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Edited Transcript of CCK.N earnings conference call or presentation 21-Jul-20 1:00pm GMT

Q2 2020 Crown Holdings Inc Earnings Call

PHILADELPHIA Aug 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Crown Holdings Inc earnings conference call or presentation Tuesday, July 21, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Thomas A. Kelly

Crown Holdings, Inc. - Senior VP & CFO

* Timothy J. Donahue

Crown Holdings, Inc. - President, CEO & Director

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Conference Call Participants

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* Adam Jesse Josephson

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Anthony James Pettinari

Citigroup Inc., Research Division - Director & US Paper, Packaging & Building Products Analyst

* Arun Shankar Viswanathan

RBC Capital Markets, Research Division - Senior Equity Analyst

* Brian P. Maguire

Goldman Sachs Group, Inc., Research Division - Equity Analyst

* Gabrial Shane Hajde

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* George Leon Staphos

BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research

* Ghansham Panjabi

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Michael James Leithead

Barclays Bank PLC, Research Division - Research Analyst

* Neel Kumar

Morgan Stanley, Research Division - Equity Analyst

* Philip H. Ng

Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst

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Presentation

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Operator [1]

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Good morning and welcome to Crown Holdings' Second Quarter 2020 Conference Call. (Operator Instructions) 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. Thank you. You may begin.

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Thomas A. Kelly, Crown Holdings, Inc. - Senior VP & CFO [2]

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Thank you, Louie, 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 2019 and subsequent filings.

Earnings for the quarter were $0.94 per share compared to $1.02 in the prior year quarter. Comparable earnings per share were $1.33 in the quarter compared to $1.46 in 2019. Net sales in the quarter were down from the prior year due to the impact of the coronavirus pandemic on unit volumes, the pass through of lower material costs, and $73 million of unfavorable currency translation.

Segment income of $322 million in the quarter was below prior year due to the impact of the pandemic on sales and operations and $11 million of unfavorable currency translation. At the end of the quarter, the company had over $1.8 billion in liquidity between its cash balances and borrowing capacity under the revolving credit facility. And the net leverage ratio of 4.7x was well within the covenant requirement of 5.75x.

As outlined in the release, we currently estimate third quarter adjusted earnings of between $1.50 and $1.60 per share and full year adjusted earnings of between $5.10 and $5.25 per share. These estimates assume exchange rates remain at their current levels and a full year tax rate of approximately 26%. We currently estimate 2020 full year adjusted free cash flow of approximately $475 million with approximately $600 million in capital spending. And with that, I'll turn the call over to Tim.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [3]

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Thank you, Tom. Good morning to everyone. Our continued best wishes for the health and safety to all of you and your families.

Before reviewing operating segments, I want to again take a moment to thank our global associates for their dedication during the current pandemic. You are needed, you are critical and you are essential to ensure that the global food supply and transportation support systems that so many take for granted operate without interruption.

We know that many of you have been directly impacted by the virus, and we continue to take measures and ask you to follow strict protocols to ensure your safety while in the workplace. From the beginning, our primary concerns have been the health and safety of our employees, their families, our customers and suppliers and ensuring the liquidity of the company in order to maintain operations and support the essential needs of our customers. Again, thanks to all of you.

When we last spoke to you in April, we described what we believed was going to be a challenging second quarter. In late March, early April, significant demand contraction was evident in our non-North American beverage can businesses. Fortunately, demand in those markets has snapped back and a few weeks earlier than expected.

The challenge now is meeting the outsized requirements of our customers as they look to rebuild their supply chains after several weeks of mandated shutdowns. From now until the end of the year and in almost every market where we produce, cans will be in short supply.

In last night's release, we announced the addition of 2 beverage -- 2 new beverage can production lines in North America. These projects originally scheduled to commence in 2021 have been accelerated into 2020. And as such, our capital requirements have increased back to the original $600 million estimate we provided to you in February.

In Americas Beverage, overall unit volumes declined 3% as strong demand in North America was not enough to offset early quarter weakness in Latin America. Our North American shipments were up 16% as we utilized open Latin American capacity to fulfill U.S. customer demand. Beginning in mid-May, customers in Latin America returned to full operations with demand now far outstripping production capacity.

We fully expect the cans available to support North America in 2020 will not be available in 2021 as those Latin markets return to normal demand patterns and as such, have brought forward our plans for the second line in Bowling Green as well as the third line in Olympia, Washington.

As noted in last night's earnings release, the third line in Nichols, New York began commercial shipments during the second quarter. And while the second quarter was short of the same 2019 period, we expect the second half of 2020 will show growth versus 2019.

European Beverage down 38% to the prior year as segment income reflects demand weakness across all operations, except for Saudi Arabia and the U.K. The demand slowdown we began to see in March resulted in overall volumes being down 12% in the quarter as our operations in Southern Europe, that is Greece, Italy, Spain and Turkey, all suffered from low economic activity, lower expected tourism and lower consumption during the quarter. Currently, customer activity is strong and, as is the case in Latin America, demand is far more than production capacity.

The supply chain in the can industry, like many other industries, is extremely efficient. Because of this, we do not have the ability to make up months of demand in a shorter time period. Frustrating for Crown and many of our customers, but perhaps if we are ever faced with such severe demand contraction with the possibility of such a sharp recovery, that we and our customers will find a way to fairly distribute carrying costs so that inventories are available when needed.

While initially delayed due to the virus, our engineers were able to complete the conversion of our beverage can plant in Seville to aluminum, adding much needed capacity to the system. We expect the third and fourth quarters to outpace the prior year respective quarters.

Sales unit volumes in European Food advanced 10% during the quarter compared to a soft 2019 period. Initial plannings were low this year due to customer concerns over a shortage of necessary harvest labor, a result of virus-related border closures. However, we are 3 weeks into July and demand remains very strong, the weather looks good and all signs currently point to a good -- to good third quarter crop yields.

Build inventories are expected to be very low from the 2020 season. And when combined with what our customers believe to be a more permanent consumer return to the food can, they are already discussing increased plantings for the 2021 campaign. We expect full year segment earnings to be slightly ahead of the 2019 level, implying that we will more than make up for the headwind of first quarter inventory carrying costs.

Sales unit volumes in Asia Pacific declined 7% in the second quarter. Shipments in China were up 11% and reflect that country's apparent pandemic recovery while Southeast Asia with volumes down 10% struggled in April and May as alcohol sales were prohibited across many locales to curb the spread of the virus. We expect gradual improvement in the third and fourth quarter as demand picks up across the region. Commissioning of the new beverage can plant in Nong Khae, Thailand was completed within the last 2 weeks, and we are currently in customer qualification.

Adjusted for currency, sales in Transit Packaging declined 20% in the quarter impacted by the shutdown of customers in many industries deemed nonessential and the general conservation of cash strategies employed by many companies to preserve liquidity.

Demand for consumables, that is strap and film, began to show recovery in June. Although our higher-margin equipment businesses are still impacted by an inability to access customer sites in many cases. We expect income improvement in the back half of the year versus the second quarter with significant income improvement expected in 2021. Demand was firm in our North American food business, almost fully offsetting weakness in global aerosols.

So in summary, it was not the quarter we envisioned at the beginning of the year. However, our teams did an outstanding job maintaining productivity and efficiencies in such a challenging environment. As Tom noted, we have reinstated guidance for the third quarter and full year based on what we see currently.

Despite the pandemic, we came within 5% of last year's currency adjusted second quarter earnings performance and we currently expect full year adjusted earnings to exceed last year. We expect to generate significant cash flow this year. And with significant liquidity, we continue to invest in capital projects where we see opportunities for growth and productivity improvements. And with that, Louis, we are now ready to open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of George Staphos from Bank of America.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [2]

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I'll ask 3 questions. First of all, can you talk a little bit further on your comment on ways to distribute carrying costs in Europe, what you were getting at there and what the implications could be in -- later this year and really over the next couple of years? And then I had a couple of follow-ons.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [3]

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Yes. So George, I think it's not specific to just Europe, it applies to Latin America as well. It applies to anywhere in the world. So I think we had a situation where -- and we discussed this briefly on the April call, somebody asked on the April call if we were still making cans and putting in the inventory. And the response is, no, we're not. And the reason is, we can't afford the extra carrying costs.

You know the margins in our business, George. They're nowhere near the margins of our consumer product customers. And so they are currently frustrated that they can't get all the cans they need to refill their supply chains after telling us that they didn't need anything for 3 to 6 weeks. And we're frustrated.

We're not in the business of telling customers no. You go to a store, George, to buy a tie. If you can't find the tie want, they try to sell you a different shirt so they can match the tie to that shirt. They're not in the business of telling you no. So it's very frustrating.

So having said that, the comment is nothing more than it's a comment. And it's -- if you want cans available when you want them, understanding you want an efficient supply chain, you've got an efficient supply chain. However, the downside of an efficient supply chain is when something like this happened and you'd tell us to turn off and then we start turning back on, we can't make up several months' worth of demand in a short period.

So it's -- I don't want to go into any more than that. But the margins in their business -- when they're selling products for $15 to $30 a case, then they can far more afford carrying costs for warehousing of cans than we can. That's all the comment was for.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [4]

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I understand, Tim. Would this be something that you could adjust for if there was mutual agreement within the year? Or would it need to be something that would be more formal and therefore, would have to be instituted as contracts rolled over?

And then kind of my last question, can you talk a little bit about Signode, how it's performed? And again, I mean this has been just an unprecedented period. It hasn't been a normal recession. But has it performed as you would have expected, both in terms of the takeaway within the end markets and the operational leveraging, deleveraging, and for that matter, specifically on working capital?

Again, this has been sort of a lightning round recession. But if we go back to the '18 Analyst Day, there was a view from the company that one of the benefits here would be you'd be able to, if you were in a recession, squeeze working capital and generate cash from the downturn. Are you actually being able to do that again given this period we've been in?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [5]

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Yes. So I think to answer your first question, George, the way to build inventory and fairly distribute carrying costs, if you will, that does not need to be handled within a contract, that can be handled on a one-off-bespoke basis with customers as they foresee the need for can.

So we will have customers, no doubt, who would be willing to do that. We'll have other customers that are so fixated on cost that they forget they need to get product on the shelf. So that's just going to be an ongoing discussion. But there's nothing to say that, that can't be done mid-season. That's just good business practice.

On Signode, so first, on the order of working capital, you'll remember, last year, we squeezed an incredible amount of working capital out of Signode, which was quite beneficial not only to the balance sheet last year, but more so to the -- to reset how we're going to operate the business going forward.

You're right, this pandemic is a little different than most we've ever seen. In other recessions, kind of everybody goes down together. In this recession, we've had entire industries, whether it be the auto industry, the steel industry, appliances, just shut down. I mean no activity whatsoever.

And so that's a little different. And so fortunately, for Signode, they're providing products across a wide variety of industries. They've got a number of industries that are still serving, but a number of industries that are shut down and are beginning to slowly open.

So I would say, all in all, certainly, we're not pleased with the results of any of the businesses we've had because they're all down. We understand that the managers and the employees are doing exceptional work across the entire company to try to make the best of it.

But probably, I would say, if you told me this was going to happen and I was going to lose 30% or 40% or 50% of the industries I'm supplying for a few months, I would've thought that the Signode results would have been far worse. But they're doing okay on price, and they're doing pretty well on cost reductions in the face of this.

But it's a volume game for them. And their material margin, the margin after direct material cost, is quite high. So it's all -- it's a flow-through business. So when the volume comes back as we fully expect it will next year into '22, we fully expect to get it all back.

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Operator [6]

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Our next question comes from the line of Mike Leithead from Barclays.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [7]

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A question first on the free cash flow update. I guess can you help us with how much incremental CapEx you're baking into this guidance with -- associated with your new announcements this morning versus maybe a weaker operating cash flow outlook?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [8]

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Yes. So I -- the first thing I'll say, Mike, and I guess we have to apologize because perhaps we weren't clear enough to all of you in April. So in April, we suggested to you that even in the face of the pandemic, and given the severe cutback in beverage can demand across a number of businesses that we have around the world, be it Southeast Asia, Latin America, Europe, that with some adjustments to capital that we felt we could get close to the original $600 million free cash flow number.

And so perhaps we should have been a bit more specific around what we were thinking in terms of cutting capital at that time. And I guess because we were not, you all did not fully reduce capital expenditures to offset the operating income loss, so the cash flow could get back to that number.

And so as we go back to a full $600 million, I will tell you that as we sit here today, that $600 million is at least $100 million higher than we were envisioning when we spoke to you in April. And as I say, I apologize, perhaps we weren't clear enough.

But given the uncertainty and the lack of visibility that we all had at the early stages of the pandemic and our concern with liquidity, we were expecting -- fully expecting to cut more out of capital and delay projects then than we are now.

So I would tell you that maybe at least $100 million of that is capital. The other $25 million will be working capital. And as you'll appreciate, businesses in Brazil and Southeast Asia are quite large and they're quite large in the January, February time frame as they get near their holiday seasons of Carnival and Chinese New Year.

So the inventory builds are expected to be exceptionally strong this year as peoples in those countries return towards more celebrations and gatherings, hopefully, as we get past this virus.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [9]

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Got it. That's really helpful color. And then just on some of the operational flexibility in Americas Beverage this year, could you maybe just give us a rough sense of how much you've had to shift from Latin America to the U.S. this year and how much your new additions next year should add roughly? I'm just trying to get a sense of how much is being replaced in North America versus kind of true incremental capacity there.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [10]

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Yes. So I will be a little careful here. But so the CMI earlier or later last week came out and felt the need to describe to its recipients that the industry in North America was going to import 2 billion or at least 2 billion units into the United States to cover demand, outsized demand again this year.

So -- and that 2 billion units is not included in the numbers they forecast. So if in the first quarter, the industry was up 8%; in the second quarter, we were up 3%; so 5.5% year-to-date, it does not include imported cans. It only includes cans produced in North America. So in fact, the growth rates are considerably higher than the numbers you're seeing.

As it relates to Crown, I'm a little surprised that CMI says 2 billion cans because we're not 50% of the market and we'd be at least 50% of that number. So we will -- we -- so what have we done recently here? We started the Toronto -- the third line in Toronto back early in the first quarter. Towards the end of the second quarter, the third line in Nichols came up. They'll be going through learning curve this year, but hopefully, are well through their learning curve and are much closer to full production levels next year.

And then we bring up Bowling Green, the first line in the second quarter, and we'll get some capacity on the second line in Olympia later in the year. So there'll be significant capacity that Crown brings into the system next year to offset what we brought in from Latin America.

Having said that, our view as we sit here today is that that's still will not be enough given the trends we're seeing in the beverage industry in North America with spiked seltzers, sparkling waters and stay at home.

And I believe just as in Europe, I made the comment in Europe on European Food. What our European Food customers believe is that there is a more permanent return to eating food cans at home because of the pandemic. And I think we're going to see more of that in North America as well for some time as well. So I think we're going to see extremely strong demand in beverage cans globally and especially in the United States.

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Operator [11]

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Our next question comes from the line of Brian Maguire from Goldman Sachs.

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Brian P. Maguire, Goldman Sachs Group, Inc., Research Division - Equity Analyst [12]

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Congrats on the good results in a really tough quarter. Just wanted to ask about the margins and the performance in Europe. The volume weakness, obviously, there was some fixed cost absorption on that. But the margin, I think 11.2% or so was quite a bit lower than it's ever been in the second quarter.

Just wondering if there were some impacts from the start-up in -- of the new -- of the conversion in Spain that might have impacted it there and what we might expect from a more normal margin in that business in a seasonal quarter like 2Q?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [13]

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So there might be a -- some impact from the start-up in Spain, but it all revolves around 12% volume decline. And it's a volume business because fixed costs are so high, especially recently in the beverage can industry across the industry as we all have been modernized -- or installing new plants, new lines, modernizing. There's been a lot of capital spent recently.

So that's all flowing through to operating income because the depreciation's reflected in that. The EBITDA numbers wouldn't look as drastic as that. But it's volume and I'm a bit hesitant to say what it should look like. I would like to be able to tell you, as I sit here today, that in a normal volume quarter, it shouldn't look any worse than what it's looked like in the past.

Now having said that, you probably -- you'll remember, I probably have stated that we've not been exceptionally pleased with the margin profile in European Beverage. And so European Beverage margins do need to improve over time. So the combination of returning volumes in an environment where the market continues to grow and the need for the industry to get adequate returns to keep investing would tell me that what I would like for all of us to believe is that the margin should be better than we've seen historically in the second quarter. We'll see if we get there.

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Brian P. Maguire, Goldman Sachs Group, Inc., Research Division - Equity Analyst [14]

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Okay. And I just wanted to follow up on the free cash flow comment from Michael's question. So I take it that the $475 million of free cash flow implies I think you were saying kind of a $100 million higher CapEx or maybe a $125 million higher CapEx than what you were contemplating 3 months ago, and that's due to the need for more capacity, given the strong demand you're seeing and that it sounds like maybe a $25 million swing on working capital.

So is that kind of $125 million most of the delta between where what you would have thought you could have hit maybe close to $600 million before and now it's $475 million, it's really just kind of pulling forward some investments and some working capital swings? That -- just want to clarify, is that about it?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [15]

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Yes. I -- that's exactly it. I guess if the original -- pre-COVID, in February, the original estimate was $600 million, $600 million of capital. So we're back to $600 million of capital. We got about $25 million more working capital now we think at the end of the year due to Brazil, Vietnam, Southeast Asia. And then the balance is just the flow-through of lower operating income.

I mean the -- I think our original guidance was -- the midpoint of our original guidance was probably $0.30 or $0.35 higher than the midpoint of our guidance now. Well, if you take $0.35 and you work back up the income statement, you get to a pretty big number at operating income. So that's the delta.

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Operator [16]

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Our next question comes from the line of Ghansham Panjabi from Baird.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [17]

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Tim, going back to your prepared comments and your characterization about the back half or at least exit run rates coming out of the second quarter. Is it fair to assume that 3Q will be the quarter where global beverage can volumes start to inflect higher again? It was down I think 5% in 2Q.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [18]

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We're going to be -- on a global basis, we're going to be positive in the third quarter, Ghansham. And I expect that every market will be higher than last year. I think some of the Southeast Asian countries were still -- the recovery is a little slow, but on a global basis will be higher.

The rate of growth perhaps is not as great as we've had in prior, let's say, first and fourth quarters only because of the available capacity we have. So the growth rates in the second and third quarter are always going to be a little bit lower than growth rates in the first and fourth when demand is high because there's more capacity available in Qs 1 and 4 than there is in 2 and 3.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [19]

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Got it. That's helpful. And then going back to North America, there's a lot going on with Bowling Green and Olympia, the line additions, versus -- in addition to what you've already announced. For North America specifically, as it relates to your production footprint for this year, where do you think you'll exit in terms of units? What's your best guess for 2021 at this point?

And then just a high-level question as it relates to the fundamentals. I mean, obviously, North American beverage fundamentals were good to begin with. And now you have the additional kicker, if you will, for home consumption due to COVID. Will there be a normalization period do you think coming out of the current situation? I'm just asking because you're adding capacity and then there's a new entrant potentially with CAN-PACK.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [20]

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Yes. So the -- pre-COVID, Ghansham, we were fairly bullish on the market. We told you pre-COVID, we thought we would be up 10% this year just because of the capacity we are bringing on and we knew it was needed. And we and others probably have been telling you that while the market is up 3% or 5%, the market could be up 5% or 8% if we had available capacity. So I don't know how much extra demand is related to COVID. Even without COVID, I think we would be capacity constrained as an industry.

So as it relates to the new entrant, we have 1 plant. They're going to build in the Northeast part of the United States. We have a plant in New York and we have 1 in Toronto. Listen, there are a lot of people that live between Washington, D.C. and Toronto. So -- and there's a fair amount of can capacity there, but there's a fair amount of demand and demand for new products, be it spiked seltzers or sparkling water, juices, teas, you name it. You know all the products.

So it's one location. They'll probably have -- when they're fully up and running and they get through their learning curve, which if they bring lines up in 2021, maybe by the end of 2022, they're fully through learning curve and by the end of 2022, they'll -- what they're going to bring up in terms of capacity will be less than 3% of the market and they'll be kind of located in one geography of the country. It's a big country. So it doesn't give me that much concern, to be quite honest.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [21]

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And your capacity footprint in 2020 to 2021?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [22]

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I don't -- you mean how many points of -- how many cans are we going to have extra each year?

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [23]

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Yes.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [24]

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We'll probably have a -- I guess this year, we're going to have -- you got me struggling here, but I'm going to guess we're going to have about -- we're probably going to sell about 2 billion more cans this year in North America from our North American capacity. That does not include what we're bringing in from other countries.

And next year, let's just say at least 1.5 billion. It really depends on how quickly we get the lines up and running. But whatever we can make, you know we can sell, and it's just how quickly we can get through construction and customer qualification and get cans out the door. So it's a significant amount of capacity continuing to be added.

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Operator [25]

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Our next question comes from the line of Arun Viswanathan from RBC Capital Markets.

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Arun Shankar Viswanathan, RBC Capital Markets, Research Division - Senior Equity Analyst [26]

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Just wanted to get back to that last comment. So if you think about maybe this year 2 billion cans in North America; next year, maybe 1.5 billion extra, would that I guess imply that you should be up double digits in the U.S. next year as well?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [27]

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No. Well, I think the answer is, I'd like to say yes but I don't think -- 1.5 billion is not 10% of our current capacity, right? It's a lower number. So -- but I think 1.5 billion is probably 6% of what our current capacity.

Are we going to -- are we going to do better than 1.5 billion and get to 2 billion? I don't know. As I said, it depends how quickly we get the cans up. I feel extremely confident whatever we can make, we're going to sell. So if we can make 2 billion more, we'll sell 2 billion more. If we can only make 1.5 billion more, we're only going to be able to sell 1.5 billion more.

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Arun Shankar Viswanathan, RBC Capital Markets, Research Division - Senior Equity Analyst [28]

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And on that point, I guess you'd stated in the past that a lot of the new capacity is built on this firm customer commitment. So are you still seeing that kind of agreement? Is it kind of 3- or 5-year contracts? Maybe you can just discuss that a little bit.

And then again, you also mentioned maybe potentially bringing up the returns in Europe. I guess would that -- would those customer commitments and contracting process include potential for price increases in North America and Europe as well?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [29]

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Well, I think we've tried, and you've seen in the results, the results of commercial negotiations over the last couple of years in North America, hopefully, you've seen that. And I think for the most part, our customers understand that -- I made a comment earlier, right, a lot of these guys sell their product for $15 to $30 a case, $0.01 to $0.02 per unit, $15 to $30 per case sale price is not their problem.

Their problem is if they can't get product and they can't get product on the shelf, they lose shelf space and they lose market share. So hopefully, they understand that better. And I think they do because customers right now understand, especially during the growth phase we're in in North America, be it pandemic related or not, I don't think it really is. I think it's a different function going -- step function happening here. They know they need cans. So they're more than willing to contract right now to get cans.

As for Europe, we are -- we have a sizable business in Europe, but we're only the third supplier. So pretty tough for us to force that step change in Europe.

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Arun Shankar Viswanathan, RBC Capital Markets, Research Division - Senior Equity Analyst [30]

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Okay. And then I guess I just wanted to ask about Signode as well. So how would you characterize Signode? I guess do you believe Q2 results are kind of the bottom and have activity rates kind of inflected higher globally?

And usually, I guess, I know it's a relatively short-cycle business on the consumables side and the strapping side. So what are you seeing there? Are you seeing kind of -- it should give you some decent visibility into order patterns. I mean are you seeing resumption of higher activity levels across different geographies in Signode?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [31]

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Yes. So we -- I mean as I said in the prepared remarks, we are starting to see strap and film -- the order patterns for strap and film improve and that will continue. I think there's still some countries in Europe and perhaps in India where it's still a little slower than we'd like to see, but they're going to come back.

I think the -- as I said on the call, the challenge we have, the higher-margin business, the equipment business, just like all of you are, let's say, you're not welcome at your investor customer offices, you're doing everything remotely, our engineers and installers are also not welcome at many customer sites.

So an inability to access customer sites is making it difficult for us to continue to drive equipment sales. So that will return. And as I said, I think that the third and fourth quarters, the income -- income numbers in the third and fourth quarter will certainly be better than the second quarter. And obviously, we fully expect 2021 to be significantly better than 2020.

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Arun Shankar Viswanathan, RBC Capital Markets, Research Division - Senior Equity Analyst [32]

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And then lastly, if you can just provide any update on the strategic review. Is there anything else you can share with us there?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [33]

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No. I think what I said in April and I'll say it again, we are -- there's a lot of work that goes -- that's done behind the scenes to prepare any business you might have for a review and a review encompasses from the beginning to the end. So we're -- we continue to do that work.

As you'll appreciate, there's not a lot going on in the M&A space right now. And we're not in the business of destroying value. So we want the share price to be higher, just like you do, but we're not in the business of destroying value for our shareholders. So we're going to operate the business as best we can, generate as much cash as we can and we'll see what the future brings us.

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Operator [34]

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Our next question comes from the line of Gabe Hajde from Wells Fargo Securities.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Senior Analyst [35]

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I guess I wanted to dial in a little bit Tim, on the commentary you made about Europe Food. This is encouraging, in my mind, given kind of the past 2 years of challenging crop yields, et cetera. So if I look out into 2021, can you help us frame up maybe if volumes are up again, I don't know, mid-single digits or something like that?

Again, I know there's a lot of uncertainty out there with what gets planted and if weather cooperates. But -- and then also, I mean are you seeing potential for the commercial environment to improve over there as well, such that margins start to march back to maybe where they've been in the past?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [36]

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So I think we -- based on what we're hearing from the customers, we fully expect them to plant more next year than this year. And whether that's 10%, 15% or 20% acreage, I don't know. This year, they under planted, as I said. They were concerned they couldn't get labor because of border closures. So they under planted. So they will significantly plant more next year.

So that we believe will happen. We believe they're going to continue to can as much as they possibly can because they're going to come out of this year with very low filled stocks. They're going to come through this pandemic having, in a number of cases, missed opportunities to sell more because they didn't have available product, and they don't want to have that again.

So I think demand is going to continue to be very strong assuming the weather cooperates. I think that's the one variable I can talk to. But let's just say we're -- we won't have a number of bad years in a row. This year looks like it's going to be really good.

So on the commercial side, the hope is that with demand being that strong and customers needing product that they understand and we understand that the opportunity for appropriate margins to the entire supply chain are in front of us. And so they have a job to do. We have a job to do and we'll need to do our job to see that we get compensated appropriately.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Senior Analyst [37]

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And then Southeast Asia, I found interesting. I guess you said China was up 11%. I think I know the answer to this, but does that change at all your sort of retrenchment strategy in that particular country?

And then we've read some reports about a couple of new entrants in other Southeast Asian countries. Again, part of that might be a function of being 1 or 2 supplier market. But anything changed over there in the competitive landscape and/or kind of that expectation for high single-digit growth absent pandemic disruptions?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [38]

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No. I think China, nothing -- I'm not sure we've ever told you what our strategy in China is, but our strategy is to get the best return for our shareholders, be that operating the business or selling the business. But they're just -- they've recovered. They came out of the pandemic -- they went into the pandemic and came out of the pandemic earlier than everybody else. So it doesn't change anything there.

In Southeast Asia, it's a big market. There's a lot of growth. And there's -- and people see opportunity. They're going to enter markets when they see opportunity, but I'm not overly concerned with the new entrants in the market. There's a lot to go around.

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Operator [39]

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Our next question comes from the line of Phil Ng from Jefferies.

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Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [40]

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Good to hear that demand's snapping back across the board for bev cans. Can you give us a sense how to think about volumes in Southern Europe and LatAm in the second half? And any cost in bottlenecks that we need to account for the surge on demand and impact on your profitability?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [41]

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Cost in the resurge in demand?

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Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [42]

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That's right.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [43]

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Oh, no, no. Listen, I think -- so firstly, we're going to be sold out for the balance of the year in Latin America. We're going to be oversold and we're going to frustrate customers by telling them we don't have enough capacity for them as I said earlier, and that's just a function of there's only so much capacity to go around when you don't make product for 3 to 6 weeks.

So -- but we're going to be sold out and we're going to be up. I don't see any extra cost because we're sold out. And in Europe, we're certainly going to be sold out through the end of the third quarter. And I think perhaps there's a little open capacity in Q4 as there always is, but we'll see. The market continues to grow there well, and I don't expect any incremental cost as well there.

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Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [44]

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Okay. So you should see pretty good operating leverage. That's great. In terms of the incremental capacity you've announced in Kentucky and Washington, how much more cans should we anticipate from these investments in -- and what type of CapEx we kind of assume for 2021?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [45]

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I think it's a little early for us to start talking about 2021. But if the business continues to grow and we continue to see opportunities that we're seeing globally, it could be -- it could well be that the capital number next year is similar to the capital number this year, but that's a function of what we continue to see in terms of opportunities.

I think on the capacity side, we -- in North America, at least we put a marker out there for 1.5 billion more cans next year. As I said, whether -- I couldn't tell you whether it's 1.5 billion to 2.25 billion, it really depends on how quick we get started, how quickly we get through the permitting processes and how quickly we finish the projects.

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Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [46]

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Got it. And just one last one on North America. I guess, ultimately, the markets sold out very tight, so that's really encouraging. But what kind of guidepost from RC would you want us to look at to keep us comfortable as supply demand is balanced? Do you need to see 3% growth in North America, 4%? Just want to understand because you and your competitors are adding a fair amount of capacity in the next few years.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [47]

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Well, so I mean it's a -- it's going to be over 100 billion cans this year in the market. I think 12 months -- trailing 12 months at the end of June, we were like 99.9 billion cans. And that does not include the 2 billion to 3 billion cans that are coming in from Latin America.

And so on a trailing 12-month basis, I think we're up about 5%, put the 2 billion cans in there, that's 7% and then we're going to have growth in the back half of the year. So let's say, the market is, I don't know, 103 billion, 104 billion cans. And you get another few percent growth in 2021, all of a sudden, you're over 105 billion, 106 billion cans. And so even at 2%, that's about 2.5 billion cans. That's 2 to 3 can lines that are needed every year just to stay up with the growth.

So there's a lot to go around here, guys, as long as the market continues to grow. And there are products that people are consuming now, specifically the spiked seltzers, which are -- I don't want to say they're entirely in cans, but I haven't seen anything not in a can. And they're replacing products in other substrates. So very good for the can market.

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Operator [48]

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Our next question comes from the line of Mark Wilde from Bank of Montreal.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [49]

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Just one more on the CapEx, Tim. I'm just curious, in North America, you called out that the Olympia line was going to be a specialty line. Can you give us a sense on all of the other projects how many of those lines are set up to be able to do specialty sizes?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [50]

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Well, I think as we said in the earnings release last night, every new project that you've seen us do this year, last year and even the year before, they're all set up to produce multiple sizes, diameters and heights.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [51]

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Okay. What does that do, Tim, just to kind of the capital cost on a line?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [52]

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It's marginally higher, but the equipment suppliers, of which we are one, there's a price for equipment. And so there's a little bit more tooling involved. I mean you're not buying tooling for just 1 height or diameter. You're buying tooling to do different heights and diameters. So there's a little bit more, but it's not -- it's marginal.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [53]

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Okay. And is there any impact on just sort of throughput or not really?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [54]

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There is initially, until we all get accustomed to running tall skinny cans. They tend to tip over more than the standard cans, as you can imagine. And it's kind of like when you go into the hospital, Mark. If you've ever been in a hospital, they give you one of those little 8-ounce squat cans. And the reason they give you that can is so you don't spill it all over yourself in the hospital bed.

So as you think about a tall skinny can, they tend to -- we just need to do some things differently. And until the teams get used to doing that, yes, there's a little bit of slowdown in throughput. But as we get more accustomed to that and as we experienced in many markets around the world, be it the Middle East, Southeast Asia, Brazil, sometimes we're as good or even better running those cans than we are on the other cans.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [55]

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Yes. Okay. All right. I want to turn then to Brazil and Mexico and I wondered, is there any way to quantify what all of the volatility that brewers being out down in Mexico, the drop-off in Brazil, what that did to kind of second quarter results? And if you could maybe include not only the can operations, but what impact that might have had on the glass business down in Mexico?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [56]

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So if you look at our earnings release and -- so in Americas Beverage, we were up, what, $21 million in segment income in the first quarter and it looks like we were down $10 million in the second quarter. So you guys are the analysts. I'll let you model that, but that's not insignificant.

European Beverage, we're down $23 million in the second quarter. This is all volume, right? And so you know beverage, it's a volume business. The volume is back. I mean it's -- when I say it's snap back, it's snap back. So we'll get that back.

I think what we can't make up is the downtime that we had in the second quarter because we only have so much production capacity available at any point in time. So if we -- if there were 2 or 3 or 4 weeks where we weren't running certain lines, you're not going to make that up. You cannot run the lines any faster than the maximum speed. So that's kind of behind us, and we move forward, exiting the second quarter with really high demand, and we're flat out right now.

On the glass side, glass is a little bit more impacted only because it's generally more on-premise than cans, but that is coming back right now as well.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [57]

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Okay. All right. Then the last one from me. We've heard some reports that retailers down in South America are a little more reluctant to handle returnables in the midst of the pandemic. Are you seeing that? And do you think that has any impact on kind of demand for one-way packaging?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [58]

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Well, it makes perfect sense that they don't want to handle anything more than once. So it's why if -- when we look at Southeast Asia, why the can jumped over glass, because the shopkeepers there have very small shops and they don't want to waste any available space with returnables, empty returnables sitting there when they can have filled product that can be sold. So that makes perfect sense and it makes perfect sense if you're worried about the virus that you don't want to handle it.

Having said that, if our customers can't get enough filled product in -- or can't get enough cans and they can't fill enough product in cans and there's demand for beer or soda or other drinks, they're going to fill what they can and push into the distribution system what they can to satisfy consumer needs. So it makes sense what you say, but right now, things are real tight in South America. I think they're going to push whatever they can as consumers want product.

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Operator [59]

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Our next question comes from the line of Anthony Pettinari from Citi.

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Anthony James Pettinari, Citigroup Inc., Research Division - Director & US Paper, Packaging & Building Products Analyst [60]

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It sounds like you'll be sold out in North America, Europe and LatAm maybe until the end of the year and then you see strong growth prospects for 2021 and beyond.

Understanding you've outlined your CapEx program, is it fair to expect you may have to undertake additional CapEx projects over the next 12 to 18 months to meet this demand? Or is there a way that we can think about sort of normalized CapEx, whether it's $600 million or a different number for what seems like kind of a new normal for demand?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [61]

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Well, we only have to go back 4 or 5 years, and we were spending $250 million to $350 million in CapEx. So this growth that we've all been experiencing has pushed up capital needs significantly, whether it's $450 million last year or $600 million this year. And I suggested earlier on this call that perhaps the number is even that great next year if we continue to see the growth.

My hope is that when we sit here in February and we have this conversation with you that I'm telling you $600 million, that will mean that there's significant growth opportunities. We all want to grow. If you don't have growth, then things get a little difficult. So we're really quite fortunate that we have significant growth opportunities.

So I don't know. I don't want to tell you what a normal number is. I'm hoping that the new normal number is something more like we're seeing now, which means that this growth pattern we're seeing is going to last for several years.

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Anthony James Pettinari, Citigroup Inc., Research Division - Director & US Paper, Packaging & Building Products Analyst [62]

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Got it. Got it. That's very helpful. And then in North America, we've obviously seen a resurgence of COVID cases here, understanding on-premise is much smaller here than in LatAm or Southeast Asia, and this is obviously kind of happening in real time.

Is this something that's impacting North American demand at all? Is it negative at the margin? Is it sort of neutral? Or is it even positive with more people buying cans in the grocery channel and staying at home?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [63]

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So I don't -- please don't take this the wrong way. As it relates to North American beverage can demand, the pandemic doesn't matter. The market was always going to be oversold this year and we were always going to be trying to find cans to serve the U.S. customers.

I would say that fortunately for the U.S. customers, the pandemic happened and there were more cans available from Latin America to come into the U.S. Otherwise, the U.S. would have been significantly undersupplied with or without the pandemic.

Now that is not -- that comment is not meant to downplay the impact of the pandemic on any individual, any industry, any employee group. Listen, people have really struggled this year. I think our governments are struggling with how to handle this so that they minimize the impact on people. So please don't take that the wrong way. But the pandemic has no impact on the outsized demand we're experiencing. We were always going to have that this year.

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Operator [64]

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Our next question comes from the line of Adam Josephson from KeyBanc.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [65]

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Tim, just on food cans, you talked about your European customers being optimistic about a new normal post-COVID for demand. I'm just wondering how, if at all, that affects how you're thinking about your food can businesses versus your beverage can businesses.

You had the surge in North America pre-COVID, which you just talked about, and then you've seen these varying trends elsewhere, but food cans are clearly benefiting in a major way from COVID. And for all we know, it could last a while, we just don't know. And as you've said, food cans are a very good cash flow business, even better than beverage cans. So how are you thinking about food cans versus beverage cans in terms of being a long-term part of your portfolio?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [66]

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Well, the first thing I would say, Adam, is that I wouldn't describe food cans as a better cash flow business than beverage cans. I think beverage cans are as good or better than food cans when it comes to cash flow. The beverage can system right now requires more capital than the food can system does because there's so much more growth and there's much more excess capacity that exists in the food can system, specifically on 3-piece food cans. But if you weren't growing in beverage cans, you'd have tremendous cash flow coming out of beverage cans.

So let's put that to the side. I think that there are a lot of people out there that have an opinion on what Crown should be doing with its portfolio. And we've always said that we have a nice mix of growth businesses and we have a nice mix of cash flow businesses. And cash flow is never a problem until you don't have it.

So there are probably 250 CEOs in the Fortune 500 that would tell you they wish they had our cash flow problem right now. So -- and I read the pre-call notes that many of you put out and some of you were disappointed with our reduced cash flow guidance. So it's never a problem until you don't have enough of it. So we're quite pleased that we have a lot of cash flow.

Having said that, there is no doubt an increase in food can demand because of the pandemic, both in North America and Europe. As I said on the -- earlier, our customers in Europe believe this is more permanent in terms of the consumers' demand for food cans. I don't know that to be the case right now in North America, but we'll see how it plays out. But it's an extremely attractive business, and we'll see where the review of the Board takes us with regards to that business. But we are here to maximize value to shareholders.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [67]

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Just along those lines, does the pandemic and the impact it's had on food can demand change at all how you're thinking about those businesses longer term?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [68]

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No. I don't think so. I think it's still the same business we always viewed it to be. Now if you tell me we're going to have COVID-20, COVID-21 and COVID-25, I hope we don't because that's going to be really painful for the global population. But if you tell me that's going to happen, then yes, that's going to change how you feel about the food can.

If we're never going to go back to restaurants and we're never going to have barbecues with our friends, we're just going to sit in the house and eat canned peas and canned corn, that's going to change how you feel about it. But I'm hopeful that that's not the case. So short of that, this is a relatively short period of time in all of our lives that's been very inconvenient for most of us. Some people have been extremely harshly affected by this.

But for most of us, Adam, this is not June 6, 1944. We are not storming the beaches of D-Day. This is a short period of time of inconvenience, and we're all going to get through this. And when we come out the other side of this, we're back to running businesses and operating our lives normally. So in that regard, it doesn't change your long-term thinking about any business that you have.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [69]

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Okay. Got it. Just 2 others. Tom, just one on cash flow. Working capital beyond this year, I mean you've done a tremendous job of taking out working capital over the past several years, I know this year will be a use because of inventory building, particularly toward year-end.

Are you thinking you've taken out most of the working cap, the trade working capital that you'll be able to do? Or do you think there's more to go perhaps next year or beyond? And then the dividends to minorities on the cash flow statement, are you thinking -- still thinking about $70 million, Tom?

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Thomas A. Kelly, Crown Holdings, Inc. - Senior VP & CFO [70]

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Yes. I think the big dollars have come out of working capital. We're in a period now where with the growth in beverage cans, we're actually using working capital. So let's assume that for the near-term anyway. And dividends to minority, about $75 million for 2020.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [71]

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And just, Tim, the exit rates for bev can. I know I think in response to Ghansham's question, you said global bev can volumes will be up you think in 3Q. Was your exit rate also up low single?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [72]

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You mean in -- globally?

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [73]

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Yes. Global bev can volumes. If they're going to be up, call it, low single in 3Q, was that the rate at which you exited the second quarter as well?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [74]

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I mean, Adam, we're sold out, right? I mean we can't make any more cans. Nobody in the can industry can make any more cans. So we had a period in the second quarter globally in a number of markets, Latin America, Southeast Asia, Europe, specifically Southern Europe, where demand was impacted by the virus. That quickly came back in mid to late May across most of those markets. We are flat out and we're going to be up in 3Q. Now is the number going to be 2%, 3% or 5%? I don't know, but we're going to be up. And the exit rates are extremely strong right now.

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Operator [75]

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Our last question comes from the line of Neel Kumar from Morgan Stanley.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [76]

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Another follow-up on your specialty can footprint. After you complete the Kentucky and Washington projects, can you just give us a sense of what kind of specialty cans next will be in North America? And how does that compare to where you stand currently?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [77]

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I didn't understand the question. Neel, can you just -- I'm sorry, please ask that question again.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [78]

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Yes. I'm saying that after you complete the North American projects where you're adding new specialty can capacity, can you just give us a sense of where your specialty can mix will stand in North America versus what it is currently?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [79]

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I'm sorry. So if we are -- let's say, we are high teens right now, 17%, 18%, when we come out of these 2 projects, we'll be in the 22%, 23% range, something like that in North America.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [80]

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Okay. That's helpful. And then just given the tightness you're seeing in the North American market, do you see any opportunities to kind of continue to improve pricing and maybe address other provisions in customer renegotiations going forward? Should we expect for margins to kind of continue to improve in North America assuming demand remains as robust?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [81]

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Well, I think, as I said earlier, in answering somebody's call, we've -- I think we've been fairly successful over the last couple of years and the results in our Americas beverage business show that. We're going to continue to have growth on the volume side, which is going to fall right through to operating income. And as we utilize -- fully utilize assets 12 months a year and as we put more lines under roof, we're going to expand margins because of the operating leverage you get with 2 or 3 lines under one roof as opposed to one line. And growing the specialty mix, we'll do the same.

So -- but we talked earlier about fair distribution of costs, and our customers are also looking for us to do the most that we can to help them compete effectively with their competitors and with their retail customers. So -- but we are always looking for opportunity to improve margins. I think we've done some of that already, so I'll leave it at that. I don't want to talk too much more about that.

So Louie, I think you said that was the last question. So thank you. That concludes the call today, and we'll speak with you all again in October. Bye now.

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Operator [82]

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Thank you. And that ends today's conference. Thank you all for joining. You may now disconnect.