Description

Thesis Summary

Crown Holdings (CCK) is an $11bn market cap company that’s the #2 global producer of metal beverage cans (behind Ball Corporation) with smaller transportation packaging, food can, aerosol and canmaking equipment businesses. The beverage can business, which makes up 70-75% of EBIT, is particularly attractive given its growth profile and high barriers to entry. It’s an oligopolistic, rational industry that enjoys long-term growth tailwinds as customers convert away from other substrates like plastic and glass. It’s also quite defensive through recessions. Crown grew EBITDA during the GFC! Despite similar business quality and arguably better recent execution, Crown trades at a ~3x EBITDA multiple discount to its closest comp Ball. That discount has narrowed somewhat from its peak in 2020/2021 but still represents a source of potential upside if it closes further from here. Lastly, Crown’s cash flow profile will materially inflect upwards in 2024 and beyond as the investment program winds down, restructured European Beverage contracts continue to phase in and volume grows across the businesses. As leverage levels reach management’s 3-3.5x target in 2023/2024, the company can resume returning substantial amounts of cash to shareholders. As a result, FCF after NCI dividends should increase from <$400mm in 2023 to $800mm+ in 2024 (7.5% yield) and grow to ~$1bn in 2027. At a 7% exit yield, that represents the opportunity for a $150 share value including dividends through the end of 2026 and a 20% IRR from today with potential to increase to $175 per share (almost 100% upside) if Crown’s beverage business rerates to Ball’s 12x multiple.

Business Overview

History of Crown:

Crown’s history dates back to 1892, when the company’s founder, William Painter, patented the crown cork bottlecap to seal glass bottles. Over the 20^th century, Crown expanded its business into can bodymaking, growing organically and through acquisitions (including the unfortunate 1963 acquisition of Mundet Cork) to reach $1bn in revenue by 1977. In the early 1990s, Crown went on an acquisition spree, acquiring companies such as Continental Can, Constar and the Van Dorn company and culminating in the $5bn acquisition of Paris-based CarnaudMetalbox (CMB) in 1996. These acquisitions expanded Crown’s footprint in metal beverage, food and household containers as well as PET containers, broadened the company’s reach in foreign markets like Europe and Asia and increased sales from $1.9bn in 1989 to $8.5bn in 1997.

In the late 1990s and early 2000s, leverage from the company’s acquisitions, deteriorating financial performance and mounting asbestos litigation payments (stemming from Crown’s ~90 day ownership of Mundet Cork’s insulation business in 1963) led to financial distress and ultimately caused the company to restructure in 2003 as Crown Holdings. In the 2000 to 2006 period, Crown cut its dividend and completed a series of divestitures, selling its Constar plastics business in an IPO as well as other businesses like plastic closures as cosmetic packaging. By 2007, the company’s revenue mix shifted to 98% metal packaging, including 47% beverage, 34% food and 17% other metal packaging.

In 2014, Crown returned to acquisitions, purchasing European food can player Mivisa for $1.6bn (9x EBITDA) and combining it with their existing European food can business of similar size. In 2015, Crown bought Empaque, Heineken’s Mexican packaging business (75% cans / 25% glass), for $1.2bn or 8x EBITDA. In 2018, Crown completed the most controversial of its recent acquisitions, purchasing Signode, a diversified transit packaging rollup, from Carlyle for $3.9bn or 10x EBITDA.

Over the past 5 years, Crown shifted focus back to the beverage business, taking advantage of market growth to complete a multi-year capacity expansion program and divesting 80% of its European food can business for an EV of $2.7bn (9x EBITDA).

Current Business Breakdown:

After the growth in beverage can and divestiture of European Food, Crown improved its beverage EBIT mix to ~72% in 2023. The company is currently broken into 5 different segments, 3 of which contain the beverage can operations (Americas Beverage, European Beverage and Asia Pacific). Below is a full breakdown:

1. Americas Beverage (50% of 2023e EBIT): US, Canada, Mexico, Brazil and small Colombia beverage can operations as well as 2 glass beverage facilities in Mexico
2. European Beverage (14% of 2023e EBIT): Europe, Middle East and North Africa beverage can operations
3. Asia Pacific (8% of 2023e EBIT): Primarily beverage packaging in Southeast Asia with a small China beverage business and smaller food and specialty packaging businesses across the region. We estimate beverage is ~85% of revenue for this segment with food and specialty packaging making up the other 15%
4. Transit (20% of 2023e EBIT): Diversified transportation packaging business purchased from Carlyle for $3.9bn (10.2x EBITDA) in 2018 under the Signode name
5. Other (8% of 2023e EBIT): Contains Crown’s North American food can and aerosol can businesses as well as its UK-based canmaking equipment business

At a basic level, the beverage can business takes aluminum can sheet and converts the can sheet into finished, painted aluminum cans. Once the cans are completed, they are transported to the customer to be filled. Here is a YouTube video of the How It’s Made on beverage cans for a visual representation of the process. Crown typically earns 8-12c of revenue per can and 1-2c of EBIT per can, which isn’t much on a per can basis but adds up when you consider they sell ~80bn annually. The largest input cost is the aluminum itself which is passed through directly to the customer. Other buckets of costs like energy, coatings, labor and freight are either passed through directly or with a once per year PPI-based partial pass though. Customers sign 3-7 year contracts (typically 5-7 years in North America and 3-5 years internationally) and source beverage cans close to filling locations where possible. Because shipping completed cans essentially equates to shipping air, customers typically procure cans within a 200mi radius of a facility which creates local monopolies for many locations.

The Transit/Signode business is a collection of packaging types used for transport including strapping, firms, wraps, airbags, edge protectors and related equipment that are sold to a wide variety of end markets. See the 2018 and 2021 investor days for further product descriptions. Tim, Crown’s CEO, recently said that there’s a 60% chance that each truck you pass by contains a Signode product. While investors have historically pushed back on the Signode acquisition due to the company’s relatively low growth, historical cyclicality (EBITDA down almost 40% in 2009 when owned by ITW) and lack of synergies with beverage, management repeatedly points to the high cash flow conversion of the business which has helped fund the recent expansion in beverage can capex. Initial performance since the acquisition was relatively weak, but Crown more recently changed management, moved the company to Tampa and implemented a $60mm cost takeout program which turned the business around. In 2023, profitability in Transit is expected to reach 2018 levels despite volume headwinds, and the business will benefit from operating leverage once volumes revert.

The “Other” segment isn’t broken down into detail, but we estimate the breakdown to roughly be 40-50% North American food, 15% beverage canmaking equipment and 40% aerosol based on previous disclosures.

Why is Crown a Good Business?

The combination of secular growth, defensive characteristics, high barriers to entry and the rational, oligopolistic structure of the beverage can market drive pricing power and 20%+ ROICs for Crown.

Secular growth: From 2007 to 2023e, Crown grew its global beverage can volume at just under a 4% CAGR when excluding the 4.8bn can contribution from the Empaque acquisition in 2015. That secular growth is driven by customers increasingly choosing beverage cans over other products like plastic and glass because they are easier to handle, faster to fill on the line, have 360-degree branding, help meet corporate recycled content goals and are preferred by consumers for their practical and sustainability attributes. When excluding still water, 84% of new beverage launches go into cans, up from 69% back in 2018.

Defensive characteristics: Crown demonstrated high resiliency in the GFC, growing both volume and EBITDA through the crisis. EBITDA grew at a 7% CAGR from 2006 to 2010. The company’s overweight private label exposure also helps capture trade down demand in a downturn.

High barriers to entry: Cans are inherently difficult to manufacture at the speed and precision that major players are able to achieve, with newer can lines producing almost 3000 cans per minute. New entrants struggle to operate at this level of efficiency, with the most recent example being Helvetia Packaging, a single facility independent in Germany that Crown just acquired for below replacement cost. As a result, large beverage customers prefer to work with established global suppliers and sign long-term contracts to ensure availability of product.

Market structure: The global market is dominated by 4 large players: Ball, Crown, Ardagh Metal Packaging and privately held Canpack. Anheuser-Busch also has a large North American canmaking subsidiary called Metal Container Corporation which feeds a portion of their internal supply needs. Major markets like North America, South America and Europe are highly consolidated, with the top 3 players in each respective market making up ~80% of overall supply. Some investors are concerned with the stability of long-term growth rates in the beverage can market and how that impacts the supply / demand balance. Our thesis is not necessarily based on predicting supply or demand growth in any particular year, but more so that demand is growing over time and the rational market participants will balance supply accordingly to protect profits. We saw this demonstrated during the most recent supply cycle as large capacity additions in 2020 and 2021 were followed by manufacturers balancing capacity in 2022-2024. For example, after adding capacity in Rome, GA, Ft. Worth, TX, Pittston, PA and Glendale AZ as demand accelerated, Ball announced closures of older facilities in Phoenix, AZ, St. Paul, MN and Wallkill, NY while pushing out capacity additions in Las Vegas and Concord, NC as demand slowed. Ardagh added facilities in Olive Branch, MS, Winston Salem, NC and Huron, OH before closing Whitehouse, OH and pushing out its planned Arizona plant additions. Similarly, Crown is expected to close the older Batesville, MS facility in March 2024 after adding facilities in Bowling Green, KY, Martinsville, VA and Mesquite, NV while expanding capacity in Olympia, WA and other areas.

Valuation & Potential Returns

We believe Crown can grow volume 5-6% in 2024, driven by share gains in North America and volume recoveries in Europe and Asia. Longer term, we believe 3% growth is achievable as LatAm and APAC outgrow North America and Europe. That implies just under a 4% CAGR from 2023 to 2027, in line with Crown’s long-term growth from 2007-2023.

We expect EBIT per can to remain relatively steady in Americas Beverage over the next few years as the lapping of startup costs and increased efficiencies from the ramp up of new facilities in Martinsville, VA and Mesquite, NV offset any potential headwinds from lower pricing on the relatively few can contracts up over the next couple of years. Europe per can profits should increase back to 2021 levels in 2024 as newly renegotiated contracts phase in that incorporate pass throughs on energy, conversion and freight costs while also taking up underlying price. Europe faced headwinds in 2022 from spikes in energy and conversion costs which were not directly passed through, issues that Crown fixed in new contracts. Lastly, we expect APAC per can profits to revert back to recently experienced levels as volume/utilization recovers in the region.

In addition to growth in beverage can, we expect the $60mm cost takeout in Transit to bring 2023 EBIT back to 2018 levels of ~$335mm and for Transit to continue to benefit in 2024+ as a volume recovery drives operating leverage. While profits ramp, capex will also step down from $900mm to $500mm due to the end of Crown’s investment program, resulting in a significant increase in cash flow generation in 2024 and beyond:

At a 7% exit yield (~9.5x EBITDA), Crown would be worth ~$150 per share at the end of 2026 including cumulative dividends, a ~20% IRR from today’s price.

Potential Sum of the Parts Upside

Crown trades at ~9x EBITDA today, a 3x discount to Ball’s 12x implied multiple when excluding the $4.5bn of expected net proceeds from the Aerospace divestiture and associated Aerospace EBITDA. We believe that the discount has historically been attributed to portfolio mix, capital allocation and Ball’s larger scale, particularly in the North American market.

Portfolio mix: After the Aerospace divestiture, Ball’s earnings stream will be almost 100% beverage can outside of a small aerosol business that is reported within the “Other” segment. Crown has increased its Beverage EBIT mix to 70-75% after the European Food divestiture but still has greater exposure to non-beverage businesses like food, aerosol and Transit. While these are likely lower multiple businesses than Beverage, they don’t materially impact the multiple at this valuation.

Capital allocation: Capital allocation has historically been a weak point for Crown relative to Ball. Ball’s acquisitions of Rexam in 2016 for ~10x EBITDA and of 4 ABI plants in 2009 for ~6x EBITDA are now capitalized at 12x and grew Ball to the #1 global player. Crown’s more recent acquisitions of Signode (EBIT roughly flat from 2018 at purchase to 2023) and Mivisa (pro forma EBITDA of ~$400mm in 2013 at announcement only materialized to ~$300mm at sale in 2021) were less successful. Historical acquisitions like Constar, CMB and even the 1963 acquisition of Mundet Cork (bought for $7mm and incurred ~$1bn in asbestos payments over time) also struggled. However, capital allocation has materially improved in recent years since the company’s 2019 portfolio and capital allocation review. The company divested 80% of European Food, reinitiated a share repurchase program and instituted its first dividend in 2 decades. Crown even completed the opportunistic acquisition of Helvetia Packaging in October 2023, paying $125mm (likely below replacement cost) for the struggling independent player in Germany. We expect future cash flow to be used for dividends, share repurchases and debt paydown. As a result, we no longer believe that any capital allocation discount is warranted.

Beverage can scale: Some investors and analysts have historically valued Ball at a premium because of the company’s scale in beverage cans relative to Crown, but we don’t believe that Ball’s 105bn global beverage can volume provides a material advantage relative to Crown’s ~80bn. If anything, Ball’s size in North America and mix towards mass beer has been a disadvantage over the past couple of years. Ball’s beverage can volumes in its North and Central America segment (its largest segment) were down -7% in 2023 and are expected to be flat in 2024. While much of that decline was due to deteriorating Bud Light volumes, they are also ceding share to Crown and Ardagh as customers try to balance their exposure to Ball. Crown is growing volumes ~7% in North America in 2023 and will add a similar number of cans in 2024 as more contract wins come online.

 To measure the implied discount to Ball on Crown’s Beverage businesses specifically, we back out the Transit business at 10.2x EBITDA (the price at which CCK purchased Signode) and the “Other” segment at 8.3x EBITDA (SLGN’s multiple). Given Crown has facilities in areas like Brazil and the Middle East with minority interest partners and doesn’t own 100% of their Beverage EBITDA, we also back out the book value of NCI from EV and the estimated pre-tax NCI from EBITDA to increase comparability. The result is an implied 9.3x multiple for Crown’s Beverage business ex. NCI, still a 2.7x discount to Ball. Some investors might argue that Transit is worth less than what Crown paid in 2018, but implied Beverage ex. NCI would still trade at a 2x discount to Ball if 8x EBITDA was assumed for Transit instead.

Rerating to Ball’s multiple of 12x on Beverage ex. NCI would raise the consolidated multiple to 10.5x, implying a share value of $118 today (30%+ static upside). If Crown traded at 10.5x at the end of 2026 (~6% yield), it would imply a share value of $175 including dividends, representing almost 100% upside and a 26% IRR from today’s price. We believe rerating is increasingly likely as Crown demonstrates consistent volume growth and capital return in 2024+.

Risks

Key risks include a weakening economic environment and high beverage pricing causing slower demand growth, inflationary pressures impacting profitability and a potential oversupply from recently implemented capacity additions. However, we believe that these risks are mitigated by several factors:

1. Weakening economic environment causing slower demand
   1. Crown demonstrated resiliency by growing both volume and EBITDA through the GFC
   2. Additional demand from customer sustainability goals supplements historical demand growth
   3. Crown’s overweight private label exposure helps capture trade down demand
   4. Any loosening of beverage can operating rates presents an opportunity for large scale conversion of still water into cans. Plastic water bottles represent a 590bn unit global market, >50% larger than the entire global market for beverage cans. Large brands moving still water brands into cans (think Dasani, Aquafina) would be substantially accretive to long term growth rates
2. Inflationary pressures impacting profitability
   1. Contracts include a full pass through of aluminum ingot globally and full pass throughs of aluminum delivery premium, conversion costs and freight in large markets like North America and Europe
   2. Other buckets of costs like energy, coatings and labor are either passed through directly or offset by once per year partial PPI pass-throughs
3. Potential oversupply from recently implemented capacity additions
   1. Highly rational industry participants will act quickly to balance capacity and protect profits as demonstrated by the most recent supply cycle
   2. More moderate growth rates free up capital to return to shareholders at attractive valuations
      

Catalyst

Acceleration of volume growth and increase in capital return to shareholders