Good morning, and welcome to Crown Holdings Second Quarter 2022 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, Nicole, and good morning. With me on today's call is Tim Donahue, President and Chief Executive Officer. If you do not 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 are contained in the press release and in our SEC filings, including our Form 10-K for 2021 and subsequent filings. The company recorded diluted earnings per share in the quarter of $2.43, compared to $0.95 in the prior year quarter. Adjusted earnings per share in the quarter were $2.10, compared to $2.14 in 2021. The second quarter of 2021 included $0.30 per share related to the discontinued European food operations, net of the interest savings, share buybacks, and equity earnings from our remaining 20% stake. 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 $432 million in the quarter, compared to $395 million in the prior year, primarily due to improved profitability in the North American tinplate and can-making equipment businesses, and 4% Global beverage volume growth. As of June 30, we have repurchased $600 million of Crown common stock under the current $3 billion board authorization. For the balance of the year, we assume that headwinds from a stronger US dollar and higher European energy prices will persist. We are forecasting a full year average euro-dollar rate of $105 million, which assumes euro-dollar parity for the balance of the year. This compares to an average euro rate of $118 million in 2021. Using the euro as a proxy for all currencies where we operate globally, each $0.01 move in the euro-dollar rate equates to $0.02 per diluted share. We now estimate energy costs to be up $45 million for the year, with the bulk of the increase in the second half. Adjusting for the strong dollar and higher energy costs, we currently project EBITDA of $1.9 billion, adjusted earnings in the range of $7.65 to $7.85 per share. Both figures are in line with previous guidance, excluding the impact of the stronger US dollar and the higher energy cost. The company currently expects third-quarter adjusted earnings to be in the range of $1.75 to $1.85 per share. Also, it should be noted, the third quarter of 2021 included approximately $0.12 per share related to the discontinued food operations, net of the interest savings, share buybacks, and equity earnings from our remaining 20% ownership stake. Our recovery of costs related to the December tornado in Bowling Green is proceeding according to plan, and our full-year estimate assumes all losses from Bowling Green will be recovered by year-end. Our target leverage remains at 3.25 times and assumes $1 billion of capital spending, $400 million of free cash flow, and total share repurchases of $1 billion. With that, I'll turn the call over to Tim.

Thank you, Kevin, and good morning to everyone. As reflected in last night's release, and as Kevin has just summarized, overall second quarter and first half performance was positive. Global beverage can volumes increased 4% despite capacity limitations in the United States and improving, but still soft conditions in Brazil. Transit performance was in line with the prior year, and our North American tinplate businesses continue to benefit from food can capacity added in 2021. Globally, customers continue to add can filling lines, leading to higher demand from can suppliers. As outlined in the release, we have numerous projects underway or announced to meet this global demand. I use the term global more than once to remind ourselves that this is not just a US business but a global business. And we have an excellent manufacturing footprint from which to grow in some of the most exciting markets. Reported revenues increased 23% in both the second quarter and first half, primarily due to the pass through of higher raw material costs and increased sales unit volumes offsetting unfavorable currency translation from the stronger US dollar. In Americas Beverage, unit volumes advanced 1% over the prior year, with 1% growth in North America, coupled with 6% growth in Mexico, offsetting a 3% decline in South America. Inflation continues to have an impact on consumer behavior, and demand for cans is not inelastic. Having said that, supply demand remains tight for Crown, and if we had more cans, we could sell more cans. The impact of the Bowling Green tornado on our system capacity has been a greater challenge than we initially estimated, but the plant has restarted, and we are working our way through the learning curve. Looking ahead, with Bowling Green further through the learning curve and coupled with commencement of operations late this year in Martinsville and mid-next year in Mesquite and also based on contracts in place, we currently project 10% volume growth in North America for 2023 over 2022. Conditions in Brazil improved during the second quarter with industry volumes up 1% over the prior year. A strong second half is forecasted mainly in the fourth quarter as the first winter World Cup coincides with the summer selling season in Brazil. Segment income for the six months reflects approximately $10 million in unrecovered incremental system operating costs related to Bowling Green, compared to $20 million unrecovered at the end of the first quarter. Unit volumes in European Beverage advanced 2% over the prior year, with shipment growth noted throughout most operations. Supply-demand conditions remain very tight, and recently announced projects in Italy, Spain, and the UK will provide much-needed capacity to our system beginning in 2023. Volume growth and location mix led to better-than-forecasted first half segment income. However, we expect the second half comparison to prior year will become even more challenging in view of US dollar-euro parity and rising energy costs. Beverage can volumes in Asia Pacific advanced 12% in the second quarter on strong shipments across Southeast Asia. Adjusting for currency and the sale of the Kiwiplan business, performance in transit was leveled for the prior year second quarter. Strong performances across the protective packaging and tools businesses, combined with the initiation of cost recovery price increases offset steel inventory holding losses in the transit business. As disclosed in last night's release, the Transit segment has initiated a cost reduction program focused on administrative overheads only. The program does not result in any reduction to production footprint or capacity. Strong performances continued across our North American tinplate and can-making equipment businesses during the second quarter. Unit volume sales of two-piece food cans advanced 13% in the quarter. And as highlighted in the release, we shipped 43% more self-made two-piece food cans than in the prior year. Our equipment businesses, both can-making and transit continue to face supply chain delays and disruptions, mostly related to display panels, chips, circuit boards, motors, but strong order flow continues with backlogs at record levels. In summary, we are pleased with the overall first half performance and excellent performance by the entire Crown team to continue to overcome the numerous challenges faced, whether that be supply chain, inflation, energy, or currency among others. We do expect energy and currency headwinds to be a bit steeper during the second half, but we are focused on managing the challenges within our control to help our customers grow their franchises and in turn grow our businesses and grow shareholder value. And with that, Nicole, we are now ready to take questions.

Thank you. We will now begin the question-and-answer session. Our first question is from Chris Parkinson from Mizuho. Your line is now open.

Great. Thank you very much for taking my question. Can you just add a little bit more color on the outlook for Latin America, inclusive of the second half of Brazil just versus your expectations a few months ago? And then also just basically do the same for APAC, just given all the noise during the second half of 2021? Thank you.

I'm not entirely certain if I have that information handy, but we anticipate that the second half in Brazil and Asia will definitely show improvement compared to last year. Asia has already started off strong. Looking at the second half for Asia, it appears we will experience substantial growth in Q3, attributed to last year's lower shipments during that quarter, likely influenced by COVID shutdowns. For Q4, considering we were up 12% in the second quarter, I'm predicting that the combined growth for the third and fourth quarters in Asia will also be at least 12% in the second half. Regarding Brazil, we saw a slight decline of a few percent in the second quarter, while the market itself was up 1%. This is mainly due to a customer mix issue; we haven't lost market share overall, but a specific customer may have temporarily lost share, though they plan to recover that. We're still expecting significant growth in the second half, and it will be interesting to see how that develops throughout the rest of the year. Inflation plays a significant role in Brazil's market, where disposable income is not as high as it is in the U.S. Therefore, spending on canned beverage products tends to be more discretionary there than we're accustomed to. Nonetheless, we are forecasting market increases, and for the full year, we expect a slight increase, which is several percentage points lower than our initial estimates earlier in the year.

Got it. And just as a quick follow-up. When we're looking at the current status of European energy prices, just versus the $20 million that we were all discussing during the first-quarter call. How should investors think about that for the second half given the current run rates? And is there any consideration already for the first half of ’23, just given your adjustments to contracts? And if we just held that steady for the next year or so, is there just anything you can add to help our thought process there would be very helpful. Thank you.

So, yeah. Hey, Chris. Listen, for the energy guide for the year, I would say, the bulk of the energy increase is going to be in the second half of the year, as I said earlier. Probably about a quarter of it basically went through the first half. The first half, we benefited from hedges that we had in place, but at the current prices. We see a strong headwind here in the third and fourth quarter on energy. So I would say 75% of the increase is going to be felt in the third and fourth quarter.

And as it relates to ’23, I don't necessarily want to comment on what I think the energy markets in Europe are going to do in the first quarter next year. I think some of that has to do with the Ukraine-Russia situation, and we'll see where we get to. But as it relates to contracts, as we've said, we are in the process of amending contracts as they come due going forward to properly recover the costs that are born upon us to manufacture products. So I don't want to get into the parsing out right now all the ins and outs of European Beverage segment income for ’23. We haven't done a budget yet, but certainly we expect segment income to be up significantly in ‘23 in that segment, compared to ’22.

Understood. Thank you so much.

You're welcome.

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

Hi, everyone. Good morning. Thanks for the details and taking my question. I guess to start off, we appreciate the guidance. Is there a way, Kevin or Tim that you could help us bridge from 2Q's earnings per share to the $1.80 mid-point in the third quarter? Is that largely energy? Any other things that you would have us keep in mind as we, again, look at that sequential decline? And I had a couple of other follow-ons.

Yeah. So, George, Kevin will provide more details on energy, but regarding currency, its impact will increase as we move through each quarter. Last year, we averaged $1.18, but currently, we're at $1.90 for the first six months. If we maintain parity, that gives us $1.90 over six months, which includes whatever the Q2 figure was, but we are already at parity. Looking ahead to Q3, we expect $1, which corresponds to EUR0.09 or $0.09 against the euro for that quarter, which is one of our larger ones. We use the euro as a reference point for estimation since we operate in multiple global currencies. Kevin, do you have any additional insights on energy?

George, I would just say, look, 25% of the cost between energy and FX we felt in the first half related to the guidance. And I would say it’s equally split, the back half of the year between Q3 and Q4 the energy and FX. So –

Okay. And just factually, Kevin, I just want to make sure I got it. So that $0.50 headwind that you called out, 25% of that you've already felt in the first half or is that true incremental, i.e., it's all felt in the second half.

25% of that we felt in the first half.

Thank you for that. My second question relates to your budget for next year, which I know is still in progress. Since Chris’s questions are somewhat connected, I wanted to bring this up now. As we look ahead, you have a challenging comparison in tinplate from the first quarter. Even without changes in foreign exchange, we are likely facing a negative trend that will impact averages for next year. Regarding energy, it’s uncertain, but let’s assume it remains stable. Given this situation, what are your expectations for price recovery in these resets, and how likely do you think it is that earnings per share can actually grow next year despite the tough comparisons between 2023 and 2022?

I understand your question, George. I'll do my best to address the points as I recall them, so please remind me if I miss anything. Foreign exchange will definitely be a challenge in Q1, slightly less so in Q2. Assuming we remain at parity, we should stay at that level in Q3 and Q4, and let's expect to maintain parity next year. Therefore, there may be some headwind there. Regarding energy, this is primarily a European concern and specifically affects the beverage can sector. Our transit business in Europe does not face significant energy challenges, as we rely more on electricity than on natural gas. However, it's still too early to make predictions about the energy market. We are currently renegotiating several contracts as we see improvements in operational costs and increased volume from new projects. We are quite optimistic that segment income in the European Beverage segment will improve. For steel, let’s break this down. You’re assuming that the steel market for tinplate will be stable or declining in 2023 compared to 2022. With that understanding, if we had gains from steel in our food and aerosol can businesses this year, we might not see those next year. To explore this topic, we can agree that growth in two-piece food cans, particularly as we ramp up production in Owatonna and accelerate progress in Hanover, should offset much of the steel headwind. Additionally, the overall steel challenges for the company will be mitigated by the absence of the current year's steel headwinds in our transit business next year. Historically, our purchasing and selling of steel products has been managed differently from our packaging or tinplate steel endeavors, and we are in the process of changing that. Nonetheless, we have faced significant steel challenges this year, which we categorize as inventory holding losses. We do not anticipate encountering those same issues next year.

Okay. And lastly, I will turn it over. Do you have a view like you have in North America for growth next year? What your rough cut volume could look like in Europe and in Brazil based on customer commitments and projects coming on. Thank you, and good luck in the quarter.

Thank you, George. Regarding North America, I mentioned a 10% growth. While I’m unsure if it will be 8% or 15%, 10% is a target we believe we can achieve based on current contracts. In Brazil, we are optimistic that the market will strengthen and consumer activity will pick up, especially in the first quarter. This is when suppliers are likely to start replenishing their inventory after a significant reduction expected in Q4 due to the World Cup. Overall, I project that Brazil may see only a 2% increase this year, but I hope for at least a 5% rise next year; however, we don't have the budget finalized yet, so I can't confirm that. In Europe, as you know, growth among can manufacturers can be inconsistent year over year, influenced by when any of us adds capacity. We do anticipate a decent amount of new capacity coming on later this year and next year. Therefore, we expect volume growth next year to be in the 6% to 8% range, whereas this year's growth is limited to about 2%.

Thank you very much.

Thank you, George.

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

Great. Thanks. Good morning guys.

Good morning, Mike.

First, I just wanted to clarify. I think you talked about $1.9 billion of EBITDA, which is about $70 million revision. Is that all currency in European energy or is there anything else in that?

No, I think you were looking at the same page I was. You would see that the majority of that, specifically the vast majority, is related to currency and energy in the second half. Within the businesses, there are both positives and negatives, but overall, the businesses tend to balance each other out, and the estimate revision is primarily due to currency and energy.

Great, thanks. And then second. Tim, I just want to dig into kind of your commentary around North America. I think you mentioned volume was up only 1%, but if I'm understanding you correctly, the key limiting factor has been your production capacity, not demand as you have more plan to be selling more cans. Is that correct? And is Bowling Green the only limiting factor to your existing plants or is there any can sheet availability issues right now?

We have some supply chain challenges, but they are primarily affecting our equipment businesses, particularly with circuit boards and chips. However, the can business is not facing significant challenges with materials like tinplate, steel, and aluminum. I can assure you that we are not seeing any impact from magnesium on our supply chain. Our suppliers for beverage and food can operations globally have managed to navigate these difficulties well, especially considering issues with some Chinese ports. In terms of Bowling Green, it has been more disruptive than we would prefer. We've also added additional production lines at several U.S. plants, which have had mixed results. If we had been able to produce more cans, our sales growth could have been as high as 3% instead of the current 1%.

Great. Thank you.

You're welcome.

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

Hey, Tim. How are you doing? Thanks for all the great color. I guess, there is certainly some concerns that from a macro environment consumer is getting a little weaker and you kind of alluded to elasticity of the can and just consumption.

Well, Phil, I didn't say demand was elastic. I said it's not inelastic.

That's what I meant to say, not inelastic. But you seem pretty confident, Tim, for growth in North America next year, as well as Europe. So just kind of give us some color on, if the macro does soften how much line of sight, I guess, some of the volume guidance you had to provide. I mean, certainly some of that is tied to some of the contracts you have coming up in North America and Europe. So just give us some color on conviction levels and securing that how you're set up from that standpoint? And just your broader view on how your business would hold up if the macro was a little slower?

I would describe North America’s growth potential as being between 8% to 15%. I’m cautious about making predictions based on the current macro environment, but we are in the process of building a can plant in Nevada. We haven’t operated in the Southwestern U.S. for nearly 30 years since we closed our facility there. In the past, we have shipped a significant number of cans to the Southern California market from Texas or Wyoming. We also have past contracts with fillers in that area tied to national agreements that we might secure in the future. While I don’t want to elaborate too much, we are potentially more optimistic about growth in North America than you might think. I recognize that consumer strength may be weak right now, and it's uncertain how long inflation will be considered transitory. I made a similar comment about transitory inflation a year ago, but I believe it’s likely to persist for some time. I think consumers will eventually return to enjoying life’s small pleasures, so I don’t expect demand to be suppressed for long. I’m optimistic that demand will rebound. However, I have tempered my expectations for growth by providing a 10% estimate.

Okay, that's helpful. On transit, it seems like the results have been somewhat uneven compared to our expectations. It appears that supply chain issues are primarily to blame, but I would like to hear your thoughts on the demand profile as we look toward 2023. You are certainly implementing actions to reduce costs, and from an outside perspective, that might suggest a slightly softer demand outlook. Could you help us clarify those points? Additionally, how does the $60 million cost reduction program progress over the upcoming quarters? Thank you.

So, listen, I think the supply chain challenges that we face in our Transit equipment business is very similar to what we faced in our can-making equipment businesses. But those supply chain challenges are not the reason for me any underperformance you might see in transit year-on-year. I mean, we are in the second quarter ex-currency and the divestiture of the business were basically flat. Now, for the full year, we're probably going to be down compared to our earlier expectations. But that's not supply chain related, that's entirely related to these inventory holding losses that we have in our steel business, which we don't anticipate next year. We got ourselves into a situation where steel was tight late last year and we went out and we procure too much steel, and then steel market collapsed, and so, we're pushing through higher price steel in a lower price steel environment to our customers. So that won't recur. But for the most part that's that. As you think about the demand profile, the demand continues to be strong across almost every one of our businesses in transit. The overhead reduction program has nothing to do with anything related to demand. As I said, we're not taking out any production capacity, we're not reducing the footprint whatsoever, this is purely administrative overheads. This is getting their S&A more in line with what the S&A should be for a manufacturing company. And I understand now that we've owned the business for four years, and maybe I'm on a little thick. I should have understood this a little earlier. I understand there's a different go-to-market strategy for the transit business than there is for the can-making business. Nonetheless, it's still a manufacturing business, and it only requires a certain level of overhead. So you should view this overhead reduction program as pure gravy coming off the top. Thinking about the $60 million, let's assume we get about $12 million in the second half of this year and we'll get the balance of that through next year.

And then, Tim, on the inventory holding charge that you talked about this year on steel, anyway to quantify that for us this year?

There is a way to quantify it. It's a significant number and we're not satisfied, but I would ask you to consider that we might have indicated in the first quarter it was $5 million, but that was likely incorrect. It was probably closer to $10 million or $12 million, and it was probably in that range for the third quarter as well. Without these steel losses, we would have actually had a solid performance in the third quarter, which highlights the strong demand we've seen in protective packaging and the tools businesses, along with a robust backlog in equipment as we look ahead. Therefore, we have less concern. I understand you may be worried about the macro environment and its potential impact on our transit business, but demand has been exceptionally strong, and the underperformance, as you and other analysts have described it, in that business is entirely due to a steel procurement issue that will not happen again next year.

Okay, thanks a lot. Great color, Tim. Thanks.

Thank you.

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

Thank you. Good morning, everybody.

Good morning, Ghansham.

Good morning. I wanted to follow up on Phil's question about elasticity or whatever term you prefer. What is the comparable impact concerning some of the other emerging markets you are present in, particularly in Asia? And looking back at the US market, while acknowledging that you are currently sold out, have there been any measurable changes regarding new business inquiries, new product development, or new categories in relation to consumer behavior? There seems to be some uncertainty about how the consumer landscape is changing in North America as well.

That's a great question, Ghansham. I understand your concerns regarding the emerging markets, which is why I was a bit cautious in my earlier response about Brazil. I believe Southeast Asia will continue to perform exceptionally well. The markets there are growing, although they are not immune to inflation and have significantly less disposable income compared to Western Europe or the United States. Nevertheless, the small indulgences, like beer consumption, remain popular, and cans are often the preferred packaging that drives growth for consumer products companies. We are quite optimistic about Southeast Asia moving forward. Are there going to be quarters with slower growth? Yes, undoubtedly. However, when looking at three to five-year periods, Southeast Asia stands out as having exceptional growth prospects over the next five to ten years. I apologize for not recalling the other part of your question.

Yes, sure. It was on North America. Any change in terms of business momentum there, backlogs, inquiry?

That's a good question. While we're not heavily involved in the craft market, we do supply to it, and the area where we've noticed a slowdown in demand is craft beer in North America. Apart from that, any declining retail data you've observed is likely coming from the larger carbonated soft drink companies, as they attempt to navigate their inflationary pressures through pricing strategies, which initially shocks consumers who are adjusting their purchasing habits. However, I believe that over the long term, consumers will adapt to higher prices for many items, and we will see a return to a healthy demand for beverage cans, both in the United States and globally, particularly in light of ongoing sustainability initiatives.

Got you. And then for the second question. In terms of the EBITDA reduction, I mean, obviously, there are reasons for that with FX and gas, et cetera. But you're still down $100 million in a very short period of time versus your original guidance. I'm just curious as to whether that changes, how you think about share buybacks? And then separately, can you just also touch on aluminum access and there has been some force majeure announcement specific to magnesium, et cetera? Thanks so much.

There is no impact on aluminum access. As I mentioned earlier, the suppliers involved in the can business, including those providing aluminum coatings, have performed exceptionally well. One of our aluminum suppliers has a minor conflict with a magnesium supplier, but they are not the only global source of magnesium, nor are they our sole aluminum suppliers. Therefore, we do not anticipate any issues regarding our aluminum supply. I apologize, I forgot the other part of the question.

The share buybacks.

I apologize for the confusion regarding share buybacks. We targeted $1 billion in share buybacks this year, and we are on track to achieve that amount. Although we expect to be down $100 million in EBITDA compared to our initial forecast, our debt will also decrease, particularly with the conversion of euro debt to dollar debt. For example, EUR100 that previously converted to $115 of dollar debt is now equivalent to $100 of dollar debt. Therefore, the impact on leverage is not significant, and we are not concerned about our earlier forecast or the level of share buybacks we committed to.

Awesome. Thanks so much.

You're welcome.

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

Hi, Tim, Kevin. Thanks for taking my questions.

Hi, Mike.

Can you remind us what the current energy hedging policy in Europe is? I think Kevin mentioned that you hedged in the first half, but do you have hedges in place for the second half as well?

Historically, we would have hedged a larger portion of our energy costs as we entered 2022. The thinking was that costs were high and would decrease over the year, which is why we did not hedge. The decisions we made regarding hedging were also affected by the war in Ukraine. We currently have some hedges set up for the fourth quarter and minor ones for next year. As Tim mentioned, we are planning to modify the European contracts. Honestly, this will be the most effective way to hedge against these costs because hedging for this year would only be a temporary measure. Therefore, we will need to pass these costs on to our customers.

Got you. And is there any percentage that you aim to hedge historically, and would you be able to share that with us?

Historically, we would have aimed to hedge as much as possible. When considering energy costs, there are two components: gas and electric. Additionally, we operate in different markets, including regulated and unregulated markets. Typically, we do not hedge in regulated markets, whereas we do in unregulated ones. I don’t have the specific market breakdown at the moment, but we generally focus on hedging the exposure in unregulated energy markets.

Got it. And just one quick follow-up, Tim. It seems that a number of beverage companies have started to build their own can plants adjacent to their beverage operations. For instance, Heineken is reported to be building a beverage can plant next to its brewery in Mexico. AmBev is also constructing a plant in Brazil, and Modelo is preparing to share a plant near its brewery. I wonder if you could discuss this trend and what it ultimately means for can demand in the beverage industry. Do you believe that can growth will slow down as this trend continues?

Yeah. I mean, historically most fillers that had can operations look to sell those can operations as margins in cans are certainly less than margins are in beer, for example. And they look to take the proceeds from that and use it for marketing and/or other expansion of filling operations. The Mexican plant that you described, the Mexican can plants to be built that you described is going adjacent to a brewery. We do not supply that brewery with cans. That doesn't mean it doesn't always circle back to the whole market, but initially it's not a concern for us, and it remains to be seen whether that can plant actually gets built. And I would just leave it at that. It remains to be seen whether all of these announced projects by some of the fillers actually get built.

Got it. Thanks very much. Good luck in the quarter.

Thank you.

Thank you. Next question is from the line of Angel Castillo of Morgan Stanley. Your line is now open.

Hi, good morning. Thanks for taking my question. Could you just give us an update on how you're thinking about free cash flow, just given the changes to the EBITDA? I think last number I kind of recall is a $400 million number. So could you just update us on how you're kind of seeing that with other puts and takes to working capital, et cetera?

Yeah. So we're sticking with the $400 million. As Tim said, we kind of got caught up in the Transit business with higher inventories at the end of last year. There were some other businesses where inventory was a little bit higher than we'd like. So we're looking to fill the hole basically with working capital initiatives that we've started to put in place.

Got it. That's helpful. And then just in terms of the Bowling Green dynamic, I was wondering if you could give us a little bit more color as to maybe what the timeline of that is? Typically I think of as kind of six months to ramp up an asset. Obviously with the tornado, there are perhaps other aspects to go through. But one, is it fair to assume that by year-end you will be kind of 100% up and running? Or just more color as to what's happening there and any implications as the inventory levels for you as we go through the year here?

Yeah, I'm not sure who told you that it's six months to ramp up a beverage can asset, but the learning curve for or the timeline to get through a learning curve and a new beverage can plant is anywhere from 12 to 18 months depending on geography, the size of the plant, products we're running in that plant, size changeovers, etc. So we had the plant running for a couple of months on line one, just brought up line two when the tornado hit. So the restart, if you will, was like a brand new opening where we basically started the learning curve all over again. So we're continuing to improve. And fortunately for us, we've got a good team in Bowling Green and almost everybody stayed with us while the plant was down for a couple of months. But we are in the process. It's a brand-new learning curve process and it will continue to get better through the end of the year and into next year. I do expect our inventory position in North America beverage will be far lower than we would like at the end of the year.

And maybe just a quick follow-up to that, any level of kind of allocations to customers to try to rebuild that inventory or no impact on that?

Well, listen, nobody likes to say what I'm about to say or hear what I’m about to say. But if we're somewhat fortunate that perhaps inflation is slowing demand for some products in some small way and that as I described earlier, we had 1% growth and really we were limited by our ability to make cans for a couple of reasons. And I described how many cans did we lose because of our capacity limitations as perhaps another 1% to 2%, whether that was 1% to 2% or 8% to 10%. It doesn't matter, we still couldn't make them. So in some small way, perhaps this helps us catch up a little bit.

Very helpful. Thank you.

Thank you.

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

Great. Thanks for taking my question. Good morning. I guess, first off, could you just remind us maybe where we are on demand and installed capacity in North America. Was it kind of around installed capacity around 115 billion units and maybe demand of 125 billion? And if that was the case, I think you called out maybe 8% to 15% growth in North America next year, maybe 10% at the midpoint or as a base case. Again, could you just reiterate, is that your expectation and what's driving that? Is that just kind of the contracts that you have in place? And is there any risk to that forecast?

So, I think your demand number, you're saying 125 billion and whether it's 125 million or 127 million or 128 million, you're not too far off. I think your installed capacity number by the end of this year, that number is probably closer to 120 million than 115 million. And certainly, imports are significantly down this year versus last year. I would tell you that the growth we are discussing for next year is based on contracts in place and I described for you customer contracts that we used to have in Southern California that we haven't had for the last couple of years related to other national contracts that we will have next year. That does not mean that it's market growth. That means, it's growth for Crown.

Okay, that's helpful. And then if I could just kind of take this little bit further. So I think you noted that Europe will be up. I don't think it'll necessarily get back to '21 levels. But segment income in Europe beverage should be up, North America should be up. Signode you won't have or transit you won't have the steel inventory issues. So I understand that you're still kind of preliminary on your '23 outlook. But given all those things, it should be up materially. I mean, do you expect that to be right and maybe grow maybe 5% or 7% and eclipse to the $2 billion down level?

It's not something you'll need to remind me about later, I'm just joking. I believe everything you've mentioned aligns with our views. We expect the North American business to keep improving due to higher volume next year. As we gain experience with more plants, our North American food can segment will likely increase volume, especially in two-piece cans. We mainly produce two-piece cans for North American food and have a significant presence in the growing pet food market. We anticipate better performance from Brazil next year compared to this year, although I can't specify how much better it will be. Despite currency and energy challenges, we expect improved outcomes for the European business next year. We plan to increase volume and recover costs through renegotiated contracts, which should result in a better year overall. Additionally, Southeast Asia is set to continue its growth, and I'm very optimistic about the region over the next five years, especially given our strong presence there. Regarding our transit side, we experienced a significant issue with steel procurement this year, but we won't face that problem next year, and it’s a substantial factor. All things considered, we are looking forward to a good year ahead.

Could you clarify when your capital expenditures are expected to decrease? Will that be in 2024 or 2025? Do you anticipate settling at around $500 million, or is there a new target level?

Let's discuss our capital expenditures. I previously mentioned that we operate on a global scale, not just in the US. Currently, after Martinsville and Mesquite, we do not have plans to increase capacity in the North American beverage can sector. However, there are many promising global opportunities as the beverage can market grows in regions like Europe and Southeast Asia. This year, we estimate around $1 billion in capital expenditures, and it may be the same for next year. Looking ahead to 2024 and 2025, it could potentially decrease, but at the same time, we will benefit from the cash flow generated by new capacity that has been added. Our business is positioned to generate higher cash flow from previously invested capital to support any future capital needs as dictated by global market demands.

Thanks.

You're welcome.

Thank you. Next question is from the line of Anojja Shah of BMO Capital Markets. Your line is now open.

Hi, good morning.

Good morning.

I wanted to go back to transit for a little while. I think you have achieved margins in the 14% level back in 2018. Just thinking ahead, once the inventory issues are behind you and you've implemented the cost reduction initiatives, do you think you can get back to that 14%? Is that a good long-term level to think about or is there more opportunity?

I haven't calculated the exact figures, but aside from the cost savings from our ongoing reductions in administrative expenses, I should mention that if we factor in the $20 million to $25 million in steel losses we incurred this year into our first half results, I would estimate that it could lead to a margin improvement of about 2% or 3%. While that might not be a large amount, it's certainly noteworthy. So to answer your question, margins can definitely improve. I want to caution you that similar to the beverage can sector, where we're experiencing higher aluminum prices, even though absolute margins may rise, percentage margins may decline due to the changing denominator. We also have to consider various commodities like paper, plastic, and steel in that business. However, we anticipate that margins will return closer to historical levels in transit.

Okay, great. Thank you. And then for my other question, can you give us a sense of what industry volumes were in North America in Q2, like what the CMI number would have been?

It's a great question. I saw that CMI released food and aerosol volumes recently, but I haven't seen their beverage can volumes. Therefore, I can't provide any information on that. Additionally, once they release their numbers, we need to consider both the import and export figures. Regarding food cans, it seems that the two-piece food can market was down about 3%, while we experienced a 13% increase due to customer mix and end market mix. However, I can't provide a CMI beverage number without guessing since it hasn't been released yet.

I thought you guys got it internally, but thank you for that.

You're welcome.

Thank you. The next question is from the line of Kyle White of Deutsche Bank. Your line is now open.

Hi, good morning. Thanks for taking the questions. In North America, I appreciate the preliminary look into 2023. But are you providing kind of a full-year volume outlook for this year for that region and kind of what you expect in the second half?

Yeah. We are estimating that for the full year, we'll see a growth of 5% to 6%. This is a revision from our previous guidance of around 8%. The change is primarily due to capacity limitations and other factors. Based on the current market conditions, we believe we will continue to improve. Enhanced performance means producing more sellable cans at the end of the production line, which has been one of our limitations.

Yeah. Got it. And then just to clarify, the 5% to 6%, that's not a product sort of adjusted number for Bowling Green? That’s just what do you actually think actual volume is?

That's an absolute number. Yes.

Okay. And then Kevin, on the insurance proceeds, any kind of update there in terms of what you expect from the insurance proceeds on Bowling Green? And then do you have any of those benefits included into the 3Q guidance or should we all roll it into the 4Q number?

Yeah. There's no benefit in Q3; it would have to come in Q4.

Got it. Are you providing kind of a total benefit, what you expect from that that's included in the full year EPS guidance?

I mean, look, what we're saying is we're going to cover all the costs related to Bowling Green.

So, Kyle, as I mentioned earlier, by the end of June, we had incurred $10 million in unrecovered costs. Using Kevin's terminology, that means there is $10 million that has been spent but not yet recovered. If you are considering what we expect to recover beyond the incurred costs for the remainder of the year, it’s $10 million, and Kevin indicates that this recovery will take place in the fourth quarter, not the third quarter.

Yeah. So I thought the $10 million was just 2Q. I thought the number was a little bit higher in 1Q. I could have been mistaken.

That's right. So what I said was, we had $20 million unrecovered at the end of the first quarter; we now only have $10 million unrecovered at the end of the second quarter. So we did recover $10 million incremental in the second quarter. The other recovery of $10 million to get us back to $0 million will occur in the second half, primarily in the fourth quarter.

Got it. That makes sense. I'll turn it over. Appreciate it.

Thank you.

We don't have any questions in queue.

Thank you very much, Nicole. So everyone, thank you for joining us. The call is concluded for the day, and we'll speak to you again in October. Bye now.

Thanks everyone.

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.