Good morning, and welcome to Crown Holdings First Quarter 2021 Conference Call. Your lines have been placed on 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. Thomas Gallagher, Senior Vice President and Chief Financial Officer.
Sir, you may begin.
Thank you, Dale, and good morning. Session. 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 crowncorp.com. Session.
On this call, as in the release, we will be making a number of forward looking statements. Actual results could vary materially from such statements. Session. Additional information concerning factors that could cause actual results to vary is contained in the press release and in our SEC filings, including in our Form 10 ks for 2020 and subsequent filings. Earnings for the quarter were $1.57 per share Compared to $0.65 in the prior year quarter.
Adjusted earnings per share increased to $1.83 in the quarter compared to $1.13 in 20.20. Net sales in the quarter were up 12% from the prior year, primarily due to increased volumes across all segments, favorable foreign currency translation and the pass through of higher material costs. Segment income improved to $433,000,000 in the quarter Compared to $298,000,000 in the prior year, primarily due to higher sales unit volumes, favorable price cost mix and the non recurrence of charges for tinplate carryover costs that we saw in 2020. As outlined in the release, we currently estimate Q2 2021 adjusted earnings of between $1.70 $1.80 per share. This estimate includes the results of the European Tin Flate business, which will be reported as discontinued operations beginning with the 2nd quarter results.
We are maintaining our full year adjusted earnings guidance of $6.60 to $6.80 per share. Assuming the sale of the European tinplate business closes at the beginning of the Q3, We expect that the earnings dilution impact over the balance of the year of about $0.50 per share will be offset by improved results in the remaining operations as compared to our original guidance. Our expected tax rate for the year remains at 24% to 25%. And with that, I'll turn the call over to Tim.
Thank you, Tom. Good morning, everyone. Thank you for joining us and our best wishes for the continued Health and safety of you and your families. As reflected in last night's earnings release, the company is off to a very good start in 2021. Demand was strong across all major businesses and despite the ongoing challenges posed by the pandemic and severe winter weather in the United States, The company continued to convert strong volume growth into record earnings.
This performance Could not have been possible without great people and our global associates continue to perform extraordinarily in the face of the pandemic, ensuring that our customers receive high quality products and services in a safe and timely manner. And while it feels that we're turning the corner with widespread session is now available. New strains and increased positivity rates in some jurisdictions remind us that we must remain vigilant In our adherence to recommended behaviors. Global demand continues to be very strong for the beverage can And we are committed to deploy necessary capital to meet customer needs. As detailed in last night's release, we expect to commercialize 6,000,000,000 units of beverage can capacity in 2021 with further investments being made to bring on at least that much more in 2022.
Before reviewing the operating segments, We thought it would be well to remind you that delivered aluminum in North America sits around $1.28 a pound versus $0.75 a pound last year at this time. So an increase of 70%. And as we contractually pass through the LME and the delivery premium, Reported revenues will reflect both volume increases and the higher aluminum costs this year. In Americas beverage, demand remains strong across all of the markets we serve with overall segment volumes up 9% in the Q1. We expect that demand will continue to outweigh supply for the foreseeable future.
And as described to you in February, we have 8 production lines in various stages of construction session to bring more supply to these markets during 2021 2022. While the CMI no longer publishes industry volumes, We can tell you that our North American volumes increased 12% in the Q1 compared to the same prior year period. Unit volumes in European Beverage increased 6% in the Q1 as growth across Northwest Europe and the Mediterranean offset softness in Saudi Arabia. Segment income reflects contribution from the volume growth and the 2 aluminum lines in Seville, Spain, which were down for conversion in last year's Q1. Sales unit volumes in European Food increased 6% in the Q1 as the business continues to benefit from strong consumer demand For packaged food, segment income which almost doubled the prior year amount reflects the above noted volume growth $5,000,000 of favorable foreign exchange and the negative impact of template carryover included in the prior year Q1.
As reported on April 8, 2021, the company entered into an agreement to sell its European tinplate businesses, which includes European Food. And as Tom said, we expect the sale to be completed in the 3rd quarter and beginning with the 2nd quarter results will be reflected in discontinued operations. Asia Pacific reported 8% volume growth in the Q1 as both Southeast Asia up 5% and China up more than 30% continue to show recovery from the pandemic related shutdowns. As described in February, activity levels are returning. However, we expect there will be virus related shutdowns and movement control orders from time to time across the region throughout 2021.
Excluding foreign exchange results for Transit Packaging were in line with the prior year. With industrial demand surging, Activity remains extremely strong in transit and we expect the segment will post full year segment income growth of approximately 25% in 2021 over 2020. There will be a large outperformance in the second quarter against an easy comp with further gains through the end of the year. Other operations also reported strong results in the Q1 led by North American Food and our beverage can making equipment businesses. In summary, a great start to 2021.
With numerous projects completed last year and Several more underway currently. We remain well positioned to continue to capture our share of global beverage can growth. Importantly, we continue to convert growth Into expanded earnings and cash flow. As Tom discussed, our full year guidance remains unchanged despite Expected dilution from the sale of the European tinplate businesses. Better than expected first quarter performance combined with continued strong demand across beverage and transit will allow us to earn through sale related dilution and a rising commodity cost environment.
And just before we open the call to questions, We ask you that you limit yourselves to 2 questions initially, so that everyone will have a chance to ask their question. Answers. But always as feel free to jump back into the queue. And with that, Dale, we're now ready to open the call to questions.
Session. Thank you so much. Participants, we will now begin the question and answer session. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question.
Answer session. Our first question comes from the line of Ghansham from Punjabi, Baird. Your line is now open. You may proceed.
Thanks. Good morning, everybody.
Hi, guys. Hi, John.
Hey, so relative to your to the guidance for the Q1 you gave on February 10, can you just kind of bridge as to what exactly drove the upside specific to the Q1? And then also in terms of guidance for 2Q, Generally speaking, 2Q is a seasonally strong quarter. Just curious as to why the earnings number for the 2nd quarter is not higher than what you delivered Q1 relative to history.
Okay. So Ghansham, it's throughout. I'll just read you off. Against what we might have budgeted For the Q1, every operation in segment income was ahead. So for example, South America was up $15,000,000 Signode was up $10,000,000 Food North America up $6,000,000 European Food up $7,000,000 European Beverage up $12,000,000 to $15,000,000 Just across the board, everybody up.
It was all volume. And so as we look forward to the rest The year we start trying to understand you always look at how could we have been off that much And how was the team off that much? I will tell you that we pushed the teams extremely hard to come with a budget this year that was We believe it was more realistic than perhaps what we saw in the 3rd Q4 last year because we had these big outperformance in the 3rd Q4. And while it's nice to outperform, you don't want to miss by that much because you could always miss in the other direction and that's a different conversation than we're having today. So But all volume related.
And so as I said, as we start looking forward to the Q2 and to your question about the Q2 sequentially, why would it be lower? We're trying to understand the 2 together. I think we certainly had some volume pulled ahead into Q1 From what we expected. And so as we sit here and look at the Q2, our Q2 guidance is higher than our budget for the Q2 As we relook at the Q2, but certainly lower than the Q1. Obviously, as I said, volume pulled ahead.
I think We're probably going to be more capacity constrained in the second and third quarters than we are in the Q1. So your volume outperformance year on year in Q1 And Q4 is always has always the opportunity to be greater just because the denominator is smaller. And then just As we look at the balance of the year, you start looking at the commodity cost environment. And while we have pass throughs for a number of Specific commodities, a whole bunch of others go into a basket, the PPI basket, whether that's utilities, labor, coatings And they're all up right now, especially in the coatings, the specialty chemical side. So We'll see how the Q2 progresses, but that's where we're at now.
Okay, got it. And then for my second question, just on your pull forward comment, was that specific to any region? And then second, related to that, just Brazil, just given the Virus proliferation, all the headlines that we see, etcetera. Is that have you started to see any impact associated with that in terms of mobility and the impact on your business. And I know you're cycling through easy comps last year, so there's it's very noisy.
But what's the real time view on Brazil?
So the Q2 will be the comps will be easier for Mexico, Brazil, Southeast Asia as you state, correct. As you know, the virus, not only Brazil, but the other country that doesn't get a lot of discussion here in the U. S, but is really bad right now is India. And so that'll be another reason why perhaps we've taken a just A different approach to the balance of the year. We don't know what's going to happen.
We have yet to see In those two countries, any real restrictions or movement control orders. We do have some movement control orders and restrictions In 1 or 2 of the Southeast Asian countries right now, but not in Brazil or India.
Thanks so much.
You're welcome.
Thank you for that. The next question comes from the line of Mike Neithead, Barclays. Your line is now open. You may proceed.
Yes, great. Thanks. Good morning, guys, Congrats on the quarter. Good
morning, Mike.
First on Transit Packaging, you highlighted in the release, I think a number of cost Structural cost improvements you've made. As we continue with this industrial recovery here, how should we think about the sensitivity of this business or the earnings leverage To industrial upcycle either in terms of incremental margins or however you guys think about it internally?
Well, I think as I said in the prepared remarks, we're going to see transit up, I'm saying approximately 25%, I think is going to be at least 25% year on year. So that's about what is that $65,000,000 to $70,000,000 of segment income improvement year on year, which That's EBITDA as well, combination of a number of cost reductions we've done over the last couple of years And the recovery of industrial demand, I think that they did much better in the Q1. Let's say that the our ability to meet demand was much better in the Q1 than we budgeted. They like a lot of businesses globally, not just the can business or the transit business, but a lot of businesses globally, Challenges being availability of raw materials and then the time necessary to convert raw materials and or assemble equipment. And so we had a softer budget for Q1 based on those concerns, but they were able to pull through that.
I think We feel very good about this year. We'll see how long this industrial demand surge is. Is it just COVID related or is there something more to it with all the stimulus that's been put into the global economies, but the business has in our view tremendous upside With the platform as it exists today and we feel very positive about the business. One thing, It's not just in transit. We point out the cost we've taken out in transit.
But one of the other reasons for the Significant outperformance over the last several quarters compared to prior year quarters is the tremendous amount of cost that our teams have taken out across all of our business is whether that's European food, European beverage throughout the Americas beverage businesses. So all of that When you do that and then you get a little volume come back, it just falls straight through to the bottom line and that's what we're seeing.
Great. That's super helpful. And then maybe just After the recent European tinplate announcement, is the strategic review officially complete? Or would you look to potentially do something similar with other assets Like your North American food business.
Well, I don't know if a strategic review is ever complete. I think it's Always incumbent upon the Board and management to look at all the assets from time to time to determine what the best outcome is for the company long term and for the company's long term Shareholders and I'm delineating between traders and long term shareholders. But We have a duty to shareholders first, but we also have a duty to other constituents, suppliers, employees, etcetera. So we're always looking at that And we feel this was a great business, right? You probably could tell from my comments over the last several quarters.
I really like this business. I like the what the business can do for an overall organization in terms of its stability and its High cash flow generation. Having said that, we did receive what we believe was a full and fair cash price. We have a little stub we'll retain and we'll move forward. But the business the remaining businesses we have are performing very well.
We have a lot of capital we need to spend over the next couple of years to deploy new beverage can capacity And the transit business and the North American tinplate businesses will supplement our capital needs with their cash flow Until such time that the Board takes a different view.
Great. Thank you.
Thank you.
Session. Thank you for that. The next question comes from the line of Neel Kumar, Morgan Stanley. Your line is now open. You may proceed.
Is. Great. Thank you. In terms of the European template sale, I was just curious what the rationale was for continuing to own a 20% stake in the business. And then I
was just wondering if you
can just offer any thoughts on how you're thinking about target leverage Post the sale. I mean, in particular, the remaining 20% equity interest in European template will not show up in EBITDA. So how will you adjust your leverage target to account for the cash flow?
Well, I think we ended last year with 3.9 or I think one thing that was interesting, we get to the end of Q1 here and this is the first time I can remember My career at Crown and I've been unfortunately been around a long time now, that our leverage at the end of the Q1 is We lower than what our leverage was at the end of the 3 months earlier, the end of the year. And so there are a couple of ways to reduce your leverage. The easiest way to reduce leverage is to increase earnings and that's what we did. But I think going forward, understanding a new cash flow profile of the company That we would say that we're comfortable in the 3 to 3.5 times range depending upon what we see for capital needs and other business conditions globally. The rationale for keeping the 20%, that was the best deal we believe we could make for shareholders.
So keep in mind that you've got a private equity sponsor Making a bid for a company, they've got to put equity up. And the less equity they have to put up, perhaps the greater price they can pay you for a business. So While it appears that the 20% cost us on the order of what about €125,000,000 I would tell you that the net of The increased purchase price we received versus what the price would have been had we not taken an equity stub Probably only cost us on the order of about €40,000,000 to €45,000,000 So it didn't cost us a lot to keep the stub Because we got a greater overall enterprise value for the business by allowing the sponsor to have to put less equity up, if that's if If you understood what I said there.
Yes, that's very helpful. And then just my follow-up, I think your prior expectations for North American growth for the full year was in the high single digit, low double digit range. Is that still the case? And is there a way to kind of break up that growth by beverage categories? How much of that coming from hard seltzers, sparkling water, other emerging alcohol categories The more mature categories like carbonate soft drinks or beer?
Well, I think what we said in February, we I think I'm trying to remember what we said. I think we said we'd be up about 10% in North America this year. I think We're up 12% in the Q1, albeit as I said earlier that it's easier to be up more in the 1st and 4th quarters than in 2nd and third just because you have more capacity available for a lower denominator. But I think we're still very comfortable with 10%. We'll bring the Bowling Green lines up this year.
We'll bring Olympia up later in the year. Listen, I'm sure it's possible to break that down by category. I haven't spent a whole lot of time trying to do that by category myself only because We're making and selling everything we can make and at some point it becomes less critical to understand What categories are growing that much as it is to try to meet your customer needs and not disappoint your customers and that's where we're at now. As I said earlier, Demand is going to far outweigh supply over the next year or 2, at least over the next year or 2, if not for the next 3 or 4 years. And we like others Probably are most focused on trying to get as much capacity in place where we see the opportunity for us And that also means not disclosing to you or others where we see our opportunity.
All right. Thank you.
Thank you.
The next question comes from the
line of Adam Josephson, KeyBanc.
Your line is now open. You may proceed.
Thanks. Tim and Tom, good morning. Congrats on another really good
quarter. Thank you.
Tim or Tom, just one on the dilution In the guidance, so it's $0.50 dilutive in the second half. You beat your guidance by close to $0.50 in the Q1. So it seems like You're effectively raising full year by the amount of the 1Q beat. And I know you said to Ghansham there may have been some demand pull forward in the quarter, Which is perhaps why your rest of your outlook is effectively unchanged. Is that kind of the right way to think about it?
And Do you think there may be an element of conservatism in there just given what's happened over the past three quarters?
Well, I hope you're right. You don't sound like the Prince of Darkness. You sound like Bosco da Gama right now, the great explorer. I'm not sure if I'm talking to Adam Josephson or not here. I'm sorry, Adam.
I couldn't resist. Listen, I hope you're right. As I said also to Ghansham and I had 4 points written down here. Tom and I were talking about this and I said to pull ahead Capacity constraints as you go forward, commodity costs and I didn't say the virus in Brazil and India, but Ghansham reminded me of that. There are a lot of things going on right now globally and it's sourcing of raw materials, The cost of raw materials globally, not just affecting the can business or the Tran businesses business, but all businesses.
And so We're trying to take an approach here that's a little bit measured. It would be really easy to get really excited about the performance over the last couple of quarters and even here in the Q1. But it's answer. We're running a business and first thing we've got to do is satisfy customer demand and meet the customers' needs. We understand you'd like to know everything.
We would too. It's just I there's a whole bunch of things that are going on. This is A really exciting time with the recovery in global economies and but there are some suppliers That are pushing price and squeezing and are also I shouldn't say squeezing, but they're having similar Demand surges in their businesses. So I don't know. It's where we're at right now.
I think that I would characterize the outperformance in Q1 on the order of $0.40 to $0.45 not $0.50 So there's A little bit of outperformance in the remaining three quarters. I know we 2nd midpoint of the second Quarter guidance that Tom just gave you is certainly above the original budget we had. So and we'll just see what the back half of the year brings us.
Yes. No, I appreciate that Tim. And just on the your cash flow outlook, I know you didn't give cash flow guidance this time Presumably because of the sale, but you were guiding to $500,000,000 3 months ago with CapEx of $850,000,000 Can you update us, Tom, perhaps on what you're thinking in terms of CapEx, working capital and consequently roughly what neighborhood you're thinking for free cash this year? Appreciate it. I know you didn't give guidance perhaps for a reason, but sorry go ahead.
Yes. So, Adam, I think the cash flow for this year perhaps is not meaningful because Depending on when we closed the transaction, Tom gave you an arbitrary date of July 1, but it could be July 15 or August, who knows when it's going to be. So we think sometime in Q3. We just did that because it was an easy cut off to give you some guidance for the balance of the year. But Depending on when that happens, there will be working capital movements plus and minus, which hit the cash flow statement, but the recovery of which goes against the purchase price.
So it's almost not meaningful to cash flow. But I think what we could tell you is that we believe capital for this year will be in the order of $900,000,000 We're going to take capital up a little Capital for this year will be in the order of $900,000,000 We're going to take capital up a little this year. Combination of accelerated project spending and also accelerated Construction costs, steel, cement, drywall, lumber, you're seeing it out there, right? All commodities are up, especially construction materials. So But assuming let's assume that we had sold the business, closed on the business December 31, 2020.
And if we said we were going to spend $900,000,000 in capital, I would tell you that we would as we sit here then we would have told you that free cash flow for the year would be in the order of 350,000,000 If that helps you.
That's perfect. Thank you, Tim. Best of luck.
Thank you. Session.
Next question comes from the line of Phil Ng, Jefferies. Your line is now open. You may proceed.
Hey, guys. Congrats on a very strong quarter. Margins and earnings were particularly strong in Europe and Americas Bev. I I mean, you typically see margins build from here, but you did call out and pull forward demand. So I'm trying to get a better handle if price cost is a big enough impact that you don't see your typical See no improvement in profitability in 2Q and 3Q.
I'm just trying to flush that out a little bit more.
You're talking about percentage or absolute, Phil? Percentages. Yes. So I mentioned in the prepared notes the aluminum cost is up 70%, right, delivered aluminum? Yes.
So you've got the denominator effect as we have this much higher aluminum cost now that will be in effect We see for at least the second and third quarter. So on a one for one pass through revenues are higher, but you're It doesn't affect reported or absolute margins, but the percentage margin on a one for one pass through comes down. So You just want to be a little careful about percentage margins with in an increasing commodity cost environment that you're passing through. What about like profitability
per can or however metric you think that's cleaner? Do you expect the seasonal improvement? Because you did call to list for a potential price cost mismatch.
No, no. Listen, I think we're going to have profitability improvement just We're going to get into the summer selling season and the more we sell, you spread your fixed cost across greater volumes and so you naturally get profitability improvement.
Got it. That's helpful. And then Tim, when you talk about your outlook for demand, I guess the risk is certainly COVID in some of these Markets like Brazil, Mexico and even India for that matter. But any concerns on the tougher comps with The nice uptick you saw in at home consumption last year. I know when we look at the Nielsen data, you're starting to lap tougher comps and it's slipping negative.
But Now I assume you got some good growth in new products, but any color on that front in terms of some of the puts and takes on potential offsets?
Yes.
So, yes, well, first thing I'll say is we're seeing a real improvement in the virus in So I wouldn't throw Mexico in the same category as Brazil and India. I think Over time, it remains to be seen how long it's going to take for people to consume less at home and start consuming more outside the home. I think there's still a big percentage of the population that's worried about the virus and rightly so. And so that will take some time. But I think demand that we have for especially in the beverage can business And especially in the Western Hemisphere for new products and for beer in Latin America and new product introductions, seltzers, etcetera in North America is going to far outweigh any of that reversal of at home consumption over the next couple of years.
Okay. Thanks a lot. Appreciate the color. Thank you.
Thank Thank you for that. The next question comes from the line of Mark Wilde, Bank of Montreal. Your line is now open. May proceed.
Good morning, Tim. Good morning, Tim.
Good morning.
Tim, I wondered is it possible for you To give us any more color at this point in terms of prioritizing the use of proceeds from the Tinplate transaction and also just Thinking how you might kind of cadence that through the year?
I want to be a little careful because we've got you're going to pay off some debt, you're going to buy back some stock and Which tranches of debt and how much stock? Obviously, we don't want to we want to do it as efficiently as possible. So I don't really want to get into too much of that. I mean, I don't know. I think if you I don't know.
Tom, you got a view? Yes. I think
you have to look at the leverage. And Tim said we'd be somewhere between 3 times and 3.5 times at the end of the year. A big range, so probably close to the middle.
Okay. All right. And the profile on Tim, there's a lot of goodwill for the beverage can and the beverage can business right now. But I was reading the latest issue of the can maker the other day And they were talking about the low U. S.
Recycling rate on aluminum cans kind of being the elephant in the room for the industry right now. And I'm just curious About your thoughts about how you improve that recycling rate, because I think we're at about 50% is
right now. We are at around 50%, which is certainly higher than plastic or glass recycling, right? Yes, to be sure. And then keep in mind the Can Maker is a U. K.
Publication and recycling rates are generally higher Outside the United States and certainly they are across Europe as well. So they're trying to point out In a society as wealthy as the United States, sometimes we take for granted items of value and aluminum has value. So it's a relevant point that the can maker made. So we live in a disposable society, right? If If your DVD player breaks, you don't buy it, get it fixed, you buy a new one because they only cost $29.99 So How do you fix it?
You can get real draconian. You can do it like Switzerland does and you can have people go around and Root through people's trash and see if they're properly separating every item and find them. I don't think that will be very popular in the United States and Pretty tough to find any politician who's going to want to take that on, but it has to come down to the consumer. And Pretty hard to force it back on the producers or the customers of the producers. I mean, you're the guy buying the can market and not properly disposing of it.
You generally not you specifically. So like it's an education process and
so I'm
not sure if there's a way To prepare an incentive program that would force consumers or incentivize consumers to want to recycle more, But we all know aluminum has great value and it's really a shame for it to end up in the common waste stream as opposed to recycling stream. I don't have the answer for you.
Yes. Well, one of your peers have talked about actually advocating for Increased use of deposit laws, things like this. Do you guys have any view on that?
Well, I think certainly if you look at deposit the deposit states, there is more recycling that occurs in the deposit states. Now you California for example has deposits. Is that higher rate of Cans coming back into California from cans sold in California due to California sales or is it people collecting cans in Arizona, New Mexico, Nevada And bringing them into California to get the nickel. They didn't pay the nickel in their home state, but they brought it to California to get their nickel. I don't know, But there is no doubt that the rates are higher in states with deposits.
I think The challenge is that our customer base understands that At the initiation of the deposit, there's likely to be a dip in demand and they don't want to face that dip in demand. I think Once that dip in demand normalizes then you're back to normal demand patterns. I would say that It would be unfair to put a deposit on aluminum cans and not put a deposit on everything. And that doesn't just mean you put a deposit On a PET plastic bottle, but you'll put a deposit on a PET bottle that's used for ketchup and mayonnaise and everything else. So I think PET bottles also have deposits, but that's generally only on beverage products and probably should be deposits on everything.
How much can the consumer withstand because then the consumer has got to try to find a way to get that back. But If you're really looking to control waste, you want to put a deposit on everything, not just on the product that has the most value.
Okay. I'll leave it at that. Good luck in the balance of the year, Tim.
Thank you.
The next question comes from the line of George Staphos, Bank of America. Your line is now open. You may proceed.
Hey guys, good morning. Good morning. Congratulations on the progress so far. My first question, I just want to try one more time To dig into some of the guidance assumptions that you have and then I've got a longer term question for you. In terms of What your guidance assumes for this year, should we assume that in the 660 to $680,000,000 you're assuming debt pay down to the midpoint of that range and that the rest of your Available cash goes to buyback.
And within the P and L, where will the stub on European templates show up. Will you include it somehow in EBITDA or will it be purely in equity earnings?
So the stub will be in equity earnings at 20%. As far as the leverage in the stock buyback, session. Yes. Look, it's by the time we sell the business or actually where we are today and you start flowing through stock buybacks, That's not a meaningful contributor to the earnings growth this year. But for modeling, I think using the midpoint of that 3% to 3.5% sounds about right.
Okay, Tom. And then thanks for that. And I guess my other question, if we take a step back, Signode had very strong performance In the quarter, it looks like it's trending better than you expected for the year. In Southeast Asia and China volumes were very, very strong. And I think you said China volumes were up 30%, obviously versus a very easy comparison.
Yes. What are the implications, If any, for the trend that you saw in the Q1 and the performance versus budget for capital allocation to those And do you see Signo, Tim, even more of a keeper These days given that performance within the portfolio or no, it's doing well, but you're going to be every bit as clinical about that business and Fit in the portfolio as you would have been 6 months 9 months ago. And within China, given the performance you're seeing,
What does that do to
your supply demand around the rest of Southeast Asia and your willingness to put capital both into China and frankly the rest of the region which looks to us to be very tight given our supply and demand work. Thanks guys. Good luck in the quarter.
So I think the principal allocation of capital dollars in the company right now In the beverage can business, there are there's minimal capital that we put into transit for specific projects That supply industry is where we see good growth, but the capital allocation in Signode is fairly minimal considering the size of the business and the cash flow it generates. We do have we have consistently commercialized new capacity Across Asia, Southeast Asia over the last several years. We had a plant come up last year. We'll have A new plant and another line come up this year. So two lines with a new plant and plans for more obviously.
We have no current plans to expand capacity in China.
Okay. And that's because you just You've been there, done that. The growth is great, but it's difficult to earn a profit on a long term basis given the amount of capacity. Would that be a fair summation? Answer.
Competition, I should say.
Yes. Among other factors, yes.
Okay. Thank you, guys.
Yes. You're welcome.
The next question comes from the line of Anthony Pettinari, Citi. Your line is now open. You may proceed.
Hi. This is actually Brian Bergmeier sitting in for Anthony. Following the sale of European Food, are there any EBIT impacts is to non reportable or corporate expense that we should be aware of? And are there any dis synergies in separating the U. S.
And the European food can businesses?
So no dis synergies separating European food can and retaining North American food can. There are in the other segments or the non reportables, The European aerosol business and the specialty packaging business probably on an annual basis has EBITDA of around $10,000,000 $12,000,000 something like that. So that will come out over the balance of the year after it's sold or starting in the Q2 because it goes to discontinued ops. And I'm sorry, Brian, what was the other part of the question?
Is that the impact to corporate expense?
Yes. So There are what we're going to be left we're going to have a European business now, which is Beverage cans only. So as opposed to a very large $4,000,000,000 $4,500,000,000 division, we're going to have a beverage can business and the product itself is more homogeneous. It's all one material Sizes, while there are sizes, it's certainly not as diverse as food cans and the manufacturing is A little bit more homogeneous than food can manufacturing. So it will require far less corporate overhead in Europe to manage the beverage business than it did to manage The division when it was a multiproduct division.
So that is already in the numbers that Tom has provided.
Got it. Thanks for
the detail on that. And as my follow-up, is it possible to quantify the impact of the Winter storm in Texas on your Americas Bev results in 1Q, were your facilities forced to take any downtime in 1Q?
We have 2 big beverage can plants in the Houston area in Texas and they were down for a couple of days each. If I had to quantify it, pick a number like $5,000,000 But that's a guess, but probably not a bad guess.
Got it. Thank you.
You're welcome.
The next question comes from the line of Kyle White, Deutsche Bank. Your line is now open. You may proceed.
Hey, good morning. Hope everyone is doing well. I'm seeing some more introduction of Spiked Seltzer into Europe. I'm just curious what you're seeing on this front. What kind of growth expectations do you have in the beverage category in the region?
And then also are you seeing that this beverage category is primarily going The can over in Europe? Or is it a much more even mix between cans and glass? Thank you.
I think just like you see in the United States, I think You're going to see as those products are introduced more and more into Europe, it will be more cans than glass or other materials. We'll see how much growth we actually get in European Beverage this year. We expect very good growth on the beer side, On the carbonated soft drink side depending on jurisdiction and depending on the rollout of the vaccines with the exception of the U. K. It's going very slow in the rest of the continent.
So we'll see what the summer tourist season looks like and outside dining On premise outside dining looks like that will have some impact as to the full recovery Of the can and other substrates as it relates to carbonated soft drink. But it will be a good season. It's just going to take a little longer than what you're going to see in North America.
Got it. And then you mentioned the inflation on aluminum, particularly in the U. S. In your prepared remarks. And understand that you passed it through from an earnings standpoint, but is this expected to have a large impact on your working capital in terms of the cash outflow this year?
It will have an impact on working capital during the year. I think as we're typically with the exception of Some Southeast Asian countries and Brazil where we're we have big 4th quarters, we're a summer selling season business. So most of that is collected. Before you get to the end of the year, it will depend on how much inventory we believe we need to carry into next year depending on demand. But As everything is basically hand to mouth right now, we're selling what we can make.
I don't expect that to be I don't expect that us to have a whole lot of opportunity to build inventory, let's put it that way. So Some impact, but again, the working capital impact already built into the numbers Tom's provided.
All right. I'll hand it over. Thank you. Thank you.
The next question comes from the line of Salvator Tiano, Seaport Global. Your line is now open. You may proceed.
Yes. Hi, everyone. So firstly, I want to ask about Transit Packaging. You mentioned that constant currency revenues were flat year on year, but industrial demand was really strong. So can you provide a little bit more color on what the markets or regions did better and what markets and regions outperformed and perhaps still decline year on year?
Yes. So I think what we what I meant to say, if I said it wrong, I apologize. On a constant currency basis, I was talking about segment income or operating income. I think On a constant currency basis, sales were certainly up year on year. Very strong In Asia, very strong.
In Europe, I think volume strong across everywhere, but on an income performance, Strong in Asia, Europe and the equipment and tools side, a little softer in the Americas. I think That's just the timing of passing through commodity costs, which we'll see come through here in April May. So just a timing issue.
Okay. Perfect. And I guess you already got a few questions about the buybacks 1st debt pay down. I would like to come back to that a little bit just to understand the dilution you said is going to be around 0 point from the sale of European food this year, full year basis, so we're looking probably close to $1 assuming you don't reinvest against the proceeds. So what is the rationale I guess to not try to accelerate buybacks in order to minimize the dilution from what would be a pretty big chunk of your earnings being sold.
Why not consider this scenario?
Just what leverage we believe we're comfortable having going forward With a smaller company and a lower earnings base and a lower cash flow base.
But as we said, we do intend to buy back stock. So It's just a matter of how much it will last.
I guess, Tom, you were mentioning before the leverage of 3 to 3.5 times, perhaps for modeling, we should think about the lead points. Why wouldn't it make sense For you to accelerate buybacks and perhaps make sure you're on the upper end of the leverage by year end because otherwise the dilution will be material And that's the best way to minimize it, it seems.
Again, it comes back to which leverage ratio we're comfortable at. And The range is 3 to 3.5. So we do have that option if we'd like to take advantage of it.
Okay, perfect. Thank you very much.
Thank you.
The next question comes from the line of Arun Viswanathan, RBC Capital Markets. Your line is now open. You may proceed.
Great, thanks. Good morning and congrats on the very strong performance here. I guess, first off, Maybe I could just ask a question. A lot of near term questions have been asked. So maybe we can just ask a question about the next couple of years.
You noted that Demand is going to far outstrip supply in beverage cans. You're adding about 6,000,000,000 units this year, 15,000,000,000 units over the next couple of is. What are some of the things you're hearing from your customers that kind of supports the statement that demand is going to far outstrip Supply, and could you specifically address maybe trends around freshness, water alternatives? Most of the demand recently has been driven by potentially some new products on the seltzer side and on alcohol alternatives. So is it kind of The water alternatives coming next and then also is it new product development because maybe some SKUs answer.
Or the beverage companies favored high velocity SKUs this last year and do you see more new product development supporting that growth in the future?
I think there's always going to be new product development. I would not characterize our belief Continued strong demand to be new products, which we're not aware of yet. But it is true that Much of the growth we've seen over the last couple of years has been seltzers and some water alternatives. I will say that during the pandemic, we've had a resurgence and growth at least on the can side for carbonated soft drinks. And as I said earlier, I think that's going to take some time before we see people start to go back out to restaurants And consume more on premise as opposed to in the home.
So at this point, We've got customer forecasts and for the next several years And as we contract with those customers to try to meet their forecast over the next several years, that's where we kind of get our comfort in what we believe Demand is likely to look like for the next couple of years. I don't really want to get into describing for you on a public call Anything which somebody could determine specific to any one customer.
Okay, fair enough. And then similarly, I guess, you guys have announced an investor event on May 27. So, is there anything you can provide as far as a preview as to what you'll discuss there, maybe on financial strategy or at least The portfolio as you see it now, maybe you could touch on those 2 and or maybe even CapEx as well? Thanks.
Well, I certainly think you'll get a full review of all the businesses we have remaining in the portfolio ex the European Sim Plate. You'll get a view as to where we see capital for the balance of this year and some of the projects we're working on. And I think it's been a It will have been about at least a year and a half, is it a year and a half or two and a half years since our last investor event. So it's probably time to do it And describe for you what the company looks like in percentage terms of revenues and EBITDA From the various businesses and frankly hopefully try to reeducate or begin the education process for some of you that are new To the story of about Transit Packaging. So again, we understand it's not well understood by many in the analysts or investment community.
It's And the reasons for that, there is no public comp. So just to again reeducate or begin the education process along that line of business.
Okay, guys. Thanks a lot.
Thank you.
The next question comes from the line of Gabe Hajde, Wells Fargo Securities. Your line is now open. You may proceed.
Kim, Tom, good morning. Thanks for taking the question. Good morning, Gabe. As kind of previously stated, a lot of questions have been I'm going to try to take another stab at the strategic review. And I don't think many investors would dispute kind of the financial profile of Signode and the apparent more resilience in the face of a recessionary environment.
But I do think some people kind of scratch their head having a consumer based packaging business is married up with an industrial operation. So, and I appreciate that you wouldn't want to market that business on trough earnings and perhaps Depressed multiples. So I guess more directly is the strategic review that you guys initiated back in November, is that complete? Or is there still kind of more work being done behind the scenes on any of the businesses?
As I said earlier, I don't think it's ever complete. I think the Board and the management are always looking at all the assets in the portfolio to determine the best use For the company's assets and do you want to convert do you want to trade that for cash or do you want to continue to operate it? I wouldn't call this an industrial business. I'd call this an industrial packaging business. So it is a packaging business.
It's just it's a different packaging business than beverage cans. But I would tell you that food cans is a different packaging business than beverage cans. There's nothing similar about food cans and beverage cans other than they're both cylinders, But their manufacturing processes are different, customers are different, market strategies are different, the seasons are different, The materials are different. So it's a different packaging business, not unlike food and beverage cans or different packaging businesses.
Fair enough. All right. And then, I guess on the hard seltzer point, maybe some folks are scratching their head in terms of our U. S. Consumers really drinking that much more, is it displacing other beverages, etcetera?
And maybe this is a delicate subject, not asking you to speak on behalf of your customer strategy, but it seems as if some of these hard seltzers might be is being imported into other countries similar to kind of a certain energy drink strategy 15, 20 years ago. So I'm curious if some of the growth that you're seeing in North America is some of that in fact perhaps earmarked for other parts of the world On some of these new product introductions.
I think the if you're talking about cans that are sold in the United States that are then filled Here in the next quarter, I think that's probably happening, but I think it's a pretty small number. I think there's no doubt that the pandemic Has people drinking more at home than obviously on premise since most bars or many bars have been shut down. As opposed to drinking draft beer or bottled beer, you're drinking canned beer at home. As opposed to drinking a gin and tonic or a vodka soda, You may be having a seltzer at home. I do think that when bars reopen, I think There is a segment of the pop consuming population that are going to continue to drink these spiked seltzers and these spiked seltzers are served in cans whether they're served in cans in House or in a bar.
So I think from that standpoint, I think we think the spiked seltzer phenomenon is here to stay for a while. There are obviously as bars and restaurants reopen, consumption of canned beverages will be lost to other substrates or draft. But I think as I said, it's going to happen in a phased way. I don't think we're going to see a big event and I think that natural growth, it will be kind of lost in natural growth. We're not going to feel any real volume turned down in our business from that.
Understood. Thank you. Thank you.
Session. The next question comes from
the line of Adam Samuelson, Goldman Sachs.
Session. Your line is now open. You may proceed.
Yes. Thank you. Good morning, everyone. Good morning. A lot of ground has been covered, but Why don't we come back to the operating profit margins in both Americas Beverage and European Beverage in the quarter?
And I'm just thinking about especially in Americas, 14% revenue growth, 40% profit growth, That incremental margin on I think you said 9% volumes would seem very high for the normal incremental contribution margin we would think in your business. And Just help us think about just price mix, cost reduction, just trying to think about the drivers of the significant operating leverage you saw in America's beverage and same story again in European beverage too. Just trying to make sure I'm Yes.
So I mean last year we installed Line 3rd production lines in 2 of the facilities, 1 in New York, 1 in Toronto. So the as you might imagine, You put the 2nd or third line into a plant, the contribution is certainly much greater than a one line plant And even more so when you spread cost out from a 2 line plant to a 3 line plant. And as I said earlier, we've been reducing costs throughout the entire system every year as all the can companies do. It's incumbent upon us to reduce our cost To provide the lowest cost option to our customers. So that just speeds through.
The big thing in Europe year on year is We have a big beverage can plant in Seville, Spain. It was not in operation last year at all in the Q1. We were converting the lines from steel to aluminum. And so that plant is now back in production and you couple that with volume growth not only in Spain That's right. The Mediterranean but also in France and the U.
K. And when you cut costs and then you have volume come through, it really does fall to the bottom line. It's not much more complicated than that.
Okay. That's helpful. And just one quick follow-up, just North America, you talked about 12% volume growth. Were import levels in the Q1 similar to what you experienced in 2020? Are you seeing that start to get Backfilled with domestic capacity, are we still running kind of a similar level short versus
So we did not really begin importing cans in The U. S. Until the Q2 last year, when the Mexican and Brazilian businesses were The beer industry was shut down in those countries for a period of time during the second and third quarter. There were some imports into the U. S.
For Crown at least in the Q1, but not very large. There will be Imports this year into the U. S. From other regions, but significantly lower than we had last year.
Okay, great. Thank you very much. I'll pass it on. Thank
you. Next question comes from the line of Jeff Zekauskas, JPMorgan. Your line is now open. You may proceed.
Thanks very much. What were the after tax proceeds Of the tinplate sales of the tinplate business? And what other revenue subtractions need to be made In the other segments outside of European Food to correct for the divestiture?
Boy, The revenue off the top of my head I don't have. It's about
$200,000,000 in aerosol and No, no, no, no.
Is it really? Yes. For a full year?
Yes. Yes. And then Promotional is less than €100,000,000 right? On the after tax proceeds, we talked about 1,900,000,000 Euro in the release pretax. The tax on that should be less than $100,000,000
Less than 100. Okay. And then for my follow-up, thank you for that. Other competitors have announced Very, very large capacity additions. Have those announcements in any way changed your strategy Or maybe you think differently about the longer term tightness of the beverage can industry?
Not at this time.
Okay, great. Thank you so much.
Thank you.
As of now, we don't have any question
in queue. Speakers, you may proceed.
Thank you, Dale. So that concludes the call today. We'll speak with everybody again in May during the virtual investor event. Thank you. Bye now.
Session.
And that concludes today's conference. Thank you all for participating.