Good morning and welcome to Crown Holdings Second Quarter 2020 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 Kelly, Senior Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you, Lilly. Good morning. With me on today’s call is Tim Donahue, President and Chief Executive Officer. 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. For additional information concerning factors that could cause the actual results to vary, please refer to our press release and SEC filings, including in our Form 10-K for 2019 and subsequent filings. Earnings for the quarter were $0.94 per share compared to $1.02 in the prior year quarter. Comparable earnings per share were $1.33 in the quarter compared to $1.46 in 2019. Net sales in the quarter were down from the prior year due to the impact of the coronavirus pandemic on unit volumes, the pass-through of lower material costs, and $73 million of unfavorable currency translations. Segment income of $322 million in the quarter was below the prior year due to the impact of the pandemic on sales and operations and $11 million of unfavorable currency translation. At the end of the quarter, the company had over $1.8 billion in liquidity between cash balances and borrowing capacity under the revolving credit facility. And the net leverage ratio of 4.7x was well within the covenant requirement of 5.75x. As outlined in the release, we currently estimate third quarter adjusted earnings of between $1.50 and $1.60 per share and full year adjusted earnings of between $5.10 and $5.25 per share. These estimates assume exchange rates remain at the current levels and a full year tax rate of approximately 26%. We currently estimate 2020 full year adjusted free cash flow of approximately $475 million with approximately $600 million in capital spending. And with that, I will turn the call over to Tim.

Thank you, Tom. Good morning to everyone. Our continued best wishes for the health and safety of all of you and your families. Before reviewing the operating segments, I want to again take a moment to thank our global associates for their dedication during the current pandemic. You are needed, you are critical and you are essential to ensure that the global food supply and transportation support systems that so many take for granted operate without interruption. We know that many of you have been directly impacted by the virus and we continue to take measures and ask you to follow strict protocols to ensure your safety while in the workplace. From the beginning, our primary concerns have been the health and safety of our employees, their families, our customers and suppliers, and ensuring the liquidity of the company in order to maintain operations and support the essential needs of our customers. Again, thanks to all of you. When we last spoke to you in April, we described what we believed was going to be a challenging second quarter. In late March and early April, significant demand contraction was evident in our non-North American beverage can businesses. Fortunately, demand in those markets has snapped back a few weeks earlier than expected. The challenge now is meeting the outside requirements of our customers as they look to rebuild their supply chains after several weeks of mandated shutdowns. From now until the end of the year—and in almost every market where we produce cans—will be in short supply. In last night’s release, we announced the addition of two new beverage can production lines in North America. These projects, originally scheduled to commence in 2021, have been accelerated into 2020. As such, our capital requirements have increased back to the original $600 million estimate we provided to you in February. In Americas Beverage, overall unit volumes declined 3% as strong demand in North America was not enough to offset early quarter weakness in Latin America. Our North American shipments were up 16% as we utilized open Latin American capacity to fulfill U.S. customer demand. Beginning in mid-May, customers in Latin America returned to full operations, with demand now far outstripping production capacity. We fully expect that the cans available to support North America in 2020 will not be available in 2021 as those Latin markets returned to normal demand patterns. As such, we have brought forward our plans for the second line in Bowling Green as well as the third line in Olympia, Washington. As noted in last night’s earnings release, the third line in Nichols, New York began commercial shipments during the second quarter. While the second quarter was short of the same period in 2019, we expect the second half of 2020 will show growth versus 2019. European beverage was down 38% compared to the prior year, as segment income reflects demand weakness across all operations, except for Saudi Arabia and the UK. The demand slowdown we began to see in March resulted in overall volumes being down 12% in the quarter, as our operations in Southern Europe, including Greece, Italy, Spain and Turkey, all suffered from low economic activity, lower expected tourism, and lower consumption during the quarter. Currently, customer activity is strong, and as is the case in Latin America, demand is far beyond production capacity. The supply chain and the can industry, like many other industries, are extremely efficient. Because of this, we do not have the ability to make up for months of demand in a shorter period. This is frustrating for Crown and many of our customers. Perhaps if we are ever faced with such severe demand contraction with the possibility of such a sharp recovery, we and our customers will find a way to fairly distribute carrying costs so that inventories are available when needed. While initially delayed due to the virus, our engineers were able to complete the conversion of our beverage can plant in Seville to aluminum, adding much-needed capacity to the system. We expect the third and fourth quarters to outpace the respective prior year quarters. Sales unit volumes in European food advanced 10% during the quarter compared to a soft 2019 period. Initial plantings were low this year due to customer concerns over a shortage of necessary harvest labor as a result of virus-related border closures. However, we are three weeks into July, and demand remains very strong. The weather looks good, and all signs currently point to a good third quarter crop yield. Build inventories are expected to be very low from the 2020 season, and when combined with what our customers believe to be a more permanent consumer return to food cans, they are already discussing increased plantings for the 2021 campaign. We expect full year segment earnings to be slightly ahead of the 2019 level, implying that we will more than make up for the headwinds of first quarter inventory carrying costs. Sales unit volume in Asia-Pacific declined 7% in the second quarter. Shipments in China were up 11% and reflect that country’s apparent pandemic recovery, while Southeast Asia, with volumes down 10%, struggled in April and May as alcohol sales were prohibited across many locales to curb the spread of the virus. We expect gradual improvement in the third and fourth quarters as demand picks up across the region. Commissioning of the new beverage can plant in Nankai, Thailand was completed within the last two weeks, and we are currently in customer qualification. Adjusted for currency, sales in transit packaging declined 20% in the quarter, impacted by the shutdown of customers in many industries deemed nonessential and the general conservation of cash strategies employed by many companies to preserve liquidity. Demand for consumables, that is strapping film, began to show recovery in June, although our higher margin equipment businesses are still impacted by an inability to access customer sites in many cases. We expect income improvement in the back half of the year versus the second quarter, with significant income expected in 2021. Demand was firm in our North American food business, almost fully offsetting weakness in global aerosols. In summary, it was not the quarter we envisioned at the beginning of the year. However, our team did an outstanding job maintaining productivity and efficiencies in such a challenging environment. As Tom noted, we have reinstated guidance for the third quarter and full year based on what we see currently. Despite the pandemic, we came within 5% of last year’s currency-adjusted second quarter earnings performance and we currently expect full year adjusted earnings to exceed last year. We expect to generate significant cash flow this year, and with significant liquidity we continue to invest in capital projects where we see opportunities for growth and productivity improvements. Without Louis, we are now ready to open the call to questions.

Certainly. We will now begin the question-and-answer session. Our first question comes from George Staphos from Bank of America.

Hi, everyone. Good morning.

Good morning, George.

My question is, how are you doing? Thanks for all the details, Tim, and thanks for all you are doing on COVID. I will ask three questions. First of all, can you talk a little bit further on your comment on ways to distribute carrying costs in Europe? What you are getting at there, and what the implications could be later this year and really over the next couple of years? And then I had a couple of follow-ons.

Yes, George, I think it’s not specific to just Europe; it applies to Latin America as well. It applies to anywhere in the world. So I think we had a situation where we discussed this briefly on the April call. Somebody asked on the April call if we were still making cans and putting them in the inventory. The response was no, we are not, and the reason is we can’t afford the extra carrying costs. The margins in our business, George, are nowhere near the margins of our consumer product customers. They are currently frustrated that they can’t get all the cans they need to refill their supply chains after telling us that they didn’t need anything for three to six weeks. We are frustrated, as we are not in the business of telling customers no. If you go to a store, George, to buy a tie, and if you can’t find a tie you want, they try to sell you a different shirt so they can match the tie to that shirt. They are not in the business of telling you no. So that’s very frustrating. So having said that, the comment is nothing more than it is a comment. If you want cans available when you want them, understanding you want an efficient supply chain, you have got an efficient supply chain. However, the downside of the efficient supply chain is when something like this happens, and you tell us to turn off, and then we start turning back on, we can’t make up several months' worth of demand in a short period. I don’t want to go into any more than that, but the margins in business where they are selling product for $15 to $30 a case, they can far more afford carrying costs for warehousing of cans than we can. That’s all the comment was for.

Understand, Tim. Would this be something that you could adjust for if there was mutual agreement within the year or would it need to be something that would be more formal and therefore would have to be instituted as contracts rolled over?

Yes. So I think to answer your first question, George, building inventory and fairly distributing carrying costs does not need to be handled within a contract. That can be handled on a one-off bespoke basis with customers as they foresee the need for cans. So we will have customers no doubt who would be willing to do that. We will have other customers that are so fixated on cost that they forget they need to get product on the shelf. That’s just going to be an ongoing discussion, but there is nothing to say that can’t be done mid-season. That’s just good business practice. So on Signode, first on the order of working capital, you will remember last year we squeezed an incredible amount of working capital out of Signode, which was quite beneficial not only to the balance sheet last year but also to reset how we operate the business going forward. You're right, the pandemic is a little different than most recessions; in this recession, we have had entire industries, whether it be the auto industry, steel industry, appliances, just shut down—no activity whatsoever. Fortunately for Signode, they are providing products across a wide variety of industries. They have got some industries that are still serving, but a number of industries are shut down and are beginning to slowly open.

Thank you, guys.

Thank you, George.

Thank you. Our next question comes from the line of Mike Leithead from Barclays. Your line is now open.

Great. Thanks, and good morning, guys.

Good morning.

Question first on the free cash flow update. Can you help us with how much incremental CapEx you are baking into this guidance associated with your new announcements this morning versus maybe a weaker operating cash flow outlook?

Yes. First thing I will say, Mike, is we have to apologize because perhaps we weren’t clear enough to all of you in April. In April, we suggested to you that even in the face of the pandemic and given the severe cutback in beverage can demand across a number of businesses that we have around the world, such as Southeast Asia, Latin America, Europe, that with some adjustments to capital, we felt we could get close to the original $600 million free cash flow number. We should have been more specific around what we were thinking in terms of cutting capital at that time. And I guess because we were not, you all did not fully reduce capital expenditures to offset the operating income loss so the cash flow could get back to that number. So as we go back to full $600 million, I will tell you that as we sit here today, that $600 million is at least $100 million higher than we were envisioning when we spoke to you in April. I apologize perhaps we weren’t clear enough, but given the uncertainty and the lack of visibility that we all had at the early stages of the pandemic and our concern with liquidity, we were fully expecting to cut more out of capital and delay projects than we are now. I would tell you that at least $100 million of that is capital and the other $25 million will be working capital. Businesses in Brazil and Southeast Asia are quite large and they are typically larger in the January-February timeframe as they get near their holiday seasons of Carnival and Chinese New Year. So the inventory builds are expected to be exceptionally strong this year as people in those countries return towards more celebrations and gatherings as we hopefully get past this virus.

Got it. That’s really helpful color. And then just on some of the operational flexibility in Americas Beverage this year, could you maybe just give us a rough sense of how much you have had to ship from Latin America to the U.S. this year and how much the new additions next year should add roughly?

We want to be a little careful here. But the CMI earlier or later last week came out and felt the need to describe to its recipients that the industry in North America was going to import at least 2 billion units into the United States to cover demand outside demand again this year. That 2 billion units is not included in the numbers they forecast, so if in the first quarter the industry was up 8% and in the second quarter, we were up 3%, that’s 5.5% year-to-date. It does not include imported cans; it only includes cans produced in North America. In fact, growth rates are considerably higher than the number you are seeing as relates to Crown. It surprises me that CMI says 2 billion cans because we are not 50% of the market, and we would be at least 50% of that number. So recently we started to Toronto, the third line in Toronto back early in the first quarter. Towards the end of the second quarter, the third line in Nicholas came up. They will be going through a learning curve this year but hopefully are well through the learning curve. Our plans are much closer to full production levels next year. We will bring up Bowling Green, the first line in the second quarter and will get some capacity on the second line in Olympia later in the year. There will be a significant capacity that Crown brings into the system next year to offset what we brought in from Latin America. Having said that, our view is that this still will not be enough, given the trends we are seeing in the beverage industry in North America with spiked seltzers, sparkling waters, and stay-at-home consumption. Just as in Europe, I made the comment in Europe on European Food: what our European food customers believe is that there is a more permanent return to eating food cans at home because of the pandemic. I think we will see more of that in North America for some time. I think we will see extremely strong demand in beverage cans globally, especially in the United States.

Great. Thanks, Tim.

You're welcome.

Thank you. Our next question comes from the line of Brian Maguire from Goldman Sachs. Your line is now open.

Hey, good morning, guys, and congrats on the good results in a really tough quarter. Just wanted to ask about the margins and performance in Europe. The volume weakness may have impacted fixed cost absorption, but the margin at I think 11.2% or so was quite a bit lower than it’s ever been in the second quarter. So I was wondering if there were some impacts from the startup in the conversion in Spain that might have impacted it there. What might we expect from a more normal margin in that business in a seasonal quarter like 2Q?

So there might be some impact from the startup in Spain, but it all revolves around 12% volume decline. The fixed costs are so high, especially recently in the beverage can industry. There has been a lot of capital spent recently; so that all flows through the operating income because of the depreciation reflected in those EBITDA numbers. I would like to be able to tell you as I sit here today that at a normal volume quarter, it should not look any worse than what it has looked like in the past. I have stated that we have not been exceptionally pleased with the margin profile in European beverage, and so the European beverage margins do need to improve over time. The combination of returning volumes in an environment where the market continues to grow and the needs for the industry to get adequate returns to keep investing would tell me that what I would like for all of us to believe is that the margin should be better than we have seen historically in the second quarter. We will see if we get there.

Okay. And I just wanted to follow-up on the free cash flow comment from Michael’s question. So I take it that the $475 million of free cash flow implies that I think you were saying kind of $100 million higher CapEx or maybe $125 million higher CapEx than what you were contemplating three months ago. That’s due to the need for more capacity given the strong demand you are seeing and that sounds like maybe a $25 million swing on working capital. So, is that kind of $125 million most of the delta between what you would have thought you could have hit maybe close to $600 million before? Now it’s $475 million. Is that about it?

Yes, that’s exactly it. The original estimate was $600 million with $600 million of capital. So, we are back to $600 million of capital. We got about $25 million more working capital now due to Brazil, Vietnam, Southeast Asia, and the balance is just the flow-through of lower operating income. I think our original guidance was the midpoint of our original guidance was probably $0.30 or $0.35 higher than the midpoint of our guidance now. If you take $0.35 and work back up the income statement, you get to a pretty big number on operating income. So that’s the delta.

Got it. Appreciate it. Thanks again.

Thank you.

Thank you. Our next question comes from the line of Ghansham Panjabi from Baird. Your line is now open.

Hey, guys. Good morning.

Good morning, Ghansham.

Hey, so Tim, going back to your prepared comments and your characterization about the back half or at least exit run rates coming out of the second quarter. Is it fair to assume that 3Q will be the quarter where global beverage can volumes start to inflect higher again? It was down, I think 5% in 2Q?

On a global basis, we are going to be positive in the third quarter, Ghansham. I expect that every market will be higher than last year. I think some of the Southeast Asian countries, the recovery is a little slow, but on a global basis, we will be higher. The rate of growth perhaps is not as great as we have had in prior, let’s say, first and fourth quarters, only because of the available capacity we have. So, the growth rates in the second and third quarter are always going to be a little bit lower than growth rates in the first and fourth when demand is high, because there is more capacity available in Qs 1 and 4 than there is in 2 and 3.

Got it. That’s helpful. And then going back to North America, there is a lot going on with Bowling Green and Olympia, the line additions versus what you have already announced. For North America specifically as it relates to your production footprint for this year, what do you think you will exit in terms of units? What’s your best guess for 2021 at this point? And then just a high-level question as it relates to the fundamentals. I mean, obviously, North American beverage fundamentals were good to begin with and now you have the additional kicker, if you will, for home consumption due to COVID. Will there be a normalization period do you think coming out of the current situation? I’m just asking because you are adding capacity and then there is a new entrant potentially with CAN-PACK?

Pre-COVID, we were fairly bullish on the market. We told you, pre-COVID, we thought we would be up 10% this year just because of the capacity we are bringing on and we knew it was needed. Even without COVID, I think we would be capacity constrained as an industry. As it relates to the new entrant, we have one plant; they are going to build in the northeast part of the United States. We have a plant in New York, and we have one in Toronto. There are a lot of people who live between Washington DC and Toronto, so there is fair demand and demand for new products, be it seltzers, sparkling water, juices, teas, you name it. It’s one location. They will probably have, when they are fully up and running and they get through their learning curve, which they will bring volumes up in 2021, maybe by the end of 2022, they will be fully through their learning curve. The capacity they will bring up will be less than 3% of the market, and they will be located in one geography of the country. It’s a big country, so it doesn’t give me that much concern to be quite honest.

And your capacity footprint for 2020 to 2021?

I don’t – you mean how many points of how many cans we are going to have extra each year? We will probably have about 2 billion more cans this year in North America from our North American capacity; that does not include what we are bringing in from other countries. Next year, let’s say at least 1.5 billion; it really depends on how quickly we get the lines up and running. But whatever we can make, we can sell, and it’s just how quickly we can get through construction and customer qualification and get cans out the door. So it’s a significant amount of capacity continuing to be added.

Thanks a lot, Tim.

Thank you.

Thank you. Our next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is now open.

Great, thanks. Good morning.

Good morning.

Just wanted to get back to that last comment, so if you think about maybe this year, 2 billion cans in North America; next year, maybe a billion and a half extra. Would that imply that you should be up double digits in the U.S. next year as well?

Well, I think the answer is I would like to say yes. But I don’t think 1.5 billion is 10% of our current capacity, right? It’s a lower number. So, but I think 1.5 billion is probably 6% of what our current capacity is that, are we going to do better than 1.5 billion and get 2 billion? I don’t know. As I said, it depends on how quickly we get cans up. I feel extremely confident whatever we can make, we are going to sell. So if we can make 2 billion more, we will sell 2 billion more; if we can only make 1.5 billion more, we are only going to be able to sell 1.5 billion more.

And on that point, I guess, you have stated in the past that a lot of the new capacity is built on firm customer commitments. Are you still seeing that kind of agreement? Is it kind of three or five-year contracts? Maybe we can just discuss that a little bit.

We have tried, and you have seen in the results, the results of commercial negotiations over the last couple of years in North America; hopefully, you have seen that. For the most part, our customers understand that, as I made a comment earlier—many of these guys sell their products for $15 to $30 a case. $0.01 to $0.02 per unit, in a $15 to $30 per case sale price is not their problem; their problem is if they can’t get product on the shelf, they lose shelf space and lose market share. So hopefully, they understand that better, and I think they do. Customers right now understand, especially during this growth phase we are in North America, be it pandemic-related or not. I don’t think it really is. It’s a different function going on here. They know they need cans, so they are more than willing to contract right now to get cans. As for Europe, we have a sizable business in Europe, but we are only the third supplier, so it’s pretty tough for us to force that step change in Europe.

Okay. And then I guess I just wanted to ask about Signode as well. So, how would you characterize Signode? Do you believe Q2 results are kind of at the bottom and activity rates have started to inflect higher globally? I know it’s a relatively short cycle period business on the consumable side and the strapping side, so what are you seeing there? Are you seeing kind of it should give you some decent visibility into order patterns? I mean, are you seeing a resumption of higher activity levels across different geographies in Signode?

As I said in the prepared remarks, we are starting to see strapping film. The order patterns are strapping film improve, and that will continue. I think there are still some countries in Europe and perhaps in India where it’s still a little slower than we would like to see, but they are going to come back. The challenge we have is on the higher margin business, the equipment business; just like all of you, or let’s say you are not welcome at your investor customer offices, you are doing everything remotely. Our engineers and installers are also not welcome at many customer sites. So an inability to access customer sites is making it difficult for us to continue to drive equipment sales. That will return. The income numbers in the third and fourth quarter are expected to be better than the second quarter, and obviously, we expect 2021 to be significantly better than 2020.

And then lastly, if you can just provide any update on the strategic review, is there anything else you can share with us there?

No, I think what I said in April and I will say it again, there is a lot of work that goes behind the scenes to prepare any business you might have for a review, and a review encompasses from the beginning to the end. We continue to do that work. As you will appreciate, there is not a lot going on in the M&A space right now. We are not in the business of destroying value; we want the share price to be higher just like you do, but we are not in the business of destroying value for our shareholders. We will operate the business as best we can, generate as much cash as we can, and we will see what the future brings us.

Okay, thanks.

Thank you.

Thank you. Our next question comes from the line of Gabe Hadey from Wells Fargo Securities. Your line is now open.

Good morning, Tim. Hope you guys are well.

Hi, Gabe.

I guess I wanted to dial in a little bit, Tim, on the commentary made about Europe food. This is encouraging in my mind given the past two years of challenging crop yields. So, if I look out into 2021, can you help us frame up maybe if volumes are up again? I don’t know, mid-single digits or something like that. Again, I know there’s a lot of uncertainty out there with what gets planted and if weather cooperates. Are you seeing potential for the commercial environment to improve over there as well such that margins start to march back to maybe where they have been in the past?

We fully expect them to plant more next year than this year. This year they underplanted due to concerns over the ability to get labor because of border closures. They will significantly plant more next year. We believe they are going to continue to can as much as they possibly can because they are going to come out of this year with very low filled stocks. They’re going to come through this pandemic having, in a number of cases, missed opportunities to sell more because they didn’t have available product. Assuming the weather cooperates, I think that demand is going to continue to be very strong. That is the one variable I can’t talk to, but let’s just say we aren’t going to have a number of bad years in a row. This year looks like it’s going to be really good.

Thank you. And then in Southeast Asia, I found it interesting; I guess you said China was up 11%. I think, I know to answer this but does that change at all your sort of retrenchment strategy in that particular country? And then we have read some reports about a couple of new entrants in other Southeast Asian countries. Again, part of that may be a function of being one or two supplier markets, but anything changed over there in the competitive landscape and/or kind of that expectation for high single-digit growth absent pandemic disruptions?

I am not sure we have ever told you what our strategy in China is, but our strategy is to get the best return for our shareholders, be that operating the business or selling the business. They recovered; they went into the pandemic and came out of the pandemic earlier than everybody else, so it doesn’t change anything there. In Southeast Asia, it’s a big market. There’s a lot of growth, and there’s a lot of opportunity. People see opportunity, and they’re going to enter markets when they see that. I am not overly concerned with the new entrants in the market; there’s a lot to go around.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Phil Ng from Jefferies. Your line is now open.

Hi. Good morning, everyone. Good to hear that demand is snapping back across the board for beverage cans. Can you give us a sense of how to think about volumes in Southern Europe and LatAm in the second half? And any cost im bottlenecks that we need to account for the surge in demand and impact on your profitability?

Listen, I think, so firstly, we are going to be sold out for the balance of the year in Latin America. We are going to be oversold, and we are going to frustrate customers by telling we don’t have enough capacity for them, as I said earlier. That’s just a function of, there is only so much capacity to go around, but you don’t make product for three to six weeks. But we will be sold out and we will be up. I don’t see any extra costs because we are sold out. I think in Europe, we are certainly going to be sold out through the end of the third quarter. We will see the market continue to grow, and I don’t expect any incremental cost there as well.

So you should see pretty good operating leverage. That’s great. In terms of the incremental capacity you have announced in Kentucky and Washington, how much more cans should we anticipate from these investments and what type of CapEx we kind of assume for 2021?

I think it’s a little early for us to start talking about 2021. But if the business continues to grow and we continue to see opportunities that we are seeing globally, it could be that the capital number next year is similar to the capital number this year. That’s a function of what we continue to see in terms of opportunities. I think, on the capacity side, at least in North America, we put a marker around there for 1.5 billion more cans next year. So whether I couldn’t tell you whether it’s 1.5 billion to 2.2 billion in the quarter, it really depends on how quickly we get started, how quickly we get through the permitting processes and how quickly we finish the projects.

Got it. And just one last one on North America, I guess ultimately, the markets sold out very tight. So, that’s really encouraging. But what kind of guideposts from our seats would you want us to look at to keep us comfortable that supply and demand is balanced? Do you see 3% growth in North America? I just want to understand because you and your competitors are adding a fair amount of capacity in the next few years.

Well, it’s going to be over 100 billion cans this year. I think on a trailing 12 months, at the end of June, we were like 99.9 billion cans. And that does not include the 2 billion to 3 billion cans that are coming in from Latin America. On a trailing 12-month basis, I think we are up about 5%. With the 2 billion cans in, that’s 7%. Then we are going to have growth in the back half of the year. I don’t know, say the markets, I don’t know, 100 to 300 and 4 billion cans. By the end of 2021, we will be over 105-106 billion cans. So even at 2%, that’s about two and a half billion cans; that’s two to three can lines that are needed every year just to stay up with the growth. So there’s a lot to go around here if the market continues to grow and there are new products people are consuming.

Okay, thanks a lot. That’s really helpful color.

Thank you.

Thank you. Our next question comes from the line of Mark Wilde from Bank of Montreal. Your line is now open.

Good morning, Tim. Good morning, Tom.

Hi, Mark.

Hi, Mark.

Just one more on the CapEx, Tim. I am just curious in North America. You called out that the Olympia line was going to be a specialty line. Can you give us a sense on all of the other projects? How many of those lines are set up to be able to do specialty sizes?

Every new project that you have seen us do this year, last year and even the year before are all set up to produce multiple sizes, diameters, and heights.

Okay. What does that do, Tim, just kind of the capital cost on a line?

It’s marginally higher, but the equipment suppliers, of which we are one, priced for equipment. There’s a bit more tooling involved. You are not buying tooling for just one height or diameter; you are buying tooling to do different heights and diameters. So there’s a little bit more, but it’s marginal.

Okay. And is there any impact on just throughput or not really?

There is initially until we all get accustomed to running taller skinny cans, which tend to tip over more than standard cans. So as we get more accustomed to that, yes, there is a little bit of slowdown in throughput; but in many markets, we are running those cans better than we run the other cans.

I want to turn then to Brazil and Mexico. I wondered, is there any way to quantify what all of the volatility that brewers being shut down in Mexico, the drop-off in Brazil, what that did to the second quarter results? If you could maybe include not only that can operations but what impact that might have had on the glass business down in Mexico?

If you look at our earnings release, we were up $21 million in segment income in the first quarter, and it looks like we were down $10 million in the second quarter. You guys are the analysts; unless you model that, that’s not any significant European beverage. We were down $23 million in the second quarter. Beverage is a volume business. The volume is back; I mean it snapped back. What we can’t make up is the downtime that we had in the second quarter, because we only have so much production capacity available at any point in time. If there were two or three or four weeks where we were not running certain lines, you are not going to make that up. You can’t run the lines any faster than the maximum speed. The glass side is a bit more impacted, only because it’s generally more on-premise than cans, but that is coming back right now as well.

Okay, alright. Then the last one for me; we have heard some reports that retailers down in South America are a little more reluctant to handle returnables in the midst of the pandemic. Are you seeing that? Do you think that has any impact on demand for one-way packaging?

It makes sense that they don’t want to handle anything more than once, so it’s why when we look at Southeast Asia, the can overtook glass because the shopkeepers there have very small shops. They don’t want to waste space with returnables. So that makes sense; if our customers can’t get enough fill products, cans, and there’s demand for beer or soda or other drinks, they are going to fill what they can and push that into the distribution system to satisfy consumer needs.

Okay, alright. Thanks, Tim. I will turn it over. Good luck in the second half.

Thank you.

Thank you. Our last question comes from the line of Anthony Pettinari from Citi. Your line is now open.

Good morning.

Good morning.

It sounds like it will be sold out in North America, Europe and LatAm maybe until the end of the year. You see strong growth prospects for 2021 and beyond. Understanding you got one, your CapEx program, is it fair to expect you may have to undertake additional CapEx projects over the next 12 to 18 months to meet this demand? Or is there a way that we can think about sort of normalized CapEx—whether it’s $600 million or a different number—for what seems like kind of a new normal for demand?

We only have to go back four or five years, and we were spending $250 million to $350 million in CapEx. This growth we have all been experiencing has pushed up capital needs significantly, whether it’s $450 million last year or $600 million this year. I suggested earlier on this call that perhaps the numbers are even that great next year; we continue to see the growth. My hope is that when we sit here in February and have this conversation with you, I will tell you $600 million—we will mean that there are significant growth opportunities. We all want to grow; if you don’t have growth, then things get a little difficult. We are quite fortunate that we have significant growth opportunities. I don’t know—I don’t want to tell you what a normal number is. I am hoping that the new normal number is something more like we are seeing now, which means that this growth pattern is going to last for several years.

Got it. That’s very helpful. And then in North America, we have obviously seen a resurgence of COVID cases here. Understanding on-premise is much smaller here than in LatAm or Southeast Asia, and this is obviously happening in real time. Is this something that’s impacting North American demand at all? Is it negative at the margin? Is it sort of neutral, or is it even positive with more people buying cans in the grocery channel and staying at home?

As it relates to North American beverage can demand, the pandemic doesn’t matter; the market was always going to be oversold this year. Fortunately for the U.S. customers, the pandemic happened, and there were more cans available from Latin America. Otherwise, the U.S. would have been significantly undersupplied with or without the pandemic. That is not meant to downplay the impact of the pandemic on any individual, any industry, any employee group. People have really struggled this year. I think our governments are struggling with how to handle this so that they minimize the impact on people. The pandemic has no impact on the outsize demand we are experiencing; we were only going to have that this year.

Got it. Understood. Appreciate that. Thank you.

Thank you.

Our next question comes from the line of Adam Josephson from KeyBanc. Your line is now open.

Tim and Tom, good morning.

Good morning, Adam.

Tim, just on food cans, you talked about your European customers being optimistic about the new normal post COVID for demand. I'm just wondering if that affects how you are thinking about your food can businesses versus your beverage can businesses. You had the surge in North America pre COVID, which don’t know. And as you said, food cans are a very good cash flow business, even better than beverage cans, so how do you think about food cans versus beverage cans in terms of being a long-term part of your portfolio?

I personally would say, Adam, that I wouldn’t describe food cans as a better cash flow business than beverage cans. Both are good; the beverage can system requires more capital than the food can system does. If you weren’t growing in beverage cans, you would have tremendous cash flow coming out of beverage cans. So we are quite pleased that we have a lot of cash flow. There is no doubt an increase in food can demand because of the pandemic, both in North America and Europe. Our customers in Europe believe this is a more permanent change in consumer demand for food cans. I don’t know that to be the case right now in North America, but we will see how it plays out. It’s an extremely practical business, and we will see what the review of the board takes us with regards to that business; we are here to maximize value to shareholders.

Just along those lines, does the pandemic and the impact it’s had on food can demand change at all? How you are thinking about those businesses longer term?

No, I don’t think so. I think it’s still the same business we always viewed it to be. If you tell me, you are going to have COVID-20, COVID-21, and COVID-25; I hope we don’t because that’s going to be really painful for the global population. But if you tell me that’s going to happen, then yes, that is going to change how you feel about the food can. If we are never going to go back to restaurants and we are never going to have barbecues with our friends, and we are just going to sit in the house and eat canned peas, that’s going to change how you feel about it. But I am hopeful that that’s not the case. This is a relatively short period of time in all of our lives. It’s been very inconvenient for most of us; some people have been extremely harshly affected. But for most of us, this is not June 6, 1944; we are not storming the beaches of D-day. This is a short period of inconvenience. We are all going to get through this, and when we come out the other side, we are back to running businesses and operating our lives normally.

Okay, got it. Just two others, Tom, just one on cash flow, working capital beyond this year. I mean, you have done a tremendous job of taking out working capital over the past several years. I know this year will be a use because of inventory building, particularly toward year end. Are you thinking you have taken out most of the working capital that you will be able to do, or do you think there’s more to go perhaps next year beyond? And then the dividends to minorities on the cash flow statement; are you still thinking about $70 million, Tom?

Yes, I think the big dollars have come out of working capital. We are in a period now where with the growth in beverage cans, we are actually using working capital. So let’s assume that for the near-term anyway and dividends to minority about $75 million for 2020.

Thanks. And just exit rates for beverage cans, I think in response to Ghansham’s question, you said global beverage can volumes will be up. Do you think in 3Q, was your exit rate also up low single?

We are sold out, right? We can’t make any more cans. Nobody in the can industry can make any more cans. We had a period in the second quarter globally in a number of markets where demand was impacted by the virus. That quickly came back in mid to late May across most of those markets. We are flat out, and we are going to be up in 3Q. Now, is the number going to be 2%, 3%, or 5%? I don’t know—we are going to be up, and the exit rates are extremely strong right now.

Terrific. Thanks so much, Tom.

Thank you.

Thank you. Our last question comes from the line of Neel Kumar from Morgan Stanley. Your line is now open.

Hi. Thanks for taking my question. Another follow-up on your specialty can footprint after you complete the Kentucky and Washington projects. Could you just give us a sense of what specialty can mix will be in North America and how does it compare to where you stand currently?

We are high-teens right now, 17%, 18%. When we come out of these two projects, we will be in the 22%, 23% range, something like that in North America.

Okay. That’s helpful. And then just given the trends you are seeing in the North American market, do you see any opportunities to continue to improve pricing and maybe address other provisions in customer renegotiations going forward? Can we meet for margins to continue to improve in North America assuming demand remains this robust?

I think we have been fairly successful the last couple of years. The results in our Americas Beverage business show that. We are going to continue to have growth on the volume side, which is going to flow right through the operating income. As we fully utilize assets 12 months a year and as we put more lines under roof, we are going to expand margins because of the operating leverage you get with two or three lines under one roof as opposed to one line. Growing the specialty mix will do the same. But we talked earlier about fair distribution of costs, and our customers are also looking for us to help them compete effectively with their competitors and with their retail customers. We are always looking for opportunities to improve margins. I think we have done some of that already. I don’t want to talk too much more about that.

Great, thank you.

Thank you, Neel. So Louis, I think you said that was the last question. So thank you. That concludes the call today, and we will speak with you all again in October. Bye now.

Thank you. And that ends this conference. Thank you all for joining. You may now disconnect.