Adam Samuelson: Okay. That’s very helpful. And if I could maybe just follow-up as we maybe take a step back because there’s a lot of moving pieces within comparable EPS growth off the 290 [ph] last year that obviously had aerospace earnings in it. You pay off debt. There’s interest income, reduced factoring expense, share repurchase, tax rate inches up. Maybe if we step back and we think about the three core beverage can kind of operating units, globally. Dan, you talked about low to mid-single-digit volume growth, what should we think about the operating profit growth in those core business units off that level of growth? Obviously, in the first quarter, especially North America, had some – had some favorability. But help us think about what that core operating leverage to look like with that kind of volume growth this year.
Howard Yu: I would say overall, Adam, that we anticipate operating leverage to continue on here, and you’ll see that. What we’ve said as it contextualizes EPS as we’ve said, hey, mid-single-digit plus on a year-over-year basis. We’ve said that the aerospace sale would essentially be neutral for us on an EPS standpoint, given the operating earnings loss associated with aerospace, but the pickup associated with the additional cash, whether it be interest income, reduction in interest expenses, we’ve retired debt. And as we go ahead and improve on some of these factoring programs. So we’ve said that for the full year, the EPS would be neutral associated with the aerospace sales. Think of it in the context of a 2x leverage. And so that’s the way we think of it within the P&L. And so that’s consistent with what we’ve modeled. That’s consistent with what we’re going to see here through the duration of 2024.
Dan Fisher: Yes. I think for the core beverage business, if you – it’s significantly higher than the historical 2x leverage if you were to back out the nearly $40 million of onetime purchase power agreement. So it’s still in excess of the 2x leverage. I think somewhere in the neighborhood of $100 million of operating earnings, we’re going to get out of the beverage business and an improved result year-over-year and that obviously has the lapping of the $40 million – $30 million, $40 million onetime benefit.
Adam Samuelson: That is all very helpful. I will pass it on. Thank you.
Dan Fisher: Yes.
Operator: Our next question comes from the line of Phil Ng with Jefferies. Please proceed with your question.
Phil Ng: Hey guys. Congrats on the strong quarter. And like everyone else, I wanted to thank Ann for all her help over the years, and congratulations to Brandon and Miranda as well.
Brandon Potthoff: Thank you.
Phil Ng: I guess my first question is really the free cash flow power of the business, certainly noisy with the aerospace sale this year. Can it be helpful, Howard, perhaps give us a little more perspective on how you think about CapEx as we look out to 2025 and beyond, maybe 2026? It’s been a big growth CapEx cycle. So just give us a little more context on how to think about that, the free cash flow and certainly a high-class problem to have, but how should we think about buyback as well pretty steady dose every quarter, more opportunistic if the pullback? Just kind of give us a little playbook and how you’re thinking about the pace of buybacks?
Howard Yu: Yes. So sure, Phil. Let me go ahead and get into that a little bit. As it relates to free cash flow, I mean, I think the way to think of it is, say, we’re anchoring to a normalized free cash flow in the $900 million to $1 billion range, right? That excludes some of the impact of the factoring unwind, and we talked about that in the context of about $0.5 billion, right? So – and I think that we can see that going forward on a consistent basis. Dan has talked about the operating cash generation of this business and how rich that is. And so we believe that that’s going to help fuel the share buyback even into years that you specified. As it relates to CapEx, I mean, the way we think about it here is getting CapEx in the ballpark of GAAP D&A on a consistent basis.
I recognize that over the last few years, that CapEx had been a little bit outgrown. And so we’re returning back to that discipline of getting CapEx into the D&A envelope. And we think that, that’s going to happen here for the next few years as well. As it relates to share buyback, look, as Dan said, I mean, we feel good about the price that it’s at and we’ll continue to buy if there is any, for any reason at all, reason for us to be a little bit more opportunistic because of the prices, then we’ll look at that as well. And so I think that we have those full optionality. I think the greater point here to know is that we’re going to return to a consistent buying back of shares, something that we had paused on for a few years here, and we’ll do that here in 2024.
We’ll do that here in 2025. And no reason to think that we wouldn’t do that going forward beyond that.
Dan Fisher: Yes, Phil. I would say – I would in the simplest manner, we are running our business, the expectation of running our business enterprise-wide is that net income equals free cash flow. So as I don’t want you to think about locking us in at $900 million of free cash flow. As our margins expand we will mitigate the working capital build associated with the growth. And if you’re in that 2%, 3%, 4%, you should be able to manage that. We got room to do that. We spend that GAAP D&A levels and some years will be less, some years it might be a bit more. But this – we should be generating a steady diet of free cash flow and returning that back to our shareholders consistently. To your point there may be some opportunities with a pullback where we can do some more.
But I think you should be locking in that you’re going to get an overwhelming majority of that free cash flow coming back to you in the form of dividends and share buybacks, over $1 million share buybacks for the foreseeable future.
Phil Ng: Okay. That’s great. And Dan, you gave a little more perspective on Europe. It sounds like still kind of choppy environment, but good to see some restocking. How your customers up for the busy summer months. Certainly, there’s big – some big sporting events like the Olympics and the euros and stuff of that nature. Are they gearing up for that? And then I think on your prepared remarks, you made some comment about perhaps Europe recovery would be more back half-weighted. Give us a little more perspective why perhaps the back half is a little better than the front desk?
Dan Fisher: Yes. Entering the year, it was – it really that the comments were more macro related in end consumer and the strength of the end consumer. We got the benefit of the restock and a little bit more favorable behavior by our customers kind of pushing volume. But we thought that there would be a natural tendency for inflation to come back and for the regasification projects that come online. So there would be more room for optimism in the second half of the year, and that’s really what we heard from our customers as well. Your point about the Euro Cup certainly is helpful. I’m more – I get more excited about the soccer “football” drinking behaviors than I do about the Olympics drinking behaviors. So that generally moves the needle a lot more than the Olympics, if you will.
So that will be helpful, and we’ve certainly heard that from – especially our larger beer customers and elements of Western Europe. So yes, it’s really macro related and I think a lot of those things are still playing out in a more favorable manner with the watch out being what happens in the Middle East as it relates to energy prices and how does that impact the end consumer. But we’re encouraged. Nothing contractual is coming online. It’s incredibly stable. This is just – and we’re starting to see increments of better pricing behaviors, a little stronger in consumer, substrate shift continues to manifest in a favorable manner for us, especially as it relates to glass moving into cans. So a bunch of small things kind of add up to a more improved outlook in the second half of the year.
And we haven’t seen anything that would influence or impact that to the negative, if anything, may be an increment higher.
Phil Ng: Got it. And then just one more for me. On North America, if I heard you correctly, you had some pull forward earnings from 2Q to 1Q. Do you still expect North America earnings to be up year-over-year in 2Q? And then give us a little update. I think there’s been some movement in North America as well with the shelf space reset on the beer side. And one of your larger peer customers, I believe is still dealing with some ongoing labor issues, I think, down in Texas. Any update on that front and how you’re kind of managing that?
Dan Fisher: Yes, I’ll let, Howard, why don’t you cover the earnings, and I’ll get back over to the union issues.
Howard Yu: Yes. I think that’s right, Phil. I do think that year-over-year earnings increment upwards here in the second quarter despite some of the pull-in from Q2 to Q1. I think as Dan said, it’s probably $10 million or $15 million that improved the first quarter. But despite that we still anticipate that we’ll have some reasonable growth as it relates to operating earnings in the second quarter as well.
Dan Fisher: Yes. I think the shelf resets have been communicated really well from – there’s been a couple of folks that have won disproportionately, and we anticipated that in our numbers, so nothing’s moved up, down or sideways. I would say, even with – even with the shelf reset, I think the beer category is down. So I think it’s less about the category reset, and it’s more about beer and how they get on with promotional activity in the peak season, are they going to drive value, excuse me, volume. And then, yes, we’re connected with our plants in Texas with that particular brewer. They’re doing a really nice job of managing it right now, but it’s still ongoing. It hasn’t been resolved, but we’re certainly working with our partner to make sure that we’re running what we can, and its being effectively managed.
And I think this is a bit of the way of the world right now as it relates to some of the strength of the unions, broadly speaking, and kind of the manufacturing base. So we had to also work with another major brewer in the quarter to work toward mitigating any supply chain shifts and, so I think – I think we’re all coming to a realization that this is probably par for the course moving forward, and everybody is getting aligned to have more thoughtful conversations in and around when these contracts come up across the industry and making sure that collectively throughout the system, we can manage them.
Phil Ng: Okay. Appreciate all the great color guys. Thank you.
Dan Fisher: Yes. Thank you.
Operator: Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.
Stefan Diaz: Hello, this is actually Stefan Diaz sitting in for Pam. Thanks for taking my questions. And just to echo my colleagues, congratulations to Ann and Brandon and Miranda for the increased responsibility. Now that the aerospace deal is closed and proceeds are in hand. Can you give any details around the potential innovation investments?
Dan Fisher: Yes. It’s a good question. So we’re always – I guess we have an underlying thought process. They’re always investing. There’s a combination of R&D that transitions and hopefully in the commercial innovation projects. And I think you’ll hear this from just about everyone that the opportunity set for us is different by region, but innovation as it relates to getting a constructive package and vehicle that can really attack, if you will, plastic. And the big linchpin there is going to be resealability. And I think there’s a lot in that area that’s being worked on and it’s being worked on by everyone in the industry and all of our customers. So that – those will be the big unlocks. And then there’s some pretty interesting stuff that’s going to be coming out as it relates to new products.
