lower cost absorption in some of the regions given planned inventory reductions. I think it was mostly in Europe and Asia Pacific. Is this behind you? Or do you have inventory as well as now where you would like?

I think with the exception of Asia, we're where we'd like to be. As we described earlier, Asia came out of Chinese New Year. The customers came out with far too much filled good inventory, and we still have a little bit too much inventory in Asia that we're working aggressively to bring down. So there will be some absorption and shortfall in Q2. That's why I earlier said that, Asia, we expect to be more or less -- well, I don't want to say on top of, but more or less close to last year in total for the year, but weighted towards the back half of the year.

Got it. That makes sense. And then in North America, just how is the ramp-up of Martinsville going and then as well as the expected startup for the Nevada plant? And then more importantly, how should we think about absorption cost of utilization after those plants are fully ramped? Do you have the volume throughput for these plans in your overall network? Or do you need to see some underlying market growth in the United States is full absorbent?

So we are -- we had an excellent startup in Martinsville. I would say, with the exception of the start-ups we've had in Brazil, historically, this might have been one of the better start-ups we've ever had. And Mesquite is still on schedule to start up Line 1 in July. So -- and we need Mesquite to start up well because we have a fairly large customer commitment in the Southwest that we would prefer not to be freighting cans all over God's green earth to get them there. So that will be quite helpful. We do have, as others do a little slack in the system right now. And so as we always do, we balance where we make cans based on the cost per 1,000 and where the customers need cans. But as I said in the prepared remarks, we are well positioned to support our customers' needs, and that's the #1 goal to support our customers' needs. I would say that over the last several years, we were running far too tight and far too exposed to any one problem in the system that could have happened that would have caused us to not meet a customer requirement. We have the luxury right now of having a little bit of slack as perhaps some others do. But the #1 goal is to make sure we're prepared to satisfy and serve the customers through the summer months, and I think we're there.

The next question comes from the line of Arun Viswanathan from RBC Capital Markets.

I guess first question is just on volumes. When you think about, say, being maybe up 10% this year in a flat market, when you look out, I guess, in the beverage can markets in general, do you now view them back to historical levels, say, 1% to 3% growth? Or is it 2% to 4%? And considering it would be maybe 2% to 4%, do you expect that your volumes in '24 would be kind of within that range? Or would you be down just given the tough 10% comp that you face in '24?

So starting with the premise that the market is flat this year and we're up 10%. I think we'll also be up -- if the -- I do agree with you that we're going to return to -- I've been more saying this than everybody else for the last couple of years that eventually, we're going to go back to history, right? So I think we'd be quite happy with a 120 billion can market, if it grew 1% to 3% every year. That's the business we're used to. We know how to run a business like that. We know how to keep our costs down to drive more value in a business like that. And it -- while it doesn't require -- well, it's not exceptional growth. It doesn't require any capital. We generate a lot of cash, we pay down debt and return it to shareholders. It's an old tried and true model that works real well. So we're okay with that. I think that using your numbers, if we return to a 1% to 3% growth market in '24, we'll also be up more than that in '24 because of the Mesquite plant and some of the new business we have in the Southwest. I'll leave it at that because I don't really know where we're going to end this year, what promotions are going to look like this year and then what our customers might say about depending on how this year ends, what they might say about what their promotional intentions are for 2024.

Okay. And just also another longer-term question on free cash flow then. So assuming that you are in a kind of more modest growth environment, 1% to 3% going forward, what does your CapEx kind of revert to normalize? Does the $900 million come down to, say, $700 million? And then...

We've already said in February, and we reiterated it today that we believe CapEx next year is $500 million. And in a market with 1%, 2%, 3% in North America and maybe the same in Europe. We have a platform that we believe is sufficient right now to support their growing and diverse needs over the next couple of years. The only growth capital we would see in the system would be some smaller expansion projects in Asia if they are warranted. So $500 million would be next year's number. And as we sit here today, I would expect $500 million way too early to give you a number for 2025, but it's hard to understand how it would be more than that in 2025.

Sure. But just to clarify that, that would imply that free cash flow is closer to $900 million and plus as you move forward. Is that right?

All else being equal, yes. All else being equal.

The one thing we have $100 million of inflow in this year's number from working capital. So clearly, that's not something we'll get over here. But your number is not far off.

The next question comes from the line of Adam Samuelson from Goldman Sachs.

And I wanted -- maybe a follow-up on that last question on market growth. I think previously, you talked about a potential for a mid-single-digit global market growth this year. It sounds like you might be airing kind of lower on that at this juncture. But could you help just frame kind of how you think about the global market at this point?

Yes. I think that given the challenges we see in one of the specific Asian markets, Cambodia, and Asia getting off to a much slower start than we had initially anticipated. We probably bring our overall growth. Even if we hit, let's say, the U.S. market is flat and we're up to 10%, even if we hit 10% in North America, we're going to be closer to flat to 2% for the full year based on some of the slowness we've seen starting in Asia and even the early slowness in Europe. That's correct.

Okay. That's helpful. And then maybe just following up. In Transit, you obviously see a strong start to the year and cost driven kind of offsetting some of the volume and market issues that you talked about. How do we think about as you get through some of these kind of more significant cost actions and they layer through the system this year, backlog on the equipment side and visibility to volumes kind of returning to growth in '24. Just what are you seeing in the forward-leading indicators in that business, don't think about the growth trajectories where some of the more significant cost actions aren't just big of a tailwind again.

Yes. So as I said earlier, the business is far more diverse than most people understand. It's not as cyclical as want to discuss. The end markets might be, but the business is not. But I think we'll have a cost structure now that I think we've got some proper management manufacturing management techniques into the business. We've got a cost structure it's exceptionally competitive. And as the economy -- the economy is going to make the turn at some point, whether that's early '24 or mid-'24, I'm not an economist, but business is exceptionally well positioned to benefit from the economic turn. And I think that one of the benefits we're seeing in that business right now is with things slowing down a little. Some of the supply chain issues that we've struggled with in the equipment business over the last couple of years are starting to ease which is allowing us to do a couple of things, obviously, complete orders and get them out the door, but reassess our own supply chain to further protect ourselves from stresses in the future. So as I said earlier, we're -- for a business where we invest no money, we're exceptionally positive on the outlook for the business.

The next question comes from the line of Jeff Zekauskas from JPMorgan.

Your accounts payable dropped $450 million sequentially, which is unusual for the first quarter. What's behind that? And are your payables and accrued liabilities higher by the end of the year-over-year or lower? Can you talk about that line?

So 2 things behind that, one of which is the cost of raw materials are obviously lower right now than they were last year. So as we're bringing materials into prepare inventories for the season, they cost less, and then therefore, the payable is less. . And then the other thing we've been working real hard to bring inventory levels down. So we're not ordering as much as we would have ordered last year. We're far more cautious on the outlook and what our customers are telling us for the outlook than we were at this time last year. So the cost and the actual level of inventories, therefore, the purchases we're making is far lower than we would have been making at this point last year. and the value of inventory and the level of inventory even lower, trying to drive it lower than where we finished the year at the end of December. So by the time we get to the end of this year, some of that will be dependent on pricing in the market for raw materials as well as our outlook for 2024, specifically Chinese New Year throughout Asia and Carnival in Brazil as those markets are more weighted towards the winter -- our winter months than the typical Northern Hemisphere markets.

So what I should take away from your comments is that, that's a representative number for the year. Maybe it's a little bit higher, maybe it's a little bit lower. But given where raw materials are that's where your payables and liabilities are running.

Yes. I mean it might tick up a little bit. We're trying to drive inventory values down to take risk out of our system. We and others carried far too much risk into the third and fourth quarters last year as sales did not materialize. And we're very focused on not carrying that risk anymore in the future. So we're going to be a little bit more cautious as to how much we carry.

The next question comes from the line of Cleve Rueckert from UBS.

I just have 2 questions. I'll ask them separately because they're not really related, but just to start off, I want to be a little bit more direct about the guidance and all the discussion that we've had around promotional activity. If that promotional activity does not materialize, is the guidance range still achievable?

The range is achievable. That's why -- I mean it's a pretty wide range. I think if you -- the top end and the bottom end, there's probably like $70 million of swing in there. And as I said earlier, even with -- optimistic as opposed to extremely confident in promotional activity, even with that with the outperformance against original target in Europe in Transit, it will more than offset some of the internal caution we placed against what we see as perhaps less or delayed promotional activity from where we would have liked to have seen at the beginning of the year. So the range is achievable.

Yes. I just wanted to make sure that was clear. I mean I sort of got some tidbits of conservatism, but it's pretty clear that promotional activity would represent upside to the plan for the balance of the year.

Well, it would present it may end -- it would -- yes, it would represent the high end of the range. Maybe it takes a little higher than the high end of the range, but let's just stay within the range.

Yes. Okay. All right. That's clear. I just wanted to more direct and explicit about it. And then just looking a little bit longer term, and this is a question that's come up with some of our conversations with the industry and investors over the past couple of weeks. I'm just wondering, like bigger picture, whether you're seeing your customers filling capacity investments, keeping pace with that 30% capacity increase that you were talking about over the last 3 to 4 years or whether some of the investment that's required to absorb that capacity is being delayed such that -- not on purpose necessarily, but it's just fading your investment a little bit, such that you would have a longer tail of growth to absorb some of the slack in the system that you're experiencing.

No, I mean -- I don't want to speak too much towards our customers. But our customers have more than enough capacity installed to meet let's just say that the North American beverage can market has about 130 billion or -- whatever the number is somewhere between 130 billion and 135 billion cans of capacity, maybe it's 128 billion or something. Our customers have more than enough can filling capacity installed in their plants to absorb that. They -- the can companies run 24/7. Most of our customers do not run 24/7. They run 5 to -- listen, the -- if they had to dial up more ships, they could dial up more ships to fill more product. That's not the issue.

Yes. Okay. All right. So it's really more of a market question than anything structural or investor...

Yes. Marcia, do you have any more questions or is that it?

That's all for the questions. Speakers, you may proceed.

Yes. Thank you, Marcia. I guess that will conclude the call today. thank everybody for joining us, and we'll talk to you again in July. Bye now. .

Thank you.

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.