Good morning, and welcome to Crown Holdings' Q2 2021 conference call. Your lines have been placed under 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 Kelly, Senior Vice President and Chief Financial Officer. Sir, you may begin.
Thank you, Harley, and good morning. With me on today's call is Timothy 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 in our SEC filings, including in our Form 10-K for 2020 and subsequent filings. Earnings for the quarter were $0.95 per share compared to $0.94 in the prior year quarter. Adjusted earnings per share increased to $2.14 in the quarter compared to $1.33 in 2020.
Net sales in the quarter were up 34% 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 $395 million in the quarter, compared to $250 million in the prior year, primarily due to higher sales unit volumes, including recovery in many locations affected by COVID in last year's second quarter. As outlined in the release, we currently estimate third quarter 2021 adjusted earnings of between $1.90- $2.00 per share. This estimate includes the results of the European Tinplate operations through August 31st. We are increasing the midpoint of our full-year adjusted earnings guidance from $6.70 per share- $7.35 per share, again, assuming the sale of the European Tinplate business closes at the end of August. Our expected adjusted tax rate for the full year remains at 24%-25%.
I'll now turn the call over to Tim.
Thank you, Tom. Good morning to everyone, and thank you for joining us this morning, and our continued best wishes for the continued health and safety of you and your families. As reflected in last night's earnings release, the company recorded another strong quarter for the three months ended June 30th, 2021. Despite numerous transitory headwinds such as supplier and transportation delays, COVID lockdowns, and cost increases, our global associates continue to rise to the challenge of supplying our customers with high-quality packaging products in a safe and timely manner. Demand remains strong across all product lines and geographies, and importantly, the company continues to convert this growth into record earnings.
Average segment income from continuing operations over the last four quarters or last 12 months June 2021, is approximately $100 million per quarter higher than the average of the four preceding quarters or LTM June 2020, with approximately $60 million of that income growth found in the Americas Beverage segment. Clearly a step change in our earnings output. We look forward to commercializing significant new capacity in the second half of this year into next to take the next step change up. The results of the European Tinplate operations are now shown as discontinued. Had the business been included in continuing operations, LTM June EBITDA would have approximated $2.1 billion. Before reviewing the operating segments, we remind you that delivered aluminum in North America is approximately 65% higher today than at this time last year.
LME and delivery premium are contractual pass-throughs, so reported beverage revenues reflect both the volume increase and the higher aluminum cost. As last year's second quarter was the so-called COVID quarter, we will also provide beverage growth percentages for the first half of 2021 versus the first half of 2019 to give a bit more information, perhaps relevance, related to our beverage can unit volume growth. In Americas Beverage, demand remains strong across all the markets we serve, with overall segment volumes up 18% compared to the second quarter of 2020. First half 2021 versus first half 2019 volumes advanced 19%. As described previously, we expect demand will continue to outweigh supply for the foreseeable future. Commercial shipments from the first line of the company's new beverage can plant in Bowling Green, Kentucky, commenced in June, with shipments from the second line scheduled to begin in September.
The third line in Olympia, Washington, and the second line in Rio Verde, Brazil, are now scheduled for an early fourth quarter startup. As previously announced, the company will commercialize five new can lines in 2022. New two-line beverage can plants are being constructed in both Uberaba, Brazil, and Martinsville, Virginia, along with a second can line being installed in Monterrey, Mexico. Additionally, the company announces today that it will construct a new two-line beverage can plant in the Southwestern United States, with commercial shipments commencing late second quarter of 2023. Customer commitments have already been secured for the plant's production capacity. Unit volumes in European Beverage advanced 28% over the prior year second quarter and 14% for the first half compared to the first half of 2019.
Income reflects contribution from the volume growth, which was recorded throughout the segment. Asia Pacific recorded 15% volume growth in the quarter and 8% for the first half versus the first half of 2019, as most operations across Southeast Asia were able to grow despite numerous COVID lockdowns and movement control orders. We do expect both Crown and customer operations to be subject to various and intermittent COVID lockdown measures throughout the balance of the year. Commissioning will commence at the new plant in Vũng Tàu, Vietnam, in September, with customer shipments beginning in October. Results in transit packaging were significantly higher than last year and in line with our expectations as strong demand for transit products and solutions mirrored the surge in overall industrial activity.
The business did well to navigate transportation delays, cost increases, and supply shortages, and is well-positioned for continued earnings growth as these conditions gradually ease.
We expect earnings growth in the back half of the year to approximate first half growth. Demand remained firm across North American food and aerosols, along with the beverage can equipment making businesses. In summary, a record first half for the company. New capacity was commercialized during the quarter, and significant new capacity will be commissioned over the back half of the year. Importantly, we continue to convert growth into expanded earnings and cash flow. Segment income and adjusted earnings in the first half up 50%-60% over the prior year, and leverage at 3.6x after repurchasing $300 million of company common stock is ahead of plan. As Tom discussed, we have raised full-year guidance and the expected closing of the European Tinplate sale still remains in the third quarter. With that, Harley, we are now ready to take questions. Thank you.
Certainly. We will now begin the question and answer session. The first question is from Michael Leithead from Barclays. Your line's open.
Great. Thanks. Good morning, guys, and congrats on the quarter.
Thank you.
Tim, I think you touched on some of the supply chain disruptions that you overcame in the quarter. I was hoping you could talk a little bit more about where you're seeing that. Is it quantifiable how much you maybe left on the table or missed out on this quarter because of some of these disruptions? Does that just get pushed into the third quarter? Just any way to kind of help us think through that?
I would say that, I think you're all well aware of there are container shortages globally. Suppliers getting containers to move product around has been a challenge. With the rapid restart of the economy both here and in Europe, component manufacturers are overwhelmed, their ability to manufacture components for assembly for us, for example, in our beverage can equipment making business and/or the transit business is a little bit delayed. Construction steel, other construction products, whether it's lumber, cement, drywall, all of that in high demand and a bit delayed. Clearly, the biggest impact we had in earnings would've been in the transit business, and maybe that's a handful, $5 or $6 million. It probably gets pushed into the next several quarters, not just the back half of the year, the next several quarters.
There's a limitation as to how much our teams. If we received everything we were waiting on tomorrow, there's still a limitation on how much our teams can process at one time as well. That'll take a little while. Given the performance and the trajectory of the overall company and each of the individual businesses, I'm not overly concerned about it. We are in the business of providing service to our customers, whether that be high-quality products or service. You always hate to tell the customers they're going to have to wait or turn customers away. They're hearing it from all of their suppliers, and we're hearing it from many of our suppliers, as I expect many companies are.
Great. That's helpful color. Maybe a follow-up question for Tom. I was hoping, could you give us how much the pass-through of aluminum and other input materials boosted sales year-over-year in the quarter? I was just hoping to get a cleaner look at overall incremental margins of the business.
Yeah, I don't have that in front of me, Mike. I can follow up post-call on that.
Got it. Thanks, guys.
Thank you.
Thank you. The next question is from Arun Viswanathan of RBC Capital Markets. Your line is open.
Good morning. Thanks for taking my question. Congrats on the strong results.
Thanks.
I guess I just wanted to understand, maybe get your thoughts and perspective on some of the scanner data. We've obviously seen some conflicting reports on volumes, and those are up against some tough comps. When you think about your own kind of beverage can volumes, you're obviously up nicely year-on-year. Where would you expect those volumes to kind of, I guess, shake out over the next couple of quarters? Would you expect similar kind of percentage gains within your own system? Again, could you help us kind of understand or maybe just offer your own perspective on what we're seeing in the scanner declines as well? Thanks.
We provided you not only the second quarter volumes versus the second quarter of last year, and I don't want to say it's not relevant, but clearly the second quarter of last year had a large event that none of us anticipated at that time, making the comparisons very easy this year. It's why we gave you the first half of 2021 versus the 1st half of 2019. You get a better picture of perhaps, it forces you to extrapolate what growth is because it's over a two-year period. Nonetheless, it's extremely significant, especially for a packaging business. The growth, we continue to expect growth across the businesses, all of the businesses. Perhaps the Asia business will be a little slower, depending on some of the COVID lockdowns, but we expect significant growth through the back half of the year.
It will not be at the second quarter levels because the second quarter last year was so depressed in certain markets. Significant growth. We are still turning away, unfortunately, in Europe and the Americas, we are still turning away customer requests. We're still importing cans into the United States, not quite at the level of last year. Fairly close. Demand remains high. I understand some of the scanner data may have some of you worried. I'm not sure that scanner data includes all retailers. When it doesn't include all retailers, especially the largest retailer in the country, you need to try to find another way to measure it. I can tell you where our company sits and within our industry, what we're hearing from our customers, they are desperate for cans.
We're desperate to get as much capacity up and running as quickly as we can. The growth outlook for us remains very strong.
Okay, great. Thanks. As a quick follow-up, maybe I can just ask a question on capital and cash. You'll be exiting this year at a relatively high rate of CapEx, and obviously, at your investor day, you kind of laid out a plan and outlook for capital from here on. You also have some new commitments as far as a dividend and potentially some stock buyback actions. Could you just kind of review the priorities for cash use at this point and where you expect to kind of finish the year on net debt and leverage? Thanks.
I think what we've said before is leverage we'd like to be in the 3x- 3.5x , and depending on how we see capital requirements going forward, that'll determine whether or not we're at the higher end of that range or the lower end of that range. I think we should be comfortably within that range by the end of this year, and it'll allow us to buy back a significant amount of stock. Obviously, we've initiated a dividend. The intention is to continue to pay the dividend, and depending on capital requirements going forward, I think the leverage is going to be where we want it by the end of the year, especially after the European Tinplate sale. The piece that moves around is how much stock you buy each year.
In other words, almost all of the free cash flow we generate each year will be used for dividends and share buyback. The one thing I'll say, I think some of you fellows that have been covering the industry for a longer time than some of the newer fellows and some of the newer investors on the buy side who are unfamiliar with the cash flow characteristics of a packaging company, especially a metal packaging company, you're not so comfortable with higher levels of debt. We have tried to maintain, and we still maintain, we never had a leverage problem. As you can see, even with buying $300 million of stock before the proceeds from European Tinplate, the leverage is 3.6x . Leverage is not an issue for a metal packaging company.
You may not like the time it takes us to get there, but we're fully confident we're going to get there and we're going to generate the cash. Now that we're there, we're going to buy back a lot of stock.
Thanks.
Thank you.
Thank you. Next question is from Kyle White of Deutsche Bank. Your line is open.
Thanks. Good morning, Tim, Tom. Congrats on the quarter.
Thanks.
Morning, Kyle.
I just wanted to walk through the guidance for the full year, the raise, specifically on the back half. Kind of get to about a $0.26 EPS raise for the back half. Just wondering how much of that is driven by having the European Tinplate results for July and August, how much is driven by some of the repurchases you've made in the quarter, and then just how much is driven by underlying business growth? Thank you.
The European Tinplate business, the two months is worth about $0.20. The residual is effectively everything else you mentioned.
Okay.
Improvements in the underlying business, net of anything going the other way.
Got you. I want to talk about Europe. You announced some new capacity here in the U.S. You haven't really announced any new capacity in Europe while other competitors or peers have. Are you concerned at all that you might be losing share in that region? Is it just a function of the markets you're in and the customers you have maybe not growing as fast? Is it just you'd rather allocate the capital to better markets such as Americas and Asia-Pac?
No, I think it's just a matter of timing. Don't go to sleep on us. That's all I'll say. With the exception of the one market over there that we don't participate in, we participate in the balance of the Western European market. Crown at the appropriate time will make those decisions and make those announcements. No, we're fully confident in our platform in Europe and the platform's ability to offer continued growth to the company.
Got it. Thanks. Good luck in the balance of the year.
Thank you.
Thank you. The next question is from George Staphos of Bank of America Merrill Lynch. Your line's open.
Hi, everyone. Good morning.
Good morning, George.
Thanks for the details. Congratulations on your progress so far. I want to come back to some commentary from last quarter and see what, if any, effect we should consider for the rest of the year in 2022 from your comments. Last quarter, you said you were worried a little bit about a pull forward of volume, accelerating volumes, and that was a reason why sequentially you were looking for a downtick in 2Q versus 1Q. As it turned out, that was not the case. You had a better quarter sequentially. Do we still have to worry about that pull forward, or are you less concerned about that in terms of the back half of the year?
Stretching a bit, recognizing it's not fourth quarter, do you think that given what you're seeing from customers, from your capacity plans, and your ability to allocate capital, that you should be able to grow through the dilution in 2022, considering European Tinplate won't be part of the portfolio?
I think that we had this discussion last quarter, because, and I understand the question, George. We're sometimes as baffled by the outperformance as you are. As I said last time that the reason why you're not overly ecstatic with it is it could go the other way, and then that's a more difficult conversation. Having said that, I would say as we look forward to the back half of the year, the amount of available capacity that we have to have an upside earnings surprise is significantly limited from where we were in the first quarter or even at the end of the first quarter. Then it's the Asian COVID situation across several of the countries. There were some lockdowns in Q2, but not to the extent that we were anticipating.
We do anticipate that across Asia and some of the markets, we're going to get more lockdowns. We have lockdowns in two jurisdictions right now for the next three weeks. That'll have an impact. The other thing is transitory inflation. We'll get the inflation back in the formulas next year, but there is some inflation in the business. Having said that, we're earning through it with the growth we have. Looking at the fourth quarter and into next year, do we have enough growth to earn through the dilution from European Tinplate? I think one of the ways you're going to earn through the dilution from European Tinplate is buying back a mountain of stock.
Yeah
It's not clear to me, George, that we're trading on a PE multiple anyway. Whether we post $7.50 or $7, it's not sure to me that anybody's really looking at an appropriate PE multiple for our company. I'd leave it at that.
Fair enough. Fair enough, Tim. For the record, not that it really matters for this call, your performance was better than expected, as was your guidance relative to our model, for what it's worth. Just for the record, what are beverage company marketing folks telling you about the outlook for new categories, new product innovation? In other words, is there something else that can take the baton or at least keep up in the race with spiked seltzers? What's your view on that on next categories, if there are any? Do we have to worry just about or expect just new flavors out of spiked seltzers to be the driver of can growth over the next couple of years?
I know of one. I don't want to talk about it because I don't want to expose the idea, which is specific to one customer or perhaps a group of customers. I think we should expect that the marketers are going to continue to try to develop. It doesn't mean they're all going to be successful, but they're going to continue to try to develop new products and new flavors, new mixed cocktails.
across a variety of whether it's real alcohol-based or some kind of mash of alcohol mixed with a variety of flavors, be it more healthy or less healthy. That's probably the wrong term to use, but I'll leave it at that. I don't think we see any shortage of ideas coming from them. Historically, we might have been worried about how much we are going to spend on incremental artwork for some of these labels. Given the strength of the market now, we charge for the artwork, so I'm not so worried about incremental artwork that we do if a product fails.
I think as we've said, we continue to maintain the outlook is really strong, and it's given the amount of imports we have coming into North America this year, I'm a little bit more bullish on the next 24 months perhaps than I was before, because it hasn't really slowed down from last year like I thought it would.
Thanks, Tim. My last one, and I'll turn it over, just from some inbound that we've gotten, can you update us on the portfolio and how you look at transit, how you look at North American Tinplate relative to the fit, the relevance, the importance in the portfolio, and in particular, what you think the trajectory for transit is over the next two years? Thanks, and good luck in the quarter.
Sure. The first thing I'll say is that we've pegged August 31st for the European Tinplate sale for the purposes of the discussion today. We're hopeful that it closes earlier than that.
I don't think it's going to close on July 31st. As we look at the other businesses in the portfolio, and specifically to your question, the non-beverage businesses, we've discussed previously that they don't require a lot of capital. The return on capital from those businesses is quite high, and the cash flow generated is quite high. To the extent that any organization has a lot of demands on its cash, be it a growth capital in one business versus another, and/or share buybacks, dividends, return of capital to shareholders, it's important, in our view, to have a well-balanced and businesses that generate a lot of cash flow, where you just tend the garden. You're not having to plant a lot of trees. For the time being, we're running those businesses as efficiently as we can.
I would like to have a discussion with all of you at some point, where we're able to demonstrate to you the upside to a business like transit packaging. For the time being, we're just going to tend the garden.
All right. Very good. I'll turn it over. Thanks, Tim.
Thanks, George.
Thank you. The next question is from Gabe Hajde of Wells Fargo Securities. Your line is open.
Tim, Tom, good morning.
Good morning.
Everyone that's important is doing well. I'm going to try to revisit a question that I think George started to go down the path of recognizing it's difficult to talk about some of these topics in a forum like this. I guess, is there anything you can share with us from customer dialogue that gives you comfort that the industry doesn't find itself in a meaningful oversupply situation in 18 months-24 months? Part of it is obviously predicting consumer behavior, but more talking about potential for substrate gains, or maybe the multiplier effect of pre-mixed cocktails that maybe we're under-appreciating, similar to what we're observing in Brazil that's happened over time with returnable glass.
We touched on this a bit last time, Gabe. I think, even as we come back from the pandemic, I think the spiked seltzers are one thing, right? Mixed cocktails are another. If you were a bar owner, when you think about people going back to a bar first, and if they're going to drink those products, they're going to be served in a can. They're not going to be mixed by the bartender. If you were a bar owner, it offers you the opportunity to control inventory, and control waste, and control theft in a much better way than bottles of alcohol would have to be mixed with seltzer out of a gun, et cetera. I think from that standpoint, we're not so worried about the reopening.
I think piggybacking on that, when you think about that, it offers a lot of upside to the can into the future. You're right. You never know what consumer behavior is going to be. I do think there's a large portion of the population, not only in the U.S., but especially in Europe, where habits have changed post-pandemic. We're not really post-pandemic, we're still in it. It's going to take a longer time for that to return to what we view as historical normal, than perhaps we anticipate. Yeah, there's always a possibility where, as an industry, we're going to overbuild, and I don't see that happening for the next two to three years. I think, as I've said, and I can only say it so many times, demand is going to far outweigh supply for the next several years.
You're not going to scare me right now by telling me some guy's doing this or some guy's doing that, and how do you feel? Where we sit today, we know we've got customers banging on the door every day looking for more supply, and we're not in the business of telling people no. We're not worried about it.
Okay. Thanks for that. I guess, early indications from on-premise and factory opening, I think going back to the scanner data, something that I don't necessarily think we have great visibility on, at least on the sell side, is obviously the supply chain is much different, and pipeline fill ahead of the July 4th holiday. From our research, I think that was pretty robust. Do you have any visibility in terms of, or anything to share with us, in terms of where those inventories are? Again, appreciating that, like I said, the Memorial Day holiday, I think, was somewhat missed, just given timing of reopening across the country.
Yeah. It's an interesting question because when cans are in short supply, typically the customers don't warehouse a lot of cans or warehouse a lot of filled product. Given the cans are in short supply, what I don't have a handle on right now is are they buying ahead and warehousing empty or filled cans for the balance of the summer into Labor Day because they're worried about supply? I couldn't honestly tell you, I can tell you that the demands on us have only increased from the conversation we had three months or six months ago.
Okay. Thank you.
Thank you.
Thank you. The next question is from Ghansham Panjabi of RW Baird. Your line is open.
Thanks. Good morning, everybody.
Morning, Ghansham.
Tim, what do you think is realistic in terms of the growth rates for the industry, specific to the U.S., in 2021 versus 2020? The new plant that you just announced, the two-line plant, is that for existing product categories, new categories that we just don't know about at this point, or a combination of the two?
I would say it's existing and new customers, but existing categories, Ghansham. I'm sorry, what was the first part of the question?
Just the industry growth rate.
Oh. The problem is the COVID quarter kind of screws it up, right? I would tell you that if last year we had, what did we have, Tom, 97 billion units, and with imports, we were about 108 billion units, 110 billion units?
112 billion units.
Is it reasonable to say that this year you could have 10% on 112 billion units? That seems like a big number. I think it depends on the supplier's initiation of capacity output. If we were apples to apples, I'd say that Crown is comfortable with 10% on its base. It could well be that we have 10% this year, but I feel more comfortable in the 5%-7% range as an industry.
Got it. In terms of the obvious, the Delta variant and the impact on lockdowns, et cetera, what are you seeing across the regions real time? Also in Brazil, I don't think you mentioned much about Brazil, but that country's going to lap some pretty significant comparisons for the back half of the year versus an extraordinary last year. Just your outlook for the back half of the year, specific to Brazil as well.
We're going to remain sold out in Brazil. The only headwind we have in Brazil is how quickly we get the second line up in Rio Verde. Clearly, the comparisons are much higher in Brazil. If we all had more capacity, it wouldn't matter. We're going to chew up all this new capacity. As quickly as we can make the cans, they're going to be taken by the customers. On the Delta variant or the other miscellaneous variants around the world, we've talked about Asia. The Asian governments are really trying to restrict the number of new cases. When I say restrict the number of new cases, you take some big Asian cities with several million people, they don't like to have 20 new cases. That's why the restrictions there are so much different.
The availability of vaccines and the availability of quality vaccines is much lower across many of these Asian jurisdictions than it is in Europe and the U.S. I'm not in Europe, and we haven't been able to get to Europe, so I'll pass on that for the time being. I would say in the U.S., I don't believe any of the governors want to go back to lockdown, and I would go as far to say to the extent that they were able to use lockdowns for whatever other political purpose they had, they've accomplished that other political purpose. They're not going back to lockdowns at this point. With some of the bigger cities, I know here in Philadelphia, we've got at least 60%-65% of the people fully vaccinated in the city of Philadelphia.
At some point, perhaps not popular to say, I don't really care. If you don't get vaccinated, don't complain when something bad happens to you. There's an opportunity out there for you to be vaccinated and for you to protect yourself and your family. If you're not willing to do that's on you. Don't ask the rest of us to suffer and delay living our lives because you've got some belief one way or the other where you don't want to take the vaccine. It's pretty clear, right? Drug companies aren't trying to kill us. They're trying to extend our lives so they can sell us more drugs. I haven't heard a good reason why people don't get the vaccination. I don't think, regardless of any of the variants, we might have some cities like Los Angeles that are forcing us to mask up again.
I don't think we're going back to any shutdowns in the United States anytime soon.
Got it. Thank you.
Thank you. The next question is from Jeffrey Zekauskas of JP Morgan. Your line is open.
Thanks very much. You spoke about your year-over-year can growth. What was your sequential can growth in beverage?
Oh, from Q1- Q2?
Yes.
Oh, boy. Hold on.
Q1 was up 8%.
No, no. Let me see. I know that was up 8%, but that's a meaningless number, right? It's got COVID quarter last year. I think what you really want to know is how many more cans did we sell in the second quarter than the first quarter?
That's it. That's the question.
19.5 in the first quarter.
Yeah. What I can tell you is globally, we're a little over 20%. Tom said 19.5%, but I think maybe it's 20%, not 19.5%. 19.9% in the second quarter, and maybe for the full year, we're 13.5%, something like that. If that gives you help.
Okay. I'll take what you're giving. In the quarter, what was EPS from continuing operations?
Sorry, what was the question again, Jeff?
Sure. In the second quarter, what was EPS from continuing operations, and what was EBITDA from continuing operations and pro forma if you didn't discontinue the Tinplate business?
The EPS is on the schedule, right?
Yeah.
The $214 from continuing operations.
No, exclusive of disc ops.
The earnings per share from continuing operations was $0.57. Discontinued was $0.37. I'm sorry, continuing was $0.97. Discontinued was a loss of $0.02.
No, adjusted.
Yeah, it's the $2.14.
Well-
Is the $2.14, $0.50 in disc ops and $1.64 in continuing operations? Is that the rough quarter impact?
Yeah. You've got to be careful with that because you have to pro forma disc ops doesn't mean what we're going to lose, right? You have to back out interest and everything else.
Yeah. On the face of the income statement, when we show you income from discontinued operations, it's not reduced by any interest expense. All the interest expense is up in continuing operations as required.
Okay.
Your second question was EBITDA for the second quarter from continuing operations?
Right, pro forma.
I don't have the first quarter press release in front of me. pro forma 12 months June.
I know pro forma 12 months.
Yeah. If you had the prior press release, if you backed out-
It's $559 for pro forma if you look at the prior numbers, but I don't know if that's correct. Is that the right number? Is it $559 for the quarter in pro forma?
No. What I was trying to say, Jeff, if we look at the first quarter, the LTM March EBITDA was $1,917, and that has food as continued operations, right? There were no discontinued operations.
Right.
Pro forma 12 months June is $2,081 billion. The second quarter, if we didn't have discontinued operations, the second quarter is $164 million higher than the second quarter last year. On this call, that's the best I can do for you without spending a lot more time.
Fair enough.
don't want to spend.
Okay. Thanks very much.
Thank you.
Thank you. The next question is from Mark Wilde of Bank of Montreal. Your line is open.
Thanks. Good morning, Tim. Good morning, Tom.
Good morning.
Good morning.
First of all, Tim, did you provide a capacity number for that new Southern U.S. plant?
I would tell you to think about 2.5 billion, very similar to Bowling Green and/or Martinsville.
Okay. All right. That's helpful. In Transit Packaging, when you acquired the business, I think you were pointing to about $85 or $90 million a quarter in EBITDA. Is that still a reasonable number in your view in light of kind of the efforts you've made to improve the business, or is it a little higher, a little lower than that going forward?
Yeah. I think where we see segment income plus depreciation, $90 million would be $360 million a year. We're going to be higher than $360 million this year, no doubt. We'll see what industrial activity is for the balance of this year and into next year and into 2023, but there's no reason why that number shouldn't continue to grow, at least at GDP rates, until such time that we take a different view on how much we want to try to grow that business.
Would you say, Tim, just if we looked at that second quarter number, were there any pieces of that business that were still cyclically weak, or is that second quarter number reflect the business is pretty much up and running full?
There's nothing cyclically weak. What is a little depressed is the equipment business, just because we're having issues on the supply side from our suppliers getting components and other items. I estimated that maybe at about $5 million earlier during the call.
Yep. Got that.
Demand is exceptionally strong. As I said earlier, even probably far stronger than we can handle right now with the folks we have in place, if we had all the supply. We don't have all the supply.
Okay. The last one from me. Is it possible for you to just talk with us broadly about what Crown is doing to help boost the recycling rate for North American beverage cans? I think that's running about 50%. I wondered, given the energy intensity of aluminum cans, if we continue to landfill 50% of all of them, is this going to somehow threaten that whole sustainability argument around cans if that rate isn't moved over time?
Oh, Mark, we did this last time, and when I went back and thought about it, a thought crossed my mind that you're a shill for the paper industry. I'm
You're a better business.
One thing I feel really good about is the paper guys are never going to find a way to package carbonated beverages. However, your question is a good question, and you and I had a disagreement on whose responsibility it is. No doubt the government is going to make it either our responsibility or our customer's responsibility, because we don't vote in elections. Individuals vote in elections. If consumers, who are individuals, don't start properly handling or disposing of products that have real value, in case aluminum has real value, then we're going to find a different answer. We have talked in the past about higher recycling rates in deposit states versus non-deposit states, and I don't really want to get on one side or the other of that issue because some of our customers have strong feelings of that.
My view is if we're going to have deposits for aluminum cans, you better start having deposits for everything else that goes into the waste stream. It's not fair to pick on one substrate.
Okay, fair enough.
What is Crown doing? We sponsor a number of efforts around the organization nationally and internationally. We do it not only individually as a company, but we do it in coordination with the Can Manufacturers Institute as well.
Okay, fair enough. Thanks, Tim.
Thank you.
Good luck in the second half.
Thank you.
Thank you. The next question is from Neel Kumar of Morgan Stanley. Your line is open.
Great. Thanks for taking my question. In terms of the 18% segment volume growth year-over-year in Americas Beverage, can you just break down the volume growth in North America, Brazil, and Mexico?
Yes, I could. I think you're going to have exceptional numbers in Mexico and Brazil because those markets were so depressed last year. That was the COVID quarter. Many of our alcohol customers were shut down. A lot of those cans were made. They were sold in North America. I would say the North American number in the high single digits, the Mexican and Brazil numbers high double digits. When I say high double digits, I mean high double digits.
Okay.
As I said earlier, Neel, I don't want to characterize some of the growth rates in the second quarter as meaningless, but when we start seeing numbers like that, they're somewhat meaningless because of what the COVID quarter was last year.
Right. That makes sense.
Here's what I'll tell you. If we looked at the first half of 2021 versus the first half of 2019, Mexico and Brazil are up high single to mid double digits in that period, so growth still quite high. North America up more than 20% over that period. I think it's a more relevant measurement period than comparing against the second quarter of last year. We can sit here and talk about unbelievable growth rates that mean nothing because you can't model them forward.
Right. That makes sense. Then just in terms of beverage can imports, I know you mentioned that Crown's beverage can imports are a bit lower than last year, but it seems that imports for the overall industry are up significantly year to date. I just wanted to get an estimate of how many cans could potentially be imported this year versus the 7 billion-8 billion cans imported last year. Are you seeing any evidence of beverage customers having to independently source cans from abroad as you and the other large producers are generally sold out?
Yeah, I didn't mean for you to think that we're importing a lot less cans. We're importing a lot of cans this year, again, slightly below what we imported last year. I don't know what the industry imports were last year. You mentioned a number of 8 billion cans. If that's the case, we probably imported 25% of those. I can't tell you what the other guys did, but we're still importing an extraordinary amount of cans this year. There are customers out there trying to make their own deals to import cans because we and the other global manufacturers, there's only so much we can do.
Great. Thank you.
Thank you.
Thank you. The next question is from Alton Stump of Longbow Research. Your line is open.
Great. Hi, Tim and Tom. Thanks for taking my question. Of course, you guys pretty much beat every segment versus expectations. The big surprise to me was the European Bevcan volume number, and particularly the first half of 2019 being almost as strong as Americas. I guess, what drove?
Certain region where you are seeing strength to drive that huge growth of mid-teen versus first half of two years ago?
There is growth in the market, and even prior to all this beverage can euphoria, there's been consistent 3%-5%, 4%-6% growth across Europe year in and year out for the last decade or decade and a half. Couple that with, we have installed new capacity throughout our European operations. Although we don't have anything announced right now, between 2019 and today, we put a new two-line can plant in Valencia, Spain, and a new one-line can plant in Parma, Italy. We have new capacity. That would be specific to Crown. That'll be the reason why our growth numbers are pretty high compared to the first half of 2019.
Great. Makes sense. As you just referenced, you of course haven't announced any capacity. Just how soon might that be coming? How big is the need over the next 12 months-18 months to add capacity in Europe in your view?
I guess we're not going to talk about that right now. We'll let you know in due time.
Okay. Makes sense. Thanks, guys.
Thank you.
Thank you. Next question is from Anthony Pettinari of Citigroup. Your line is open.
Good morning.
Morning.
At the Analyst Day, you talked about expectations to grow global beverage can volumes, I think by 10% in 2021. I think in your response to Jeff Zekauskas, you talked about maybe being able to grow 13%+, if I heard that right. That's the first question. To the extent that there has been that change in view, is it primarily driven by better than expected demand, or is it really driven more by better operations in terms of getting some of these plants up earlier than expected and running well?
What we said was, I think Jeff was asking the rate of growth in the second quarter versus the first quarter, and what we said was the second quarter was up about 20%, and year-to-date June, we're up about 13% or 13.5%. Clearly the second quarter had higher growth than the first quarter, some of which is due to COVID. I still think we're going to grow in the third quarter and fourth quarter, but those growth rates in the third and fourth quarter will not match the growth rate in the second quarter because of the comparison to COVID. I think on a global basis, perhaps, 10% or 11% is still a reasonable number.
Okay. That's helpful. We've read about increases in construction costs, whether it's materials or steel or labor. When you look at the cost of constructing and staffing a greenfield bev can plant, maybe compared to a couple of years ago, is it up 10%-15%? Is there any kind of color you can give us on that? In terms of impact or risk from rising construction costs to CapEx guidance and maybe the longer term CapEx goals that you articulated at the Analyst Day, any thoughts there?
Where we sit today, it's plant specific because we expect some of this will I don't know if the steel guys are at their apex yet, they might be at their apex. As we sit today, if I sat down to sketch out a plant cost today versus what we thought a plant was going to cost us to build two or three years ago, it could be 20%-25% higher today than it was two or three years ago. I don't think we're going to stay at that level over the next several years. I don't think we need to adjust our long-term capital planning to take that into account. I think we're going to get a reversion on some of that.
The risk to the company by spending an extra $30 or $40 million to build a factory today versus two or three years ago, I think you need to look at that risk over a 40-year to 50-year period. When you build a factory for beverage cans, you plop it down in a place, and as we've said before, it's not like moving a call center, right? It's not like moving all you fellows out of New York City to Hoboken. You're not going to move a can plant. That plant's going to be there for 40 years or 50 years, so we're not going to get overly excited. We don't like it, but we're not going to get overly excited nor change our strategy as relating to trying to service our customers.
Okay. That's extremely helpful. I'll turn it over.
Thank you.
Thank you. Next question is from Adam Samuelson of Goldman Sachs. Your line is open.
Yes. Thank you. Good morning, everyone.
Morning.
A lot of ground's been covered. I really just want to clarify. On the guidance in one of your other comments, you mentioned that about $0.20 or of the 25% or so increase in the implied second half guidance is really a reflection on the treatment of the divestiture and the timing impact. Separately, you just said that in May, you thought global can volumes for the year would be up 10%, and you thought that was still a pretty good estimate, maybe 10%-11%. I'm just trying to make sure I'm characterizing that right, especially given the magnitude of the second quarter outperformance. Is the view, have you tempered your second half volumes if you exceeded the full year range by so much in the second quarter? Just trying to make sure I'm comparing apples to apples there.
No, the comparisons in the second half are much different than the comparisons in the first half, specifically the second quarter, right? You've got growth rates in some of the locations that were severely impacted by COVID last year in the second quarter. You're not going to have those same growth rates in the second half because those markets came back in the second half of last year. While there's still going to be very good growth in the second half, you just can't have another COVID quarter, nor do we want another COVID quarter.
That I get. Maybe framed differently, then, is it that in the guidance that you've given for both the second quarter and frankly for going back for the first quarter, which you meaningfully exceeded in both cases, is the real variance you had left a good amount of volume contingency out of your formal guidance because you were uncertain about the macro and ultimately mobility was good, demand was good, and operations ran well, that you were able to outperform your initial expectations in both the first and second quarter?
Yeah, I think we're doing our best to bring capacity on as quickly and as efficiently as possible. If we're up 13.5% through six months, maybe for the full year, we're going to be up 11.5% or 12% or 13%. As I sit here today, I'm telling you it's 10% or 11%. It really depends on how quickly we can get the capacity up and running and how efficient the factory is when it comes up and run. We have a lot of capacity coming up in the second half. I have no doubt that whatever we bring to market, we're going to fully sell out. It's a function of how quick we can get it up.
Thank you. Any additional questions, Adam?
Oh, sorry. Yeah, that's very helpful. Thank you very much.
Thank you.
Thank you. The next question is from Adam Josephson of KeyBanc. Your line is open.
Thanks. Tim and Tom, good morning. Hope you're well.
Morning, Adam. Thank you.
Just a couple guidance questions. Tom, just on the buyback, can you clarify what you're expecting to buy back this year? Is it just the $379 or an amount significantly greater than that as part of your full year guidance?
As Tim was saying, we're kind of solving for the leverage. If we want the leverage to be 3x-3.5x, pick the midpoint of that. We'll buy back stock such that we're about 3.25x. The $379, there will be more to come as we go through the last six months.
Got it. Okay. Tim, on the 3Q guidance, similar question to what came up on the last call, which is normally your 3Q earnings are higher than your 2Q earnings. I know you're losing a few cents, I assume, in September from the presumed absence of European Tinplate. Can you just, again, remind me or help me understand why the implied sequential earnings decline? I know you said you think you'll have some production constraints, which I think you thought as well going into the second quarter. You talked about inflation, but I think you also talked about your expectation of inflation last quarter, and obviously you ended up beating your guidance quite significantly.
We've modeled and given you a forecast, assuming we keep European Tinplate through August. For most of you who followed us for some time, you know the European food business is heavily weighted to the third quarter, and it's heavily weighted to September. That's a fairly good size number. I think that as we sit here, there are areas where there is inflation in the business, and it'll take us till we get the contract risers the opportunity to do that next year to recover that. I hope we're being a bit cautious, but we'll see.
As I said earlier, one of the big things, Adam, is that the available capacity in the third quarter to outperform what you or I would forecast, the available capacity is lower because you've already built into your forecasts that you're going to sell everything and more that you can make in Q3.
Got it. I appreciate that, Tim. Just longer term one on CapEx. I think you talked about $900 million this year, and obviously you just announced new plants come 2023-ish. Is there any reason to expect a decline in CapEx from this year's presumed levels of $900 million over the next, call it, two, three years?
I think as I sit here today, I could comfortably tell you that we expect to spend similar or more next year.
Beyond that, my crystal ball is not that good, so we'll see.
Tim, just one last one on the cash flow issue. Just given the new assumed closing date of the deal, any thoughts on what your cash flow might look like? I know working capital's going to be messed up. There are other issues that are going to be messed up. Any thoughts on what cash flow's likely to look like given these myriad issues?
Yeah. Again, the food business, a lot of shipments over the summer, and the cash flow is lower because you lose the earnings from the business for the last four months. Not only that, but the working capital true-up with the buyer happens within the purchase price mechanism, not through the cash flow statement, not through free cash flow. I think, again, I don't like to use the term meaningless, but it's not something that's meaningful for modeling purposes going forward.
Right. Appreciate it, Tim. Thank you.
Thank you.
Thank you. The next question is from Philip Ng of Jefferies. Your line is open.
Hey, guys. Thanks for squeezing me in. I guess you mentioned, Tim, your outlook for the next 24 months, a bit more bullish than you previously thought. Sounds like maybe you're a little less worried about the reversal from a reopening dynamic, but any more color on why you're a little more upbeat than you were, call it, three to six months ago on the demand side?
Well, two reasons. The one is that the customer requests for cans have not subsided at all. In fact, they're increasing. The level of imports that we and others are bringing in, again, are not really subsiding. Just as we talk to customers, and you think about what a reopening might look like or a delayed reopening might look like, it just gives you a little bit more confidence that even in a full reopening, the growth rates are going to far outweigh any impact from a reopening.
Got it. Were there any pockets that were more stronger, a bigger contribution? Is it any of these new products that we might not be as close to? Spiked seltzer seems to have moderated a little bit and maybe the reopening piece. I'm just trying to flesh out were there any variables or your customer base where you've seen a little stronger demand than you previously expected?
Yeah. Obviously they're not going to have the same growth rates that they've had in the past, right? They've had tremendous growth rates, but they're growing off a much larger base. From a can company standpoint, there's still significant unit volume growth. Sometimes we get hung up on growth rates, and we forget about absolute unit volume growth and the contribution we get from that. The demand has been across all products. Without saying something I don't want to say, I'll just leave it at that.
Okay. That's helpful. When we think about the back half of your guidance, a few of my peers have just mentioned that maybe the guidance looks a little more conservative, and there's different reasons why you're accounting for that. You mentioned maybe the capacity constraint provides a little more limitation for big upside surprises like we've seen in the first half. Appreciating you have some of that capacity coming on later this year, but when do you kind of expect that capacity kind of hit its full stride where you would have more optionality for upside? Is that early next year? Just any more color around that would be really helpful.
I'd like to think we are getting better, and I'd like to think we are getting better at bringing lines on and getting up through learning curve quicker and better than we have in the past. I think we are doing that. We have some locations around the world that do it much better than others. Far, it feels like the first line in Bowling Green is going real well. Are they able to continue that advancement through learning curve as well as they're doing on the first line when you complicate the plant and you bring up the second line at the same time? We'll see. Typically, we like to tell you that it takes us about 12 months to get through full learning curve. Some of the factories do better, as I said.
The only thing I can tell you is I know that all the teams are trying as hard as they can.
Got it. All right. Thanks a lot.
Thanks, Phil.
Thank you. Our last question is from Salvator Tiano of Seaport Global Holdings . Your line is open.
Yeah, thanks for taking my question. Just wanted to check a little bit on the new startups. I was under the impression that some of them were scheduled for Q3, so wanted to confirm that they are being delayed by a few months as most of the startups are now in Q4. Secondly, as we think about the startup expenses, do you expect most of them to align with the calendar of the startup, say Q4, or with the hiring and training in advance, could Q3 include a lot more startup costs than Q4? How should we think about that?
You are correct in saying that there's been a small slippage in bringing some of the factories up maybe a month or two from late Q3 into early Q4. Some of that has to do with raw material supply, building supply. Some of it, quite frankly, has to do with the fact that we're right in the middle of the season, and we're trying not to disrupt the plant from running at the highest efficiency it can possibly run at. On startup costs, the only thing I'm going to tell you is we don't talk about the impact of startup costs. We've been building plants, greenfield plants, for well over 20 years. We've added significant greenfield capacity to our platform globally in every market. It's something we do, and it's just something that's embedded in the forecast that Tom's provided you.
I don't think I have an answer for you as to whether there's more or less. It's part of the business when you bring up factories, and we're going to have enough growth and enough positive things happen that we don't need to talk about the impact from startup costs.
I think in the past you've mentioned also that you do not provide an explicit dollar number. My question here will be more about the timing. As we try to model it on our own and make our own assumptions, should we think that because these are early Q4 startups, that a lot of the startup costs will happen in Q3? Should we think that no, it's going to be in Q4, regardless of what amount it will be?
If you're going to model it, if you're starting the plant up in Q4, you're going to have a little bit of training and other expenses in Q3, and then as the plant comes up through learning curve, you've got significant expenditures in Q1 and Q2 until you get to breakeven. That's just all part of the number that you're seeing. I let you guys model how you want to model.
Okay, perfect. Thank you very much.
Thank you. Harley, I think you said that was our last call. Thank you very much, Harley. For all of you, that will conclude our call today. Thank you for joining us. We look forward to speaking with you again in October. Bye now.
Thank you, speakers. That concludes today's conference call. Thank you all for joining. You may now disconnect.