Good morning and welcome to Crown Holdings First Quarter 2019 Conference Call. Your lines have been placed in a listen-only mode until the question-and-answer session. Please be advised that this conference is being recorded. I would now like to turn the call over to Mr. Thomas Kelly, Senior Vice President and Chief Financial Officer.

Sir, you may begin..

Thank you, Kris, 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 2018 and subsequent filings. Earnings for the quarter were $0.77 per share compared to $0.67 in the prior year quarter.

Comparable earnings per share increased to $1.05 in the quarter versus $0.94 in 2018. Net sales grew 25% in 2019 versus 2018, primarily due to the acquisition of the Transit Packaging business in April of 2018 and increased beverage can volumes partially offset by 100 million of unfavorable currency translation.

Segment income in the quarter improved primarily due to the Signode acquisition as higher global beverage can volumes were offset by lower European food can results and startup costs at the two new beverage can plants in Europe.

As outlined in the release, we estimate second quarter 2019 adjusted earnings of between $1.43 and $1.53 per share and reaffirm full year adjusted earnings of between $5.20 and $5.40 per share. These estimates assume exchange rates remain at their current levels and a full year tax rate of between 25% and 26%.

Also consistent with our previous guidance, we currently estimate 2019 full year adjusted free cash flow of approximately $775 million with between $400 million and $425 million in capital spending. Net leverage at the end of 2019 is expected to be in the low 4s. With that, I’ll turn the call over to Tim..

Thank you, Tom, and good morning to everyone. I’ll be brief and then we’ll open the call to questions. As reflected in last night's release and as Tom just summarized, the first quarter was on plan and puts us directly on a path to achieve free cash flow of 775 million for 2019.

While results were mixed across the operating segments, food and beverage unit demand was up in most geographies demonstrating the strong fundamentals across our global businesses. We have reviewed the progress on major projects underway or recently completed in the release, all of which are on the same timing as we described in February.

In a supplemental table to the release, we have provided the currency impact on sales and segment income by operating segment, so my comments will focus on currency neutral performance. In America’s beverage, sales units advanced 2.5% due to solid performances across Latin American operations with volumes in North America leveled to the prior year.

Segment income improved $16 million due to the volume increases in Latin American cans and Mexican glass, pricing recovery and 2018 startup costs from the three major projects in Chihuahua, Monterrey and Nichols now behind us. Our 2019 outlook for this segment remains positive.

Unit volumes in European beverage advanced 3% over the prior year as strong performances in Eastern Europe, France and Spain offset of softness in Jordan and the UK. As we noted in February, startup costs and currency weighed on the seasonally small first quarter.

Beginning with the second quarter, comparable results will accelerate as we cycle through startup and currency with the second quarter and full year results expected to be in line with 2018. Sales unit volumes in European food were up 3% in the first quarter with most product categories showing gains over 2018.

Segment income, ex currency, was off 4 million as contribution from the volume gains in the seasonally small first quarter was not enough to offset inflationary increases in costs such as energy and labor. Currently, our expectation is for a normal seasonal pack and full year income performance to be in line with 2018.

For your modeling purposes, Q2 will be a bit short of the prior year and as we still experience currency headwinds with growth in the second half. Beverage can volumes in Asia Pacific advanced 1% as demand remained strong across Southeast Asia offsetting the impact from the closure of the two facilities in China.

Adjusting for currency and step-up depreciation from the acquisition, segment income in transit was in line with the first quarter of 2018. Strong demand in Europe in protective offset some softness in the U.S. strapping business. Excluding currency, our 2019 transit outlook is for sales growth of 2% to 2.5% and segment income in line with 2018.

Directionally, we expect Q2 to be a bit short of last year’s record performance with growth to be experienced in both Q3 and Q4. A GDP plus or minus business, the transit performance is right in line with our pre-acquisition expectations.

Strong sales volumes and good cost control in North American food and closures drove the segment income growth in non-reportables. So in summary, a solid start to the year with results mixed but overall on plan. And as many of you are well aware, the first quarter is seasonally small so it’s far too early to comment on our seasonal food packs.

And with that, Kris, we’re now ready to take questions..

Thank you. Participants on the phone, we will now begin the question-and-answer session. [Operator Instructions]. Our first question will come from Tyler Langton of JPMorgan. You have an open line..

Yes. Good morning. Thanks for taking my question..

Good morning..

Just on America’s beverage I think margins were up around 140 basis points and you kind of mentioned the factor that’s driving that.

And is that – I know Q1’s a seasonally slower quarter, but is that sort of level of improvement sustainable for the rest of the year if you can just kind of provide some color on that?.

The answer is we sure hope so. I think we’re going to see – as far as I can see right now, we’re going to see considerable improvement of getting Q2 versus the prior year. Perhaps a little too early to call Q3 and Q4, but I think overall we’re feeling much more positive about the segment. I don’t want to characterize the performance in Q1.

As you say, it’s a smaller quarter. So any increases you have and specifically the lack of the startup costs in the first quarter this year compared to last year have a much more meaningful impact on a small quarter like Q1. So I think Q2 will see gains. I think we’ll have gains all year.

I think the percentage gains are – as you get into the bigger quarters are just smaller, that’s all..

Okay. That’s helpful.

And in transit, did you say flat segment income for the year? Was that including the impacts of FX or excluding and I guess if you can just provide a little bit more --?.

So if we excluded FX, we’d be up a bit. But with FX we’ll be flat for the year..

Got it..

We’re modeling about $7 million or $8 million of FX in the business I think for the full year..

Just within transit I think you mentioned that your strapping business was a little weaker, Europe protective up.

Are you seeing any signs of slowing with sort of the other businesses that transit competes in?.

Yes, so what I would tell you is a little confusing and that we would have – just given all the news that’s coming out of Europe now, we would have expected Europe to be a bit slower and Europe actually had some acceleration across most of its product lines which we’re still trying to understand just given the broader macro news coming out of the Europe right now.

In the U.S., I think more of it had to do with some competitive efforts made by others and our unwillingness to cut price. So we’ll see where it takes us. I think in general and we’re seeing this in some of our transit businesses and I’m reading this in some general economic news, I think people are just a bit more cautious now.

I don’t think there’s any real signs of a looming recession, but people are a little bit more cautious. And obviously the longer we go until we have a recession that cautious nature eventually they have to refill their pipeline. So I think we’re fairly confident we’re going to have another strong performance in transit.

And as I said, this is a business that’s – and we’ve always maintained it’s a GDP plus or minus business. Given the very low capital requirements of the business, you’re not expecting huge growth unless you do bolt-on acquisitions.

So this is a business that’s operating right in line with our expectations and continues to flow enormous amounts of cash..

Great. Thanks so much..

Thank you..

Our next question will come from Scott Gaffner of Barclays. You have an open line..

Thanks. Good morning, Tim. Good morning, Tom..

Good morning, Scott..

Good morning..

Tim, if we could just talk a little bit about the North American volumes. I think you said they were flat in the quarter and obviously the industry data was quite strong. I think maybe you’re coming off a difficult comp year-over-year.

Can you talk about what you’re seeing relative to the industry why your volumes would have been flat?.

I think one thing we did talk about in February was that we expected to under index the market this year. We’ve over indexed the market for several years in a row. We’re pretty tight on capacity.

As you know, we were sourcing cans from the competition last year and incurring higher cost than we could produce those cans for and higher cost in terms of freight. And we did make some decisions this year for some contracts that rolled over and for some other situations.

We made some decisions that it didn’t make a lot of sense for us to continue to outsell our own capacity. So what we’re trying to do is only sell directly our capacity. And so we’ll under index this year.

But nothing wrong – obviously the fundamentals in the market are extremely strong and – the overall market and the demand from our customers from our locations and our capacity footprint is also strong.

It’s just our operational change this year to try to reduce the extra cost that we were incurring last year at the end of the day, Scott, we were making and sourcing cans for practice in some cases last year and that’s a bad practice to get into. We don’t want to do that anymore..

Completely agree. If we look at the year-over-year change in profit, you said plus 16 million. You mentioned a few things; LatAm cans, glass, some startup cost and price recovery.

Can you just help us get a little bit more granular on those buckets so that we can make our own judgment on the continued improvement as we move through the year?.

How much do I want to tell you? It’s always the $1 million question, right?.

Maybe the easiest one is just the startup cost sort of how much was that?.

So I’ll give you a number because it’s – I can tell you that our glass results in Mexico were up 4 million year-on-year. So that’s an easy number to tell you. And some of that will be startup from the new furnace last year, but more to the point the furnace is fully operational and fully sold out this year.

So if we’re talking 16 million ex currency, you’ve got 4 million coming out of glass. Nichols and Monterrey, there’s probably 3 million in there just startup. Our efficiency numbers in Nichols are now 90% plus whereas this time last year we were probably still in the 70s. I’m trying to stay away from pricing obviously.

You can tell, right? The plants – generally the system is running better operationally and so as I was describing earlier, our willingness to give up volume and not try to make every can for every order and source from others is saving us money. We’re not experiencing any freight increases year-on-year and we’re not changing labels as often.

So operationally, in the factories we’re running better. But if you wanted to cut this up in four buckets, I’d say glass startup cost in Monterrey and Nichols, better volumes in Brazil, pricing, you could cut it up four ways times four is 16, something like that..

Okay, fair enough. Just last one on transit packaging, I know you don’t have huge backlogs in that business but coming into 2019 I think you said the backlog at the end of 2018 were relatively strong.

Did you see any significant shifts in the backlog throughout the first quarter?.

So I would say the backlog is lower – so at the end of '18 it was stronger than at the end of '17. At the end of March this year, it’s stronger than it was at the end of December '18, but it’s a little bit lower, about 3% or 4% lower than it was at the end of March of '18.

And that’s kind of in line with what I said that there’s a lot of hesitancy in the market right now for people to step out and place orders. But I think it’s just a – our guys feel pretty confident that’s just timing at this point and it’s going to be recovered, because we don’t see any underlying issues in the economy or real demand.

It’s just people being very cautious at the beginning of the year..

Sounds good. I appreciate it, guys..

Thanks, Scott..

Our next question will come from Anthony Pettinari of Citi. You have an open line..

Good morning..

Good morning..

On the last call I think you talked about a $0.09 impact from FX for your EPS.

Just marking the market, what are your expectations for the year now? And then assuming FX is a bit more of a headwind than it was at the beginning of the year, has your free cash flow bridge changed at all compared to three months ago if you look at FX and then maybe just the performance of the individual businesses?.

Sorry, Tom and I were talking while you were talking. I think if we said $0.09 before, maybe it’s $0.10 or $0.11 now that the euro is a little – a touch weaker. Cash flow bridge hasn’t really changed. Okay, there’s a little more currency in there.

But we are – the one thing I would say is that we’re – the North American beverage plants operationally are running exceptionally well and perhaps they’re running better and quicker than we had anticipated. So the team would have come through with a budget and a target and at corporate we would have put a little hedge on that.

Just worried that they wouldn’t get as quick. And I think they’re getting there quicker than we anticipated. So we’re going to overcome currency with performance..

Okay. That’s helpful.

And on European bev, I’m wondering if it was possible to breakout vols in Europe proper versus what you saw in the Middle East? And then in terms of the timing of lapping some of those headwinds in the Middle East, is that a 2Q or a 3Q event and when can that part of the business kind of grow more in line with what Continental Europe is seeing?.

Yes, so in Europe and again we described to you back in February we were a little capacity constrained last year. We’ve got the three new lines up now. We’re experiencing startup and I’ll touch upon one of the little – one issue we had there. But European volumes up about 4.5% in the quarter, Middle East down about 2%.

But operationally income in the Middle East is only down about $0.5 million to $1 million from an operational standpoint. So most of the shortfall you’re seeing is currency and startup.

And then there is some price cost pressure in that again a small quarter, so you don’t have enough volume to overcome in the first quarter energy and other labor inflation that you’ll be able to overcome in later quarters when you have more volume.

The one issue just to mention with the startup, one little problem we had exacerbating a startup in Spain, until I think April 2 or April 3 we weren’t hooked up to the power grid in Spain. So we were running the plant one line and then the second line off of diesel generators and that’s a little bit more expensive than you would like to do.

But that’s behind us now. So we’re not going to experience that any longer..

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

Thank you..

Our next question will come from Ghansham Panjabi from Baird. You have an open line..

Hi, guys. Good morning..

Hi, Ghansham..

Hi, Tim. I guess going back to Signode, maybe you can just break out and I’m sorry if I missed this but how machine sales did versus the consumables, how did the cadence of volumes factored in the quarter in early look at April the starting up of the normal seasonality and just give us some more color on Signode? Thanks..

Yes, I think most of the volume shortfall – we saw the big volume shortfall we saw was in the U.S. strapping business and that’s both plastic and steel strap for the reasons I described. I think it’s more to do with competitive pressure than anything else and that the team has been pretty firm on price policy.

Equipment and tools more or less right in line with the prior year. And Europe up – protective up, as I said. Demand in Asia a little softer than we expected. And mainly the Asian business is a strapping business for a large part of the business of steel strapping business.

They’ve got a big steel strapping business in Australia and one of the big mill in Australia was on strike in Q1. So we didn’t ship any strap to the one large customer there. But generally February was a pretty soft month, March firmed up a bit. March was pretty much in line with last year. So nothing out of the ordinary.

As we’ve described, it’s an extremely diverse business.

And individually if you looked at any one product line in any one geography, the movements from period-to-period in terms of volume can be quite shocking up or down but it doesn’t translate to a whole lot on the top line because individually everything is so small compared to the unit as a whole..

Okay. And then just to clarify on U.S. – the pricing comments you made. I guess I really don’t understand that. Steel prices are still pretty high.

Plastic prices pulled back a little bit, but what’s driving this competitive sort of hesitancy, if you will, or disconnect in terms of what you referenced from a pricing standpoint in the U.S.?.

Yes. The CRU is pretty high and you’ve got a couple of customers out there or a couple competitors out there that are trying to gain volume. So it’s just competition, Ghansham..

Okay. And then just one final one on European food; volumes were pretty strong but you called out Tim just energy and labor. I haven’t heard you really call that out in the past specific to that region. Just some more context on that. Thanks so much..

Yes, the only thing I was trying to point out is that every year or a lot of years we have inflationary – and you’ve heard us talk about inflation before in North America as it relates to the PPI and we have similar mechanisms in the contracts in other geographies around the world. And plus or minus sometimes they work better than others.

But in a small quarter like Q1 where the volume is – while you do have volume gains, there is not enough volume to offset price escalation that – cost escalation that may be above your price modifiers.

Energy has been and I’m sure if you talked to – and I’m talking about electricity, if you talk to any manufacturer across Europe, they’re going to tell you electricity rates across Europe have been skyrocketing over the last couple of years. And it’s just something we have to do a better job covering. And there are a lot of ways to cover it.

You can cover it with increased volume, you can cover it with better cost management and you can cover it with better terms within a contract when those contracts come for renegotiation. But it’s just a headwind that’s more meaningful in a small quarter like Q1..

Got it. Thanks so much, Tim..

You’re welcome..

Our next question will come from Mark Wilde of Bank of Montreal. You have an open line..

Thanks. Good morning, Tim. Good morning, Tom..

Hi, Mark..

Hi, Mark..

Tim just coming back to Europe for a couple of things in the beverage can area, can you give us some sense of how big those startup costs were in the first quarter and then just cadancing through the balance of the year?.

I could tell you that the startup in the first quarter is on the order of – including the increased depreciation on the order of $10 million. So it’s not insignificant. There are three lines and all three lines are larger lines. They’re not the smaller lines we typically put in Asia for a startup, for example.

They’re pretty full lines just given the demand patterns that we see in Europe and the fact that we’re sold out and the expectation we have for continued can growth across Europe as the sustainability push continues to become more meaningful, so about $10 million.

We’ll have a little bit in Q2 maybe on the order of 3 or 4, but I do believe – as we sit here today as I said in the prepared remarks, I do believe that our performance in Q2 if we were 15 million or 16 million short in Q1, we’re going to be pretty much right on top of Q2 last year and Q2 this year..

Okay.

And then the sustainability growth in Europe, can you talk about what that really is translating to right now? Is it just discussions with customers about potential conversions or what are you actually seeing and hearing from them right now?.

I’m going to be a little careful because you got one or two customers that don’t want to us to say much. But if you want to think about products which have typically been packaged in a competing substrate, you’ve got a number of customers now understanding and trialing cans for those products. And so they’re beyond talking.

They’re now at the trialing stage..

Okay, all right.

And then finally just that new line or third line in Cambodia, is that actually some of the equipment that you’re moving out of China?.

No, that’s new equipment. The Chinese equipment will go to one of the factories in Vietnam and Ho Chi Minh and the other line is slated – I think we’re going to move it into Hanoi. So both will go to Vietnam..

Okay, all right..

It’s just timing. One’s happening now. The other will happen later..

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

Thank you..

Our next question will come from Debbie Jones of Deutsche Bank. You have an open line..

Hi. Good morning..

Good morning..

Good morning, Debbie..

You mentioned in the release robust growth in Southeast Asia and Brazil. I know you talked about it a little bit. But, one, I didn’t catch the Brazil growth if you mentioned it.

And two, I was hoping to get some commentary on whether or not this is kind of above your expectations of what you’ve been seeing and if there’s anything notable about trends in either of those regions that’s changing driving the pack mix?.

So I think Southeast Asia was up on the order of close to 10% and that would have been pretty much in line with our expectation coming back to – I don’t have Brazil. I have Latin America in front of me and Latin America looks like it’s up about 7%, 7.5% in total. I will tell you Brazil is up more than that.

And then Mexico and Colombia are up a touch below that. Honestly speaking I think the Brazil growth is a bit more than we expected.

Now having said that, they just came out of what two or three years of some of the worst economy in recession they’ve had from what '15, '16, '17 and it’s a market that’s undergoing incredible reforms whether they’re political, social economic. I think the future is exceptionally bright for Brazil. So we’re exceptionally bullish.

And notwithstanding our current capacity constraints until we get the new plant in Rio Verde running in late Q3, we expect Brazil to be quite healthy throughout this full year..

Okay. And that was actually my second question because I was a little surprised by the growth results when in fact you’re a bit capacity constrained given that the startup isn’t until later this year.

So curious if you could comment on that and then your thoughts on the overall supply/demand balance in the region because it does seem like there’s a little bit trickling in from a lot of different directions, but we are seeing the growth..

Yes, so I think certainly if you think about the months of August or September through Carnival, we are – all the companies are sold out. And then leading up to that, a big capacity constrained and how much inventory we can build. But coming out of Carnival, usually the months of March, April, May are a little bit lighter.

So we do have the ability as the market grows this year compared to the prior year to experience growth. I think in terms of utilization in the market, the market’s what 28 billion, 29 billion cans and I think over the last couple of years we’ve picked up 4 or 5 percentage points in the pack mix from glass to can, so really positive.

And while there is a little bit excess capacity currently, I think it’s going to quickly be absorbed. I don’t see it creating any real issue in the near term. I think this is a market that’s 200 million, 210 million people and as we’ve said before the beer market is now 50% in cans. In the United States it’s 70% in cans for beer.

There’s no reason why over the next what five, seven, 10 years that Brazil can’t be 70% in cans. And I think – I know you guys follow the glass market and I think the glass guys would tell you they’re pretty much sold out in glass right now in Brazil. So as the fillers need more packaging, they’re coming to the cans.

So it’s pretty exciting right now in Brazil..

All right, great. Thanks and good luck in the quarter..

Thank you..

Our next question will come from George Staphos from Bank of America. You have an open line..

Thanks. Hi, everyone. Good morning. Thanks for the details..

Hi, George..

I guess the first question that I had is on beverage – a lot of my questions have already been asked and answered. But on the one hand you’re seeing a very tight market condition across a lot of your geographies and that’s a good thing.

On the other hand while you want to keep that market tight you also want to meet your customers’ needs for various reasons including avoiding others who might be considering entering the market to come in.

Are you finding with new customers, with new facilities, with discussions that you’re having with customers right now about potential additions, projects, what have you that the terms are – forgetting about pricing for a minute because I know you can’t really go there, but getting more favorable for you in terms of what is expected from the customer relative to what’s expected from Crown? And are you finding that you’re at least being able to majority sell out your new lines as they’re coming on? Is that ratio heading higher from what you can see again given this currently really good market condition? We haven’t seen this in 20, 30 years..

Yes, so it’s similar to the question you asked in February, George, because we talked about the cola wars of the '80s and I know that’s what you’re referring to. I would say it’s different by geography but certainly we are tight everywhere. We’re doing our best to bring up as much capacity as we can.

We’ve got several projects in Asia, we’ve got several in Europe that just completed, we’ve got one underway in Brazil. And in North America we’ve got a situation where it’s the biggest market in the world and traditionally it’s been the most – the least profitable on a percentage basis.

Not necessarily the least profitable on a cash flow basis but on a percentage basis. So as you look at allocating capital and making capital decisions and returns, it’s the least attractive market historically.

So we’re trying to get to a situation where we can make it a bit more attractive so that as we present opportunities and capital request to the company and to the Board, we can do it with the idea that it makes sense to do. And having said that whether the customers understand that or don’t understand that, I don’t think they really care.

They’ve kind of been in the driver’s seat for the last 30 years dictating terms to the suppliers and clearly it’s a little shocking for them. But their margins are 40% and our margins are 10%. So any time they want to trade that margin profile and work back towards the middle, we’re prepared to do that.

But we’re trying to get to a situation where returns justify new capital. And the first goal is you want to service your customers with quality product and high service. And we don’t want to limit their ability to get their product on the shelf. But at the same time we’ve got to be fairly compensated for what we’re trying to do.

You spent a lot of time, George, over the years in a number of different factories for a variety of different products that are made and you fully understand the engineering feat behind beverage cans at 3,000 cans a minute is no short feat. So we do need to be fairly compensated for that.

So that’s what we’re endeavoring to do at least here in North America and we’ll see if we can do a little better in some of the other regions as well..

And I realize this is a tough question to answer and ultimately there are no guarantees on life on anything, but the window if you want to frame it that way, do you see it staying at least as widely open as it is now to have more constructive discussions with your customers around the globe? Is there anything that you see on the horizon that maybe again is giving you some caution in terms of your ability to again push better terms, get more fairly compensated again beyond price terms, all the other ways that you can bring value and get value for what you do? How would you discuss that if possible?.

I want to stay away from that. The only thing I would say is and this is kind of – you know this already but I’ll say it anyway. We have goals and aspirations and our competitors have goals and aspirations and so do our customers. And those three different buckets of aspirations are not always aligned.

So the one thing that gives you caution is how far do you push and how much risk are you willing to take and that goes along with capacity as well.

We’ve had situations in the past when we thought it was a great idea to put a lot of capacity in because it looked like things were going to be great for a long time and then the industry wakes up one day and it’s not running at 97% utilization, it’s running at 88% or 90% and that’s not a good answer for the beverage can business.

So we’re always a bit cautious around how much capacity we’re going to rush to put in understanding that others may do the same and understanding that the other substrates whether they have issues or not currently, they may figure out a solution to their issue and they’ll become relevant again or more relevant than we think they are right now..

Two last ones and then I’ll turn it over and the first one you can just do quickly.

Relative to where you were a year ago, that opportunity to gain share from other substrates and markets where environmental concern is most pronounced, has that accelerated or is it pretty much the same pace as you would have seen a year ago? And then a one-off question.

There was a charge that you took for intangible amortization from prior acquisitions in the quarter you just reported. What was that related to? Was it related to an acquisition that didn’t necessarily have the value you thought it would have and write it down here? Thank you, guys. Good luck in the quarter..

So the first answer is it may or may not be at the same pace it was a year ago, the sustainability question you had but I will tell you I certainly believe it a 180 degrees more today than I would have believed it a year ago. So my conviction is much stronger today than it was a year ago.

I think others, customers included, their conviction levels are much higher. George, you’re going to have to give Tom a little more – we’re a little puzzled by the second question. Tom’s looking at me puzzled..

I thought there was a charge you took in the quarter on your non-reportable – that you took out of operating earnings for amortization of prior acquisitions.

Did I miscast that?.

I don’t think so. The amortization we have is just the normal amortization from Signode as well as Mivisa and Empaque which we had last year. So I’m not sure what that is..

Footnote one, the first quarter of 2019 we recorded charges of $47 million for intangible amortization from prior acquisitions. We can take it offline but that is what I was asking about..

Yes, amortization of the intangibles, it’s not a one time. It’s just the normal amortization flowing through. It flows through every quarter..

Okay, got it. Apologies, guys. Have a good quarter..

That’s okay..

Thank you, George..

Our next question will come from Adam Josephson of KeyBanc Capital Markets. You have an open line..

Tim and Tom, good morning..

Good morning..

Hi, Adam..

Tim, just on the segment commentary for '19, correct me if I misheard you, but I think you said for all segments ex America’s beverage you’d be flat ex currency and I think currency is going to be about a 20 million or so drag this year.

So that would – correct me if I’m wrong, that would imply that America’s bev would be up pushing 60 million this year? I know you didn’t quantify America’s bev, but --.

Yes, so let’s just back up a second. What I said was not ex currency. So if we’re going to talk about European beverage, European food, transit, Asia with the currency headwind for the full year, they’ll all be more or less in line with the prior year..

Okay.

But all of the growth this year will be in America’s bev?.

And in the non-reportables, yes..

Non-reportables, okay. You mentioned you’re obviously capacity constrained in North America. We’ve seen the CMI data. It’s been growing 3%, 3.5% the last couple of quarters.

I’ll ask you in a moment about what your longer term view is there, but how long do you intend to remain this capacity constrained in North America? And then what if anything do you plan to do about it?.

Well, I think we’ve been pretty clear that we’re trying to get fair compensation for the products and services we provide before we dedicate anymore capital to a market that historically has been the lowest return market of any of the markets that we operate in around the world.

And we’re prepared to consider that in the future but not at the return rates that have existed over the last several years. I do think the market will remain extremely tight. There are some product categories within the market that are oversold right now. There are some sizes that are short in the market.

And I think as we look for the rest of the year and into next year I wouldn’t be surprised if can growth is 1.5% to 3%. That’s a wide range but it’s – from quarter-to-quarter you don’t know how it’s going to play out.

I think we’re starting to see customers react to pressure in certain jurisdictions where some other substrates are out of favor and their looking to pack more in cans. So this could remain tight for some time..

And you’re comfortable ceding share for a year or two in the meantime if it comes to that?.

Yes, I can’t tell you what others are going to do. I can only tell you we’re going to try to get fairly compensated before we make any more investments..

Right. And just on that longer term outlook, Tim, 1.5 to 3-ish, obviously the last 10, 15 years the market’s been flattish, down a bit. Last two quarters up 3.5% or so.

Is there something that you would point to starting in the last – starting six months ago that notably changed or did you see something building up such that you were not surprised to see these huge growth rates relative to what we’ve seen over the past 10, 15? I’m just trying to understand what would have seemingly changed on a dime really in the last six months and why would that be sustainable?.

So beginning several years ago, you started to see an increase in energy drinks, sparkling waters, craft beers and then craft beer usage of cans accelerating.

But over the last six months what has happened that’s allowed that to bubble to the surface is that mass beer has not experienced large declines that it experienced in several quarters before that. So mass has been pretty – in cans has been or alcoholic in cans has been fairly consistent, it’s not been down.

So it’s allowed the other categories to bubble up and show growth across the entire industry..

Got it. And just last question on the substrate shift and sustainability. Obviously glass has been losing share over the years.

Do you have any data as to cans versus plastic over the years? Have cans been gaining any share from plastic? Do you expect that to happen? Because when we’re talking sustainability, I assume you’re referring more to plastic than to glass although I could be mistaken.

But is there any data that you have that support this idea that there’s been a substrate shift away from plastic?.

Yes, you break it down in two – there’s no plastic to speak of in beer and there’s no glass to speak of in CSD. So in beer it’s cans versus glass and in soft drink it’s cans versus PET.

I think the big thing that’s happened in CSD is over the last decade, the liter it’s sold in 2 liter bottles, the larger bottles is shrinking and it’s more single serve. So their units may be up but the liters have moved a little bit. I think it’s in the United States maybe a little too early to say that we’re seeing anything from the CSD players.

But what you are seeing and we talked about this last time and I think it was specific to one of your questions, Adam, for whatever reason we’re seeing – I had to get that in, sorry. We’re seeing new product introductions more and more considering the can whereas the can would not even have been considered 5 or 10 years ago.

Now it’s top of mind for people introducing new products..

Thanks, Tim..

Thank you..

Our next question will come from Arun Viswanathan of RBC Capital Markets. You have an open line..

Great. Thanks. Good morning, guys..

Good morning..

Just wanted to ask I guess going back to the other issues around your position, given that the beverage can growth is pretty robust here, would you consider resourcing cans elsewhere if it came to that and you found yourself too constrained to meet your customer demand?.

Well, so what we’ve tried to do coming into this year is not have ourselves in the position where we have to source from others. And from time-to-time through the industry we’re all pretty good about helping each other out if somebody has a fire or a strike and certainly on commercial terms.

But if we have a production issue that requires us or limits our capacity or ability to make cans to satisfy the contracts we have in place, then we’ll source cans. But we’re not actively trying to source cans just so that we can say we’re selling more cans..

Okay, understood.

And then also just looking out I guess, do you expect that you’re overall growth kind of on volumes to kind of continue in this 2% to 4% range and maybe if you can just run through your expectations for each geography, mainly Americas, Europe and APAC and Latin America I guess that would be great?.

Yes, so I think globally we expect 2% to 4%. We’ve been what 3% to 5% every year for the last 10 years I guess and this year maybe we’re going to be on the order of 2.5% to 3%. The largest market we have North America, we’re going to be largely flattish this year just because of capacity.

But the other markets; Brazil, we’re going to sell every can we can make. So hopefully in the softer months of the Brazilian winter, we obviously have compared to last year, last year we would have capacity. This year we’ll sell the capacity.

Perhaps in Brazil will be up high single digits, Mexico will be up, Europe with the new factories coming on line especially as they come a learning curve and the startup is behind us in the second, third and fourth quarters, we could be up this year 8% to 10%. That’s obviously not a sustainable number.

That’s just a number that’s in place because we’ve got capacity coming on this year and some others had capacity coming on in the prior years. Middle East flattish, that’s plus or minus 1%. China, we’re going to be down substantially this year because we basically cut the business in half when we took three lines out. We only have three lines left.

But Southeast Asia will be up 10%. So it’s a mixed bag but all-in-all, it’s fairly positive. The only market where we’re probably – somebody used the term earlier ceding share in fact are doing that is North America and we’re just trying to do that until we get ourselves in the position where return rates justify more capital..

Great, thanks.

And then on Signode, if I may lastly, I guess how would you characterize the performance in the quarter? And I guess how would you kind of view the trajectory from here? Do you think there was any impact from macro headwinds in China and Europe? And have you seen any signs of why some of those are getting better? And this base side of earnings, is there any seasonality that we should keep in mind for future quarters that would make those higher or lower or --?.

So the second and third quarters are a bit stronger. The seasonality is not as acute as in beverage or food cans. Signode has an extremely small operation in China. I think our revenues in China are 20 million. But having said, the Chinese/U.S. trade negotiations do have impacts throughout the Asian region. And as I said, Asia was a little softer.

I don’t think that has anything to do with the overall economies and notably India, because India is our biggest market in the Asian business. I think it just has to do with the cautiousness of people that are – the buyers currently. I think that’s going to come back, only timing.

As I said earlier, we were very surprised just given the macro news out of Europe that the European business wasn’t as strong as it was in Q1 and Q2 looks like it will be okay as well. And North America as I described I don’t think there’s any fundamental underlying issue other than we decided to let some business go for price reasons.

But all-in-all, it’s going to be a pretty firm performance. It will be flattish to last year which means they’re going to overcome 8 million or 9 million of currency. And the second quarter last year was a blowout quarter if you remember.

And so they’ll be a little short of that in the second quarter this year, but third and fourth quarters will be up against last year..

Great. Thanks..

Thank you..

Our next question will come from Chip Dillon of Vertical Research. You have an open line..

Hi. Good morning, Tim and Tom..

Hi, Chip..

Hi, Chip..

Hi.

First question is basically when you look at the yield curve and I know it started to steepen a little bit, but it looks like interest rates especially in Europe have gone straight down in the first quarter and I don’t know if you have been thinking about or does it make sense to do some refinancing or if you have maturities coming up that could lower your interest expense in reaction to that?.

Yes, Chip, on the term loan side, that’s the debt we plan on repaying with our cash flow to delever. So that wouldn’t be a good thing to refinance right now. And on the fixed rate side, most of that debt is not callable. So we’re not really in a position to refinance that..

Chip, this is the result of decades of bad policy across almost every country in Europe, right. So hopefully this doesn’t come to the United States any time soon. It’s almost remarkable that real rates are negative, right. Nominal rates might still be a touch positive. Real rates are negative. It’s unbelievable..

It is. But if you’re in a period where you have to borrow money, there is that silver lining that you’re not paying that much..

But listen this is exactly what we did when we financed the Signode acquisition. Tom would tell you whether you can see it in the annual report or not, we borrowed 8 and 10-year money under 3% on secured. It’s remarkable – I wouldn’t lend money to myself at that rate..

You’re not alone on that one. I don’t think you gave us a split between your proper in the Middle East in that segment. If you did, I apologize for missing it.

Do you have that?.

On volume, yes, I said Europe was up 4.5 and the Middle East was down 2..

All right. And then lastly, I know it’s still early in the year but you look at the array of projects you have coming on and they’re all coming on this year. Could we see next year’s CapEx come down or said differently, do you see visibility into certain areas? You mentioned Brazil has some slack but that might change in the next year or two.

Should we expect to see more startups next year in the bev can space around the world by you?.

Listen, my hope is – one of the nice things about having the real privilege to run a company like Crown is the opportunity and it is a real privilege. So my hope is that that number is not going to come down, that we’re going to continue to have opportunities.

And I think the exciting thing now globally in beverage cans just given the high recyclability of the product and the high recycled content that goes into the can sheet, the opportunities look really promising. So I think the answer is you’re not going to see capital come down.

We’re going to continue to have opportunities and we’re going to continue to build a business and we’re going to have an industry that continues to build over time here. It’s a pretty good time to be in beverage cans..

I hear you. Thank you..

Thank you..

Our next question will come from Gabe Hajde. You have an open line..

Good morning, Tim and Tom. Thank you for taking the question..

Good morning..

As George stated, halfway through the call my questions have already been asked.

But if you could give us any sense for – I know it’s early in the season but any flooding impact to North American food, plantings or discussions from customers that orders maybe a little bit later just because things got in the ground late?.

No, I don’t – from a lot of the products, nothing’s going into the ground yet. So this flooding will have happened before the planting season and hopefully – I can’t talk about this with 100% specificity but hopefully the water recedes and the ground dries enough so they can get into the field and do the planting. But we have not heard anything yet..

Okay. And maybe I’ll try to take one last stab at the question in America’s bev profitability. When I look at EBITDA margins I think they went from mid-19s to something in the mid-16s. There were a couple of issues in 2018 with higher transport costs and as you pointed out sourcing cans.

Can you parse out for us or sort of help us understand what in your mind justifies putting more capital to work there from an EBITDA perspective or how you look at it?.

The other big thing that happened in '18 versus '17 if you’re looking at margins was about a 20% increase in the cost of aluminum. So the denominator effect on a one-for-one pass-through in percentage terms reduces the margin, not the absolute margin.

So yes, I’m probably going to stay away from – you’re asking me to justify yes or no in putting capital on a business that’s making 16% versus 19%.

I think we’ve been pretty clear that where we’re at now – and keep in mind our America’s beverage includes Latin America, right, and we’ve been more than happy to expand the businesses in Mexico and Brazil over the last several years and we’ve been hesitant to do the same in North America which leads you to understand that those margins are different in those geographies.

Not a whole lot different but different enough that we’ve been unwilling to put more capital in the U.S. until we can reasonably restore margins in the U.S. to a level we like..

Got it. Thank you, Tim. One last one trying to take a different angle at the beverage can shipments. They were stronger here in the fourth and the first quarter which are seasonally smaller.

Do you have any from your vantage point any visibility as to if this is customers trying to better plan coming into the summer season or if it’s some of these less sort of seasonally sensitive products that are being successful, maybe sparkling water or something like that?.

No, I think as I answered – the answer to Adam’s question, I think we’ve been seeing great momentum in a lot of the nonalcoholic categories other than CSD for the last several years. We saw it all through last year, but last year the big beer guys were down early in the year and they seem to have recovered and/or stopped the slide in Q4 and Q1.

So you’re starting to see the other categories that performance come through the overall CMI data and I think that will continue. I think the promotions – the beer guys are running the adequate promotions to continue to push the products. And while the imports from Mexico especially across the one labeler continue to do exceptionally well, the U.S.

guys are doing a better job of maintaining their share and driving more volume allowing the growth in sparkling and energy to come to the top..

Got it. Thank you. Good luck..

Thank you..

Our next question will come from Edlain Rodriguez of UBS. Your line is open..

Thank you. Good morning, guys..

Good morning..

Good morning..

Tim, one quick one for you on Signode. You’ve talked about like the competitive pressure in the U.S. and your unwillingness to lower prices.

So how does that get resolved? Is it a question of demand is going to have to pick up for everyone to be willing to raise prices? So how does that get resolved in your view?.

Like any other competitive situation there is some business you’re prepared to leave and there’s some business you’re not prepared to leave. So you react to that. And there will be other opportunities in the future.

But it is a – I’m not sure we showed you at the Analyst Day that the revenues by product line, by geography, but it’s so diverse that we don’t get overly concerned from product-to-product across geography from quarter-to-quarter. We’re trying to run a business and have a policy that makes sense for the long term.

So it gets resolved by growing the business in other areas or having an opportunity to recover what may have been lost a quarter ago or a year ago..

Okay.

And as a follow up to that in terms of the unexpected strength you saw in Europe, is it pre-buying? Are you able to tell at all of what’s going on?.

Yes, I don’t think it’s pre-buy. I think the demand was stronger than we expected and what I don’t know is how weak they were in Q1 last year in Europe. But they did better than they expected and they did better than we expected.

From our expectation it had to do as I said earlier just the macro news coming out of the Europe doesn’t sound great and they were remarkably strong compared to that macro news. And it looks like they’re going to remain pretty firm throughout the year. So we’ll have to endeavor to understand some more.

But again, I know I said it earlier and it could be a little frustrating for you to hear it again, all of these things the business is so diverse and the cost of the product to the customer is so small relative to the product they’re protecting that volume swings plus or minus don’t necessarily move the income number plus or minus anywhere near the same ratio as you would expect in cans..

Okay. Thank you very much..

Thank you..

Our next question will come from Brian Maguire of Goldman Sachs. You have an open line..

Hi. Good morning. Thanks for taking my question..

Good morning, Brian..

I just had a two-part question on aluminum sheet supply. One, was there any impact in 1Q from some of the 4Q issues that you and others in the industry talked about? And then sort of on a different note, you talked about needing to be fairly compensated from your customers for capital you put in place.

Some of the aluminum sheet guys particularly in North America are talking the same language these days about needing to raise price in the market there being tight.

Just wondering if you could remind us how those contracts are structured? Is that pass-through to the customer or do you just pass through the raw aluminum price and any kind of concern you might have about supply agreements for aluminum sheet and price increases there?.

So the issue that we faced in Q4 with the sheet quality is behind us. As we think about being fairly compensated, yes, if I was an aluminum guy I’d feel worse than I do as a can guy. And the customers are beating our brains in and we’ve been beating the aluminum guys’ brains in for 25 years.

And if I was an aluminum guy I’d say I want to be fairly compensated as well. So the ingot price is quoted on the LME. That is what it is. Their margin to convert ingot to can sheet or end stock or tab stock is the negotiating point.

Certainly in North America and for much of Europe and many jurisdictions around the world, these are strong pass-throughs that we have with our customer base. You always worry about the relative cost differential between your product and a product in another substrate. But we’re on the right side of the environmental argument right now.

And then there are some – there are several customers that buy aluminum directly and we just tole the metal for them into cans. So I’m less concerned about price right now. I don’t know what it takes for the aluminum guys to be happy with returns. Certainly if they double the price, that’s a problem for everybody.

But I don’t think they’re going to double the price. I think they’ve got some other percentage in mind. In the longer term – certainly in the near term, Crown’s pretty well fixed with supply. I don’t know how the others are fixed right now. One of the big mills in Tennessee went down for can sheet. They’re going to do auto stock.

So supply is another issue just given the tariff situation and the tariff situation is not something that’s sustainable just given the amount of aluminum that needs to come into the country to deal with domestic supply or domestic demand needs and not an issue for Crown right now, but longer term that needs to be resolved..

I guess my question is along the lines of if we are in this new period with, like as George put it growth we haven’t seen in 30 years, the whole supply chain needs to react and do you think there’s enough spare capacity in aluminum sheet today to absorb that or do they need to put more capital to work and be compensated for it?.

The answer is there’s not enough capacity especially with the Tennessee mill going to auto, there’s not enough can capacity – sheet capacity in the United States. And we would certainly love to put them – have them put more capacity in just like our customers would like us to put more capacity in. And it comes down to economics.

So we all have to – our problems are our problems and their problems are their problems, so we all have to manage our own problems. But you’re right. The question behind your question is the right question.

It’s just who’s going to get there first and how are we going to make sure everybody is properly rewarded for the efforts and the risk they’re taking..

Makes sense. Just one last one from me, I noticed some of the trade peer articles were reporting there was probably a small PET food can plant in the UK that of all things is converting to plastic pouches and it did cite you as being one of the suppliers there.

Just wondered if you’re expecting an impact from that or there could be some other customers you pick up.

But is that factored into your outlook for European food cans volume this year?.

Yes, it’s not a big number. A little interesting in that they’re going to from a sustainable product to a pouch and so we’ve talked about recyclability. And so a PET bottle has some recyclability characteristics to it, not like the can but it has some. A pouch has none. Multilayer with all kinds of other contaminants in it, it’s pure trash.

So a little interesting that a food company would make that switch in an environment like Europe right now where sustainability in the environment is top of mind for everybody. If I was one of the beverage companies, I’d want to know why they’re not attacking the food companies the same why they’re attacking any beverage companies.

But it’s a small impact on us..

Okay, sounds good. I appreciate it..

Thank you..

Our next question will come from Neel Kumar of Morgan Stanley. You have an open line..

Hi. Good morning..

Good morning..

Good morning..

With your contract renegotiations you’ve obviously talked about getting benefits for pricing.

But have there been any other terms you’re looking to get improvements in, like custom order patterns or freight?.

Yes, so without going into detail the answer is yes..

Okay.

And then I’m just wondering in terms of your working capital expectations for the year, are there still expected to be flattish and what generally drove the $920 million working capital build in the first quarter? Was that just season and in line with your expectations?.

Yes, so we would expect the number to be flat for the year. The build this year was more or less in line with last year. That’s not all working capital. There’s also the difference between, for example, cash interest and interest expense in there and some other things, taxes versus cash tax.

But largely it’s the seasonally working capital build that we typically see plus some from Signode had a little bit in the first quarter as well..

Okay.

And then just lastly, I guess versus your expectations coming into the year, is your guidance for 2019 a little bit more back half weighted than you had anticipated just because of weaker FX in some of the plant startups or are they generally – or is it generally in line with your expectations?.

I think we characterized in February the performance this year would be stronger in the back half of the year versus the frontend due to currency which was going to hit Q1 and Q2 and the big startup cost in the beverage business in Europe in Q1 and a little bit more in Q2. So that’s kind of in line.

The only – maybe we brought down internally our expectations for the second quarter just a touch just because currency has moved a little bit lower, but we feel pretty strongly we can recover that in the back half..

Thank you..

Thank you..

Our last question will come from Mark Wilde of Bank of Montreal. You have an open line..

Just two quick follow-ons, Tim.

One, can you just give us a sense of kind of how we might think about sort of cadencing and comps for that Middle Eastern business for the balance of the year? And then also on Signode, I recall about a year ago you saying you felt pretty good about kind of growth prospects for the first couple of years for Signode because you thought a lot of that was kind of dialed in.

And you’re talking about 2% or 2.5% growth here in '19. That doesn’t seem like a real big growth number to me..

So Middle East, I think we’re generally going to have a flattish year. So as I said, volumes plus or minus 1. And I think we’re going to see that flatten out in Q2 through the balance of the year and income performance similar, maybe plus or minus 2 million or 3 million versus the prior. So no big moves like we saw last year..

Okay..

And then on Signode, at the risk of disagreeing with you I’m going to disagree with you..

Okay..

So for a business that has roughly $2.5 billion in revenue where you spent 30 million in capital, 2% to 2.5% growth is pretty good, right. Historically in the can industry if we had 2% or 2.5% growth, we were doing back flips. We were always thrilled.

We’re kind of in this iPhone world now where if things don’t go up 10% every week, somehow that’s a disappointment. But I’ll take 2.5% growth all day long in a business that has 90% free cash flow conversion because it has very little capital requirement.

And then to the point where we can supplement it with bolt-on or several years from now something perhaps a little larger, that’s a nice position to be in from our standpoint. I’m happy to listen to why you’re disappointed in that, but I do disagree with that..

Okay, fair enough..

Okay. Thanks, Mark. So Kris, I think you said that was the last question, so that concludes the call. And we thank all of you for joining us and we’ll speak to you again in July. Bye now..

Thank you, speakers. That concludes today’s conference call. Thank you all for participating. You may now disconnect..