So I’m – it’s less of an issue. I agree, I mean, four or five years ago, we spent in an inordinate amount of time on things just like that because it wasn’t in the ethos, it wasn’t in our management patterns and our cadence of conversations, in our S&OP process. But I think it’s pretty well under control, not to say that the world is not going to change here suddenly, and we need to manage it. But I would put this in the category of very low risk for us at this point in terms of just how we’re managing our portfolio. And then I’ll let Howard weigh in on some of the processing comments again.
Howard Yu: Sure. So I think, first and foremost, George, that is a non-comparable compensation component associated with the aerospace sale. Part of the variable performance-based compensation plan for all employees. I think the way we think of it is the magnitude of the impact of this disposition causes the expense to be not normal. And so we’ve recognized approximately a $4.7 billion gain on this disposition which is unprecedented, of course, and not likely to ever recur. And so for that reason, we’re treating that as a non-comparable compensation component associated with that.
George Staphos: Okay. Thanks, guys. I’ll turn it over.
Dan Fisher: Thank you.
Operator: Our next question comes from the line of Edlain Rodriguez with Mizuho. Please proceed with your question.
Edlain Rodriguez: Thank you. Good morning, everyone. Again congrats to Brandon and Miranda and Ann, we’re going to miss you. Quick one on Europe. Clearly, a better start to the year, better than expected. But are you seeing any fundamental improvement in terms of consumer spending improving? Because everything else we hear about you about – like things were improving quite a bit. Like what was the surprise, like what are you seeing there?
Dan Fisher: Great. Yes. So I think it’s twofold. I wouldn’t say end consumers are spending more. I would say the relative inflation versus payroll mechanism and then the promotional activity for our customers is impacting and influencing volume. And the other piece is the, I think there was an unwind to an unnatural inventory level by retailers, by our customers at the end of Q4. And so they built that up a little bit. So it’s probably half of Q4 to Q1, if you will, inventory stocking, getting back to a more normalized baseline. And then some – really some more aggressive behaviors from the customers, across Europe that has enabled a little bit more volume. It’s not – it’s not incredibly exciting, but it’s better than we anticipated heading into the year.
But I wouldn’t say there’s more spend by going into these categories, I would say. It’s a little bit substrate shift, little bit favorable category, the can certainly winning versus the other substrates. That gap has widened probably more in Europe than in any other region relative to the trade-offs from glass and plastic into cans. So we’re the beneficiary of that, but I wouldn’t shock it up to. There’s a lot more spend happening. I think we’re the beneficiaries of the mix.
Edlain Rodriguez: Okay. Makes sense. And another one, in terms of like the share repurchase, I mean then, like how do you balance the pace of that share repurchase? Like with your commitment to buy back shares versus like a higher and higher share price. I mean, of course, it’s a high-class problem to have, but how do you balance the pace of that?
Howard Yu: Yes, Edlain, I think we’re committed to getting back to it. I mean we had, I think, had a pause for a few years as it relates to share buyback, and I think that we’ve consistently heard from our shareholders as well that returning that in some measurable fashion and on a consistent basis important. And so we’re just starting in this program, right? I think we’ve mentioned that we bought about $350 million worth of shares here. And we’ll be thoughtful, clearly as to how the stock price is going. And even as it relates to what vehicles we use to buy back some of that share, we do have a long history of utilizing different instruments. I mean the 10b-18 when the blackout is not there and the 10b-51 when the blackout is there, and then we’ll look at things like smaller ASRs as well if the volatility and the economics work for us.
And so we’re looking at all those things holistically in conjunction with the Board and we’re being thoughtful about them. What we do believe that for this year, we’ll spend about $1.3 billion worth of share buyback. Combined with our dividend policy, that will return about $1.5 billion back to the shareholders.
Dan Fisher: And then relative to elevated stock price. I mean we’re very comfortable in buying back our shares at this level still, that’s absolutely something that we talk to our finance committee and our Board with and we model things internally. And yes, we’re very comfortable returning value back to our shareholders right now at these levels and even elevated above this. So – but it’s definitely something that we’ll look at. But where the stock is, even trading up today, it’s like we’re very comfortable about shares at this level. So it’s a great question. And it’s, hey, let’s see how we get on here over the next three months to six months, but I think we owe it to return value back to our shareholders at the levels that we’re talking about for the foreseeable future.
And it’s just a good – it’s a really good mechanism in behavior return value. If we’re generating more free cash flow, generating more earnings, we have plenty of dry powder to do things as they present themselves in terms of bolt-on M&A, et cetera. So I think we can do all of it. And that’s kind of how we’re looking at it at this point.
Edlain Rodriguez: Okay, perfect. Thank you guys.
Dan Fisher: Thank you.
Operator: Our next question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.
Adam Samuelson: Yes, thank you. Good morning everyone.
Dan Fisher: Good morning, Adam.
Adam Samuelson: Good morning. Let me extend also my congratulations to Ann on her retirement and addition to the family. Maybe I wanted to come back to the cash flow side first. Maybe, Howard, I just want to clarify, you bought that – you talked about $2.8 billion of debt in the quarter. I believe that was higher than what had been initially kind of targeted maybe there’s some timing component to that. Did you also reduce the factoring programs on receivables? Or is that a cash outflow that is still yet to occur is obviously a lot of moving pieces on the balance sheet, I’m trying to make sure we understand what has happened and what has not in the cash [indiscernible].
Howard Yu: Yes, no problem, Adam. So yes, we did retire $2.8 billion of debt that was – we had talked about it from an apples-and-apples standpoint of about $2 billion, but recognizing that, that was anticipating the sale of aerospace sometime after the March 15 date. March 15, we had to do about €750 million denominated debt that was retired. And so that equates to the essentially additional US$800 million [ph] of that gets us to the $2.8 billion in the quarter. As it relates to factoring, given the cash that we had on hand, we did move forward with the factoring in a meaningful way. We still – we probably did more of the unwinding here in the first quarter than we would anticipate for the full year. And so that was to the tune probably about $1.1 billion.
But by year-end, we’re going to stay with our goal – specified goal and target of unwinding about $0.5 billion of AR factoring by the end of this year. So you’ll see that going a little bit the other way throughout the course of this year as we have a $1 billion tax payment that we’re going to have to make here in second half – or actually in second quarter and through the second half as well.
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.
