Earnings Call Transcript
Crown Holdings, Inc. (CCK)
Earnings Call Transcript - CCK Q3 2022
Operator, Operator
Good morning and welcome to Crown Holdings Third Quarter 2022 Conference Call. 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.
Kevin Clothier, CFO
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 Form 10-K for 2021 in subsequent filings. The company recorded diluted earnings per share in the quarter of $1.06 compared to $0.79 in the prior year quarter. Adjusted earnings per share in the quarter were $1.46 compared to $2.03 in 2021. Net sales in the quarter were up 12% from the prior year, primarily due to pass-through of higher raw material costs and increased beverage can volumes. Segment income was $336 million in the quarter, $344 million at constant currency, compared to $379 million in the prior year, primarily due to higher energy prices in Europe and the costs associated with higher inventory levels in Europe and Asia, partially offset by improved profitability in North American tinplate and can-making equipment businesses and 6% global beverage volume growth. During the quarter, the company amended and extended its credit facility to August 2027. We raised an additional $1 billion in floating rate debt and used the proceeds to retire EUR 885 million in euro notes due in February 2023, which carried a blended rate of 1.3%. The balance sheet remains strong with no significant near-term maturities until September 2024. As a result of the refinancing and higher rates, the company now projects net interest expense of $270 million for the year and $350 million if rates were in place for the entire year. As of September 30, we repurchased 6.4 million shares of Crown common stock and spent $722 million of the current $3 billion Board authorization. Since we reinitiated the share repurchase program in 2022, we've repurchased 15.3 million shares, or 11% of the shares outstanding. For the balance of the year, we assume continued headwinds from the stronger U.S. dollar, higher European energy prices, slowing demand, and higher interest expense. The company currently expects fourth quarter adjusted earnings to be in the range of $1 to $1.10 per share and full year adjusted earnings in the range of $6.60 to $6.70. As for current projected EBITDA, we currently project it to be approximately $1.77 billion, capital spending of approximately $850 million, and free cash flow of approximately $100 million. Free cash flow of $100 million is considerably lower than our previous projection of $400 million due to greater use of working capital, mainly driven by the timing of inventory purchases and higher interest paid due to rising rates. We expect leverage to be between 3.25x and 3.5x, and we remain even more committed to maintaining a strong balance sheet in this rising rate environment. With that, I'll turn the call over to Tim.
Tim Donahue, CEO
Thank you, Kevin, and good morning to everyone. As reflected in last night's earnings release, performance in the third quarter and our outlook for the fourth quarter are both well below our previous guidance. As noted, while beverage can volumes were up 6% globally in the quarter, customer demand was lower in almost every market and product line compared to our prior expectations. We now estimate global beverage can volume growth of 4% for 2022, down from our prior estimates. Looking ahead to 2023, global beverage can volumes are expected to increase by 6% with growth expected in each of our operating segments. As a result of lower-than-expected third and fourth quarter beverage unit volumes, we now carry too much raw material inventory across our Asian and European operations at a time when the price of aluminum has declined approximately 10% to 15% from July and August averages. This higher cost material impacted our third quarter results in both Europe and Asia and will continue to have an impact in the fourth quarter. Hoping to avoid supply chain issues that we dealt with over the past 2 years and considering long delivery times, we ended up with more material than needed given the lower sales. The impact for the company is lower margin resulting from the pricing formula on the sell-through of finished products later than anticipated versus when the material was purchased. These balances will be worked down in the fourth quarter. As Kevin discussed, we have reduced our 2022 capital spending to $850 million from $1 billion, mainly the result of unannounced projects being indefinitely postponed. Our two projects in the United States, Martinsville and Mesquite, are progressing well, and it is important that we have good start-ups to meet customer commitments and expected 10% North American volume growth in 2023. Mesquite improves our North American footprint, allowing us to more efficiently serve the Southwestern United States. Today, we serve this region from our plants in Ensenada, Mexico, Wyoming, and Washington State. The Mesquite plant frees up volume from currently supplying plants for their own region and allows us to recapture volumes with previously supplied customers in the Southwestern U.S. While we have no current plans for any future capacity expansion in the United States, we do believe that the North American market will continue to grow, perhaps more on the order of 1% to 3% as supply chain issues for our customers continue to improve. Earlier this month, we began shipping commercial cans from the second line in Uberaba, Brazil, and expect to progress quickly through the learning curve. With all planned projects in Brazil now complete, we are well positioned for future growth, including the coming summer season and Carnival in February. Turning to the operating segments; in Americas Beverage, unit volumes advanced 2% over the prior year, but this was well short of our earlier expectations. Brazil and Mexico, both up 8% compared to the prior year, were offset by North America where volumes declined 6% in the quarter, led by a sharp decline in the month of September. While CMI no longer publishes quarterly shipment data, we would estimate that the North American market, including lower imports, was down 4%, both in the quarter and for the 9 months to September. Previously, we estimated that our North American volumes would be up 5% to 6% for the year. We now revised that to a flat volume performance in 2022 for North America. We currently expect fourth quarter shipment growth in Brazil, leading to an overall flat volume performance for the year which is a nice recovery from a soft first half. For the segment in '23, we expect overall volume growth of 8%, including the aforementioned 10% growth in North America. Unit volumes in European Beverage increased 3% in the third quarter with shipment growth noted in Italy, the Middle East, and the U.K. And again, while volumes advanced versus the prior year, they were short of our earlier expectations, largely related to hyperinflationary conditions in Turkey and customer supply chain issues in the U.K. The expected headwinds from energy and currency both accelerated during the third quarter, primarily as contracts used to hedge energy in earlier quarters rolled off. Volumes are expected to be modestly up in the fourth quarter and up low single digits in 2023 as we bring on more capacity in both Italy and Spain. We continue to make very good progress on contract renewals to restore margins to acceptable levels in Europe. Beverage can volumes in Asia Pacific advanced 26% in the third quarter, off a very easy comparison in the prior year, with strong growth noted in Thailand and Vietnam. And similar to North America, volumes being up 26% compared to the prior year, they were certainly short of our earlier estimates, due primarily to economic softness across the region and COVID-related shutdowns and electricity restrictions in China. Sequentially, volumes were down 12% from the second quarter and fourth quarter Asian results will continue to be impacted as we carry higher-priced raw materials through the fourth quarter. Volumes in the fourth quarter are expected to be modestly higher as growth in Southeast Asia will be tempered by China, and we expect about 5% to 6% growth next year. Adjusting for currency performance in transit was largely in line with the prior year third quarter; inflation-related selling price initiatives and cost reductions largely offset a 6% blended volume decline. Pricing cost reductions are expected to benefit again in the fourth quarter, and similar to the third quarter, will be offset by volume and currency. We do expect income improvement in the segment in 2023 as inflation recovery and cost reduction will outweigh economic-related volume softness. Performance across North American tinplate and can-making equipment continued to be firm compared to the prior year as we continue to sell more self-made 2-piece food cans. Aerosol sales unit volumes were down 20% in the third quarter, resulting in lower-than-expected overall performance. Known for their convenience and dispensing products, aerosol cans are economically sensitive and demand softness is expected to continue into the fourth quarter. Segment results in 2023 will be down compared to 2022, due to the continued economic softness in aerosol cans and the year-over-year impact of inventory benefits realized in 2022. So in summary, a disappointing third quarter performance and fourth quarter outlook. When we last spoke to you in mid-July, we expected the impacts from energy and currency to be steeper in the second half. What we did not foresee, however, was such a sudden and sharp decline in global demand for beverage cans nor such a sharp increase in interest rates. While we remain cautious as to the effects on demand from continued inflation and higher interest rates, we currently expect volume growth in each of our global beverage can markets next year. And this volume growth, combined with contractual inflation recovery is expected to more than offset unfavorable currency and the effects of the 2022 inventory benefits, leading to opportunities for significant EBITDA improvement in 2023. And below the line, the company will face headwinds, as Kevin alluded to, from higher interest expense as well as increased retirement expense.
Operator, Operator
Our first question is from the line of Mike Roxland of Truist Securities.
Mike Roxland, Analyst
The first question is about your confidence in achieving 10% volume growth in North America in 2023, especially considering the changes in customer order patterns. What makes you confident that you will reach that growth in North America next year?
Tim Donahue, CEO
Yes, that's a good question, Mike, and I expected some skepticism given that we misjudged the latter half of the previous year when we last talked. I can share two important points. Firstly, we have regained some customers that we previously supplied in earlier years thanks to our new capacity, which contributes to Crown's market share growth. While we weren't actively pursuing share growth, it's still a noteworthy aspect. Secondly, although it feels awkward to admit, with our growth remaining flat in North America for 2022, achieving 10% growth in 2023 is more feasible now than when I initially suggested it back in July, when we anticipated higher growth this year. It's a simple math issue. I believe it's reasonable to expect a significant increase in units shipped next year in North America. However, those shipments will be lower than what we projected in July, primarily due to the existing contracts we have in place. We're fairly confident about this. If customers choose to fill another substrate instead of the aluminum beverage can, the situation may change. Additionally, it seems there was a significant destocking that customers experienced in September, which was unexpected. We are only three weeks into October, but so far, shipments appear to be aligning with our revised estimates and customer forecasts.
Mike Roxland, Analyst
Thank you for the information. I have a quick follow-up regarding the comment on October volumes. What is your outlook on how those volumes will trend for the fourth quarter? Also, when did you first notice changes in customer order patterns? In your last comments, you mentioned a slowdown in demand for certain products, though you didn't specify which ones. It seems that demand started to decline gradually over the quarter. Can you clarify when you began to observe these changes, which products and markets were affected, and if there was a specific reason for this shift?
Tim Donahue, CEO
Yes. When we discussed this in July, we spoke about a week earlier than we are now, so we only had a few weeks of data. At that time, we noted a decline specifically in craft beer, and that weakness has persisted into the third quarter for the craft customers we serve. However, starting in early September and continuing through the end of that month, we observed widespread reductions in order placements from customers across all products, particularly in carbonated soft drinks. This caught us a bit by surprise as we didn't expect customers to adjust their order patterns so rapidly in September. I'm sorry, Mike, but there was a question you asked earlier that I missed.
Mike Roxland, Analyst
Yes. Apologies. Just a little late. So you’ve noticed that order patterns haven’t worsened so far in October compared to the fourth quarter and the first few weeks, right? The orders you’re seeing in the fourth quarter align with your revised lower expectations?
Tim Donahue, CEO
No, I think so far in October, we’re only a couple of weeks in and what we see looking out seems to indicate that orders are aligning with our revised forecast and, more importantly, our customers' revised forecast. Certainly, that's significantly below where we thought we would be when we spoke to you in July. However, as we've updated the numbers that Kevin just provided, we seem to be maintaining those figures quite well at the moment.
Operator, Operator
Next question is from the line of Ghansham Panjabi of Baird.
Ghansham Panjabi, Analyst
Just as a follow-up to the last question, Tim, in terms of the customer feedback you’ve been receiving. I mean, obviously, there’s been a pretty significant change in the month of September. I just kind of look back and connect with your customers, is it just previous shortages that maybe led your customers to over-order? Is it more pronounced consumer elasticity that they’re seeing? What can you share with us on that?
Tim Donahue, CEO
Sure. I think we came out of COVID with a greater than expected benefit for the beverage can. As we emerged from the pandemic, we might not have fully anticipated the decline in at-home beverage can sales. A significant factor here is elasticity, which we mentioned previously. I believe that the beverage cans have more elasticity than we initially thought. It seems that consumers have a better understanding of their circumstances than we do, especially compared to those in Washington and New York. We're observing this trend in our business right now. We’re hopeful that we're getting a better handle on inventories and forecasts. Although it’s still early in the quarter, it looks like we’re aligning more closely with the new forecasts.
Ghansham Panjabi, Analyst
Okay. For my second question, could you clarify the metal loss for the third and fourth quarters? Additionally, I expect there will be worse fixed cost absorption in the fourth quarter as you adjust inventories. If you could provide estimates for that as well. Finally, looking ahead to 2023, aside from your comments on volumes, what are the key differences we should consider for 2023 compared to 2022? I'm referring to factors like foreign exchange, interest expense, and the price adjustments you're implementing in Europe, along with any positive developments.
Tim Donahue, CEO
So stay on the line, Ghansham, because you just asked a bunch of questions. Let me explain the metal issue. This is a raw material issue for us. It's not a North American issue for us because we're tied up pretty well with the customers. We have some customers in Europe and a significant majority of customers in Asia, where we have pricing formulas that determine the price of cans based on a formula that includes the LME price one, two, or three months prior to when we deliver the cans. We procured metal at a certain time and will sell the cans after processing in the future. Generally, that conversion and contract aligns well with previous months. Over the last couple of years, we've faced significant supply chain concerns around aluminum and expected higher volumes, particularly in Asia, so we didn't want to miss shipments to customers. We procured the metal we believed was needed for deliveries. However, when those requests started to decrease or stop, we ended up with more raw material at prices reflecting the LME from May, June, July, and August. Now we are not going to deliver those cans based on the previous two or three months. We will deliver them four or five months later when the LME is 10% to 20% lower. This creates the cost headwind we are discussing. In the third quarter, this could be around $15 million to $20 million, and in the fourth quarter, approximately another $20 million to $25 million, as we work through this metal issue in 2022 and aim to avoid any exposure going into next year. Was that clear?
Ghansham Panjabi, Analyst
Yes, very clear.
Tim Donahue, CEO
And then, I'm sorry, the other part of your question?
Ghansham Panjabi, Analyst
The fixed cost absorption for 4Q as you rightsize the inventories and then also…
Tim Donahue, CEO
I don't have a major fixed cost absorption issue in the fourth quarter. We will experience lower absorption in the North American Beverage business this year compared to last year because we were operating at full capacity last year. This year, there will be a bit more flexibility in the system, which isn't necessarily a bad thing. There are some concerns in Asia, but they are not my primary focus. Our main issue in Asia and somewhat in Europe is related to the LME situation. In North America, our larger concern is the lower volume than we anticipated. I appreciate your question about absorption. We will strive to reduce inventories, but right now, our challenge lies with raw inventory rather than finished inventory.
Ghansham Panjabi, Analyst
Okay. And just on the 2023 variances?
Tim Donahue, CEO
Yes, you asked several questions. As I mentioned, the potential for significant EBITDA improvement is clear. While I know this may not be well-received due to its broad range, I estimate an EBITDA improvement of $100 million to $200 million. The primary factors influencing this are not just currency fluctuations or our ability to recover costs through our contracts. The two main factors are our projected volume growth of about 6% for next year, which could range from 4% to 8%, and the inflation pass-throughs included in our contracts that will allow us to recover inflation this year. We haven’t projected any further inflation or reduction in inflation for next year, which could also impact the outcome. Below the line, we will face challenges from certain accounting treatments related to retirement benefits, which Kevin can elaborate on if needed, as well as interest expense. Kevin has provided some insight into how current interest rates and anticipated Fed hikes could affect our interest expense on a full-year basis compared to our current projections. Thus, while there are significant improvement opportunities at the EBITDA level, we will face some headwinds.
Operator, Operator
Next question is from the line of Phil Ng of Jefferies.
Phil Ng, Analyst
On some of these levers for 2023 to get to that $100 million to $200 million, can you kind of give us a little more color, particularly on the price recapture piece? I believe North America, a big part of that is the nonmetal escalators. Can you kind of size that up? And then on Europe as well, how much progress we should expect in terms of your ability to kind of recoup some of the inflation you’re seeing?
Tim Donahue, CEO
I believe that the majority of our growth next year will come from our Beverage businesses in the Americas and Europe, while Asia Transit will balance out the non-reportable segment. I can't provide specific figures at this moment and don't feel comfortable discussing them openly, but both inflation recovery and volume will play a significant role. In Europe, we are adjusting contracts to reset prices and account for specific costs, while in the United States, we anticipate benefits from inflation recovery and volume growth. However, I am not ready to share detailed amounts right now.
Phil Ng, Analyst
Got you. Okay. And then, Kevin, you mentioned that CapEx is projected to decrease to $850 million. Is there any preliminary insight for 2023 regarding how we should approach this? Regarding the unannounced projects that are being removed from consideration, can you provide any information about whether these pertain to a specific market? Additionally, as you take a broader look at your operations in North America or Brazil, are there any facilities that you might consider suboptimal and evaluate carefully in light of the current growth projections?
Tim Donahue, CEO
Yes. We have been facing capacity constraints in nearly every market globally for the past few years. While some facilities outperform others, the newer facilities show long-term potential. In the short term, older facilities are operating more efficiently due to decades of adjustments and experienced workforces that excel at making cans and adapting designs. Therefore, I wouldn’t label anything as suboptimal. Considering our expected 6% year-over-year volume growth, we can't reduce capacity. I need to be cautious about how I phrase this, but I believe we acted responsibly in recent years, especially in North America, by not announcing or expanding plants beyond what we deemed necessary based on the contracts we secured. So, we do not see any need for that. As we look ahead to next year, we sold the European food can business last year, and one of the conditions of that sale was relocating our beverage can operations from the Braunstone U.K. facility to another site. We are currently building a new facility in the U.K. because we need to vacate the current facility by mid-2024. While this results in a slight capacity increase, it is not substantial since we are constructing a three-line plant to replace a two-line plant. The cost of building a new beverage can plant has significantly increased over the past couple of years compared to our previous expectations. A major portion of our capital expenditures in 2023 is allocated to the Peterborough site in the U.K., which is basically a replacement for the Braunstone move. If you are looking for a figure for next year, it includes the spending to complete the Mesquite project and the line expansions in Italy and Spain, along with a few projects in Asia, as well as a large investment in Peterborough. We anticipate reaching a capital expenditure figure similar to $900 million or $1 billion again, barring any adjustments when we enter next year.
Phil Ng, Analyst
And Tim, some of the unannounced projects that you guys are pushing out indefinitely, any color which region in particular?
Tim Donahue, CEO
That's why they were unannounced. So they will stay unannounced and they may be unannounced forever, right? They may never come back. But at one point in time, you think they're okay based on where you see the world going and the world changes. So we change. Perhaps they come back in the future, perhaps they don't, but I don't think it would do us any good to tell you what we are thinking about.
Operator, Operator
Next question is from the line of George Staphos of Bank of America.
George Staphos, Analyst
I guess the first question I had for you, you might have mentioned it, but I didn’t see it in my notes. Did you cite an expectation for volume growth in North America for the fourth quarter? You said you’re running in aggregate much more in line with your reforecast. Could you tell us what North America is expected to be at in that reforecast? And I had a few follow-ons.
Tim Donahue, CEO
I would say that North American volumes, we expect to be up a couple of percent in the fourth quarter.
George Staphos, Analyst
Okay. Could you tell me where the strength is coming from on a relative basis in that 2% by end market?
Tim Donahue, CEO
We're largely a carbonated soft drink and sparkling water supplier in North America.
George Staphos, Analyst
Okay. Yes. We knew that, but okay. Understood. So I guess the second question I wanted to ask you is, do you see any potential challenges over the next two years in terms of your demand outlook, what you're seeing for the market, and where you see capacity coming on? You talked earlier to one of the questions about you're going to need the capacity that you're bringing on because you see 6% growth, and recognizing that. Where are you perhaps a bit more pensive in terms of that supply-demand balance hanging in within any one region? And could you remind us, across your regions, do you have any important years we should remember in terms of contract renegotiations or qualitatively, how do you stand over the next two to three years across the regions on that front?
Tim Donahue, CEO
I will address the second question first. In North America, we feel confident about our position contractually for the next two to three years, and potentially longer depending on the customer. In Brazil, our contracts extend a few years out. The Asian market operates more on an annual basis, but we hold significant shares in most countries there and generally perform well. Our success will hinge on volume growth, cost reduction, and managing competition from new or potential entrants. As for Europe, as we've shared over the last year, we are renegotiating several contracts this year and next. We are making good progress in restoring margins and are fortunate to have the chance to renegotiate these contracts. This process should be completed by the end of next year, providing us with a stable outlook for the following years. On the factors, George, I think the unknown is how much further the Fed is going to go. There's a valid argument that they may have waited too long and now must take necessary actions, which will come at a cost to us all to manage inflation. Inflation negatively impacts those at the lower end of the economic spectrum, who do not gain from stock market increases and face significant challenges when purchasing products. Therefore, the Fed needs to control inflation. I can't specify how much more they will go and what demand destruction may occur in the short term before things stabilize and begin to recover. However, based on what our customers are indicating for next year and the contracts we have in place, we are anticipating significant volume growth next year, which we aim to discuss further.
George Staphos, Analyst
Understood. On that point, I’ll ask one quick one and then I’ll turn it over, just to be curious. So have you haircut to a larger degree what customers are telling you relative to the experience this year? Or you’re more or less baking in what customers are telling you in terms of your volume expectation for next year? And then maybe for Kevin, can you just give us that quick update on the retirement issue and what that’s going to mean at the bottom line for '23?
Tim Donahue, CEO
Thanks, George. So the answer, yes, George, you should expect that we've grown certainly much more skeptical with customer forecasts.
Kevin Clothier, CFO
So George, yes, we've been amortizing through about $15 million of unrecognized gains related to postretirement changes we made back probably more than 10 years ago. They're going to disappear next year. We also see some potential higher below-the-line pension costs. So we're probably looking at it in the neighborhood of $30 million.
George Staphos, Analyst
Kevin, is the $30 million inclusive of that $15 million or that would be additive for the $15 million?
Kevin Clothier, CFO
Inclusive of the $15 million, George.
Tim Donahue, CEO
So just to summarize that, George, we made significant changes to our postretirement medical benefit programs a decade ago, resulting in large gains which the accounting universe requires us to amortize over a period of time as opposed to booking at the time you make the change. That amortization period has run out.
Operator, Operator
Next question is from the line of Mark Wilde of Bank of Montreal.
Mark Wilde, Analyst
Tim, I wonder just toggling away from beverage can for a minute. Can you just talk with us about what you’re seeing right now in terms of both volume and then kind of price/cost issues in the Transit Packaging business? It seems like the global economy is slowing down. How is that manifesting itself in Transit Packaging?
Tim Donahue, CEO
As mentioned in the prepared remarks, we observed a blended average volume decline of approximately 6% in the third quarter. We expect volumes to continue to decline in the fourth quarter and into next year. Typically, our Transit business aligns closely with fluctuations in economic activity. This year, we have been focused on addressing and adjusting a steel inventory imbalance, which may have resulted in larger volume declines than anticipated as we work to reduce inventories and modify our ordering and selling processes. We expect to move past this issue by the end of the year. However, we believe that economic activity, particularly in Europe, looks quite bleak for the coming year. We are exploring various strategies, including the headcount-reduction program we announced in July, to align our costs appropriately. Regarding pricing, we understand that volume will decrease, but we cannot absorb any inflationary costs; they must be passed on. If we sell less because customers are unwilling to accept those inflationary prices, we will accept that decline. However, we will not sell products at a loss just for the sake of sales. In our forecasts, we expect lower volumes in the fourth quarter and next year, primarily offset in the fourth quarter and more than offset next year by price and cost reductions.
Mark Wilde, Analyst
Okay. Just two quick questions, Tim. First, can you share any updated thoughts on the impact of recession on both beverage cans and food cans? Looking back to 2008 and 2009, beverage cans performed relatively well due to some shifts in market share during that time. Additionally, could you provide an update on the progress of ramping up new production lines and facilities?
Tim Donahue, CEO
Someone in the company, whom I greatly respect, reminded me that recessions don't affect the can business. What truly impacts all businesses, including ours, is inflation. The key distinction between now and the 2008 financial crisis is the current level of inflation. Inflation is what diminishes demand, whereas a recession doesn't necessarily do so. In fact, as you were trying to point out, we generally perform better in a recession since our products are priced more competitively to provide value to consumers. Inflation is the crucial factor here. That's why I mentioned earlier that it's challenging to imagine inflation worsening significantly from its current state. However, if it continues, there will eventually be a breaking point related to either input costs or consumer demand. At the moment, I can't definitively tell you what that will be. But this is the major difference, in my opinion. Regarding the food can ramp-up, we brought up the Hanover facility. I think the third line in Owatonna starts up sometime in November. So we'll have all of our 2-piece food can needs met by our own internal production going into next year.
Operator, Operator
Next question is from the line of Mike Leithead of Barclays.
Mike Leithead, Analyst
First, just a couple around capital deployment. You talked about finishing a few projects off that gets you to about $900 million to $1 billion next year. But just should we expect that to start kind of normalizing or falling off after that? Or is that a fair run rate? And just related to that, just given the macro, what not, EBITDA is obviously a little bit lighter. But is there any change to your framework or thinking about target leverage of 3x to 3.5x EBITDA?
Tim Donahue, CEO
So two great questions. I think post-2023, as we sit here today, we would expect capital to come off significantly from that $900 million to $1 billion number. It's a little early to say because we're not there yet and we don't know what the world is going to bring us in terms of opportunity, but it's not out of the question to think that, that number couldn't fall to something like $600 million. On the balance sheet, as Kevin said, given a rising interest rate environment, and we're expecting that the Fed is going to probably do something in November and maybe even another hike in December, we're more committed than ever to maintaining a strong balance sheet. We've typically described for you target leverage in the 3% to 3.5% range. I think we have a Board meeting later this week and we'll have a significant discussion with the members of the Board, taking on their experience from past inflationary times. It wouldn't surprise me if they want us to earn towards the lower end of that target range and be closer to 3% than 3.5%.
Mike Leithead, Analyst
Fair enough. Kevin, I apologize for bringing this up again, but I wanted to follow up on the earnings outlook for next year. It appears that EBITDA may increase by around $150 million. There's a wide range to consider. Based on your comments regarding net interest, it seems there could be an $80 million net headwind next year, along with pension considerations. So, overall, when we look at all these factors, should we still expect EPS to increase next year? How should we approach the below-the-line items?
Kevin Clothier, CFO
Yes, Mike, it's a bit early in the process for us to provide a definitive answer. You're pointing out all the right concerns. When considering other factors, our tax rate will highly depend on where we generate our income and how it accumulates. It's still too soon to determine our exact positioning, but you're addressing all the key issues. Currently, we are assuming a SOFR rate of about 4.35%. If the Fed raises rates further next year, we could see interest expenses exceed the figures you're estimating. Until we have more clarity, I prefer not to commit to a projection for our EPS.
Operator, Operator
Next question is from the line of Arun Viswanathan of RBC Capital Markets.
Arun Viswanathan, Analyst
So I just wanted to go back to an earlier comment that you made, Tim. Did you say that most of the improvement on the segment EBIT level would be in Americas and Europe Beverage and then some improvement in Signode or Transit would offset non-reportables in APAC? Is that what you said?
Tim Donahue, CEO
Yes. So we gave you a very wide range of EBITDA improvement. If you consider that there'll be some smaller gains in Asia in Transit, they'll offset the decline in other. So, pretty large gains in the Americas and a large gain proportionately in Europe as well.
Arun Viswanathan, Analyst
Okay, that’s helpful. And just considering all of that and considering your comments on volume growth and some uncertainty there, I know that you have a customers’ outlook that leads you to believe around 10% for next year. But would you say that the fixed asset base in certain of these locations is carrying too much cost? I mean, is there an opportunity for rationalization, especially when you look at Europe, as you said, could be continuing to be weak next year materially and maybe some other areas as you’re doing in Transit?
Tim Donahue, CEO
As we discuss our current situation, our customers have provided us with requirements contracts, indicating they expect a certain volume next year, and we are committed to meeting that expectation. Over the past several years, we have primarily faced capacity constraints. If demand increases, we may encounter similar constraints next year. While I understand your interest in our global beverage can capacity, we currently do not have the ability to reduce that capacity. The only region where we will have available capacity next year is in the Middle East, which we sometimes use to meet shortages in other markets. In North America, across the Americas, and in Asia and Europe, where we are already significantly capacity-constrained, we cannot reduce capacity at this time.
Arun Viswanathan, Analyst
And then just a quick one, if I can. On non-reportables, I know there was a $35 million-or-so metal gain. So we’ll take that out. But then you’d likely be down from that, beyond that as well, just given some of the extraordinary equipment sales that you guys achieved this year. Is that right? So maybe back out.
Tim Donahue, CEO
I don't believe our equipment business can be considered extraordinary. If you look at the other segment, I'd point out the inventory gain we had last year and the anticipated decline in aerosol can sales next year compared to this year. Equipment sales may decrease slightly, but not significantly. As I mentioned, the decline in those other sectors due to those two main factors will be balanced out by growth in Transit in Asia.
Operator, Operator
Next question is from the line of Christopher Parkinson of Mizuho.
Christopher Parkinson, Analyst
If we just take a step back on the euro energy costs, is there any way to quantify the extent of that headwind going back to the beginning of the year and what the cumulative rate is year-to-date and then also what you’re expecting for the fourth quarter? And just any incremental information we could utilize to help us assess the cushion from the contractual renewals for 2023?
Kevin Clothier, CFO
Okay. So on the energy front in Europe, we had expected some increase in European energy costs when we started the year. Once the Ukraine war hit and the natural gas stopped flowing from Russia, as you know, the prices have skyrocketed. So right now, when we look at it on a full-year basis versus our original guidance, we think the number is probably in the range of $52 million to $55 million year-on-year. That’s up a little bit from our previous guidance but largely in line. From a fourth quarter perspective, we're looking at probably a hit of around $20 million. We do have some hedges but we still probably think that we're in the $20 million range. The TTF is a little bit lower right now than we expected. We may pick something up there, but it's too early to tell if you go back and look at the history of this TTF. So that's where we're at. The number in the third quarter was a similar hit to what we've seen in the fourth quarter.
Christopher Parkinson, Analyst
Got it. Circling back to your comments about North American demand, it seems that the second and third quarters were challenging, but there is a shift for the fourth quarter. I'm curious about the outlook for 2023. What feedback are you receiving from your customers? You mentioned some hesitance to trust others, but are there any insights regarding ready-to-drink products or a moderation in the declines seen in hard seltzer? Any additional details based on product type would be very helpful.
Tim Donahue, CEO
We are not a major supplier to the hard seltzer market. Regarding significant volume changes, I don't have the exact figures we shipped, but we are definitely above 25 billion units in North America. When considering percentage impacts on a base of $25 billion or more, ready-to-drink is appealing and is growing, with potential future opportunities. However, to achieve the results we are discussing, it must come from our core products. Our core products are carbonated soft drinks and sparkling water. These are the markets we anticipate will rebound, and where we have secured additional contracts for next year compared to this year.
Operator, Operator
Next question is from the line of Angel Castillo of Morgan Stanley.
Angel Castillo, Analyst
Tim, I was just wondering, as you think broadly in terms of strategies, there are a number of things that have been an impact. So we talked in this last question about energy hedging and maybe some of that playing a factor in the fourth quarter. How are you thinking about your level of hedging for next year? And then more broadly, as you think about sourcing, obviously, metals has been a bit of a headwind here in the second half. How are you thinking about your strategy evolving? Are you buying less or changing as you see the kind of the macro be a little bit more difficult?
Tim Donahue, CEO
So I'll do the metal, and Kevin will come back on hedging our thoughts around hedging. On the metal, yes, listen, I think we're going to take a different approach. We went through the early pandemic and post-pandemic fighting through supply chain issues, trying to get as much material as we could to meet growing customer demand coming out of the pandemic. It kind of caught up with us here this summer, and we're left with too much material at higher prices. We're going to take a different approach and we're going to order what we think we need. If we're short, we're short. But we cannot afford, especially in markets like Asia and in markets like Europe, where we don't have specific back-to-backs with customers, to take the risk. What I'm saying is if we're short of material and customer demand is greater than we forecast after taking into account their forecast, then that's going to be where it is. But we can’t afford to take the risk that volumes don’t materialize as we initially thought or as we were initially told. So that will be a change, and that change is already happening. I think that’s the question you’re asking. That change is already happening for the fourth quarter right now. We are bringing in much less material. Bringing in less material, you have a much lower accounts payable balance. The liquidation of payables, in a strange way, reduces your cash flow because it looks like you’re utilizing more working capital than you’re utilizing. The right thing for us to do is bring less material in and have less payable as we go into next year. Kevin, do you want to take the energy?
Kevin Clothier, CFO
Yes. So on the hedging front for next year, at this point, we're very limited in terms of the number of hedges that we have in place. I think we've been pretty clear in terms of our overall strategy for covering the energy cost: you can hedge from 1 year to the next. But in terms of overall risk, our view is that this isn't something that we can absorb at any time. Our view is that we need to pass this on to the customers. We've done a number of things and renegotiated a number of contracts to actually get the pass-throughs put in place, and we think that's the best way to handle this. I wouldn't expect to have a material amount of hedges for next year.
Angel Castillo, Analyst
Got it. That’s very helpful. And then in terms of capital allocation, could you just remind us how you’re thinking about buybacks? I think you had outlined a $1 billion number for this year. So can you just help us understand, I guess, how to think about that this year and next year in terms of repurchases?
Tim Donahue, CEO
Yes. I think we described earlier for you in this interest rate environment and depending on what we see the rates do after the next several Fed meetings, we'll certainly take a closer look. But as I said, we have a Board meeting later this week. We have another one in December, and we're going to take some good advice from our Board members as to where they think the appropriate level of leverage should be, and that will directly impact the amount of shares we buy back this year and next year. So, to be determined.
Operator, Operator
Next question is from the line of Gabe Hajde of Wells Fargo Securities.
Gabe Hajde, Analyst
I might be getting a bit too detailed, but coming into the year, there was an estimated $40 million challenge in Europe Beverage related to aluminum conversion costs that were expected to be addressed over the next two years. I'm interested to know more about the $1 challenge you mentioned in your press release, which was related to interest, Europe energy, and what was the other component?
Kevin Clothier, CFO
So Gabe, let me break it down. Foreign exchange is roughly between $40 million and $45 million. At the start of the year, we anticipated interest expenses to be around $210 million. Last year, we utilized the proceeds from the tinplate sale to pay off about $1.8 billion in bonds. We expected interest expenses to be significantly lower this year. However, our estimate has increased from $210 million to $270 million, resulting in a $60 million increase. Additionally, energy costs are projected to be in the range of $50 million to $55 million.
Gabe Hajde, Analyst
Okay. But the aluminum conversion issue should be resolved with contract renegotiations for next year. And sort of an extension of that, Tim. We’re reading some articles here about labor inflation next year in Europe. I’m just curious how your contracts are positioned to deal with that. And I want to say it’s around labor is typically, I don’t know, 12% or 15% of the cost structure. Just any thoughts there?
Tim Donahue, CEO
The aluminum conversion issue was factored into our earlier guidance, which is why Kevin didn't mention it in the dollar reconciliation he provided. This is one of the aspects of contract renewals we are addressing moving forward. Regarding labor, I agree that it is likely to rise across the board. We don’t have specific exclusions for labor, but it is accounted for in the inflation adjustment features within our contracts.
Gabe Hajde, Analyst
In both the U.S. and Europe or…
Tim Donahue, CEO
Yes.
Kevin Clothier, CFO
Yes.
Gabe Hajde, Analyst
Okay. And one last one, if I may. Tim, you made a comment about your customers potentially choosing to fill other substrates versus the beverage can. I’m curious if that was just a hypothetical or if in fact, maybe as we’re seeing consumers move to more on-the-go consumption that that’s something that you’re getting through your commercial discussions? And does it take anything away from the can winning?
Tim Donahue, CEO
No, no, it was purely hypothetical as it relates to looking forward and the unknowns as we look forward. I don't think we've seen any of that right now. I don't think we've seen any negative substrate shift away from the can, in fact, just the opposite. But as we think about volume growth and inflation and the consumer going forward, just purely hypothetically, you don't really know what the customer is going to do.
Operator, Operator
Next question is from the line of Kyle White of Deutsche Bank.
Kyle White, Analyst
But I’m curious about Europe. Volumes there continue to hold up quite well. Any concern that that region might see a similar situation to the U.S. with a sizable drop-off like you experienced in September just given the inflationary pressures on the consumer? Are you concerned about that risk? And then anything you can do to prepare for something like that?
Tim Donahue, CEO
If you consider the situation, the European market and the U.S. market have experienced some corrections, especially towards the end of the third quarter, as we work to achieve balance moving forward. The U.S. market, particularly for beverage cans and many other products, exhibits greater resilience compared to the European market. If I were to evaluate from an external perspective, I would view the European market with more concern than the U.S. market. We concur that Europe might face more challenges in the future compared to the United States. We've faced constraints in our capacity, but during contract renewals, we secured additional business with a significant customer, which we will need to fulfill. As I mentioned earlier in response to Arun's question, we do not have the option to reduce any capacity.
Kyle White, Analyst
Got it. And then on the U.S., understanding that you have some incremental business that you regained that you used to serve previously next year, just curious what kind of underlying market growth you need to see in the U.S. for next year in order to reach your 10% target.
Tim Donahue, CEO
I would think that underlying market growth for us to achieve our target is low single digits.
Operator, Operator
Speakers, Kyle is our last question. You may proceed.
Tim Donahue, CEO
Oh, I'm sorry. Okay. Thank you very much then, Nicole, and thank you, everybody, for joining us. That will conclude today's call, and we'll speak with you again in February. Bye now.
Operator, Operator
Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.