Crown Holdings, Inc. Q3 FY2021 Earnings Call

Good morning and welcome to Crown Holdings Third Quarter 2021 Conference Call. Your lines have been placed on 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, Andy, and good morning. With me on today’s call is Tim Donahue, President and Chief Executive Officer. If you don't already have the earnings release, it is available on our website at crowncorp.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 the 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 $0.79 per share compared to $1.59 in the prior year quarter. Adjusted earnings per share increased to $2.03 in the quarter, compared to $1.96 in 2020. Net sales in the quarter were up 17% from the prior year primarily due to the pass-through of higher material costs and increased beverage can and Transit Packaging volumes. Segment income improved to $379 million in the quarter, compared to $367 million in the prior year, primarily due to higher sales unit volumes. As outlined in the release, we currently estimate fourth quarter 2021 adjusted earnings of between $1.50 and $1.55 per share and full year adjusted earnings of $7.50 to $7.55 per share. Our expected adjusted tax rate for the year is between 23% and 24% consistent with our nine-month rate. I'll now turn the call over to Tim.

Thanks, Tom. Good morning, everyone, and thank you for joining us today. Our continued best wishes for the continued health and safety of you and your families. Before reviewing the third quarter results, we want to again express our sincere appreciation to our global associates for their continued efforts during the ongoing pandemic. With many of us now vaccinated, we're moving in the right direction, but we should expect the next several months to remain challenging, as COVID variants make their way through various populations. Again, we ask all of you to remain vigilant in protecting yourselves, your family members, your associates and your communities. Demand remains strong across all product lines and geographies, with the exception of Vietnam, where hard lockdown measures by the government essentially curtailed all business and consumer activity for much of the third quarter. We expect Vietnam will slowly reopen during the fourth quarter. Reported revenues increased 17% during the quarter, as higher beverage and transit volumes, coupled with the pass-through of raw material cost increases, offset supply chain challenges. In the face of these challenges, we continue to grow earnings. And in July, we discussed with you the step change in earnings that we have experienced beginning with last year's third quarter in which EBITDA over the last five quarters averages approximately $100 million more than the previous six quarters. Our teams continue to do a great job commercializing new capacity, converting that capacity into income growth, and we look forward to more capacity coming online over the next several quarters. We're also pleased to report that our efforts related to the environment and sustainability have not gone unnoticed. In September, ESG ratings provider Sustainalytics again ranked Crown in the top position for mitigating ESG risk within the metal and glass packaging sector. Also during the quarter, the company joined the Climate Pledge, where we have committed to be Net Zero Carbon by the year 2040. The sale of the European tinplate businesses was completed on August 31 and going forward our share of net profits will be reflected in equity earnings. As discussed previously, we continue to experience inflationary pressure across all businesses. Many of our businesses contractually pass through higher costs, including steel and aluminum, but some businesses will have a timing lag to recovery. As costs are passed through, revenues will increase; however, percentage margins will decline due to the denominator effect of 1-to-1 pass-throughs. Before reviewing the operating segments, we remind you that delivered aluminum here in North America is approximately 75% to 80% higher today than at this time last year. LME and delivery premiums are contractual pass-throughs, so reported beverage revenues reflect both the volume increase and the higher aluminum cost. After reviewing the various analyst reports on magnesium and related aluminum supply, I would say that many of you have a very good understanding of the situation. The concerns related to magnesium, as many of you have noted, relate to energy curtailments in China. China has restarted some production recently, so hopefully, that eases some of the concerns recently voiced in Europe. There is magnesium production here in the United States, so we have less concern about domestic supply. And in the near term, we do not believe we have any supply concerns over the next six months, although we continue to monitor our suppliers' supply. In Americas Beverage, overall unit volumes advanced 4% in the quarter, as continued strong demand in North America and Mexico offset a difficult third quarter comparison in Brazil. Our third quarter 2021 volumes in Brazil were more than 10% higher than the third quarter of 2019. However, third quarter 2020 volumes were up 30% over the third quarter of 2019, as that country rebounded sharply from the second quarter 2020 pandemic lockdowns. A combination of – we were never going to have enough cans in our inventories compared to the prior year, and a pullback in consumer spending related to inflation concerns led to the lower sales this year. We have seen consumer slowdowns in the past in Brazil. However, the market has always recovered to even higher levels. Late in the third quarter, we began commercial shipments from the second line in the Bowling Green Kentucky plant. With the third line in Olympia Washington now operational here in early fourth quarter. Next month, we will begin operations on the second line in Rio Verde Brazil followed by a late first quarter 2022 start-up on the second line in Monterrey Mexico. New two line plants in Uberaba Brazil and Martinsville Virginia will come online late in 2022 followed by the new two-line plant in Mesquite, Nevada scheduled for a mid-2023 start-up. A lot of activity, but the team is fully committed to continue our growth with a well-balanced customer portfolio. Unit volumes in European Beverage advanced 5% over the prior year with strong volumes across most operations in the segment. Inflation offset unit volume growth with freight utilities and labor being most notable. And with inflation expected to remain elevated across Europe, we project income will decline in the European segment in the fourth quarter and during 2022. In Asia-Pacific, unit volumes declined 8% in the quarter owing entirely to a 55% contraction in Vietnam. Excluding Vietnam, unit volumes grew 20% in the quarter. The Vietnamese government instituted hard lockdown measures to curb the spread of COVID and its variants. And for example, a hard lockdown means that you're not allowed to leave your house, and the army will deliver to you all food and essentials. And while we expect Vietnam will slowly reopen during the fourth quarter, we do expect that from time-to-time we will be subject to various lockdowns or movement control orders, as the various countries look to prevent the spread of COVID. Our new plant in Vung Tau, Vietnam is now qualified to begin commercial shipments to customers. As expected, Transit Packaging had another strong quarter recording double-digit gains in revenues and segment income, volume growth in steel strap tooling and across protective packaging offset inflationary headwinds notably freight. The business continues to navigate supply shortages, transportation delays, and inflation, and remains well-positioned to continue to grow earnings in the fourth quarter and through next year as these conditions ease over time. Performance in our North American food and beverage can-making equipment businesses remain firm throughout the third quarter. And earlier in the year, we commenced operations at a new food can plant in Dubuque, Iowa. And during the third quarter, we began commercial shipments from a new two-piece food can line in our Hanover Pennsylvania plant. These line additions provide much-needed capacity to our domestic supply footprint allowing us to eliminate imports. And we expect significant improvement in earnings from food in 2022 as these new lines come through their learning curves. So in summary, a very strong first nine months of 2021 with EBITDA up 26%. As described earlier, we have several capacity projects recently completed and are underway and are pleased to reconfirm the 2025 EBITDA estimate of $2.5 billion was provided during the May Virtual Investor Day. Near-term while we may experience inflation and supply chain-related headwinds over the next few quarters, we currently expect 2022 will be another strong year of earnings growth with EBITDA estimated to be approximately $2 billion. In addition to North American food, our beverage can businesses in North America and Brazil and our Transit Packaging business are all expected to have strong years in 2022, allowing us to earn through the dilution related to the European asset sale and headwinds from a persistent inflationary environment. Before opening the call for questions, there are a number of you in the queue. So we ask that you please limit yourselves to no more than two questions, so that others will have a chance to ask their questions. And with that, Annie, I think, we're now ready to take questions.

Thank you. We will now start the question-and-answer session. Our first question will come from Ghansham Panjabi of R.W. Baird. Your line is now open. Please proceed.

Thank you. Good morning. I hope everybody is doing well. First off on North American beverage, if you said this I missed it what were industry volumes for the quarter do you think for 3Q? And then, how did you track relative to that? I know you're adding some capacity in terms of commercialization et cetera. And then second, in terms of the supply chain constraints that you discussed. Can you just give us a little bit more detail into what exactly you're constrained with at this point?

Good morning, Ghansham. We no longer have industry volumes since the CMI does not collect or publish them. In North America, we experienced a 7% increase in the third quarter compared to the same period last year. Year-to-date, we are likely up around 9% compared to the previous year in North America. We also saw gains in Mexico, likely up 10% to 11% for the quarter. However, Brazil faced a 15% decline compared to last year's third quarter. Additionally, the third quarter of 2020 versus 2019 saw a 30% increase. If we normalize the activity given the pandemic lockdowns, the third quarter this year compared to 2019 was up 10%, which is roughly 5% each year. We are still focused on the can business and are pleased with 5% growth annually in a strong market. We are facing supply chain challenges in our European Beverage business regarding freight availability and driver scarcity, which we are also experiencing in the United States. Although transit had a good quarter, we could have performed even better if not for parts shortages. Like many companies, we are struggling to secure enough parts and materials to fully capitalize on a strong business environment. Nevertheless, we are doing well in transit, though it is somewhat disappointing that we could have achieved better results.

Okay. And then, on the magnesium shortage, just to clarify. S, have your suppliers declared force majeure in anyway? In either region that you have exposure to and I guess you're adding a lot of capacity here in North America. And so are others and that is going to stress the supply chain even further in terms of access, so just your thoughts in terms of risk management, how are you sort of ensuring that you're managing procurement?

So we have not had any suppliers declare force majeure related to magnesium supply and/or their can sheet rolling capacity. You're right. We like others have announced significant capacity expansion in North America to meet the needs of our customers' growing portfolios. We typically contract with our suppliers such that we do not believe we have any supply concerns in the North American market for all of the projects that we've announced.

Got it, thank you.

You're welcome.

Thank you. Our next question will be from the line of Anthony Pettinari of Citigroup. Your line is now open.

Good morning. This is actually Bryan Burgmeier, sitting in for Anthony. On the last call you mentioned a $5 million impact from supply chain disruptions in Transit. It sounds like that got a little bit worse in 3Q. Is it possible to quantify what the headwind was? And what is the timeline for recovering those costs?

Yes. That's a great question. You can put whatever number you want in there, perhaps our segment income could have been $3 million to $5 million to $7 million better in the third quarter. I don't know if I would tell you that you can add that to the second quarter shortfall, perhaps some of it. The timeline to recovery it's kind of interesting. Bryan, if you went to the supermarket and you were looking for your favorite snack food, and let's say you get to the supermarket and the shelves are empty. The question is do you run around to another supermarket and try to buy that snack food or do you just go home and say, 'You know what I can do without it.' So I don't know the customers, especially as you get towards the end of the year and they look towards trimming what they spend through the end of the year and they push out their spending on the following year when they get a new budget. I don't know how much of that is – we'll make up the purchase from our supplier versus we'll just learn to do without for a few more months. So I don't know if I've answered your question but in all honesty, I think supply shortages curtail GDP. There is no promise that you're going to get the sale in the future. It's just like you go into the supermarket; you may just learn to do without.

Got it. Thank you. That's very helpful. And for my second question, how would you characterize raw material availability amongst your suppliers for things such as inks and coatings? I know there have been some strains in the petchem markets. And how would you characterize Crown's labor availability and staffing relative to your expectations?

I don't think we have – I'm not aware of any coatings – coating challenges we have with procuring supply. Obviously, the market – the energy markets, the oil markets are quite strong and so the coating guys have higher input costs and they're looking to pass that on to us. Labor, we, like everybody we have – depending on the region we're in, particularly the United States being a little bit more challenging, procuring all the labor that we need, we are able to staff and run the factories and not miss shifts but it's not ideal. I think we all know what's happened in the United States, where we've turned our economy into an economy where anybody had the opportunity to succeed if you work hard to an economy where people now say 'I don't need to work. I'll just get a free handout from the government.' So we all know we see what's happening. We'll see how long this persists. I think not a shock. Not a shock, right? We kind of know what we voted for last November. So we'll see if it gets any better. But we like others, we're having to find creative ways to run our factories.

Got it. Thank you. I’ll turn it over.

Thank you.

Thank you. Our next question will be from the line of George Staphos of Bank of America Merrill Lynch. Your line is now open.

Thanks very much. Hey, Tim. How are you? Hi everybody. Thanks for the detail. I want to come back to the question on aluminum supply and magnesium. And I recognize this is kind of difficult to talk about live mic. But you said, North America you expect, you should be able to have no issues with supply for the projects that you have. And correct me if I misphrase anything that you intended the way you want to communicate that. But in the areas where you might have supply constraints, where you won't have enough aluminum for your capacity, what are you doing at this stage of the game, given what you see as a potential shortfall? I think you said six months from now to try to avoid that being an issue. Whatever you can share would be great. And then I had a quick follow-on on Europe and the guidance there.

George, if the Chinese decide they're going to curtail energy production or whatever scam they're trying to pull in the global community related to their climate pledge, if you really believe that or you just don't think they're trying to extort the rest of the world. And extortion is a word that one of the analysts used in describing magnesium prices. Listen, I think if there is no magnesium, we like others are going to have an issue not just in the can business but in aerospace and every other business across Europe. We don't see a problem in the United States. There is domestic supply. That domestic supplier, I think is taking advantage of the situation from a price perspective, but I think they have adequate means and availability to continue to produce magnesium. But if there is no magnesium then rolled and stock is going to become very difficult. Can stock is less problematic given that we can make – they can make can stock from higher percentages 100% recycled material and there's enough magnesium and other alloys in the recycled material to do that. On the end stock there's less recycled material used the alloy content is a little higher just to make sure it’s hard enough. So, I'm not going to – given that I'm the first guy talking here. I'm not going to be the one to take it on the chin. Listen, the can industry is not going to be the only industry with the problem if there's not enough magnesium if the Chinese decide to shut it all down. But I think for the next six months, we don't see an issue.

Is there an opportunity, I don't think there would be given what you've said in the past by capacity constraints, but is there an opportunity perhaps to front-load some of your production for your customers to get ahead of what would be the supply chain shortage six months from now, or is a zero-sum game and that's unrealistic in the first place?

I don't think you're going to get any more aluminum from the aluminum suppliers when they're contracted to sell you at this point.

Yes.

They're also trying to manage their inventory so they meet supply contracts, right?

Could you provide more insight into your guidance for 2022 in Europe? You mentioned that the fourth quarter would see a decline, which isn’t unexpected given the comparisons and other factors. What are the key elements we should consider regarding Europe, especially since aluminum supply will play a significant role? Also, if you can provide any forecasts at this point, what should we expect in terms of potential EBIT growth or declines in Europe in 2022? Thank you.

Yes. I think I was pretty clear we're going to have an EBIT decline in 2022 in our European business. There will be cost headwinds, and we do not have any capacity of significant nature coming online in 2022 in the European sector to offset those cost headwinds. We'll wait until February to give you a more accurate number. We're in the budgeting process now. We can pretty much see where we're going to be globally directionally, have a pretty good handle, but we'll refine the European number for you after the year-end call. But it will be down in 2022 versus 2021.

All right, Tim. Thank you very much. Good luck in the quarter.

Thank you.

Thank you. Our next question will be from the line of Chris Parkinson of Mizuho. Your line is now open. Please go ahead.

Great. Thank you very much. You hit on this a little in your prepared remarks, but can you just quickly walk us through the situation in Vietnam. It appears as though things were easing as of mid-September ever so slightly. So just any comments on that, as well as any other markets that are entering what you would perceive as a normalization process as we approach 2022, it would be greatly appreciated. Thank you.

So I think the only other market where we see significant production curtailments related to COVID and/or other outside factors would be Myanmar. We have a small operation there, so I wouldn't spend a lot of time worrying about it. It's minimal in terms of contribution. Vietnam is slowly coming out of the hard lockdown measures. It will take time to refill the supply chains. It will take time to get workers back to the various factories in the various provinces, but province-by-province, are coming back at different rates.

Understood. And just as a follow-up. There has been a substantial degree of, I guess, call it, market noise on hard seltzer growth as it relates to the overall Bevcan outlook. But can you just comment on other markets customers and verticals product launches, etc.? Would further underscore your confidence in growth, and perhaps mention what you believe investors may be missing? Thank you.

So, I think you're focused on one or two of the large hard seltzer providers. And if the two large guys that you're all well aware of let's say that; two years ago, they had 80% of the market and they continue to project that they were going to have growth like they experienced over the last couple of years and keep their market share, then they were probably foolish for assuming that others wouldn't come into the market, specifically others that are large beer marketers who have huge marketing budgets and control a lot of shelf space. And so, I think they've lost market share and by losing market share they've lost their growth trajectory. Having said that, the hard seltzer category now makes up 10% of the alcohol category from almost 0 a few years ago. It is a very large category now. We don't expect hard seltzer to go away like other alcohol products have gone away in the past. We think this is a product that's going to stay there. It may not grow as rapidly as it's grown over the last couple of years. Now having said that we're not a very large supplier to the hard seltzer marketers. We supply one of the guys in a small way. We don't supply the other one. But the other products where we continue to see growth are functional beverages, teas, energy drinks, juices and we see that continuing to expand.

Thank you.

Thank you.

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

Hey Tim. Pretty encouraging results, given the challenging backdrop and it's helpful to kind of give us that $2 billion EBITDA guide for 2022. Given that you're expecting Europe to be down, what are some of the other areas where you're going to make things up assuming Asia might be slower to come back as well?

Yes, that's a good question. Europe will see a decline, while Asia will remain mostly stable. When budgeting, we aim to be reasonable. I'm not suggesting $2 billion just to potentially retract it next year. I'm confident in this estimate, and we're providing it earlier than in the past, though we want to clarify some temporary circumstances, particularly in Vietnam and Brazil. As mentioned earlier, North America and Brazilian beverages will experience significant growth this year. We expect new capacity to be fully operational in Bowling Green and Olympia next year, along with a second line in Rio Verde, Brazil. Transit Packaging will also improve next year based on this year's figures. Additionally, we have two new can lines for the food business, which will replace imports from Europe with domestic production, resulting in savings on both cost and freight while increasing availability for what we anticipate to be a steady or growing demand for food cans in the future.

Super. That's really helpful. And then given the amount of inflation you're seeing and Tim correct me if wrong, you had these contractual pass-throughs. There's a lag for certain components. It sounds like the pass-through mechanism is working pretty nicely in Americas for next year, so we should see EBIT margins on an apples-to-apples basis inflect because it's kind of flattish in 3Q. And then what's the issue of Europe? I mean, you're calling for some compression. Is that just mostly timing related, or is it more on the potential shortage of magnesium?

We talked about the stable situation in Q3 and the impact of rising aluminum prices. If we sell materials worth $10 and make $2, that's a 20% margin. If we sell materials for $20 and still make $2, our margin drops to 10%. With aluminum prices nearly doubling over the past year, this denominator effect has reduced our percentage margins. However, this doesn't indicate that absolute margins are decreasing; it's just the impact of the denominator. We should be cautious in assuming that this effect will reverse next year. Aluminum seems to be maintaining its high levels in both the LME and delivery premiums, as well as the conversion costs from mills for can sheet production. This trend is likely to be observed across all markets. Historically, pass-throughs have been effectively managed in our US operations, and to a lesser extent in some international markets where we have the time to adjust and address cost increases or renew contracts as they come due.

Okay. So there's potentially more of an opportunity to repair some of that in 2023 on the European side in terms of better flow-through?

Yes.

Okay. Thanks a lot, Tim. Appreciate it.

Thank you.

Thank you. Our next question will be from the line of Anojja Shah of BMO Capital Markets. Your line is now open.

Hi. Good morning.

Good morning.

Good morning.

You've been very aggressive on share repurchases year-to-date. And I know some of that is due to the proceeds from the sale of European tinplate. But can you give us some sense on how you're thinking about share repurchases for the rest of this year and maybe into next year?

Yes. What I want to convey is that before we received the proceeds, our leverage was 3.6 times, which is a reduction from just over 5 times following the Transit acquisition. Through income growth, debt repayment, and cash generation, we managed to reduce our leverage to 3.6 times. With the closing of the tinplate sale, I can assure you we never faced a debt issue. We anticipated generating cash to continue paying down debt. While some may worry about the short-term, in the packaging sector, we typically produce stable cash flows depending on how we allocate capital, including CapEx and dividends, which influences our debt repayment capacity. We actively repaid debt, bringing our leverage into the mid-3% range, which is reasonable considering our expected cash flow. Fast forward to the end of August, we were aware the deal would close and that we would have a significant cash influx, leading to further debt reduction, including repayments due in 2022 and 2023, as mentioned in the balance sheet footnote. So, what else should we do with the cash? We took the initiative to buy back shares. While we repurchased about $750 million worth, we have board authorization for $1.5 billion. Before next year, at the December board meeting, we will need to request a higher authorization because the current $1.5 billion will not cover our planned buybacks for this year and next. Therefore, you should expect continued share repurchases. While I won't specify the exact figures, we could buy between $1.5 billion and $2 billion of stock collectively between 2021 and 2022, which is significant relative to our current market capitalization.

Yes. That's very helpful. Thank you. And for my second question can you talk a bit more about that UK pension move that you announced recently, especially, the financial implications? Because I think you talked about $1.3 billion non-cash charge and the cash contribution. So maybe if you can just run through what we should expect for that.

Yes. So I'll start and I'll let Tom do all the details. We sold a very large business in Europe. The business had over $300 million of EBITDA on a standalone basis. It had a number of employees throughout Europe. It had legacy pension liabilities specifically in the United Kingdom very large plan in excess of $2.5 billion with assets to support it. And our view was that as we became smaller in Europe after the asset sale the most prudent thing to do was to relieve the balance sheet of any future exposure income and/or cash flow wise from a liability that was no longer supported by assets or operations as we sold the business. I'll let Tom describe for you the cash needed to affect that and specifically why the write-off was non-cash.

Yes, on an ongoing basis, it really won't have much of any impact on the income statement. We were close to zero when considering the return on the assets and the expense side of the equation. So really, nothing going forward. The $1.3 billion is essentially a release of deferred losses that are recognized in equity from some time ago. This is just an accounting entry and does not involve any cash. The cash as we disclosed in the release was essentially a permanent contribution of about $96 million. Additionally, there is an advance or a loan of another $170 million that will be repaid as the remaining liquid assets in the plan are sold and the money comes back to us. Of that $170 million, I would expect that number to be down to about $100 million. So we would have received $70 million back by the end of this year, with most of the rest flowing through next year.

And when Tom says the liquid, you'll appreciate that's private equity infrastructure real estate assets like that that are not as liquid as marketable securities.

Yeah. So instead of doing a fire sale, we're going to take our time to sell them, get full value. And the way to do that was through the loan to the pension plan.

I got you. Okay. Thank you. That was very helpful. That’s it for me.

Thank you.

Thank you. Our next question will be from the line of Salvator Tiano. Your line is now open. Please go ahead.

Yes. Hi, thanks for taking my questions. So my first question is a little bit on Brazil. Sure demand is 10%. I think you mentioned over 2019, but a lot of market players have been betting on very significant demand growth there. There's a lot of capacity addition by you and competitors. So how do you see demand going forward despite the tough comps already, because we do need very solid growth to absorb all this new capacity?

We continue to have a positive outlook on the Brazilian market. Looking back at our experience since 1996 when we entered with beverage cans, while there may be declines in short timeframes like three or six months, over longer periods such as two, three, or five years, we have consistently seen significant growth. As I mentioned earlier, although we've faced slowdowns in the past due to various factors, including customer marketing strategies and consumer pullbacks—currently, there is a slight pullback—we have always bounced back to even higher levels. We anticipate that the market will continue its recovery as we move forward. We're currently entering a strong time frame, particularly in the late fourth quarter and first quarter, and are optimistic about high sales during this peak season.

Okay, perfect. Just in Europe regarding the issues you're facing. I'm wondering in the UK where we started seeing earlier the tracking shortages, are you seeing more severe pressure on volumes and costs than in mainland Europe? How do these two regions compare?

I would say that freight is a bigger issue in the UK than Mainland Europe at this point, yes.

And with regard to any other costs, any differences?

Well, I think we're going to see utilities not only in the UK but in some of the Northwest Europe also be a headwind. And obviously labor is a headwind every year on the European continent and on the island.

Okay. Thank you very much.

Thank you.

Thank you. Our next question will be from the line of Kyle White of Deutsche Bank. Your line is now open. Please go ahead.

Hi, good morning. Thanks for taking the question. Do you have a sense if customers are looking to warehouse, more beverage cans than normal given some of the supply chain issues that we're seeing, which could potentially negatively impact the Nielsen scanner data relative to your reported volumes. And any concerns that this could potentially lead to some destocking later on?

The first thing I want to highlight is that there are no cans available for them to warehouse. Even in a low quarter like the fourth quarter, the market remains sold out. We're generally sold out across all suppliers. There isn't any excess aluminum that the suppliers are willing to provide in advance, as they are focused on meeting their future supply contracts, and we are doing the same. Usually, our customers do not warehouse cans and prefer not to fill in warehouse goods for an extended period, as they all aim to market based on sell-by dates. Therefore, we're not worried about a destocking in the future because there will be no advance stocking at this time.

That's helpful. Did you provide any insight on the headwind from start-up costs associated with the second line at Bowling Green and the additional line at Olympia? How do these start-ups compare to your expectations?

We did not give a number. Again, we have start-ups almost every year and in every quarter. So the impact on start-ups is really the carryover effect is it more or less than it was in the prior year quarter. So, we've tended to not use that as an excuse, if you may, if you will. I would characterize for you that the first line in Bowling Green came up, as well as any line we've ever had, and that includes our Brazilian experience, which has always been very strong. The second line, coming up well not as good as the first line. Obviously, we're spreading labor now over two lines, and training more workers but coming up quite well and Olympia is starting up well also.

Got it. Thank you. I’ll turn it over.

Thank you.

Our next question will be from the line of Arun Viswanathan of RBC Capital Markets. Your line is now open. Go ahead.

Great. Thanks for taking my question. Thanks for all the details. So just I guess, I just wanted to get back to the magnesium issue. Sorry to believe it at this point, but my understanding is there's more of it used in ends maybe 3times or 4 times as much. And could you just comment, I know that you feel secure for the next six months. But beyond that time frame, are there any measures you guys could take to potentially switch around the sourcing or maybe substitute to different products? Is this at all causing you guys any kind of concern? And then just again, if you could comment on the end part and clarify that for us as well. Thanks.

Well, Arun, I think the major concern we have is that suppliers of magnesium whether it's the US supplier and/or the Chinese are taking advantage of a situation to extort higher prices for our suppliers, who pass it on to us and then from us who then pass it on to our customers and then our customers then have to pass it on to the consumer. That's our major concern. It just makes the package more expensive. And how long that extortionate activity last we'll see. I do think there's enough magnesium in the United States. We're just talking about price. I think the Chinese situation, depending on how much influence China wants to have in the global markets with respect to the variety of raw materials that they have in their country boundaries and how they export raw materials and how they try to control global economic growth will dictate how much magnesium is available for other markets. I would be very interested for you to ask these questions, to the other beverage can suppliers so that perhaps I learn a little bit more as well. But I said it earlier, Arun, if the Chinese don't release any magnesium and our suppliers of aluminum in some markets don't have any aluminum, then yes, there's not going to be aluminum for cans, for all the companies not just for Crown, there's not going to be aluminum for aerospace. There's not going to be aluminum for cars. And you guys need to take a step back and rationally think about do you really think that's going to happen.

Thank you for that. I also wanted to revisit the market growth outlook for the next few years. You mentioned the situation in Brazil, which shows a 5% compound annual growth rate over the last three years. When considering North America, particularly with the upcoming products and the impacts from COVID, as well as the perception of a pull forward, do you still anticipate a compound annual growth rate in the mid-single digits for the period between 2018 and 2025? How should we view the longer-term growth prospects for the market?

No, I think that's about right. I don't think we've seen any pullback post-COVID if we really are post-COVID. But let's assume we're post-COVID. I don't think we've seen any noticeable pullback that would at this point tell us we need to revisit our expected growth in the market over the next several years.

Okay. Thanks.

Thank you.

Thank you. Our next question will be from Adam Samuelson of Goldman Sachs. Your line is now open, please go ahead.

Hi, thank you. Good morning. A lot of ground has been covered this morning. I was wondering against that $2 billion EBITDA forecast for 2022, where do you think CapEx is going to shake out and on the CapEx outlook broadly, are you seeing any supply chain and cost inflation impact some of the costs for some of your new projects? And how is that influencing future returns in your mind?

Yes, we discussed this briefly last quarter. We plan to allocate around $1 billion for various projects next year as we aim to invest more capital globally and continue growing the business. We’re estimating our spending for this year to be about $900 million, though we’ll see if we manage to complete it all. Regarding the supply chain challenges, particularly with building materials and construction steel, there’s significant demand which can lead to occasional delays. Therefore, it's uncertain if we will receive everything on time or if there will be a delay of three to six months. Concerning returns, higher construction costs will naturally impact future returns. However, as I mentioned previously, when we establish a factory, we expect to remain in that location for 40 to 50 years, which allows us to spread out the added costs over a longer timeframe. While it’s important to note that returns and internal rates of return generally materialize during the early years and that a higher initial investment can lower overall returns, our primary goal is to grow our business, provide products to our customers, expand alongside them, and explore alternative ways to mitigate those costs. Therefore, the additional upfront construction costs are unlikely to deter us, considering the strong customer demand and their willingness to enter into long-term contracts to satisfy that demand.

Okay, that's helpful. And then just quickly as we get closer to the end of the year, what's your latest view in terms of total can imports into North America for 2021?

I'm looking at Tom to see if he has a better figure. Yes, Tom is telling me that through the first half of the year, we surpassed $9 billion. Therefore, we can expect the industry number to be between $13 billion and $14 billion this year. Our estimate will likely be in the range of $1.8 billion to $2.5 billion of that total. Hopefully, as more capacity becomes available, those figures will decrease in the future, and those cans will be accessible to local markets.

Great. I appreciate the color. I'll pass it on. Thanks.

Thank you.

Thank you. Our next question will be from the line of Mike Roxland of Truist. Your line is now open, please go ahead.

Hi, good morning. Tim, Tom, and Tom congrats on a good quarter.

Thanks Mike.

Most of my questions have been asked. Just have just two quick questions. Just following up on the hard seltzer comments earlier. Realizing it's a small component of your business. Can you just help us think about how the new plants you're building and that are starting production related to hard seltzer? In terms of those lines how much of all those new lines related to hard seltzer are focused elsewhere? And do you really need to adjust your current production plans given the fact that hard seltzer is to your point, Tim, has slowed dramatically from a couple of years ago.

We have already commercialized two lines in Bowling Green. We’ve also announced projects in Martinsville and Mesquite, Nevada. I don’t want to reveal too much at this point since others are listening, but there is a very limited number of those six can lines that were anticipated for the hard seltzer category. That’s all I’ll say.

Got it. I appreciate that. Thank you.

Thank you. Our next question will be from Alton Stump of Loop Capital. Your line is now open, please go ahead.

As I mentioned, the hard seltzer category currently represents a substantial 10% of the alcohol market. I do not expect it to drop to 7% or 8%. Instead, I believe it will maintain around 10% or potentially increase slightly over time. We will observe how alcohol marketers, as well as new entrants to the alcohol market, decide to promote their products in the future, and I am confident they will opt for cans as their preferred marketing format. That makes sense. And then a quick follow-up as you mentioned of the eight billion cans are imported into North America last year any ballpark estimate as to how much of that market or why imports will be available to ship here in 2021.

So, yes, 13 billion cans is a significant quantity that we estimate will enter the market in 2021. We will still require cans from certain overseas markets next year to satisfy customer demands, provided all the capacity comes online. Can we reduce that number by half? I'm not sure, but there will be considerable imports next year, similar to this year. I do not anticipate it being at the same level, although we would be pleased if the demand warranted the new capacity coming online, as well as a similar substantial level. We'll see how it develops.

Okay. Great. Thanks, Tim. I’ll hop back in the queue.

Thank you.

Thank you. Our next question will be from Gabe Hajde of Wells Fargo. Your line is now open, please go ahead.

Gentlemen, good morning. Thanks for taking the question.

Hi, Gabe.

Good morning, Gabe.

Tim, I had a question for you on contract renewals here in North America. If memory serves this year was a little bit of a lower renewal period. And I also appreciate that some customers have kind of accelerated some things given obviously the tight market conditions. So can you remind us kind of for 2022, if there are any sizable contracts that are coming up for renewal. Again, kind of focused on US with any market, if you'd like to call it?

There are contracts that expire each year. I prefer not to elaborate too much since both we and our competitors work with a small number of large customers, and we know who they are and have an understanding of their suppliers and contract lengths. However, I can tell you that there are no significant renewals that we are concerned about at the end of 2021, 2022, or even 2023.

That's helpful. I appreciate the openness regarding the policies in China, especially considering the lack of compliance with the Phase 1 trade agreements with the United States. If their dual control policies are indeed real, it could mean higher aluminum costs for everyone in the next two to three years. From your perspective, does this influence the total cost of ownership of a package? Is there a risk that it makes PET or other alternative substrates more competitive?

I believe this does not address the sustainability issue with PET. It does not resolve the problem of polluted oceans and streams, nor does it alleviate the fact that fish are suffering due to debris from PET. While it does not solve the PET problem, it highlights the urgent need to bolster recycling initiatives in the United States, especially considering the potentially rising costs of aluminum. Currently, we estimate that about 40% of households in the U.S. lack access to curbside recycling. For the U.S. and local governments to genuinely commit to sustainability and recycling, it is essential to expand curbside recycling access as much as possible. Like others, we are collaborating with the CMI and the recycling partnership to enhance these statistics. This improvement could potentially be facilitated through effective deposit systems at either the state or federal level, where each material bears its own costs. Nonetheless, this does not lessen the significance of aluminum in the realm of true closed-loop recycling. Aluminum remains a critical component of the recycling framework, as it essentially supports the recycling of all materials. Moreover, with the increasing cost of aluminum, the importance of recycling it becomes even clearer. We are eager to see how this evolves, and like others, we are working together to improve these figures, emphasizing that it is now more important than ever.

Understood. Thank you.

Thank you.

Thank you. Our next question will be from Angel Castillo of Morgan Stanley. Your line is now open.

Hi. Thank you for taking my question. I’m interested in your comments about income in Asia being flat next year. Could you provide some insights into the factors influencing that in terms of volume? I'm thinking about Vietnam's improvement at the end of the fourth quarter and looking ahead to next year. It seems that the rest of Asia continues to perform much better than Vietnam. I'm curious about the overall situation and how much caution might be reflected in the 2022 forecast. It's clear that we still have a lot to consider.

It’s still early. Thank you for that. We provided a $2 billion estimate and indicated that we expect Asia to remain roughly flat year-on-year. We anticipate volume growth and are optimistic that Asian countries are shifting towards treating COVID as endemic rather than pandemic. The timeline for this transformation is uncertain, but we do believe that volumes will improve next year. I should note that the Asian market is significantly more competitive in terms of pricing and the passing through of raw material costs compared to other regions. Consequently, we will experience a delay in passing on increased aluminum costs to customers, particularly in Asia, compared to what might occur in the United States or Brazil.

Understood. That's very helpful. Can you provide insights on how specialty cans are performing across different regions compared to your overall beverage can volumes?

Yes, Tom, correct me if I'm wrong, but in North America, specialty cans account for about one-third or slightly more of all the cans sold. By specialty, we refer to anything other than the standard 12-ounce can, which includes slim cans and 16-ounce cans. In Brazil, the percentage is likely around 50% at least, while in Mexico, it might be closer to 20% to 30%. In the Middle East and Southeast Asia, depending on the country, it could range from 50% to 85% or even 90%. In Europe, it's approximately 50%, especially since a significant amount of beer is sold in 50 centiliter and/or 44 centiliter cans.

Understood. Thank you.

Thank you.

Thank you. Our next question will be from the line of Jeff Zekauskas of JPMorgan. Your line is now open, please go ahead.

Thanks very much. In North America, you said your volumes grew about 7% in the quarter and 9% year-to-date. Can you break that up into alcoholic and nonalcoholic volume growth?

I don’t have that information right now. You’ll need to check with Tom after the call. I would guess, though I could be mistaken, that a larger portion of the growth will come from nonalcoholic beverages rather than alcoholic ones. It might be around two-thirds to three-quarters of the growth coming from nonalcoholic products compared to alcoholic ones.

And in Europe, you said you're not really going to expand capacity next year. What kind of volume growth are you expecting? And why is it that you can't offset your inflationary costs more rapidly?

We are experiencing incremental growth from recent plant start-ups in Italy and Spain that will add some volume. However, we do not have any new projects launching in 2022. The contract recovery practices for can makers in Europe have historically differed from those in the Americas, and we are actively working to enhance these contracts over time.

Okay. Thanks very much. That’s clear.

Thank you.

And we no longer have any questions.

Is that the last question, Andy?

Yes sir, thank you. Sorry about that.

Well, thank you very much Andy and thank you all for joining us. That concludes the call today. We'll speak with you again in early February. Bye now.

Thank you. And that concludes today's conference call. Thank you everyone.