Crown Holdings, Inc. (NYSE:CCK) Q1 2024 Earnings Call Transcript

Crown Holdings, Inc. (NYSE:CCK) Q1 2024 Earnings Call Transcript April 30, 2024

Crown Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to Crown Holdings’ First Quarter 2024 Conference Call. You lines have been placed in a listen-only mode until the question-and-answer session. Please be advised that 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.

Kevin Clothier: Thank you, Elle and good morning. With me on today’s call is Tim Donahue, President and Chief Executive Officer. If you don’t 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 and our SEC filings, including Form 10-K for 2023 and subsequent filings. Earnings for the quarter were $0.56 per diluted share compared to $0.85 per diluted share in the prior year quarter. Adjusted diluted earnings per share were $1.02 compared to $1.20 in the prior year quarter.

Net sales for the quarter were $2.8 billion compared to $3 billion in the prior year, reflecting higher beverage can shipments in Americas and European beverage offset by the pass through of lower raw materials and lower volumes in most other businesses. Segment income was $308 million for the quarter compared to $320 million in the prior year, reflecting improved results in global beverage offset by lower volumes in the other business and $12 million higher corporate costs, which include $8 million of costs related to a facility fire. Free cash flow in the quarter improved by $296 million, driven by improved operating cash flow from lower working capital and lower capital spending. The balance sheet remained strong with net leverage at 3.4 times at quarter end compared to 4.1 times for the same period last year.

As stated in the earnings release, second quarter adjusted earnings per diluted share are projected to be in the range of $1.55 to $1.65, with full year projected to be $5.80 to $6.20 per share. The earnings guidance includes net interest expense of approximately $380 million, average common shares outstanding of approximately $120 million, exchange rates at current levels, full year tax rate of approximately 25%, depreciation in the range of $310 million, non-controlling interest in the range of $130 million to 140 million and dividends to non-controlling interest of approximately $110 million. We currently estimate 2024 full year adjusted free cash flow to be in the range of $700 million to $750 million with no more than $500 million of capital spending.

At the end of 2024, we would expect net leverage to be at the lower end of targeted leverage range of 3 to 3.5 times. With that, I’ll turn the call over to Tim.

Timothy Donahue: Kevin, thank you. Good morning everyone. I’m going to actually be very brief and then we’ll open the call to questions. As reflected in last night’s earnings release and as Kevin just summarized, first quarter performance came in better than expected with global beverage can results up more than 11% over the prior year. Increased shipments of beverage cans in both North America and Europe offset lower shipments in Asia. Cash flow performance was again strong due to lower working capital usage combined with lower CapEx. Americas beverage recorded unit volume growth of 5% reflecting 7% growth in North America and a 1% decline in Brazil. And while the Brazil market grew mid-teens in the first quarter, our shipment performance reflects a comparison against a very strong first quarter last year in which we grew 23%.

We maintain our full year volume growth target of 4% to 5% for the North American business and expect low to mid-single digit growth in Brazil in 2024. In Europe, shipments bounced back nicely from the destocking of the prior year’s fourth quarter and in contrast to the fourth quarter, our weighting towards southern Europe delivered benefits versus the overall market as that region, combined with the Gulf States where we’re more heavily represented, performed better than Northern Europe. Perhaps too early to declare an inflection in Europe, but April shipments were also strong and the sentiment for beverage can shipments is more positive than only three months ago. We continue to expect 2024 segment income will exceed the 2021 level and the relocation from our Braunstone, UK plant is now complete with the Peterborough plant in full startup.

Our income performance in Asia Pacific advanced 15% as cost reduction efforts initiated in the fourth quarter more than offset 8% lower shipments in the region. We do expect full year income improvement in the segment as continued benefits from capacity pruning offset the impact of lower volumes. As expected, first quarter transit performance was down to the prior year, with price and volume contributing equally to the overall shortfall in both revenues and income. Specific to the various lines of business, the protective products businesses accounted for more than 50% of the revenue and income decline, reflecting weakness in the freight industry during the first quarter. We are expecting conditions to improve later in the second half, in line with expectations across the trucking industry.

Performance in Other reflects lower demand for beverage can equipment and aerosol cans that we previously discussed. So in summary, beverage cans had a very good start to the year and we see that momentum continuing into the second quarter. We continue to grow share in North America, maintain and restore margins to more appropriate levels, and generate significant free cash flow per share. 2023 was a record year of EBITDA for the company and we aim to match that performance despite the headwinds previously discussed. And I think Elle, with that we are now ready to take questions.

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Q&A Session

Operator: Thank you, sir. [Operator Instructions] Our first question comes from the line of Ghansham Panjabi of RW Baird. Your line is now open.

Ghansham Panjabi: Thank you, operator. Good morning, everybody.

Timothy Donahue: Good morning, Ghansham.

Kevin Clothier: Good morning.

Ghansham Panjabi: Good morning. Tim, the 7% growth in North America that you’re forecasting for 2024, you mentioned share gains were a part of that. One of your peers when they reported last week, were talking about having lost share and having line of sight towards filling that share, what time period that is. Can you give us a sense as to your confidence on your share position as we look out to 2025 at this point or is it too early to tell?

Timothy Donahue: So just a slight correction, Ghansham. We had 7% in the first quarter and I said we reconfirmed our growth target for this year in North America, 4% to 5%, so just a slight correction. And I can’t comment on what one of the other peers said, but I would tell you that we are, as we sit here today, based on the activity, even the lighter promotions or more sporadic promotions that we’re seeing, that we used to see in the past, extremely confident in that 4% to 5% for this year and we have no reason to believe that our share would do anything other than be slightly positive in 2025 versus where we are today.

Ghansham Panjabi: Okay, that’s great to hear. And then for my second question on APAC, the improvement, I think some of your customers were talking about an improvement in regions such as Vietnam as well on a relative basis for them. How are you feeling about that region overall from a growth standpoint, in terms of sustainability, relative to what you delivered in the first quarter?

Timothy Donahue: So our shipment, as we said, our shipments down 8%, I do think the market in Southeast Asia was probably up on the order of 9% to 10% in the first quarter, and our lower shipments versus the market reflective of capacity pruning. I think we took out five lines. So if I had to sit here today, off the top of my head, I think we have 29 beverage can lines operating before the program, and now we have 2024. So we took out 15% to 20% of the capacity or 15% to 20% of the lines, probably more on the order of 12 to 13 of capacity. So a capacity realignment, cost reduction more appropriate for what we see in the near-term. So I do think that the market will, over the medium term, three to five years, continue to grow. We still have great expectations for the Southeast Asian market for growth, and we think we’re exceptionally well positioned, and the cost structure is more reflective of that now.

Ghansham Panjabi: Okay, thanks so much.

Timothy Donahue: Thank you.

Operator: Thank you. Our next question comes from the line of Chris Parkinson of Wolfe Research. Sir, your line is now open.

Unidentified Analyst: Hey guys, it’s Andrew on for Chris. Main question is, how did America’s beverage volume break down not only by geography, but by category? So would you be able to speak to beer seltzer, the other products?

Timothy Donahue: So, up 7% in North America, down 1% in Brazil, flattish in Colombia, up mid-single digits in Mexico. Mexico and Brazil, we’re heavily weighted towards beer. And then in North America, we’re more heavily weighted towards nonalcoholic, although we do have some alcoholic, but more heavily weighted to nonalcoholic carbonated soft drinks, sparkling waters, juices, teas, et cetera and I’d say that in North America, we had a pretty solid performance. All the numbers are in now. Not everybody reports to CMI [ph], but based on what we do get from CMI and other commentary made from the peer companies, it appears that including exports, the market was flat in Q1 and we were up 7%, so we feel pretty good about that and we’re up 7% and growing margin.

The important thing is that we’re not just growing for growth sake, that we’re growing to improve margin. Just, while I’m on the topic, I think a few months ago we gave you an estimate of what we thought the market would do for this year, so the market is flat in Q1. I think at that time in early February, we said we expected the market to be flat to up 1%. If you want to change that to flat to up 2%, you can do that. Not necessarily my overall concern. I know we’re going to be up more than that and as I said, we’re growing our business and we’re growing our margin, which is the important thing.

Unidentified Analyst: Great. Thanks, guys. I’ll turn it over.

Timothy Donahue: Thank you.

Operator: Thank you. Our next question comes from the line of Anthony Pettinari of Citigroup. Sir, your line is now open.

Anthony Pettinari: Good morning. In the release there was reference to continuous operational improvement, and I was just wondering if you could provide any detail or quantification of that in terms of how much efficiency you think you can bring out of the system. Are there some newer plants that maybe haven’t reached the levels that you’re looking for or do you feel like you kind of lost some efficiency during the pandemic? I’m just curious how you kind of think about that opportunity, especially with, I guess, CapEx coming down 2024, 2025.

Timothy Donahue: Great question. I would say actually the opposite. I would tell you that our teams in the factories were incredible during the pandemic, and I don’t think we lost any efficiency during the pandemic. I would tell you that they rose up and they were absolutely wonderful. I think the efficiency losses or increased spoilage is a natural effect of putting new capacity in. As you disrupt the system, you move people around, you move support around, and newly hired workforces are learning how to make cans and that’s a learning curve, as you’ve heard us and others describe, that can take anywhere from 12 to 24 months, depending on any particular factories. So I think there’s always improvement to be made in the new factories and obviously even in the more seasoned factories, the goal is to get better and so today we might have a plant that is the best performing plant, next year it may not be.

So the goal for them is to try to become the best performing plant again. So it’s principally around productivity, less spoilage, more good cans out the back end of the line, but not an insignificant number. And it’s a number that we aim to achieve in all businesses globally, around the world. It’s used for a variety of things. Those gains are used for a variety of things. It’s incumbent upon us as we think about the value proposition that we deliver to our customers, to not only deliver them quality and service, but to deliver them the best priced package and make our product as competitive as possible compared to the other substrates they deal with, and to make them as competitive as possible on the shelf as they look at the market, their products.

And oftentimes our productivity gains, sometimes we keep them for ourselves, sometimes they’re transferred to the customers and the customers use that to market their business, which in turn helps us in the future.

Anthony Pettinari: Okay, that’s very helpful. And then maybe just on the full year guidance, I think you bumped up minority interest by $25 million, but reiterated the EPS guide. So I don’t know if there’s other puts and takes in there, but does underlying EBITDA go higher or just how is the view on full year EBITDA versus initial expectations?

Kevin Clothier: So, Anthony, in terms of minority interest, we’re generally, I think we initially guided to $130 million of actual expense and we now got in between $130 million and $140 million because we think the results are going to be a little bit better in those areas where we have minority partners. In terms of EBITDA, I don’t — we didn’t disclose it previously, but I think based off of what we saw in the first quarter, it’s trending higher than where we were, but it’s early in the year and we want to see where it goes from there.

Anthony Pettinari: Okay, that’s helpful. I’ll turn it over.

Timothy Donahue: Thank you.

Operator: Thank you. Our next question comes from the line of George Staphos of Bank of America. Sir, your line is now open.

George Staphos: Thanks, everyone. Good morning. Thanks for the details.

Timothy Donahue: Hi, good morning.

George Staphos: How are you doing? Tim, could you give a bit more color, Kevin, a bit more color on in terms of why you think beverage cans have had a little bit of a stronger start to the year in your key markets, in as much as promotional activity, it doesn’t sound like it’s been anything to write home, that hasn’t been bad, but hasn’t really been a surge yet. And then I had a couple of follow-ons.

Timothy Donahue: So, George, let me start with Asia, and I’ll talk about the market in Asia, not our shipments. But I think the economies in Asia post the pandemic have really struggled. Obviously, disposable income is a much different number in economies in Asia than it would be in Western Europe or North America. So I think we’re back to the point where you’ve got a little bit more certainty or less fear in the environment for the consumer and the beer companies, principally beer, are doing a bit more promotional activity in Asia, and that’s why you see the Asian market growing again. But naturally, the Asian market is going to be a growth market. More and more people are moving up the economic ladder. I do think I agree with your comment when we talk about a change in beverage can shipment patterns in Europe.

Certainly, I think the destocking was so great last year in the fourth quarter, and there’s again, a bit more confidence in the market from our customers. Hard to understand because I do still think the consumers are relatively weak in Europe, and they’re certainly weaker in Europe than they are in North America. But I think that destocking was so great that we have a little bit of a restocking effect. But all signs point towards a pretty healthy summer as we sit here today and obviously, as you know, we’re going to have seven or eight weeks in a row where we go from the European Cup right into the Olympics beginning in mid-June right to the middle of August. So I think there’s a fair amount of excitement in the European marketplace around two large events, both of which are going to be held in Europe in the same time zone.

I think Brazil up, again we had destocking in Brazil last year, and as you know, the Brazil market fluctuates from time to time. It goes up and down and you’ve heard us say in the past that we don’t like to get too concerned about any one quarter versus the next. We take a longer-term view, and as we’ve always said to you, if you look at Brazil over any three to five-year measuring period, you always see the line going up, and we continue to expect that going forward. North America, as I said George, the market was flat, which is reflective. Let me just back up a second. Including imports, I think the imports were down about a half a billion units year-on-year. So the imports are not very large anymore. Excluding imports, maybe the market was up 1% or 2%, but including the imports, the market was flat.

So, that would not be a reflection of a, what you described, a churn in the market. But I think it is a positive sign in that, as you rightly point out, that promotions are at a lower level than we’ve seen historically, and perhaps even a lower level than we’d like to see and we’ll see how promotions look over the next couple of weeks as we get here ahead of Memorial Day. And then obviously we’ll have July 4th, and then after July 4th, we have the Olympics, although I don’t view the Olympics as a huge drinking event, certainly not to the level of the European Cup, and Americans not so interested in the European cup. So we’ll see what the market brings. I think, as I said, I think the market in North America from 0 to 2%. But as I said in reference to Ghansham’s question earlier, we’re exceptionally confident in our 4% to 5% projection for Crown.

George Staphos: Thanks, Tim. I guess the next question I have is, you’ve mentioned, as you have, that you expect to spend no more than $500 million of CapEx the next two years, 2024 and 2025. What is the overall volume growth that underpins that? And are there any regions where maybe it would be the high class problem where if you start trending much above a certain level, whatever level that would be, that you have to start spending more. CapEx. Are there certain growth thresholds in key markets and if you could identify them where maybe that CapEx number has to start bubbling higher? And then my last one and I’ll turn over and it’s really just a quickie. Asia-Pac Southeast Asia ex-China is not a huge market. You took your capacity down 12%, 13%.

You were down, I think you said 8%. The rest of the market was up significantly. That suggests that ex-crown the market, if I’m doing, if I interpreted what you’re saying correctly, was up really a lot. And I’m just trying to square that with your volume outlook there, if you understand what I’m saying, small market, you’re the biggest guy in the market.

Timothy Donahue: So I do and obviously, George, the 10%, that’s our best estimate of what we think the Southeast Asian market and keep in mind it’s a variety of countries, right? It’s eight or nine countries. That’s our best estimate. Maybe the number is wrong, maybe it’s six, but we think it’s nine to 10. And so that would imply, as you say, that the Crown perhaps lost a little share, which we knew we would when we took some capacity out. But we still have — we’re still by far the largest participant in Southeast Asia with in excess of 40% of the market. And again, as we’ve discussed repeatedly in almost every market that we’ve talked about over the last couple of years, we’re not here just to make cans. We need to make money for the shareholders.

So we’re focused on trying to return appropriate margin levels and so the pruning we did was necessary. But you are right. It does imply that some others really grew. As I said, it’s not a perfect science estimating the growth in Indonesia versus Thailand versus Malaysia, et cetera, because my memory is awful. What was the first question? Oh, I got it. Yes, now I remember. I think as we sit here today for the years 2024 and 2025, regardless of what comes at us, we feel very comfortable with no more than 500. And if you wanted to combine that and say over the two years, no more than a billion, but it’s not like we want to do 700 in one year and 300 in the other. So I think we’re going to be as measured as we can be and we’ve tried to be very measured over the last six years.

I do think that North America, we are highly utilized right now. We’re in the mid-90s. I do think we have some open capacity in Brazil and Europe, even. Not so much in Asia anymore. But I think we’re positioned well in most markets to handle historical growth or even double the historical growth we’ve seen in many of these markets over the next several years without having to add more capacity, unless something dramatic changes George. If we get a — somewhere in the world, if we get a government that outlaws one of the competing substrates for whatever reason, and we have a much bigger move towards aluminum beverage cans, then, yes we’re all going to have to spend a little bit more money, but we’d certainly welcome that opportunity.

George Staphos: Okay. Thank you, Tim. I’ll turn it over.

Timothy Donahue: Thanks.

Operator: Thank you. Our next question comes from the line of Phil Ng of Jefferies. Sir, your line is now open.

Philip Ng: Hey, guys, congrats to a solid start to the year and still pretty choppy backdrop. I guess my first question is solid 1Q, 2Q guidance a little ahead of consensus. You guys rated the full year guide certainly very early in the year, but just kind of give us some thoughts on how you’re thinking about the cadence. Are you less confident in the back half or just being a little conservative here?

Timothy Donahue: Well, I think we’re, well as we sit here today, we’re very confident in the guidance we’ve given you. A bit early to change any guidance. We had a very good start to the year last year as well, and then we had a huge destocking effect in Europe in the fourth quarter, just perhaps too early to change. So I don’t want to say — we’re certainly confident. I don’t want to say we’re not confident and I don’t want to say we’re being overly conservative. I just think it’s early in the year, and we’ll know more as we talk to you in July.

Philip Ng: That’s helpful. And then, Tim, like what are your customers telling you? I mean, it sounds like promotion is still a little uneven in North America. Europe is off to a better start, but Asia as well, but what are your customers telling you today in terms of how they’re thinking about the year and how they’re planning the year at this point versus, let’s say, a few months ago?

Timothy Donahue: Yes, I mean, I don’t think they’re prepared to give up their value over volume strategy yet. It’s yielding incredible benefits for them and obviously, the more volume of anything you ship, the greater risk you take. So they’re able to make more money by taking less risk. And listen, I understand their strategy. If I was them, I’d do the same thing. So I think at some point they may get pressure from their bottlers or they may get pressure as they look at their share of the market versus their competition. And sometimes people get concerned about share, more concerned about share perhaps, than they should. And the way they deal with that is promotion, and we’ll see who goes first. But I think in Europe, I think it’s more just restocking.

Asia, it’s more restocking and the market returning the growth more healthy consumer. Brazil, I think it’s largely to do with, as in Mexico as well, largely to do with a transition away from one way or returnable glass to aluminum beverage cans in the near-term or returning back to the can after we came out of the pandemic. And in North America, I think they like the value proposition they have. So we’ll see how the year progresses.

Philip Ng: Okay. And then on transit, I mean, I guess your comments was fairly in line up with your expectations, at least for us, it was a little softer. I think we were expecting kind of flattish first half earnings. Once again, Tim, it’s my forecast, not yours. The view was maybe, perhaps cost that would offset a lot of that. So relative to how you’re thinking about that business, did you see incremental weakness on demand on the trucking side? How are things kind of progressing in 2Q and do you expect earnings to be up in the back half with perhaps demand getting a little better or incremental cost action? So just kind of help us think about the progression of transit in this year?

Timothy Donahue: Yes. So I think most of the cost that we described to you from the program we initiated in 2022 was out last year. So there’s always incremental things we do to reduce cost. But most of our cost out was last year. The markets, we did well last year. The markets are obviously digesting a lower volume environment, and anytime you have a lower volume environment, their price does come into it. So we’re constantly measuring price versus volume. But I think if you were to go back and take a look at how some of the large trucking firms performed in the first quarter this year compared to last year, you wouldn’t be surprised that we’re also slightly down. Some of the trucking numbers are down, some very large numbers.

So I think we expect similar performance in Q2 as Q1. Q3 may be a little flatter. And so we are hoping for a bounce back in Q4. We’ve got a lot of puts and takes. And to your earlier question, are we confident? Are we being conservative? Maybe in one business we’re being more conservative than in another. And we just see how the year progresses in each of the businesses. But I think in the overall context, fairly confident in the guidance that Kevin provided you, but it could move around by business. But the one business where we’re hoping for a recovery in Q4 is transit.

Philip Ng: Okay. Thank you. I appreciate the color.

Timothy Donahue: You’re welcome.

Operator: Thank you. Our next question comes from the line of Mike Leithead of Barclays. Sir, your line is now open.

Mike Leithead: Great. Thank you. Good morning, guys. First question, I think in the last quarter there was obviously a lot of talk about areas like Mexico glass, can making equipment, aerosol areas that are headwinds this year, I guess how did those areas perform in 1Q relative to your earlier expectations? And has your full year expectations for those businesses changed at all as we sit here today?

Timothy Donahue: So the Mexican glass business is inside the Americas beverage business. And I think we described to you previously that that business, which performed exceptionally well last year, would return to more historical levels this year. And I just want to clarify one thing. I saw somebody wrote something that we were losing money in Mexico glass not true. The business still makes high teens, low 20% EBITDA margin. Last year, it would have made high 20% EBITDA margin as some of the customers rebuilt the returnable glass float. So we’re just back to more normal levels. But I think we described that business as being down on the order of $30 million to $40 million year-over-year for you, but still a very healthy, very profitable business.

And then in the other segment, food cans North America, aerosol cans North America, and the beverage can equipment company business and I think previously, as we described, we told you that bev can equipment down on the order of $35 million to $40 million, but again, still profitable. Just not as profitable as it used to be, as we’re principally doing service and tools at this point, as opposed to new shipment, new equipment shipments. And then aerosol cans, I would tell you, in line with what we expected, the only business in the first quarter a little weaker than we would have expected was North American food shipments were a little softer than we expected. Having said that, April was strong, we have a couple of customers that were, I don’t know if they were delayed or their marketing plans were delayed, but they picked up nicely in Q2 or early in Q2 in April.