Crown Holdings, Inc. Q4 FY2021 Earnings Call

Good morning and welcome to Crown Holdings’ Fourth Quarter 2021 Conference Call. Your lines have been placed on a listen-only mode until the question-and-answer session. Please be advised that this conference is being recorded. I would now like to turn the call over to Mr. Kevin Clothier, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you, Younis, and good morning. With me on today’s call is Tim Donahue, President and Chief Executive Officer, and Thomas Kelly, our retiring CFO. 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 actual results to vary is contained in the press release and in our SEC filings, including Form 10-K for the 2020 filing and subsequent filings. The company recorded a loss in the quarter of $7.95 a share compared to earnings of $1.12 in the prior year quarter. The loss includes charges to fully settle a UK pension plan and premiums paid to retire $1.7 billion of notes related to the sale of the tinplate business. As a result of the sale of the European tinplate business, all periods have been restated as required and the results of the business are reported in discontinued operations. Adjusted earnings per share increased to $1.66 in the quarter compared to $1.50 in 2020. Net sales in the quarter were up 24% from prior year primarily due to the pass-through of higher raw material costs and increased beverage, food and transit volumes. Segment income was $357 million in the quarter compared to $358 million in the prior year, as the benefit from higher unit volumes was offset by inflationary pressures and the effects of the strong dollar. We purchased $950 million of stock in 2021 and returned an additional $105 million to shareholders from quarterly dividends. We have repurchased an additional $150 million of stock so far in 2022 and we expect again to return at least $1 billion to shareholders in 2022. As outlined in the release, we currently estimate first quarter 2022 adjusted earnings of between $1.80 and $1.90 per share, and full year adjusted earnings of between $8.00 and $8.20 per share. The first quarter estimate assumes no recovery of overhead costs or lost profits from the Bowling Green plant, which was damaged by the tornado in December. The full year estimates do, however, assume all losses from Bowling Green will be recovered from the timely collection of insurance proceeds throughout the year. These estimates assume exchange rates at current levels, equity earnings between $40 million and $45 million and a full year tax rate between 24% and 25%. We currently estimate 2022 full year free cash flow of approximately $400 million with approximately $1 billion of capital spending. Dividends to non-controlling interest are expected to be approximately $125 million. EBITDA, as defined, is expected to be $2 billion in 2022, up from $1,782,000,000 in 2021 and $1.5 billion in 2020, representing an increase of 33% in two years. We expect net leverage for 2022 to remain between 3 and 3.5 times compared to 3.2 times in 2021. We had a great year in 2021 and are well positioned for the future. With that, I’ll turn the call over to Tim.

Thank you, Kevin, and good morning to everybody. Our continued best wishes for the health and safety of all of you and your families. Before reviewing the operating performance for the fourth quarter, we again express our appreciation to the global Crown team for their continued efforts in overcoming the many challenges of the past two years to continually serve our customers well. While we know many of you are vaccinated and boosted, we ask that those of you who are not that you consider the data, which shows that hospitalization rates among the unvaccinated are almost 10 times higher than among the vaccinated. Our recommendation is that you please get vaccinated, get boosted and remain safe. As previously announced and in advance of his retirement, Tom Kelly stepped down as the company’s Chief Financial Officer on January 1. It’s been my pleasure to work alongside Tom for more than 25 years, a professional of the utmost integrity. The company has benefited from his counsel and we are grateful for the strong financial position created under Tom’s stewardship, establishing a strong foundation for continued future growth. On behalf of the entire Crown family, I want to thank Tom for his leadership and dedication and wish him and his family much happiness in retirement. And just a few words from Tom now before we begin. Tom?

Thank you, Tim. It’s been my pleasure working with you and the entire Crown team over these many years. Kevin, congratulations again and best of luck in your new position and responsibilities, and to those of you in the investment community it’s been a pleasure working with all of you during my time at Crown.

Thank you, Tom, and congratulations again. As described in last night’s earnings release, 2021 was an outstanding year for the company. Record performances in earnings per share, segment income and EBITDA were achieved. And as Kevin described, we believe 2022 will be even better. With beverage can demand continuing to outweigh supply in most global markets, we continue to invest for future growth, with approximately 20 billion units of beverage can capacity having already been commercialized or announced for commercial startup between 2020 through the end of 2022. Included within our third quarter earnings release in October, we outlined numerous achievements in our sustainability journey. We have since announced new global recycling rate goals to increase the circularity of the aluminum beverage can. The aluminum beverage can is already the most recycled beverage package in the world and we are committed to achieving even higher recycling rates to boost recycled content. In the fourth quarter demand remained strong across all businesses and geographies. Reported revenues increased 24% from higher beverage, food and transit volumes, coupled with the pass-through of higher raw material costs. Fourth quarter segment income was in-line with the prior year as higher volumes offset unfavorable currency and higher costs. In Americas Beverage, demand continued to outweigh supply as evidenced by as many as 15 billion can units being imported into the United States during 2021. To meet the growing demand, we completed construction on four production lines across the segment in 2021 and will commercialize an additional seven lines in 2022 and 2023. In North America, unit volumes advanced 6% in the quarter, and 9% for the full year. In early December, our newest plant in Bowling Green, Kentucky took a direct hit from an EF-3 rated tornado, resulting in the immediate curtailment of operations at the plant. An unfortunate situation given how tight the market is, with both production capacity and onsite inventory lost, but we expect operations to resume in March. Income in the fourth quarter was still healthy but down versus the prior year due to the loss of productivity and sales at Bowling Green, inflationary cost increases, and a strong prior year comparison. Looking ahead to 2022, we expect earnings in this segment to again expand double-digits, although that will be weighted towards the back half of the year due to the timing of our contractual PPI pass-throughs and timing related to insurance recoveries for Bowling Green. Unit volumes in Europe Beverage advanced 14% in the fourth quarter, and 12% for the full year with strong volumes noted across Mediterranean and Middle East operations. As expected, segment income declined in the fourth quarter due to inflationary cost pressures for materials, freight and utilities more than offsetting the benefit of volume gains. We expect 2022 will remain challenging in the segment and are taking actions to implement price increases to properly recover material and non-material cost increases as contracts renew. Underlying demand for aluminum beverage cans is growing and we believe our contractual price-cost recovery program will largely be completed over the next two years. Sales unit volumes in Asia-Pacific advanced 12% during the fourth quarter and 6% for the year as the hard lockdowns imposed across the region over much of the third quarter eased and economies reopened during the fourth quarter. During the third quarter of 2021, we began operations at a new beverage can facility in Vung Tau, Vietnam and in the fourth quarter brought the second line in the Hanoi, Vietnam plant online. Additionally, during the third quarter of 2022 we expect to commercialize another beverage can line in Phnom Penh increasing our production footprint to six lines across three plants in Cambodia. Income growth in the segment is expected to be modest in 2022 as volume growth and improved efficiencies arising from more normal production patterns are expected to offset higher raw material costs. Sales and transit packaging advanced 32% in the fourth quarter with segment income up 28% on the back of a 16% weighted average volume gain. Almost every product category was up double-digits, including plastic strapping, film protective, equipment tooling and service. For the year segment income was up $64 million or 25% and we expect further gains in 2022 from improved equipment deliveries and an ultimate easing of supply chain pressures. Fourth quarter demand was strong in North American food, offsetting cost inflation and shipment timing in the beverage can making equipment business. During 2021, we expanded two-piece food can production capacity with the completion of a new plant in Dubuque, Iowa, and the addition of a new line to the Hanover, Pennsylvania plant. We expect significant improvement in earnings in 2022 from higher food can volumes, higher equipment deliveries, and the contractual pass-through of cost inflation. So in summary, a busy and productive year in 2021. We completed the divestiture of the European tinplate assets, reduced pension obligations, and importantly commercialized significant new beverage and food can capacity in 2021. Despite the challenges in our European business, our outlook for 2022 is strong and we expect estimated EBITDA of $2 billion, up 12% over 2021. We also reaffirm the 2025 EBITDA estimate of at least $2.5 billion provided during the May Investor Day. With leverage within our reported range and the elimination of $3 billion in pension liabilities, our balance sheet is strong, generating solid cash flow. We continue to invest in our businesses for future growth and again expect to return more than $1 billion to shareholders in 2022. We ask that you please limit yourself to two questions so that we may get to as many of you as possible. And with that Younis, we’re now ready to open the call to questions.

Thank you. We will now begin the question-and-answer session. Our first question is from the line of Angel Castillo of Morgan Stanley. Your line is now open.

Good morning, and thanks for taking my question. Let me just start out, I just wanted to ask, I guess what you’re seeing in terms of the volumes by region, as we think about that 9% for 2022 and also how should we think about kind of the cadence throughout the year as well?

Probably a little too early to talk about the first quarter, only January behind us, but thinking about volume for next year, I think in total, as we say in the release where we’re going to be up 9%, perhaps a little more than 9%, we expect double-digit growth in Asia. I think in the Americas segment, we expect double-digit growth with both North America and Brazil being very strong. And in Europe, currently we are capacity constrained and we expect volume growth in Europe to be flatter, perhaps up 0.5% for the year.

Got it. That’s very helpful. And then, as we think about the Bowling Green incident and just maybe where that might have impacted inventories, as you think about that double-digit in North America. Any sense for maybe how much of an impact that may have or there may be in terms of volume? I’m just kind of how you feel about your inventories heading for the year?

Yes, it’s a good question. So I think, it's one plant. We will begin to bring the plant back up early next month, bring the first line back up and then get the second line going. After that it’s a new factory and I don’t want to say we’re going to have to go through a learning curve again, but we’re certainly going to have to, as we bring the lines back up, debug the equipment. These are not workers that have been in the system for 30 years making cans. They’ve been making cans for six to 12 months now. So it’s not necessarily second nature to them. There’s some retraining and a learning curve to get back through. So we will lose capacity out of Bowling Green for the full year from what we might have originally expected, even as we bring the lines back up. Having said that, it’s one plant in a system and it doesn’t change our estimate of double-digit growth in North America for the year. I will tell you that it did not, to your question, it certainly did not help our inventory position. As you’re well aware, the market is extremely tight. The industry is not quite hand-to-mouth, but the market is very tight. And we are still importing cans. We will import cans to service customers and to overcome the Bowling Green challenge. But our inventories are a little lower right now than we would have liked and that will cause some strain on the system as we get through the first two quarters of the year.

Appreciate the color. Thank you so much.

Thank you. And the next question is from the line of Christopher Parkinson of Mizuho. Your line is now open.

Hi, this is Harris Fein sitting in for Chris. Can you please speak to the transportation and logistics challenges that you are seeing across geographies? How have they evolved in 1Q thus far versus 4Q and what are your base case expectations for the balance of the year? Thank you.

Yes. Europe is the most challenging and certain markets in Europe are more challenging than others. I don’t see any overwhelming challenges as it relates to transportation of our finished goods to customers. There are some issues on the transportation side with raw materials, especially raw materials that are on container ships; that continues to be somewhat challenging. There still are numerous delays and the time on water, and the time to unload once they arrive at the port, is still a bit longer than we like, but like others, we are managing through it at this point.

And then, regarding Southeast Asia specifically, Vietnam versus your prior commentary, is there any other insight that you can give as to how that situation has evolved and how that plays into the $2 billion EBITDA guidance?

I think we’re going to have a real strong performance in Asia. We’ve had growth each year for as long as I can remember, with the exception of last year which was slightly down only because of severe shutdowns due to the virus. We had growth this year in Asia and we expect significant growth, likely double-digits next year, because it appears that most countries are beginning to evolve towards treating the pandemic as endemic as opposed to pandemic and are learning how to live with it. Currently it feels like in Southeast Asia, especially the big markets for us — Cambodia, Vietnam, Thailand — are all wide open right now.

Thank you. Our next question is from the line of Mike Roxland of Truist Securities. Your line is now open.

Thanks very much. Congrats Tom on your retirement and best of luck in your future endeavors. And congrats Kevin on your new role as well. One quick question. Tim, you mentioned current supply chain logistics issues and obviously your inventory is not where you would like. How do you think about inventory levels coming out the other side? Do you think you’ll start to carry higher levels of inventory in case conditions revert or worsen? Will you carry higher levels of inventory going forward?

Depending on who you ask in the company, you’ll get different answers. If you talk to our manufacturing folks, they would like to carry higher inventories. The situation is that even as we get past the Bowling Green restart and we’re back to full production, we’re not likely to have the luxury to carry higher inventories, because demand is so strong in almost all the markets where we operate. We are constantly trying, as are others in our industry, to get more capacity in as quickly as possible to serve the growing demand for a variety of products our customers are offering to consumers. I don’t think anybody is going to have the ability to grow inventories for the next several years given that demand is so strong. In the absence of overcommitting capital to any one region, we will be fairly responsible in how we deploy capital into the markets where we operate.

Got it and thank you. One quick follow-up. You mentioned some cost recovery mechanisms you’re pursuing with European customers. Can you talk about actions you’ve taken? You mentioned a two-year horizon to correct these. What have you done thus far? How have those conversations proceeded? What’s the feedback been and what progress have you made? I realize contracts renew at different times.

Europe has been different. The commercial contract convention for pass-throughs is different in Europe compared to North America and we’ve been trying to move more of the raw material risk to our customers who ultimately have pricing power to the consumer. That will take some time. The good news is the market remains tight in Europe and there is a growing shift to cans in Europe, as we’ve seen in North America, so customers need cans. We are in the early stages of this, but as contracts renew over the next two years we expect largely to complete this through the end of 2023 going into 2024.

Thank you. The next question is from the line of Michael Leithead of Barclays. Your line is now open.

Great, thanks. Good morning guys. First question on Americas Beverage, Tim, can you unpack the moving pieces in the quarter between North and South America. And then, how you think about the regional split in terms of earnings growth for 2022 as well? Are there differences between how fast each region should get that price catch-up you mentioned?

I don’t have all of the volume numbers at the top of my head. We had really good growth in North America and good growth in Mexico. Brazil was a bit more modest given a cool, wet season and perhaps a softer economy there. Long-term, we remain exceptionally bullish on cans in Brazil. Most of the PPI recovery will come through in Q2 and Q3, so largely by the end of Q3 we'll have that back in North America. Expect the Americas Beverage segment will probably have a decline in segment income in Q1 related to last year just due to timing — PPI largely recovered in Q2 and Q3 and we’re not going to recover any of the Bowling Green hit until later in the year. But for the full year, it's going to be another strong performance in the segment from an income perspective.

Okay, that's super helpful. And then maybe just a quick follow-up for Kevin. Can you just speak to the level of share repurchases that you're currently incorporating into full-year 2022 EPS guidance?

So yes, Michael. We're looking at spending close to $1 billion in share repurchases and we assumed an average share price of around $120.

Thank you. The next question is from the line of George Staphos of Bank of America. Your line is now open.

Hi everyone, good morning. Thanks for all the details. Kevin, again congratulations; and Tom, congratulations to you. It's been a pleasure working with you over the years. I have one shorter-term question and one longer-term question. Did you call out what the impact of the tornado in Bowling Green was either including the recovery or cost of the damage and the ripple effect it had on the network in Q4? And in turn, what is the negative in round numbers for Q1?

Yes. Your round number for Q1, I think about $20 million, George.

Okay.

And that doesn’t mean that Bowling Green contributes $20 million per quarter. It’s the incremental cost that we're going to incur but ultimately we will recover it from the insurance company. The incremental cost we incurred was to continue to service customers for existing business.

Right. And for Q4 was it comparable?

No, it’s not that big. We had a lot of inventory in the plant which was a loss. Think about maybe $5 million to $10 million, perhaps around $7 million. We don’t have an exact number but we probably had 80 million to 100 million units of inventory on site which were lost. So, yes, unfortunate.

No, I appreciate it, Tim. And again, thankfully no one was hurt from what we could see in the release. Strategically a longer-term question: you are reinvesting in the food can business. Machinery has also been core to Crown for many years. Can you help us understand if perhaps at some point you'll be disclosing more data on the businesses you have in the other segment and in particular on machinery? Strategically, how does it help you operate and is there a way that you use it strategically in go-to-market and from a commercial standpoint in the beverage can sector?

Our beverage can making equipment business is based out of the UK; we acquired that business a little over 25 years ago and have grown it substantially since then. For many of the pieces within the beverage can line, our equipment is the leading industry standard. Strategically, as you think about the tremendous growth the industry is experiencing, there are a couple of bottlenecks to assuring that growth. One is securing enough aluminum and the other is procuring equipment on time. Having our own equipment business helps because we can get slots with our equipment supplier to assure we can get equipment installed as necessary to meet the growth demands of our customers. It also helps our equipment supplier better understand the growing technical needs of the business — higher speed, lighter weights, better power transformation, and a variety of things that make equipment more appropriate for a rapidly transforming business. As it relates to disclosing more information on the remaining food and aerosol can business and equipment, we'll see what we get to in that.

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

Thank you. Good morning, everybody. And Tom, just want to echo the congrats on your retirement. I guess, first off on the 9% volume growth assumption for 2022 off a 79 million base, that implies about 8 million cans and maybe $800 million plus in sales? What do you estimate the operating leverage to be for the new additions based on how operating leverage shook out for 2021 with the 9% growth you saw last year? I know there's a lot of moving parts. I'm trying to bridge the $220 million or so of EBITDA differential between 2021 and 2022. Maybe break out some of those moving parts.

Ghansham, roughly $220 million of EBITDA growth — perhaps half of that is in the global beverage business and half is in transit, food and equipment businesses. We're going to have a fairly strong equipment performance in 2022, transit will do better and food and aerosol will do better on the back of PPI recovery which was particularly acute in those businesses over the back half of 2021 combined with significant in-house two-piece food can volumes. We've been short two-piece food can capacity for a few years and have been sourcing cans from our former sister operations in Europe and competitors in the United States. So we'll make our own cans, significantly transferring profits that were recorded elsewhere to our own books going forward. That would be the split. Much of the growth will be in the Americas segment as Europe will be down.

Okay, thank you. And in terms of your comments on Europe being somewhat capacity constrained, you're spending $1 billion in CapEx in 2022. Your main competitors are spending perhaps twice that including projects in Europe. How should we think about the evolution of CapEx toward that region going forward?

Within the $1 billion number there is a significant piece that's Europe; we have yet to announce those locations for other reasons. But we're not sitting on our hands in Europe; we just haven’t announced those projects yet.

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

Thanks. Good morning, Tim and Tom and Kevin. Tom, I will just add my congratulations to you, I really enjoyed working with you. Tim, first question I have on the transit packaging business. Did you see kind of an acceleration in the underlying growth there driven by reduced labor and increased automation that we're seeing in a lot of industries?

The short answer is absolutely. I neglected to mention in my prepared remarks that it was perhaps a 16% weighted average volume growth in this year's fourth quarter versus 2020, which was against an easy comp, but compared to 2019 we're up about 8% weighted average volume. We’re not investing a lot of money in transit; we're just running those assets harder. Automation is prevalent, especially in the transit business where companies want to automate the backend of their manufacturing process — how they transfer the end of manufacturing through packing, warehousing and distribution. Given labor shortages and rising labor costs, I think this trend has a multi-year runway.

How many years of runway do you think that might have? Would you say three to five years?

Three to five years is reasonable. When we bought the equipment business and through the end of 2020, our backlog in equipment and tooling was about $80 million to $85 million. We are over $200 million in backlog right now. Given the labor situation and other factors, I think this is here with us to stay and this is likely multi-year.

Thank you. The next question is from the line of Anthony Pettinari of Citi. Your line is now open.

Good morning. Congrats to Tom and Kevin. Bevcan demand looks obviously quite strong globally. When you look at the supply-demand balance, could you go through regions and characterize which markets are uncomfortably tight where you're importing cans or would expect to import cans in 2022 versus markets where supply-demand is more balanced and any regions where supply-demand is worse than you'd like?

Thank you, Anthony.

Depending on how you define 'uncomfortable', every market we operate in with the exception of China and the Middle East is oversold. Southeast Asia as a market is not oversold in 2022 but for us we're oversold. We're fully sold out in China. The Middle East has some slack and is the one area where we have cans available. The United States will continue to be oversold for the next couple of years at least. Europe is exceptionally tight in many markets. Brazil might be a little loose for the first six to nine months this year, but only by a couple percent and that’s a short-term issue tied to weather and economy; long-term Brazil remains very healthy for can growth.

When you look back two years into the pandemic, do you think the pandemic was a net benefit to bevcan demand, neutral, or negative? If it was a benefit, do you view that as a structural accelerator or more of a one-time change? Is there risk of reverting?

I think consumer behavior has changed in a way that is more permanent. At-home consumption has increased over the last two years for both beverage and food cans and I believe that change is likely more permanent. Even as economies reopen, eating and drinking out has become a different experience — service has been inconsistent and costs to eat out are higher. So at-home consumption is likely to remain elevated and that benefits cans for years to come.

We have Phil Ng on the line again from Jefferies. Your line is now open, Phil.

Good morning. Jefferies, John. I apologize, you could hear me before but I did want to extend my gratitude to Tom for all the insight he's been able to provide over the years. And I'm really looking forward to working with Kevin going forward. I just wanted to touch on imports. It sounds like cans will be sold out through 2023. The industry data for December showed imports down about 37% year-over-year, which is still two or three times pre-pandemic levels. Do you think we can get back to more normalized imports into the U.S., or do you still see capacity continuing to be extremely tight and needing imports to supplement current demand levels?

I wouldn’t read too much into December imports being lower; December is a softer season. The industry imported roughly 15 or 16 billion units in 2021. I can’t say we’ll get back to that level in 2022, but I’d bet at least 10 billion units will come into the market in 2022. We as a company, and others in the industry, are still turning away business. There is not enough capacity and companies are increasingly introducing products in aluminum as opposed to PET for sustainability reasons. Until more capacity comes online, imports will continue to be strong for the next couple of years.

Understood. And then about the new capacity coming online, have you experienced delays due to supply chain disruption in the projects you have coming on in 2022? And could you quantify how much capacity the Cambodia line will add?

The Cambodian line will come up in the third quarter and will be sized initially for about 700 million units. We have experienced supply chain delays for some equipment, but we try to place orders thoughtfully so equipment arrives when needed. Early on, construction steel was challenging, but we are through that now. We are managing equipment lead times and project timing to minimize delays.

Thank you. The next question is from the line of Gabe Hajde of Wells Fargo Securities. Your line is now open.

Yes. Thanks for taking the question. Good morning, Tom, congrats. Kevin, look forward to working with you. Good morning, Tim. I know you fairly let us into previewing the forward year; you did so in Q3 and you told us $2 billion in EBITDA. You're reaffirming that today despite some FX headwinds and Bowling Green impacts. Can you talk about material availability risks — aluminum, magnesium or other risks — that would put you below that outlook? Anything keeping you up at night?

Good morning, Gabe.

Gabe, there is always something that can go wrong. I think we have a lot of momentum. We know the first quarter will be a bit softer in Americas Beverage due to timing around PPI recoveries and Bowling Green, but the year looks strong. Some things have moved toward our favor since October. On balance, we feel as comfortable today as we felt in October despite some minor headwinds. I'm not overly concerned about magnesium right now. Aluminum is tight globally. Geopolitical risk could change things — for example, a major disruption in gas supply to Europe would affect metals — but as of now we feel pretty good.

Okay. Now that was more meant to be congratulatory — you guys were able to overcome these issues. Quick clarification: Tim you mentioned not wanting to overcommit capital. Was that comment more about working capital and inventory or about permanent capital and capacity? The working capital number was around $536 million use of cash — any view on what that number could look like for 2022?

My comment was purely about inventory levels. I don’t think we’ll have the ability to build large inventories given demand. We also don’t want to overcommit long-term capital to one region. We want to be disciplined in deploying capital where needed.

Gabe, in terms of working capital, as we invest in new plants and add capacity, we'll need to add working capital. We're looking at probably at least a $100 million working capital build. We will manage it as much as possible, but that's the neighborhood we're looking at today.

I appreciate it. Good luck, guys.

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

Great. Thanks for taking my question. Thanks for all your help, Tom. And congrats, Kevin, to you as well. I guess my first question is on Europe. You noted a potential two-year cost recovery trajectory. Could you describe the contracting process there? A couple of years ago when this happened in North America it was a sold-out market and an opportunity to bring up returns to mid-teens. Is there a similar opportunity now in Europe or how do you characterize that market?

The market in Europe is similarly tight as North America was a couple of years ago and we expect it to remain tight or get tighter in certain regions. Our efforts over the next two years are largely around ensuring contract provisions allow us to fully recover our cost. The customer has the ultimate pricing power — if there's inflation, the consumer needs to pay for that. We're focused on fairly recovering our cost which would imply margin expansion from fourth quarter levels but may only imply margin recovery back to levels where we were previously satisfied.

Got it. Thanks for that. And then on transit packaging — we've seen a nice recovery there — would you say the business is fully recovered from COVID-related industrial weakness? What inning are we in and do you expect continued EBITDA growth in 2023 as well?

We would expect EBITDA growth in 2022 and 2023. Largely recovered from COVID; the remaining headwind would be supply chain where there's still some tightness for circuit boards, motors and components delaying equipment shipments. But overall we expect continued improvement.

Thank you. And our next question is from the line of Adam Josephson of KeyBanc. Your line is now open.

Thanks. Good morning, everyone. Tom, congrats on your retirement. Question on food can strategy: you sold 80% of your European business last year and you're adding significant capacity in the U.S. Can you talk about how core U.S. food cans are to the company versus Europe? Also how much capacity you're adding in the U.S. relative to your existing base?

If you include the third line in Olympia coming up in Q3 2022, plus the line in Hanover and Dubuque, we’re expanding two-piece food can capacity in North America by roughly 35%. We have been procuring cans from our former sister company in Europe and from competitors in the U.S. While we own the business, we aim to run it well and serve customers effectively. We're a packaging company — beverage, food or transit — and we aim to generate returns and cash flow to fund growth and return value to shareholders. I wouldn’t say one business is more core than another; each contributes to the company’s objectives.

One follow-up: you mentioned both steel food cans and aluminum beverage cans benefitted from the pandemic. Do you think the pandemic was structurally more beneficial to one versus the other?

From the pandemic, food cans probably benefited more due to at-home consumption. Beverage cans have also benefited from pandemic-related shifts, but they've received an additional structural boost from sustainability trends as retailers and CPGs move more toward aluminum from plastic to meet ESG goals.

One last: in North America, which categories are growing the most quickly? Where do you expect the bulk of growth this year and why?

Energy drinks, carbonated flavored waters, and teas are among the fastest-growing categories on a percentage basis, although from a unit perspective CSD remains large. So in terms of percentage growth, flavored sparkling water and energy drinks are notable, but CSD and other established categories continue to contribute materially to unit growth.

Thank you. And our final question is from the line of Silke Kueck-Valdes of JPMorgan. Your line is now open.

Hi, good morning. When you bring the Bowling Green plant back online, will it come back at the same capacity, around 2.4 to 2.5 billion cans, or do you think you can bring it back at a larger size? Could that mean a bottleneck while you're re-starting the plant?

The plant is sized to produce about 2.4 to 2.5 billion units per year depending on size mix and changeovers. We'll bring it back to that rated capacity. As I noted earlier, it will take time to debug the equipment and go through the learning curve with employees. The employee group at Bowling Green performed well during commissioning and we’re hopeful they’ll come through the restart well. Okay. Well, thank you very much. Yunis, I think that concludes the call today. So we thank everybody for joining us and we'll talk to you again in April. Bye now.

Thank you. And that concludes today's conference call. Thank you all for participating. You may now disconnect.