Tim Donahue - President and CEO Tom Kelly - SVP and CFO.

Chip Dillon - Vertical Research George Staphos - Bank of American/Merrill Lynch Scott Gaffner - Barclays Bank Ghansham Panjabi - Robert W.

Baird Randy Toth - Citi Adam Josephson - KeyBanc Capital Markets Tyler Langton - JPMorgan Mark Wilde - BMO Capital Markets Arun Viswanathan - RBC Capital Markets Brian Maguire - Goldman Sachs Chris Manuel - Wells Fargo Kyle White - Deutsche Bank Edlain Rodriguez - UBS.

Good morning, and welcome to Crown Holdings' First Quarter 2018 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. Thomas Kelly, Senior Vice President and Chief Financial Officer.

Sir, you may begin..

Thank you, Angela, and good morning. With me on today's call is Tim Donahue, President and Chief Executive Officer. On this call, as in the earnings release, we will be making a number of forward-looking statements. Actual results could vary materially from such statements.

Additional information concerning factors that could cause actual results to vary is contained in the press release and in our SEC filings, including in our Form 10-K for 2017 and subsequent filings. Earnings for the quarter were $0.67 per share compared to $0.77 in the prior year quarter.

Adjusted earnings per share were $0.94 in the quarter compared to $0.77 in 2017. Net sales on a currency neutral basis were up 9% for the quarter primarily due to increased beverage can volumes and the pass-through of higher material costs. Segment income was up 8% for the quarter at actual rates.

Corporate costs were below the elevated amounts from the first quarter of last year and are more representative of the run rate we experienced in the last three quarters of 2017. As you can see in the release, we no longer report North America Food as a separate segment.

Beginning with its initial reporting in the second quarter, we will report transit packaging as a segment.

On the cash flow statement, adjusted cash used for operating activities in the first quarter is above the prior year amount primarily due to higher exchange rates, higher material costs and lower utilization of our factoring and securitization programs due to large cash balances already on hand from borrowings to fund the Signode acquisition.

These are timing items and will have no impact on full year cash flow. Net leverage at the end of 2018 is expected to be approximately 4.7x and we expect the ratio to decline by about half a turn each year going forward as we use cash flow to delever.

As outlined in the release, we are estimating second quarter 2018 adjusted earnings of between $1.55 and $1.65 per share and full year earnings of between $5.35 and $5.55 per share. In the release we have provided a reconciliation between our previous guidance and the revised guidance.

These estimates assume a full year tax rate of between 25% and 26% and that exchange rates remain at current levels. We are projecting full year adjusted free cash flow of approximately $625 million after approximately $460 million in capital spending.

Finally, on our Web site we will post revised 2017 segment income numbers by quarter as adjusted for changes in the presentation of pension costs and the exclusion of intangibles amortization charges. With that, I’ll turn the call over to Tim..

Thank you, Tom, and good morning to everyone. As reflected in last night’s earnings release and as Tom just discussed, we’ve had a real nice start to the year and expect an excellent overall performance for the year 2018.

For the quarter, we outperformed our initial expectations by about $0.08 per share primarily from strong global beverage can demand and cost performance throughout our European operations.

The headwinds that we experienced in recent years from currency translation have reversed and as expected will continue to benefit our performance compared to prior year. We have reviewed the progress on the major projects we have underway or recently completed in the release, all of which are on the same timing as we described in February.

The Signode transaction was completed in early April and as Tom just described, transit packaging will be reported as a separate segment beginning with the second quarter of 2018. As such, we have streamlined our current segment reporting in preparation for the inclusion of the transit business.

Notably, we now combine North America Food with our other non reportable businesses. In total, net sales advanced 15% over the prior year first quarter with increased volumes, currency translation and the pass-through with higher raw material costs all contributing to the overall gain.

As we discussed in February, tin plate steel is up double digits versus 2017 and delivered aluminum is up more than 20% year-on-year, so we expect significant reported sales gains in 2018 from the pass-through of these raw materials. Given the aforementioned, the following segment comments will focus on volume performance versus the prior year.

In Americas Beverage, overall volumes advanced 4% due primarily to volume gains in the United States and Brazil. Segment income as expected was down slightly in the first quarter due to start-up costs at the new glass facility in Chihuahua and a plant furnace rebuild in Orizaba.

Both projects are now complete and we expect our glass capacity to be sold out for the balance of the year. Unit volume demand in European Beverage was down low-single digits overall with Continental Europe flat and the Gulf states down mid-single digits.

Segment income was up due to strong cost performance year-on-year and a couple of million dollars from currency. While volumes in European Food were lower as expected following customers pulling ahead of the 2018 steel increase, segment income in European Food was up $5 million due to cost performance, positive mix and currency.

Segment income in Asia advanced more than 10% over the prior year as continued strong demand throughout Southeast Asia and a lower cost base in China both drove the improvement. Segment income in our non-reportable businesses was up over the prior year due to a strong performance in North American Food cans.

So in summary, a real good start to the year. As we have said before, the first quarter is seasonally small and we have generally stayed away from changing guidance this early in the year before having more clarity on the various food packs. Having said that, the outlook for our can businesses at this time is quite positive.

That is demand looks to be solid for the balance of the year and operationally we’re performing well. So as noted in the release and as Tom just described, we have raised the pre- Signode guidance 3% at the midpoints. Turning to Signode, the acquisition closed on April 3, 2018.

As shown in our updated guidance, Signode provides significant accretion to earnings and cash flow. With only nine months of inclusion in 2018, earnings per share accretion is 15% at the midpoint and cash flow accretion is 25% with more to come in the full year of 2019.

As shown in the release, we expect Signode to add $0.69 per share to our results in 2018 which is before approximately $0.55 per share of amortization of acquired Signode intangibles. As is customary in our peer group and to more closely match cash earnings, we now add back intangible amortization to our adjusted earnings per share results.

We are confident that the addition of a premium business such as Signode to Crown’s strong and diversified existing metal packaging franchises will create value for our shareholders for many years to come. Many of you had expressed some concerns surrounding the level of debt, growth rate and perceived cyclicality of the Signode businesses.

We think it’s important to deal with these head on. As for the debt incurred to acquire Signode, we used all debt and no equity given our desire to have all the benefits of the transaction accrued to our shareholders. With the availability of attractively priced fixed and floating rate debt we believe this was in the best interest of our shareholders.

With expected free cash generation of more than $2 billion over the next three years, total leverage will return to mid 3 levels with almost all of the pay down coming from our floating rate debt thereby reducing any impact from rising rates. As to growth, we do believe that with minimal CapEx the transit business will grow at GDP levels.

While their growth over the last four years was only 1% ex-currency, there have been numerous organizational operational changes enacted by management during this period which we believe position the business for higher growth levels.

As for cyclicality, yes, the business is a bit more cyclical in the can business but we firmly believe any reference to the global financial crisis of 2008 and 2009 is misguided due to the unique nature of those events.

However, what we can say is the Signode business today is far more diversified now than then with the proportion of overall sales to end markets such as metals and construction being 25% lower now than in 2008. As restated in the earnings release, we remain confident in the free cash flow target of 775 million we have set out for 2019.

And while I don’t want you to get ahead of yourselves, in recent years we have taken great care to at least achieve if not outperform the free cash targets that we have set. Then lastly before we open the call to questions, we ask that you limit yourselves to two questions initially so that others will have a chance to ask their questions.

You’re always free to jump back into the queue. So with that, Angela, we’re now ready to open the call to questions..

Thank you. We will now begin the question-and-answer session of today’s conference. [Operator Instructions]. Our first question is from Chip Dillon of Vertical Research. Please go ahead..

Yes. Good morning and congratulations Tim on your Cats. It will be our turn next year..

Well, it’s like putting two roses around a thorn in the last three years, but even more enjoyable than that and we’ll get back to Crown in a second. Two members of our legal team went to Michigan, so I find it necessary to remind them that Michigan lost the championship game. But let’s get on the ground. Thank you..

There you go. Listen, I had two quick questions, one and a follow up is, when you look at the leverage, are you all open if you got an acceptable offer to sell what might now not be as core of a business as maybe in the past? You mentioned that the U.S. food can business is doing better.

Is that something that is as important going forward as maybe it was in the past given Signode and given some of the changes in that business?.

Well, I think our North American food business operates well. It clearly with the addition of incremental capacity by a new player into the market a few years ago, the market itself has a little bit of overcapacity. I think as an industry we’re learning how to deal with that.

The key thing is to provide customers with quality containers and quality service and we believe we do that well. I wouldn’t say that North American food is not core.

Our decision to place it in the non-reportables as opposed to a separate segment is just really an effort to try to streamline and make more efficient our description of the larger businesses we have with the inclusion of the transit business. But as you know we have a very large food can business in Europe.

We have food can operations in Southeast Asia and our North American food can business is not only cans but its vacuum closures and includes operations in the United States and Mexico and it still remains core to us. It would have to be a very enticing offer I think at this point for us to want to let go of that business.

We’re firmly committed to the business and we actually do quite well at it..

Okay, that’s helpful. And real quickly for Tom. The net working capital build almost $1 billion, that’s certainly a big number for one quarter. We’ve never seen one that big.

Is part of that timing related or maybe you could otherwise give us a little help with that number?.

Yes, it is timing. As I mentioned in my prepared comments, really three things; currency rates are higher. So as the cash is going out at higher rates, you’re going to see a bigger U.S. dollar number. Input costs are higher as well. And then the third thing is we --.

We require accounting changes..

Yes, absolutely. Those are the two primary items..

Okay, makes sense. Thank you..

Thank you, Chip..

Thank you. Our next question is from George Staphos of Bank of American/Merrill Lynch. George, go ahead please..

Thanks for the time. Good morning, everybody. Two questions, gentlemen, first of all with Signode. Could you provide any color on how the business did in the quarter? Obviously knowing that you didn’t actually have it during the quarter and therefore it’s not in the results.

But how did it perform relative to what the expectations were? Can you put a volume or EBITDA growth figure on the business? That’s question number one. And question number two totally on the other side, just trying to find the $24 million in acquisition costs that you had adjusted out of earnings in your P&L.

I’m assuming 9 million of carried interest was certainly in interest expense. Does that mean there were $50 million of acquisition costs in the corporate line? Thank you very much..

So just quickly and if I get it wrong, Tom will fix this. But you’ve got $3 million of acquisition costs in the restructuring line and then in the foreign exchange line there’s $15 million, George. So it’s 15, 3 and 9 is the 27 actually and you can see that on the reconciliation table.

But Tom can come back and explain that in more detail after I deal with the Signode Q1 performance. So as you can see on the – we’ve provided you just for context the historical revenue for Signode for the last five quarters only because we figured you’d want to know.

And so if they were up 62 million or 11% or 12%, about 25 – I’m looking at – 25 to 30 of that was currency and the balance was volume. So real strong volume performance. If I’m being selfish I would have hoped that they would have had no volume growth and would have saved it all for Q2.

But I think this is – seriously I think this is more indicative of what we saw when we looked at the business throughout the latter half of last year.

And notwithstanding many people’s concerns that as we said in the prepared remarks that they’re growth has not mirrored GDP over the last several years but we have seen a number of changes that they have enacted and we believed that their business was at an inflexion point to reap the benefits of growing economies specifically Europe and even the United States, but more importantly to refocus on revenue growth within their own system and to refocus on their premier equipment and tool package that they offer not only as a way to grow equipment and tool sales but also as a way to tie in growing consumable sales.

And I think we see a little bit of that at the first quarter and we’re hopeful certainly but we’re more than hopeful, we’re confident that the business is going to grow at higher levels than you’ve seen over the last four years..

Tim, just a quick follow-on if I could and I’ll let it go. Did the revenue growth or volume growth meter in to EBITDA growth that pretty much sustained rate? And just as we think about the quarters, will there be any seasonality that we should think about in terms of margin? Thank you, guys..

Well, I think if they’re – I don’t have the EBITDA in the front of me. I think if they’re revenue growth was 11%, I think the EBITDA growth was more like 6%, George. And so – again, timing.

They obviously have cost input issues like any other business including the can business and I think what actually will happen is Crown will get the benefit of that as they pass that through in Q2 as opposed to the prior owner not getting into Q1.

The second part of the question, George?.

Just the cadence on margin seasonally. They’re much different across the quarters as one quarter --.

They’re not – oh, boy, I don’t have it in front of me. They are nowhere near as seasonal as we are. They will have higher earnings in Q2 and 3, but it’s generally – it’s much flatter. Q1 looks like the smallest quarter for them from what we’ve seen historically and what we see projected for this year. Q2 is a little bigger. Q3 is a little bigger.

Then Q4 is a little smaller than Q2. But it looks like Q1 is smaller. But it’s not to the level the seasonality that you expect to see in northern hemisphere food and beverage can business as you won’t see in this business..

Okay. Thank you so much..

Thank you..

Our next question is from Scott Gaffner from Barclays Bank. Please go ahead..

Thanks. Good morning, guys..

Good morning, Scott..

Hi, Tim. Just following up a little bit on the volume comments around Signode, you mentioned some of the changes that they’ve made within the business to go after growth.

Can you get a little bit more granular because it sounds like they tried to get less cyclical out of some of those cyclical upside and now – but you were saying that the business is going to grow faster. Is it in new end markets? What are the new end markets? Maybe you could just provide a little bit more detail so we could understand that..

So I think – I got to be a little careful here because I – we’re always caught between trying to explain to you or justify to you why we believe that something’s going to happen and giving away trade secrets or business I may not make you fully happy but I’ll do my best.

Certainly they are a much more broadly distributed business across end markets today than they were 7, 10, 15 years ago and they’ve continued to do that. And I gave you two examples; metals and construction. Those two markets clearly being markets that are impacted much more in recessionary times than other markets; for example, food and beverage.

And then the metals market for their products is largely a mature market. So they made a large effort not only to try to diversify their product lines in other areas to get away from – not really just to get away from recessionary characteristics but more to establish growth if the metals market is a mature market.

I’m going to be a little careful saying too much.

I think the big thing is a renewed focus on their identification with the new management team as to the equipment and tool business that they operate which is widely regarded as the superior equipment and tool business for strapping and stretch across all markets to use that as a competitive advantage not only to grow equipment and tools but to grow consumables.

And beyond that, I’m hesitant at this point to say too much because I’m mindful of the fact that there are others listening out there and we’re trying to protect the business we just bought..

Sure. I understand that. Just two quick things on guidance; one, on the working capital. What’s the assumption for the full year? And then just for a minute focusing on the rationale to change the adjusted EPS to exclude the intangibles of amortization.

I understand the rationale to get closer to cash EPS but you do provide free cash flow guidance, so that number’s already out there already. I guess I just don’t see the peer analysis.

Maybe you could enlighten us a little bit on that as to other peers or what peer group you looked at to make that more of a comparable analysis?.

Yes, so I think if – just on the working capital, probably a negative of 25 million to 30 million this year. On the peer group analysis, I think if we look at the two global beverage can companies that have recently done a large transaction, they exclude the amortization of acquired intangibles. They are two most significant global peers.

And listen, while I agree with – while I may agree with many of you that it’s not optimal and we haven’t excluded it in the past, I think we do ourselves a disservice and our shareholders a disservice when we look at comparability especially as investors screen companies on different metrics, whether they be PE or any other metric.

So I think just a measure of comparability so that we’re not disadvantaged when prospective investors screen, we believe that it was appropriate to make that change to be more comparable. To not do that, we’d be incomparable and probably put ourselves at a disadvantage because I’m not sure that Scott you’re covering 30 companies.

You don’t have the time to figure all that out and spend a lot of time explaining to people, but you got to understand one company does it this way and the other way. So I think it’s just easier from the standpoint of the beverage industry we’re all doing it that way and so we’re all consistent..

All right. Thanks, Tim. Thanks, Tom..

You’re welcome..

Thank you. Our next question is from Ghansham Panjabi of Baird. Please go ahead..

Hi, guys. Good morning..

Good morning..

Tim, you addressed some of the cyclicality and debt concerns related to Signode, but one of the other issues that people seem to have is just leadership continuity given that it’s a very, very different business for you. So maybe you can just touch on that as well..

That’s a great question, Ghansham. I don’t have a firm answer for you right now. I think what they have is and many of you know who the CEO of Signode is. You’ve had experience with him and other packaging companies. Listen, he is a great leader and he’s very disciplined and he’s got great vision.

We’re hopeful that he’ll stay with us for an extended period of time. Having said that, he’s ambitious. We understand that. We understood that when we bought the company. And we’ll with that as it arises. Now having said that, they have a pretty deep team at Signode.

We have a number of managers at Crown as well who are seasoned managers and I don’t want to – no one business – it’s always easy to look at somebody else’s business and think you can run it if you’ve never done it. So I don’t want to give that impression.

But we have a fair number of managers here at Crown that if we felt that that was a better avenue than one of our managers at Signode, we could.

But I think they have a pretty deep team in Signode and we’ve spent a fair amount of time with numerous senior managers and while we want the CEO to stay, we understood when we bought the company there might be a time limit to that. So we’re prepared to undertake that and plan for that transition if and when it should occur..

Okay. And then just in terms of Signode’s contribution as it relates to EBITDA for this year, what are you assuming? What is the budget for 2018 EBITDA for Signode? And of the core volume growth you saw in the first quarter, can you just sort of parse it out between the three verticals they have and also the major geographies? Thanks so much..

Okay. Let’s see here. We’re going to just a while. So I think we’re probably in the 395 to 400 range roughly, Ghansham, for 2018 for Signode. And then the volume growth, so if roughly $25 million to $30 million of volume growth, I’d say that strapping, steel and plastic was probably half of that number.

Protective looks like it was 5 to 7, equipment was – I’m adding numbers up here. I apologize. Equipment and tool and service were 7 million to 8 million. So it’s kind of spread across all of the verticals, Ghansham..

And did any geography stand out?.

I think they did well in both Europe and Asia understanding that the protective business is primarily a North American business. The strapping and stretch business are global businesses. And equipment and tool obviously are global businesses. So I’d say that performance was pretty strong overall.

There’s a pretty nicely broadly distributed gain across the board..

Okay, perfect. Thank you so much..

Thank you..

Thank you. Our next question is from Anthony Pettinari of Citi. Please go ahead..

Good morning. This is actually Randy Toth sitting in for Anthony. You guys mentioned a furnace rebuild and new glass capacity in Mexico as the main drag in NA bev.

Is there any way you can quantify that?.

Yes, so in addition to those obviously we’ve talked previously about the inflationary pressures relative to our contractual pass-throughs, all of which changed on April 1 because based on our contracts we do reset pricing to beverage and food can customers based on inflation and this was the first year in several years that we’ve had positive PPI to pass-through.

So that pressure will abate as we go forward the last three quarters of this year. But I would say that if you combine startup and the Orizaba rebuild, the furnace was down for 65 days. So one-third of our furnace capacity was down in Orizaba for almost the entire quarter and we’re talking upwards of $7 million to $8 million there..

Okay, that’s helpful. And then Europe seems to have done pretty well in the quarter.

Can you parse out how much of that was Continental Europe versus many some recovery in the Middle East or just how you guys think about that?.

Yes, so year-on-year Europe did better primarily driven by in the first quarter of last year we were in conversion in France converting the second line from steel aluminum so that we only had one line operating in France last year and we’re carrying all the cost of the factory, all the labor of the factory with only one production line whereas this year we’re absorbing labor and all the other overheads across two lines and the incremental volume.

That’s the big driver. I think there was about $2 million of currency but the big driver was cost performance and the big driver of cost performance was the Custines, France conversion that happened in Q1 last year that didn’t occur this year. Volumes were down in the Middle East around 5% or 6% as we expected.

And as we told you in February and as we have budgeted in our numbers that we provided in the guidance, we do expect European beverage to be down each quarter year-on-year for the balance of the year. But that is baked into the guidance and that’s largely driven by the Middle East..

Okay, that’s helpful. I’ll turn it over..

Thank you..

Thank you. Our next question is from Adam Josephson of KeyBanc Capital Markets. Please go ahead..

Tim and Tom, good morning..

Good morning, Adam..

Just one Signode question, correct me if I heard you wrong, but if you’re thinking Signode does about 400 million of EBITDA this year and at the time you announced the deal, you gave a number of 384. Presumably there was some FX benefit '17 to '18.

So what are you thinking just roughly in terms of organic or EBITDA growth ex-currency this year?.

So let me explain the 384 for you. Their actual audited EBITDA for 2017 was 370 million. We gave you 384 because we currency adjusted the '17 numbers to what was the end of the year currency rate. So that’s already built into the 384 and that was about 9 million. And they had some other one-offs that we added back to get to our 384.

So the real growth is 384 to roughly 395 to 400. Let’s put a band on it because I don’t want to be so fine to tell you that that’s the number. But that entire growth, $11 million to $15 million is organic..

And that would be roughly representative of what you would expect in future years that type of growth it sounds like..

I think that’s about 3% or 4%. And considering that capital – the capital needs of that business are quite low, you should not expect – unless we do something bolt-on acquisition wise with such low capital and high cash flow, you wouldn’t expect any more than that. I think that’s pretty good return given the high cash flow nature of the business..

Got it. And just on the guidance, Tom, the 775 implies about 110 million of organic free cash flow growth next year. Can you help us with how much of that is lower CapEx and how much is organic EBITDA growth? Just because it would seem to imply pretty substantial EBITDA growth next year more so than you’ve achieved in recent years.

So just a little more help along those lines would be terrific..

Yes, at this point we have about $25 million of improvement from lower CapEx. And then beyond that a big piece of it comes from EBITDA, but don’t forget the combination of Crown and Signode. So we have an extra quarter of Signode for one thing. And then we expect growth at Signode.

And then organic growth at Crown should be in line with what we’ve seen in the last number of years, $40 million or $50 million. We can also pick up – we’re going to repay debt. We could pick up some interest as well..

Okay. And just on the leverage, Tom, can you just – I think you said 4, 7 but at the time you announced Signode you said pro forma would be 5, 1 at closing and then you earlier mentioned you expect to get down to 3, 5.

So can you just help me with what you’re at right now compared to the 5, 1 that you thought you’d be at and when you expect to get to the mid 3s roughly?.

Yes, so it’s 4, 7 at the end of the year if you pro forma the Signode numbers in and that and everything else here you’re probably at – we’re at a peak period so you’re well above 5. But had you done it at the end of the year we would have been at 5, 1 or something in that neighborhood.

So we’ll use the cash flow this year to get down to the 4, 7 and then from there it’s about half a turn a year..

Thanks so much, Tom. I appreciate it..

Thank you. Our next question is from Tyler Langton of JPMorgan. Please go ahead..

Good morning. Thank you.

Just had a question on the working capital I guess with just aluminum prices where they’re rising, is there any risk I guess on the working capital and free cash flow front or does the use that you talked about of 25 million to 30 million kind of capture that?.

No, that captures that..

Okay, perfect. And then just on I think you mentioned the bev can business in the U.S. saw growth. I know the industry was flat but CSD did better than beer. Just talk a little about what you’re seeing in your business there..

As you said, CSD did better than beer. As you know we’re more heavily skewed towards CSD than beer. We have one factory in Houston, Texas which supplies a brewery that’s real close by and we do a lot of Canadian beer. Canadian beer is certainly performing better than United States beer. Now having said that, we don’t believe U.S.

beer consumption is down. What is happening is that you’ve got a shift of Mexican imports coming into the U.S. So the CMI numbers do not include the Mexican imports. But beer consumption we believe is healthy as it ever was. It’s probably up a little. The U.S. numbers are down but being offset by Mexican imports.

But we’ll be up more than the industry just because we’re skewed more to CSD..

Got you. Okay. Thanks so much..

Thank you..

Our next question is from Mark Wilde of BMO Capital Markets. Please go ahead..

Good morning, Tim. Good morning, Tom..

Good morning, Mark..

Can you guys talk a little bit about what you’re seeing in terms of transit in transportation costs and give us some sense? Is that all going to be kind of a pass-through for you guys?.

So we like everybody else are faced with and we saw this coming. This is not new, right. You’ve heard this from others as well and a lot of you have written about it. But there is a shortage of drivers. Some lanes are extremely tight. Because some lanes are tight and drivers are short, there are some lanes that carriers don’t want to do.

But having said that, when you work all through it, you get increased freight costs.

And we like others have had an experience of that and that’s probably $5 million or $6 million in the first quarter that we experienced and that’s obviously included in the numbers and we’ve made in our guidance that we give you for the balance of the year we made adequate provision to take into account what we see for the balance of the year in terms of freight costs.

For those businesses where we’re responsible to deliver, we have many customers who actually pick up cans and they have the freight responsibility on themselves. But for those customers where we deliver, we have formula pricing.

And as I mentioned earlier, we adjust that formula one time a year via the pass-through up or down relative to the PPI index. And as I said, April 1 this year was the first time in several years we’ve actually had a positive pass-through on PPI. So that will soften the blow a little bit as we go forward here..

Okay.

And just as kind of a follow-on to that, Tim, I’m just curious what you’re seeing in terms of like packaged mix down in Mexico particularly for the beer coming up here, because it just seems like if transit is a bigger issue that the Mexican beer companies may want to pivot forward cans which cube out better and have a lot less weight than glass and if you add that to the fact that millennials seem pretty comfortable of buying kind of premium beers in cans versus glass, I just wonder whether all of that is creating any kind of shift in the Mexican kind of packaging market especially for export beer?.

So as we described to you I think a couple of years ago when you bought EMPAQUE, we always – our view and we still have the view that the southern part of Mexico, if you will, is more of a glass market and the northern part of Mexico is skewing more towards one way – not just one-way glass but more towards cans than returnable glass.

And we continue to see that. So there is a marketer that is U.S. based that has the Mexican operation but does not sell in Mexico, it only sells into the U.S. I don’t want to say they are exclusively importing cans because they’re not, but they’re increasingly importing cans versus bottles.

Our large customer that we have in Mexico is for their imports into the United States, specifically Texas and the southwest, they have skewed recently to bottles into that market.

So it’s a little bit all over the place but your general premise is correct, Mark, that millennials are very comfortable just like our fathers were with drinking beer out of a can. And the northern part of Mexico, i.e. those plants that would import into the U.S., are skewing more towards cans as opposed to the southern part of Mexico..

Okay, very good. I’ll turn it over. Thanks, Tim..

Thank you..

Your next question is from Arun Viswanathan of RBC Capital Markets. Please go ahead..

Thanks. Good morning..

Good morning..

Just a question on Signode first. You discussed some initiatives to grow that equipment and tools part of the business.

Where is that right now versus consumables and what’s kind of the optimal level you think going forward?.

Well, I think like a lot of our can businesses, currently a lot of our can businesses I think the order backlog in their equipment and tools businesses is pretty full right now. So we’re obviously talking to the Signode management team about how to relieve some of that pressure.

But their prospects for the balance of the year are quite strong given the backlog..

And just related to that, as a percent of sales is there anything you can do to help us understand that? And then similarly if you are – you discussed prior – using this as potentially a platform for future growth.

I know it’s really early in the process here, but where would those opportunities arise? Would they be in technology or consolidating smaller competitors or anything like that?.

You’re right. It is early. However, you’d also be right to assume that we undertook to try to understand that exercise before we made the acquisition which we did. And so the opportunities are certainly in equipment and tools. It could be that given the backlog and what we see in the future, we might need more capacity in that regard.

But there are numerous opportunities across all of their businesses, be it industrial packaging, consumables, protective and equipment and tools. And then within protective, as we described for you before, while they had a very strong share of the market in the protective areas that they participate in, the protective market is quite big.

And so there could be adjacencies that we wish to explore not only in protective but also in equipment and tools as you think about the backend of a manufacturing line. So there are a number of opportunities but as we all know we don’t have a limitless balance sheet and we have return hurdles. So we’ll evaluate those going forward.

But there’s no shortage of opportunities. We just have to find ones that we believe makes sense and make the most economic sense..

And then just – sorry, just one quick one. Maybe you can just give us an update on your filling up on Nichols, how do you see that progressing through the year and similarly your own volume outlook for Americas’ beverage through the year? Thanks..

So I think Nichols is running quite well. We’ve made a number of improvements through the back half of last year and we are – we’ve come up learning curve quite well over the last six months. So we’re pretty satisfied with Nichols improvement and the continuing opportunities for them to improve.

As for demand versus capacity in North America and I would describe this as Mexico, United States and Canada, as we sit here today we believe we are sold out and I think the industry’s in a pretty strong position right now. We have the concern certainly at Crown and I imagine throughout the industry and you got a chance to talk to the other guys.

Cans are – there’s an increasing preference for cans such that they could be can shortages this summer. So we’re all trying to find ways to make more cans to service our customers..

Thanks..

Thank you..

Thank you. Our next question is from Brian Maguire of Goldman Sachs. Please go ahead..

Good morning..

Good morning..

Just wanted to follow up on the 4% volume growth in the Americas, just wondering if you could break it down a little bit more regionally and in particular just focus on Latin America and what you’re seeing there, particularly Brazil seeing some better volume trends the last couple of quarters and sort of what’s the outlook down there?.

Yes, so I think Mexico was low-single digits, Brazil mid-single and North America or U.S. about 4 – I’m sorry, not mid-single. Maybe Brazil closer to 3 or 4.

So Brazil – as we look at Brazil and we actually have our Brazilian folks in this week, the business environment and the outlook by the people in the business community right now is very positive in Brazil.

There have been a number of business reforms enacted by the new President which leads everybody to have a positive outlook for the business environment. There is an election – I guess they have elections in five or six months from now.

So the only thing that everybody’s waiting on is what’s going to happen in the election which I think is September, October. I’m not sure when it is. So everything will skew towards being more political this year than business. But the market is quite strong.

One thing we look at is Brazilian beer production and so we went back – our guys went back and provided us some detail. Compound annual growth for the five years ending 2014 was about 2.5%; for the three years ending '17 was flat and the market’s projecting about 2.5% for the next five years.

So as we look forward, we think beer production is going to resume its positive growth trajectory. But more importantly the share of beer that’s in cans we believe will continue to grow. So if in 2010 35% of the beer was in cans, last year was about 49%.

And we see that number growing a couple of percent this year and we don’t believe there’s any reason why it shouldn’t be within five years 55%. And as you know, the North American marketplace is about 68% to 70%.

So we don’t think in five years we get to 68% to 70% but we do see a continuing trajectory of more beer packed in cans versus glass in Brazil which will skew very positively for the can makers..

Okay. Thanks. That’s very helpful. Just a follow-up question on the rise in aluminum and steel prices and I recognize you passed that through very quickly to your customers.

But just wondering if there is any inventory timing lags that would impact you at all? And then just sort of philosophical – I know you passed it through your customers so not much impact to your margins.

But when your customers are faced with a price increase nonetheless due to that, do you see them change their behavior at all or does it really just take a long time for that to play out?.

That’s a good question. So just to clarify. It does impact our percentage margins, right, because you have the denominator effect. It doesn’t impact the absolute margin. You’re right about that.

In the first quarter there was buy ahead in December by the European food can customers ahead of the increase and we knew that volumes would be a little lower in Q1 because of the year-end buy ahead. But we’ve quickly seen here over the first couple of weeks April demand is snapped back. So that’s quite good.

There is always the thought that if your raw material costs go up too high or you disadvantaged compared to other substrates, I think that food cans as compared to the other substrates are still extremely – I don’t want to use the term cheap. That’s not the right term.

The value that a food can affords to the customer and the consumer is far superior than other packages. That is even with rising tin plate costs, food cans are still less expensive and more valuable throughout the entire supply chain than other substrates. They hold nutrition as well if not better than even fresh food.

So yes, there’s a concern there but what I’ll tell you it’s a – food cans are still a screaming bargain compared to what the flexible guys and others are offering to our food can customers..

Okay.

So bigger picture I guess aside from the working capital hit, you wouldn’t expect much real impact then?.

No..

Okay. Thanks very much..

Thank you..

Our next question is from Chris Manuel of Wells Fargo. Please go ahead..

Good morning, gentlemen, and congratulations to the strong start to the year.

Tim, do you happen to have – I guess two quick ticky-tacky questions and I really [indiscernible] question is, but what the free cash flow from Signode was or would have been in first quarter? Does 40 million sound about right? And then what was your previous assumption for working capital? Again, I had a 40 million number for that too.

Is it a drag? Does that sound right?.

Tom, why don’t you take working capital?.

Well, Signode is 165 for the year is what we said. So generally 40 for the quarter doesn’t --.

But, Chris, that’s a levered number at our borrowing and everything else, right. That’s not their cash flow based on their old capital structure..

No and that’s kind of where I’m going with this as you talked about raising your numbers. I’m looking at your 3% on your earnings numbers basically is what you suggest an improvement but it appears to me if that the free cash flow number actually didn’t get raised.

It’s flatter, in fact maybe even down a little and that’s why I’m trying to dig into this. So if I took your old 500 number, I added the 165; then would 665 and if I back out what Signode would have been in the first quarter about 40; that would imply it’s about flat.

But if memory serves in your new assumption for working capital, over $25 million to $30 million hit this year, I was thinking – you guys talked about opening a couple of plants. I thought the hit was more in the 40 magnitude. So it seem like that’s a little less.

Is there something perhaps I’m missing?.

Yes, I think Tom – that number we just gave you 25 to 30 hit is a new number. I think in February, Tom probably told you working capital was going to be flat.

So as we sit here today and we look at – as one of the other questions earlier, we just look at the magnitude of the steel and aluminum costs, obviously we’re going to carry more working capital through the end of the year balance sheet just because of the impact on inventory and receivables with raw material costs.

So I think that’s probably the part you’re missing..

Okay, that’s helpful..

We’ve been able to make up the cash flow from increased working capital from higher material costs in other ways..

Okay, that’s helpful.

And man I don’t want to keep sounding like I’m negative here, but it feels like – is there something different in the first 19 or so days that you’ve owned Signode that caused you to somewhat downgrade your outlook for it? When you announced the acquisition back in December, you talked very clearly that Signode was a GDP plus growing business.

Today you told us it was a GDP business. Maybe I’m just kind of tomato/tomato thinking this little differently but it feels like perhaps you’ve kind of back peddled a little or softened your outlook for growth in the business.

Any thoughts there?.

No, I think you’re parsing terminology. There are businesses within Signode that are double GDP. There are other businesses which are more mature; but in total, GDP, GDP plus. If GDP’s 2.5, Chris, and we come in at 2.6, I think that’s GDP plus. But if GDP’s 2.5, you should not expect 5%, right..

Tim, that’s fair. I guess I am parsing. You’re correct. But I’m just trying to make sure I understand that nothing changed in your outlook from the business. That’s all..

Nothing has changed. This is a business that given its installed capacity base and its network of plants which is its real advantage has the ability with minimal capital to grow at GDP rates and that’s something you don’t find very often..

Okay, that’s helpful. Again, I just wanted to make sure that nothing changed in your mind with the view. It sounds like maybe it did, but I don’t want to over read that..

If anything, Chris, given what we saw through the end of the year in their budget process and their re-forecasting process over the last month, we probably feel a little better about the business than we did before..

Okay, thank you. That’s perfect. Good luck in the quarter, guys..

Thank you..

Our next question is from Debbie Jones of Deutsche Bank. Please go ahead..

Good morning. It’s actually Kyle White filling in for Debbie.

Just wanted to ask on the 3% raise to pre-Signode EPS guidance $0.14 about, what are the drivers of that? It looks like you got most of it this quarter which is interesting given the seasonality but just curious as to certain business or region that is doing better than expected?.

Well, I think we said it in the release and in the prepared remarks, it’s global beverage can growth. And as I just said to sort of an earlier question, as we sit here and look at some of our key markets, North American beverage which is Canada, U.S., Mexican beverage, Southeast Asia, we and many others are going to be stretched for cans.

We’re in a sold-out position. It’s a real good position to be in.

And not only does it speak to the strength of our business in 2018 but I think it speaks to the strength of the business and the strength of the industry as we look forward as more of our customers and more consumers understand the benefits of the beverage can versus other packaging substrates. So we got a pretty positive outlook..

Okay.

And then just following up on that getting the positive outlook and the shortage that you’re kind of seeing there also, kind of some of the rationalization that’s happened in the market, just kind of curious on your views going forward in terms of just getting the value of your can versus other substrates and seeing if you can get more for it?.

We agree with you. We think we should all get more for what we do. We think we’ve provided incredible service to our customers, high quality products, protects the integrity of their product like no other and we agree. We think we should get better prices..

Thanks for that..

Thank you..

Our next question is from Edlain Rodriguez of UBS. Please go ahead..

Thank you. Good morning, guys..

Good morning..

Just one quick one on what you’ve seen in Southeast Asia, like is that market as strong as it appears to be? And also you’ve talked about like a lower cost base in China.

Is that something that’s sustainable going forward? And is that going to improve I guess like your results there?.

So China – real simple in China. We closed the factory in Shanghai in late '16. We closed the factory in Beijing in late '17. As we have communicated to you before, we started pruning customers that were not economically viable to supply. So we probably had lower can sales compared to capacity.

Now that capacity is in line with those customers who are willing to pay a fair price for our products. So that’s just matching our capacity and cost base to those customers who are willing to pay a fair price for cans. Yes, Southeast Asia is fantastic. It is very competitive.

There are some new entrants into the market but we have an extremely strong position in several of those markets. We have a very deep local management team that understands each one of the countries, the customs and the habits of the people who live in those countries. And so we continue to be very fortunate in that regard.

And again, the market has grown so much so quickly that basically in many respects and in some of these countries, the beverage can jumped right over the glass bottle. So the package of choice is the beverage can. It is viewed as the premium package throughout Southeast Asia..

That makes sense. And one last one in terms of again free cash flow in the guidance. So you have that $0.14 improvement in there.

How come that doesn’t slow to the cash flow guidance? Like your cash flow seems to be unchanged and yet you have that $0.14?.

So I’ll answer it two ways. I think we just – in response to Chris’ question, we were not modeling any working capital impact in February when we gave you our number. We now model $25 million to $30 million headwind in working capital.

And the only other thing I’ll say and I wanted to caution you all because I don’t want you getting ahead of yourselves or ahead of us, but we typically have tried to do better than the guidance we’ve given you in the past with cash flow. So we’ll see how the year plays out. But we’re certainly comfortable with the number we’ve given you..

Okay. Thank you..

Thank you..

Our next question is from Adam Josephson of KeyBanc Capital Markets. Please go ahead..

Tim and Tom, thanks for taking a couple follow-ups.

Just one on Brazil, the capacity additions that you’ve spoken about in previous calls, can you just update us on what you see happening there and when you expect that capacity to actually hit?.

I’m not aware of the three major can makers any capacity there that’s been publicized. You do know there’s a fourth entrant to the market who bought the steel can maker in the northeast part of the country. They are in the process of converting that to aluminum.

And I believe they already have opened up their beverage can plant in the middle of the country, near Brasilia the capital. So that is up and they’re working through learning curve and they have a plan and they have a customer and it’s a big growing market. So we should be able to absorb that..

Sure. And just on the growth in the legacy bev can business versus Signode, correct me if I’m wrong but I think you talked about how Signode’s GDP perhaps GDP plus in your legacy bev can businesses is lower than that, right, and now you’re talking about really good growth in global bev cans and being short this summer.

So can you just help us with your long-term outlook for the growth in the beverage can market versus that for Signode and how the two compare to each other?.

Yes, I think global beverage can growth can be and it has been certainly for us for the last 5 or 10 years, we’ve grown it at levels far and excess of the market just given our aggressiveness in building new capacity in certain markets around the world ahead of others. I still believe we can grow it GDP, GDP plus levels.

3% certainly is ahead of GDP in my mind. We can do that. That requires capital. The great thing about Signode is that the GDP business or GDP plus business with very little capital. So both businesses are really good businesses. So I think we’re happy with our beverage can business.

We’re happy to continue investing and growing that business and we’re happy to have Signode join the Crown family and deliver value there. Signode is a bit like our European food business which with minimal capital generates consistent and sustainable free cash flow year-in and year-out..

Sure. Thank you, Tim..

Thank you..

Thank you. Our next question is from George Staphos of Bank of American/Merrill Lynch. Please go ahead..

Hi, guys. Thanks for taking the question. It’s late. I’ll make it quick.

Tim, we’ve been asked this question a lot recently when we’ve seen volatility in aluminum, do you expect there to be any kind of change in buying behavior by your beverage can customers? Traditionally, we’ve not seen a lot of elasticity in demand relative to the underlying material but is that your expectation going forward why you think that’s been the case? Second and maybe a different swag on the question, you mentioned that the industry is tight.

You might be short of cans this year.

Do you think – recognizing it’s kind of hard to stock up on cans for the obvious reasons, do you think there’s any pre-buying in the beverage can numbers ahead of higher aluminum pricing so that demand is maybe a little inflated earlier in the year relative to what you’ll see later in the year? Thank you and good luck in the quarter..

So in answer to the second question, I don’t, George, because our customers don’t like to carry inventory any more than five minutes before they fill the cans. They want the cans delivered 15 minutes before they fill them. There’s not a lot of warehousing that they do on their part. I’m sorry, the first question, George..

Historically, we’ve not seen – and historically being like the last 15 years when we look at it, there’s not a lot of – yes..

I don’t know where the breaking point is but it’s not at a $1.12 for delivered aluminum which is kind of where we sit today. I don’t know how high aluminum will have to be, but they obviously have restraints in their filling system. What they can fill and economically what makes sense for them to move to most volume and cover their overhead.

And clearly we can see that. Clearly the can is what drives their volume and covers their costs. I think the other thing we haven’t talked about, there is growing momentum in the European community and I think we’re going to see it in a number of other regions. Plastic’s going to have some real challenges.

And the Chinese don’t want to take any more plastic scrap. So the Europeans are now trying to figure out a way of what are they’re going to do with their plastic or how they’re going to get rid of the plastic, how they’re going to recycle it, how they’re going to reuse it.

And those systems are not yet in place to do that whereas we know that metal not only are the systems in place but metal has real value and metal pays for the entire recycling effort around the world. So we’ll see where that takes us over the next several years. But I don’t see higher aluminum costs changing our customers buying habits..

I appreciate the time, Tim. Thank you..

Thank you, George..

Thank you. And our last question is from Mark Wilde of BMO Capital Markets. Please go ahead..

Tim, I wondered if you could just talk a little bit about sort of growing the can business further in both Southeast Asia and in Latin America. I think in Latin America right now you’re in Mexico, you’re in Colombia, you’re in Brazil.

But I know that can penetration has actually moved up pretty markedly in some of the other economies down in the region..

Well, it has but there are can plants already in Chile and Argentina. I think there’s an announced can plant in Paraguay. So where we’re at, we do well. We don’t have to be in every country and I think our competitor feels the same way. They don’t have to be in every country.

You take the opportunities that are afforded to you and if you get there first, you have an opportunity. If you don’t get there first, you’ve got to wait for the market to grow significantly enough so that there is room for somebody else. And with Southeast Asia, we have a great position.

We have a platform that we certainly believe is unmatched by anybody and in some respects our platform in Southeast Asia is unmatched by everybody else put together. And we feel pretty good about that. It’s been a lot of hard work for the last 12 or 13 years by the team in Asia and we can see those numbers paying off now.

So there will be more opportunities, but as I said earlier we’re going to be judicious in how we spent capital. We do need certain returns and our Asian team knows that. We do a fairly good job using our own project management and engineering group to build plants in the most economical fashion, yet still provide quality low cost containers.

So we’re always looking for opportunity but there are others out there doing the same and so we’ll continue to look..

Okay, fair enough. Good luck..

Thank you, Mark. So Angela, I think you said that was our last call. Thank you very much. That concludes the call today. We thank you for the interest in Crown and we look forward to speaking with you again in July. Bye now..

That concludes today’s conference. Thank you for your participation. You may now disconnect..