Crown Holdings, Inc. Q1 FY2022 Earnings Call

Good morning, and welcome to Crown Holdings' First Quarter 2022 Conference Call. Your lines have been placed in 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, Kerry. 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 crowncork.com. On this call, as in the earnings release, we will be making a number of forward-looking statements. Actual results could vary materially from such statements. Additional information concerning factors that could cause actual results to vary is contained in the press release and in our SEC filings, including our Form 10-K for 2021 and subsequent filings. The company's recorded earnings in the quarter were $1.74 per share compared to earnings of $1.57 a share in the prior-year quarter. Adjusted earnings per share increased to $2.01 in the quarter compared to $1.83 in 2021. Net sales in the quarter were up 23% from the prior year, primarily due to the pass-through of higher raw material costs and increased beverage can volumes. Segment income was $383 million in the quarter compared to $369 million in the prior year, primarily due to improved profitability in North America, tinplate businesses, and can-making equipment, including a net benefit of $30 million from lower cost inventory, offset by the timing of insurance recovery for the incremental costs related to the Bowling Green tornado and $8 million of unfavorable foreign exchange. We have repurchased 400 million of Crown common stock to date from the $3 billion program that was authorized by the board in December. While Brazil remains soft, we do expect volumes to begin to recover in Q2 and throughout the year. When combined with the stronger U.S. dollar and higher energy costs in Europe, we now project EBITDA to be $1.97 billion for the full year. Our estimate for adjusted earnings for the second quarter is in the range of $2 to $2.10 per share, and for the full year, we remain in the guidance range of $8 to $8.20 per share. The full-year estimate continues to assume all losses from Bowling Green will be recovered from the timely collection of insurance proceeds by year-end. It assumes we repurchased an additional $600 million of common stock in 2022, and achieved about $1 billion for the year. We continue to expect free cash flow to be $400 million, with capital spending of $1 billion. And we maintain a target leverage ratio in the range of 3.25 times for 2022. With that, I will turn the call over to Tim.

Thank you, Kevin, and good morning to everyone. I'll be brief, and then we'll open the call to questions. As reflected in last night's release and as Kevin just summarized, overall first-quarter performance was better than expected. Although, compared to the prior year, results were mixed across the operating segments. Global beverage can volumes were up 1% in the quarter, reflecting sold-out conditions in most markets and demand for beverage cans remaining an excess of our ability to supply, with the exception being Brazil, where our unit sales declined by 20%, in line with the market decline of 26%. Overall, global volumes advanced by 6.5% in the quarter when excluding the Brazil market. We have summarized our major capacity expansion projects in the release with second-quarter start-ups as follows: The second line in Monterrey, Mexico began commercial shipments earlier this month, and the first line of the new greenfield plant in Uberaba, Brazil will begin shipping to customers next month. Reported revenues increased 23% in the first quarter, primarily due to the pass-through of inflated raw material costs. Comparatively, the cost of tinplate steel has almost doubled compared to the prior year, while diluted aluminum is up approximately 75% on average in the first quarter of 2022. Recent strength in the U.S. dollar impacted segment income in the first quarter by $8 million, and was as follows: both European beverage and transit, $3 million each, while Asia was $2 million. In Americas beverage, like-for-like North America unit volume growth was 6%, excluding the temporary loss of Bowling Green production capacity. Due to this temporary loss, we carefully managed our capacity and inventory levels ahead of the busy summer selling season, which limited opportunities for further volume growth. Demand remains strong in Mexico and Colombia, with unit volume growth of 4%, limited by capacity. Low consumer confidence driven by high inflation and unemployment, and the delay of Carnival led to significant first-quarter softness in the Brazilian market. We anticipate volumes will begin to return early in the second quarter, and as Kevin noted, we expect further recovery as the year progresses. Segment income in the quarter reflects approximately $20 million in incremental system operating costs due to the Bowling Green tornado. We expect to begin receiving insurance recoveries during the second quarter, with both lines at Bowling Green now back to operation. With continued learning curve improvements on recently installed capacity, we expect second-quarter income to exceed the prior year, offsetting the Bowling Green insurance timing. Unit volumes in European Beverage advanced 6% over the prior year, with notable growth across Mediterranean operations and Saudi Arabia. Moving into the second quarter, we remain sold out, and look forward to incremental 2023 capacity from recently announced projects in Spain and the UK. Income in the segment was better than forecast due to volume growth and mix, but as previously discussed, we do expect significant earnings headwinds in this segment during the second quarter and for the balance of the year. Beverage can volumes in Asia-Pacific advanced 8% in the first quarter, as strong shipments across Southeast Asia offset the impact of COVID restrictions in China. Adjusting for currency, segment income in transit packaging declined $6 million in the quarter primarily due to higher costs, including the impact of inflation and the carryover of higher-priced year-end steel balances brought into 2022. Appropriate pricing actions have been taken, and we expect second-quarter income in the segment to reflect that. As noted in the release, our North American tinplate and beverage can-making equipment businesses had strong results in the first quarter. In North American food, we benefited from additional two-piece food can capacity installed in 2021, leading to a 16% unit volume sales growth in self-made two-piece food cans in the first quarter. Additionally, pricing actions were taken to recover 2020 inflationary cost items. So in summary, a solid start to the year with results mixed, but overall ahead of plan. Looking ahead to the second quarter, Bowling Green is now back up and running, contractual recovery of inflation commenced on April 1st in North America, pricing actions have been taken in transit to recover inflation, and we continue to expect global beverage can demand to remain strong. So with that, Kerry, I think we are now ready to take questions.

Thank you. We will now begin the question-and-answer session. Our first question is from Ghansham Panjabi of Baird. Your line is now open.

Thank you. Good morning, everybody. I guess, Tim, maybe focusing on the U.S. Clearly, mobility is starting to increase, people are moving around, flying, etc. On-premise sales dollars seem to be improving as well, commensurate with that, and restaurants, etc. Can you just characterize for us if that's having any impact on packaged beverage volumes or maybe even food as it relates to how you see the rest of the year unfolding?

It's a good question. You would expect that to be true. We haven't seen it yet. As I mentioned in the prepared notes, we weren't very aggressive in selling cans in the first quarter. We're a bit concerned about our summer inventory levels since we lost capacity early in the year, and we obviously won't reach full capacity until we get the plant through the initial learning curve stages at Bowling Green. However, it does not seem that the demand for beverage cans is slowing down significantly.

Sounds good. Regarding the slight decrease in EBITDA this year, could you outline the different factors contributing to it? Also, considering the difference in timing for Carnival last year compared to this year, do you have an idea of the potential impact for the first quarter? Could you also share what you are observing in Brazil so far in Q2?

Right from the beginning, Ghansham, the decline in EBITDA due to currency was anticipated, but it's likely an additional $10 million from where we stood a couple of months ago. If we consider the euro, which acts as a reference point, it's currently at 107 or 108. I believe, two months ago, it was around 111 or 112. In Europe, we should expect an additional $20 million in headwinds compared to a couple of months ago. Brazil may contribute around $10 to $15 million, although this is offset by minority interest at the EBITDA line, along with unexpected gains we didn't foresee from Asian beverage and food, as well as some strong performance in European Beverage during the first quarter. This results in a total EBITDA reduction of approximately $30 million.

Yes, Brazil.

It's hard to quantify the delay of Carnival. The market was down. I think the market was down 26% we were down 20%. It doesn't make me feel good that our better than market performance still left us down 20. However, I got to tell you it, maybe the Carnival is at best 10 of the 26%. The balance is going to be shaky. Consumer confidence in the face of high inflation and high unemployment. And so as we've said to you before, we've seen these conditions before in Brazil from time to time and it does not dampen our outlook for the growth in the Brazilian market long-term. We have experienced headwinds in Brazil, and as we've said before, we always seem to recover to higher levels, and that's what we fully expect.

Thanks so much.

Thank you. Ghansham.

Our next question is coming from the line of Kyle White of Deutsche Bank. Your line is now open.

Hey, good morning. Thanks for taking the question. I just wanted to follow up there and Austin's question on Brazil. I guess given where the consumers are and kind of the deceleration that we saw in this quarter, what's giving you the confidence that you're going to see demand recover through the balance of the year?

I believe we are beginning to notice positive trends compared to last year. As we reach the end of April, we're seeing not only improvements when compared to last year but also an increase in absolute terms, indicating customer demand is picking up. Furthermore, with events like Carnival coming soon, the World Cup later this year, and the summer selling season approaching as we head into Brazil's fourth quarter, I remain optimistic. As I mentioned before, we have experienced similar situations in the past. The economy tends to be unpredictable, which affects consumer behavior as their confidence rises and falls. However, I am quite confident that demand will rebound.

Got it. And then just transitioning to non-reportables. Are you able to parse out the drivers of earnings improvement this quarter? How much was driven by the sell-through of inventory from last year? How much was underlying improvement in food cans as well as the equipment business that you own?

Overall food can volumes for Crown were flat in the quarter, however we sold 16% more cans than we made, which means while we were flat, we bought a whole bunch of cans from third parties last year that we are not buying this year that we are able to sell. That's a significant piece of profit for us. We're not paying profit to somebody else and we're not paying the freight to come in from Europe. As Kevin noted, we had about a net $30 million inventory gain, so that's a significant portion, about half of the growth, I think, in the quarter, and the other half, I think about two-thirds food cans and one-third equipment.

Got it. That's very helpful. I'll turn it over.

Thank you.

Thank you. Next in queue is George Staphos from Bank of America. Your line is now open.

Thank you very much. Good morning, everyone. I appreciate the details. I just wanted to clarify something, Tim, regarding Kyle's question. You mentioned that you sold 15% more food cans than you produced, but that was specifically for two-piece cans, correct? Could you also provide a rough breakdown of three-piece versus two-piece cans for the Crown network as it currently stands? My second question is about transit. I believe you mentioned in your release that there has been inflation, which aligns with your expectations. Last quarter, you anticipated transit would contribute to profit growth this year. Can you provide more guidance on your expectations for this year and whether your outlook for this segment has changed since February?

I think I was going to give you a number. I hate to give you a number. It's just like, I'll take half of your salary too, George. Come on, now.

Half of nothing is nothing, Tim.

So I think if we consider transit for the full year, I think we're probably considering currencies a headwind, and we sold a fairly profitable business, that after those two items, we will probably still see an increase of around $15 million for the full year, which would tell you that in the next three quarters, we're going to be up about $20 to $25 million net of the loss of the Kiwi business and a little bit of currency headwind.

Understood. And on the topic of transit for the full year, we believe that currency challenges are a factor, and considering we sold a quite profitable business, even with those two considerations, we expect to see an increase of approximately $15 million for the full year. This suggests that in the upcoming three quarters, we anticipate a rise of roughly $20 to $25 million, taking into account the loss of the Kiwi business and some currency headwind.

Question on three-piece cans.

Yeah, three-piece compared to two-piece in terms of your position, go ahead.

We don't buy any three-piece cans. Everybody in the market, as you know, George, has excess three-piece can capacity. We are principally a two-piece can maker. We're probably at Crown 60% to two-thirds two-piece with about a third of our business being in three-piece. And just looking at the first quarter, three-piece cans were up a few percent, 3% in the quarter. But the big growth that we had was in two-piece cans, which were largely flat, but self-made cans were up tremendously.

Thanks. That's great, that's very helpful. Tim, my last one just broadly on America's Beverage Can volume. Is there anything that you're seeing in the market related to North America that is dampening your growth outlook, or if you could talk to why you might feel comfortable or reaffirmed in your growth outlook relative to new products? And within Brazil, there's been a lot of questions already from Ghansham and Kyle on Brazil, which is obviously a concern right now for you. One of your peer rigid packaging companies today was talking about the fact that they're sold out in a different substrate. Do you worry at all about cans losing share to glass because of the macro conditions or what you typically see from one way to returnable packaging when you have macro downturns? Thanks and good luck in the quarter.

Thank you, George. So I think in the short term, you will see potentially a shift in the large 600 ml glass bottle to the 600 ml glass bottle.

Okay.

As consumers have less buying power and they look to share a beer among two or three people as opposed to having their own single-serve in a can. Now, having said that, these are short-term data points. This is a three to six-month headwind in the economy. I think the outlook for the overall Brazilian economy, and the outlook for Brazil as a global economy is quite bright over the next 10 to 15 years. We remain very bullish on Brazil. I think if you look at anything in the short term, you can become concerned. We're not exceptionally concerned in the short term because we've seen it before, and we're very confident that it's going to turn, and the can continues to be the increasingly preferred package in Brazil.

And North America?

North America. As I said to Ghansham, I got to say we weren't very aggressive in selling in the first quarter. As I said, we have our own customers and our other customers or smaller potential customers continue to ask for cans at rates that are much higher than we've ever seen. You would expect perhaps, with everything that's reopening as Ghansham noted, that perhaps we'd see a little dampening of demand but it hasn't happened. I think that, I said it last time on the earnings call, I think the prospect of eating out at restaurants is not a very compelling prospect right now. And I don't mean to take a shot at some of those restaurants but it's really expensive, the service is lousy, and the food isn't that good. So if you decide you want to prepare a meal at home, I think the kitchen is being used a lot more nowadays than it was used pre-pandemic, and it will continue to be used more than pre-pandemic. The can for purposes of food and beverages is going to continue to be strong. I think we're in a period where we felt really good from a sustainability standpoint as it relates to cans a couple of years ago, and post-pandemic, we are seeing the can usage being re-energized by consumers in their own kitchens.

Okay. Thank you, Tim.

Thanks, George.

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

Hey, guys. Good morning. Tim, I guess Russia, clearly a large exporter of commodities, including energy, is there any supply issue that we should be mindful of? And certainly, you called out energy that’s going to have a bigger impact on your margins in Europe. But it sounds like a few of your peers are trying to push pass energy and freight costs a little more on a real-time basis. How are your conversations going? And how are your kind of renegotiated contracts in Europe as we speak?

I think we renegotiate contracts. We are steadfast in our determination to be fairly compensated for the goods and services that we provide and that includes energy, freight, raw materials, and the conversion of those raw materials, as well as any other costs, regulated or unregulated labor, etc. So I think in the interim, however, we do have contracts. We expect our suppliers and customers to adhere to their contracts, and likewise, they expect us to adhere to ours. Having said that, we have not seen any disruption in the supply of raw materials and to our energy to our global sites, including the sites in Europe.

Got it. That's helpful. Can you remind us how those contracts work? Is it that most of your business has contracts that allow for pass-through, so the delay is more of a minor issue? Looking at this business over the medium to long-term, it tends to be a bit cyclical. What is your outlook for it? It seems like you are still anticipating strong results. I'm curious if there is anything you've done since acquiring it to reduce that cyclicality moving forward. Thanks a lot.

Thank you. Regarding Signode, most of our larger customers have contracts that include escalator clauses, but that likely accounts for only about 20% of our overall Signode business. The majority is priced on a monthly or per-order basis, depending on current commodity prices such as hot rolled coil index, paper, or resin. This allows us to adjust prices more quickly in that sector compared to the can business. Since acquiring the business, and even prior to that, we've made significant efforts to shift its focus away from primarily serving the metals industry towards increased supply in the food, beverage, and other consumer product sectors. Previously, 10 to 15 years ago, approximately 30% to 35% of sales were in the metals industry, whereas now that figure may have decreased to about 20%. In contrast, food and beverage market share has risen from around 8% to about 20%. While I know the "R word" is not a popular topic, I believe that the substantial backlogs we have for equipment, tools, and services in both Signode and our can-making businesses will help prevent disruptions to the forecasts I provided earlier, even if there is a slight slowdown in the market.

Okay. Thanks a lot.

Thank you.

Next one in queue is Mr. Mike Leithead of Barclays. Your line is now open.

Great, thanks. Good morning guys. First congrats on the transit packaging divestment, it's a really nice transaction multiple there. Are there other, call them singles or doubles like that within the portfolio? Or I guess just how do you think about your overall portfolio as it stands today?

So I think that one was an easy one, it's software. We're not in the software business. Obviously looking at the multiple, I wish I was in the software business. Small business is self-contained, it was fairly easy to do. The reason it took a couple of years to get it done is we're trying to find the right partner for that business who is going to continue to grow the business and service the customers in the corrugated industry. But many of those customers are the customers for Signode for equipment, and also for commodities. There are numerous businesses under the transit umbrella. And I would say to you that the focus is on improving the portfolio of businesses that Crown operates, whether that be in transit or in metal. I think it would be probably inappropriate for me to say anything other than app, but we're always trying to improve the portfolio of businesses we operate.

Thank you, Tim. Regarding European Beverage, it seems the market is quite strong and you're fully engaged. I'm curious if the market demand provides any leverage for quicker price recovery or contract structuring. How should we anticipate the pace of recovery in that area?

Yes. I believe we mentioned previously that it will take us a couple of years to recover, expecting to regain about a third of it next year and the remainder in 2024. If we had extra capacity, we could adjust prices based on the current market conditions. However, we do not have any extra capacity, so we are operating within the limits of our existing contracts.

Got it. Thank you.

Thank you.

Our next question is coming from the line of Gabe Hajde of Wells Fargo Securities. Your line is now open.

Good morning, Tim, Kevin.

Morning, Kevin.

I had a question not to focus too much on the near-term, but I think there was some commentary about normalization above can volumes in the UK. And I'm trying to marry that up. I mean, I know it's common practice for you'd have a large portion of business on your contract before committing capital. So just curious what you're seeing in underlying demand in that country, and then confidence interval and future demand trajectory there. And I guess relatedly, if I missed it, I apologize. But you said profitability in Europe was a little bit better. What was driving that? Was that better volume or production levels or is there something else that happened?

So Q1 was better volumes than we had forecast, principally in Saudi Arabia and Jordan. The UK is the largest can market in Europe. It continues to migrate away from other substrates to the can. There's a lot of capacity that’s going into the UK and the market remains sold out. Demand for cans exceeds not only the existing capacity, but the announced capacity. So I think we remain very bullish on the UK can market, is all I really want to say at this point.

Okay. Thank you. And then again, I apologize if I missed it. Can you quantify the earnings impact from steel volatility that we saw in Q4 and then in Q1 for the transit packaging business? And then I guess conceptually the way I think about it is to the extent those products are protecting high-value items on the road or in transit, I would suspect that you're able to get price efficiently and I know you've said that. But is there an opportunity for margin expansion or uses ensuring that you were getting back inflation?

I think Kevin described net $30 million in inventory, and think about inside of transit we probably had a headwind of $3 to $5 million. Add that to the $30 and that gives you what we had on the tinplate side, about a $4 to $5 million headwind in transit. You got two things you've got, obviously we're trying to make sure we recover inflation. We're also trying to obviously grow the business and grow earnings. You're always trying to do a little better to answer your question. Yes, we're trying to expand margins. Now, that's absolute margins I think in an environment where the raw material costs, i.e. the pass-through, is significantly higher year-on-year. Do we appreciate that? Because of the denominator effect of tinplate at 75% higher aluminum percentage margins are likely to be lower in that environment, and vice versa when the commodities come down, percentage margins go up.

Thank you.

Thank you.

The next one is coming from the line of Anthony Pettinari of Citi. Your line is now open.

Hi, this is actually Bryan Burgmeier, sitting in for Anthony. You've announced two new capacity adds in Europe in the last month or so. Is that an indication that your contract renewal talks in Europe are going well and you expect to see more raw material pass-throughs moving forward, or are those unrelated to one another?

Well, I think they are always related. I think it's a reflection of the demand that we see in the market from existing customers who are willing to enter into volume commitments and also new customers. But it's underpinned by the notion that we're not going to add capacity unless we're fairly compensated for products. So the answer is, it is connected, but you wouldn't build it if it didn't have more volume.

Got it. Makes sense. Last question for me. In the U.S. and in Europe, are you seeing any signs of consumers trading down to lower priced beverage products? And if you are not seeing that already, is it possible. I will say how it trade down dynamic towards lower-priced fear, lower-priced soft drinks would impact Crown, given your beverage portfolio?

So we are seeing store brands and the demand for cans from those who fill store brands and other labels that are not national labels, expand exponentially right now, obviously limited by our capacity and the Bowling Green temporary shutdown. But what you described is happening. I'm certain it's also happening in food, but I can't off the top of my head, I can't point to it. I can absolutely point to it in beverage cans. We do have a very strong private label beverage can business and we're very strong with some of the regional marketers of beverage products. So I think that we do well in that environment, yes.

Got it. Thanks a lot and good luck in the quarter.

Thank you.

Next one in queue is Arun Viswanathan of RBC Capital Markets. Your line is now open.

Thanks for taking my question. Sorry about that. I just have a question about the ready-to-drink market. So that's one of the few markets we're actually seeing growth. Do you expect the negative comps and the scanner data to continue for non-ready-to-drink cocktail markets? And I guess ready-to-drink continue to show mid-single to high single-digits? And how does that square with what you guys are seeing within your own system? Is it just that you're seeing the growth because of the capacity that you have in place? Thanks.

I think we've talked about ready-to-drink for a little over a year, maybe a couple of years. It is picking up some momentum. Some of that momentum is offsetting the slowdown in growth of certain products. While the growth has slowed, ready-to-drink is an incredibly important part of the beverage can market. It accounts for 10% to 12% or maybe even a little bit more of the beverage can market, and so many of these drinks are in sleek cans. Obviously, all of the capacity we've announced as sleek capabilities is one of the reasons for expanding the industrial footprint to grow the business in line with volume demand but also to grow the business for the types of products, and the size or shape of the can that the marketers and the consumers prefer. So yes.

Okay thanks and then as a follow-up, I'm curious about the CSD market in a similar way. That's a market that was relatively weak for many years, showing negative growth and seems to have turned around. Do you expect that positive growth in CSD to continue, and what should we expect as far as growth rates, and maybe if it is it across North America versus Europe?

I mean, I think in North America, as you point out, it did decline for a while. It seems like we're back on the uptick on CSD, so I think we do expect some growth. I would tell you, if you want exact numbers, you probably should be talking to your beverage analysts. But certainly, the two large marketers of CSD products have been showing fairly good growth and I think they're fairly bullish, certainly in North America. And with respect to the one who is a bit more global than the other, they've been showing tremendous growth on a global basis. But I think in Europe, the big growth that we're going to see in CSD is more from conversion away from glass into the can. I think the hope is that globally we all get a bit more responsible with respect to the environment and we start to see some PET come back to cans in several markets. But the only thing I would tell you is that it's pretty hard for us right now in most markets to entertain that growth just given the sold-out conditions. So it's going to take us a while as an industry to get capacity to the levels where we can absorb the growth that we think will come to the can over time.

All right. I'll turn it over.

Thank you.

Next question is coming from the line of Chris Parkinson of Mizuho. Your line is now open.

Great. Thank you. Just very quickly on your comment on the environment and the PET. Just given what's happening in a few states and most notably California and a couple of airlines and even Miami Beach has an agreement with Pepsi kind of shifting over to aluminum versus plastic. Have there been any other incremental signs that there could be actually somewhat of a material shift even off an incredibly low base, or is that just something that continues to linger off in the distance?

No, I think. I don't want to say it's lingering in the ultimate distance as you say. But I think what you point out in a couple of jurisdictions, the momentum is there. There are some jurisdictions and states, at least in the United States, where it will take a little longer. But I think let's just say in the blue states, if you will, we're going to see a lot more momentum in that regard. I think all throughout Europe, we're going to see momentum in that regard. But as I said earlier to Arun's question, I think the limiting thing for us is our ability as an industry to get capacity in to accept more rapid fashion. That conversion that we think from an environmental standpoint that wants to be driven by those who have greater environmental concerns. So as an industry, you've seen over the last couple of years a significant number of announcements, and we're all making. I think it's pretty clear that new product introductions by existing marketers or new marketers have beverage products significantly weighted more towards the aluminum can than other substrates. So as an industry we’re trying to get there, it takes time to build equipment, it takes time to procure equipment, and it takes time to build a factory and a trained workforce. We're doing the best we can as an industry and we’re here to help clean up the planet.

Got it. And just a real quick question, you hit on RTD already. Just very quickly, could you hit on just what you're seeing in both North America and European energy drinks, just what you've seen in the last four months as well as your outlook for the remainder of '22 and perhaps longer? Thank you.

Thank you. So we do have energy drink customers. We don't have a huge energy drink business. We're looking to expand on that, but the energy drink market on both continents that you've just mentioned is exploding right now. So the outlook for energy drinks is quite high.

Thank you very much.

Thank you.

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

Thanks. Congrats. Tim, Kevin, and Tom on the good quarter despite all the puts and takes. Just a lot of my questions have already been asked, just two quick ones here. There's been some talk about improving supply chains. And obviously, that was prior to some of the recent Chinese COVID lockdowns. What have you seen, just from a supply chain material transportation, any of those constraints that were really bottlenecks? Have you seen any improvement in them recently?

Let's put Port Shanghai aside for a second. Shanghai is the one that's happened over the last several weeks, month, that has been something that's caught many industries off guard. We are managing our businesses effectively so far. The hope is that some of that tension will ease. The port might be open, but they can't get trucks from the province or county in China, so it's still difficult. But I think we're working through that. I think the big headwind that we've seen from a supply chain standpoint is in our equipment businesses for beverage can-making equipment and some of the signode equipment or transit equipment, tors and circuit boards, display screens, and things like that are still in short supply globally, and we like many other industries are doing the best we can to try to procure as much of the components we need from a select few suppliers. Let's be honest, there are select few suppliers that meet the standards that we require and that our customers require, so we're all doing the best we can to try to do that. But that still remains tight.

Got you. And then just one quick follow-up. On that last point, Tim, on the constraints with respect to Bevcan making, any impact to your own expansions? So if there are delays in terms of procuring or getting the metals and other things you need to make for that business, does that put at risk any of the expansions that you have planned given longer lead times to procure that?

The only issue we've encountered is that the second production line in Martinsville, Virginia has been pushed back into early 2023. We originally thought both lines would be operational in Martinsville this year, but the second line is now expected to start in February 2023. This delay is primarily due to the supply of construction steel. Occasionally, we may also experience delays of 30 to 60 days for some Bevcan or transit equipment deliveries compared to our initial timelines. However, we are all doing our best to service our customers and procure the necessary goods. It has been challenging, but we are managing.

Got you. Good luck in the balance of the year.

Thank you.

We have three more questions in queue. Our next one is coming from the line of Anojja Shah of BMO Capital Markets. Your line is now open.

Thank you. Morning, everyone.

Good morning, Anojja.

Good morning.

Just wondering. We're hearing a lot about elevated glass demand weaker this morning from a major glass producer. Given that, can we get an update on your Mexican glass business? Are you seeing a pickup in interest or business around that?

So we are. The answer is yes. And again, we are capacity constrained. We operate four furnaces in two factories, a significant proportion of our volume is tied under a long-term agreement with one customer. We do our best to try to push more tonnage through the furnaces depending on the type of bottles we're making. Obviously, you make more or less depending on the bottle but you can only push through so much tonnage. So we're doing our best to service other customers, we have many, a few other customers under contract as well. And then there’s non-contract spot customers, obviously, that we'd love to be able to service. But as you say, demand is quite high for glass, at least as we see it in Latin America, we don't follow the other glass markets. We do follow the Latin American markets because of our exposure in Mexico, but it is quite strong.

Great. Thank you for that. And then that new line that you just announced in Agoncillo in Spain. If I'm correct, I think you have steel lines there right now, two steel lines. Is the idea eventually to retire those steel lines or is there enough demand for all those lines?

You are correct. It was a steel beverage can facility in the north of Spain towards the Bilbao region where the steel mills are, and for that reason, it was set up as a steel plant many decades ago. We have beverage can making in the plant now. We have one steel line, and we're putting in the aluminum line. Depending on the price of steel versus aluminum, it will dictate if and when we retire the steel line, but we would expect to add a second aluminum line in time. Regardless of whether we keep the steel line or not, it will depend on the arbitrage between steel and aluminum for those customers in Spain that may still be willing to take a steel can.

Okay. Makes sense. Thank you very much.

Thank you.

Our last question is coming from the line of Angel Castillo from Morgan Stanley. Your line is now open.

Hi, thanks for taking my question. I have a quick inquiry. Could you provide an update on the global beverage shipments number? I believe you indicated it was greater than 9% last year for the full year or last quarter. Where do you anticipate that figure will be, and how should we consider Q2? There’s some seasonality to factor in, and with some plants coming online, including Bowling Green’s return, how should we view those shipment numbers in relation to the full-year outlook?

We initially estimated a 9% growth for last year and anticipated another 9% growth this year. However, considering the weaker performance we experienced in Brazil in the first quarter, while we expect Brazil to recover as the year progresses, we may need to adjust our expectations to an 8% growth due to the first quarter's softness in that market.

Understood. And then just wanted to switch to cash flow, given all the softness, it's impressive you're still able to maintain that $400 million. So curious what are some of the puts and takes there, and within that, any benefit or impact from pension as we see interest rates rising?

In terms of cash flow guidance, clearly we reduced the EBITDA guidance to $1.97 billion from $2 billion, you have a $30 million headwind there but we're looking all over the place for ways to make that up, and the easiest way is to reduce our inventory. We've had a very high inventory level coming into 2022 due to all the supply chain issues. We've carried more inventory than we typically have had. So that is really the main driver, or the main item that will offset the EBITDA.

Understood. Any, I guess, comments on pensions?

Pension contributions as we expected. The one thing on the pension, we are expecting to get in as part of the UK settlements in the neighborhood of $100 million of proceeds this year, or through this year and through the first part of 2023, that's on plan in our $400 million free cash flow guidance, that would be additive. If you look at the press release, we've actually added back the proceeds that we've gotten so far this year.

So just to make sure we're clear on that, the $400 million free cash flow does not include the recovery of the illiquid pension assets from last year's settlement of the UK pension plan. So when we talk about pension plans on a global basis, we really have the plant in the United States and Canada, and other than that, it's very immaterial around the world for pensions.

Very helpful. Thank you.

Thank you.

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