Good morning and welcome to Crown Holdings Third Quarter 2022 Conference Call. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to turn the call over to Mr. Kevin Clothier, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you, Nicole and good morning. With me on today's call is Tim Donahue, President and Chief Executive Officer. If you do not already have the earnings release, it is available on our website at crowncork.com. On this call, as in the earnings release, we will be making a number of forward-looking statements. Actual results could vary materially from such statements. Additional information concerning factors that could cause actual results to vary are contained in the press release and in our SEC filings, including Form 10-K for 2021 in subsequent filings. The company recorded diluted earnings per share in the quarter of $1.06 compared to $0.79 in the prior year quarter. Adjusted earnings per share in the quarter were $1.46 compared to $2.03 in 2021. Net sales in the quarter were up 12% from the prior year, primarily due to pass-through of higher raw material costs and increased beverage can volumes. Segment income was $336 million in the quarter $344 million at constant currency compared to $379 million in the prior year, primarily due to higher energy prices in Europe, the costs associated with higher inventory levels in Europe and Asia, partially offset by improved profitability in North American tinplate and can-making equipment businesses and 6% global beverage volume growth. During the quarter, the company amended and extended its credit facility to August 2027. We raised an additional $1 billion in floating rate debt and used the proceeds to retire EUR 885 million, euro notes due in February 23, that carried a blended rate of 1.3%. The balance sheet remains strong with no significant near-term maturities until September 2024. As a result of the refinancing and higher rates, the company now projects net interest expense of $270 million for the year and $350 million if rates were in place for…

Thank you, Kevin and good morning to everyone. As reflected in last night's earnings release, performance in the third quarter and our outlook for the fourth quarter are both well below our previous guidance. As noted, while beverage can volumes were up 6% globally in the quarter, customer demand was lower in almost every market and product line compared to our prior expectations. We now estimate global beverage can volume growth of 4% for 2022, down from our prior estimates. Looking ahead to 2023, global beverage can volumes are expected to increase by 6% with growth expected in each of our operating segments. As a result of lower-than-expected third and fourth quarter beverage unit volumes, we now carry too much raw material inventory across our Asian and European operations at a time when the price of aluminum has declined approximately 10% to 15% from July and August averages. This higher cost material impacted our third quarter results in both Europe and Asia and will continue to have an impact in the fourth quarter. Hoping to avoid supply chain issues that we dealt with over the past 2 years and considering long delivery times, we ended up with more material than needed given the lower sales. The impact of the company is lower margin resulting from the pricing formula on the sell-through of finished product later than anticipated versus when the material was purchased. These balances will be worked down in the fourth quarter. As Kevin discussed, we have reduced our 2022 capital spending to $850 million from $1 billion, mainly the result of unannounced projects being indefinitely postponed. Our 2 projects in the United States, Martinsville and Mesquite are progressing well and it is important that we have good start-ups to meet customer commitments and expected 10% North American volume…

[Operator Instructions] Our first question is from the line of Mike Roxland of Truist Securities.

The first question, Tim, just -- you mentioned it just recently in terms of your confidence in getting to 10% volume growth in North America in 2023. Given what’s happened with customers adjusting their order patterns, what gives you that level of confidence that you will be able to achieve that level of growth in North America next year?

Yes. So it's a good question, Mike and I expected this. And I guess it's fair to say we expect all of you to be a bit skeptical given that we misread the back half of the year when we last spoke to you. I will tell you 2 things. The first and importantly, we regained some customers that we had previously supplied in prior years with some of the new capacity we have. So that is share growth for Crown, not that -- and I would say that we weren't necessarily looking for share growth. Some of it came to us. But that's not an insignificant piece of the equation. The other thing simply and it doesn't feel good to say this but with our growth being flat in North America for 2022, the prospect of 10% growth in '23 is easier than it was when I suggested to you that we could have, let's say, 10% growth back in July when we expected higher growth this year. So that's just a math thing. I think I think it's fair to say that unit shipped next year will be up significantly in North America. Units shipped next year in North America will be down compared to what we thought they would have been in July and that's just from the starting point. But largely relates to contracts we do have in place. We're fairly confident. Now if customers decide they're going to fill another substrate instead of the aluminum beverage can, then things will change. But I do think that I do think there was a significant destocking that the customers went through in September. September volumes were really weak, caught us off guard. And it's only -- we're only 3 weeks into October here but it seems to be at least the shipments so far here in October seem to be holding up to our revised estimate and customer forecasts.

Got you. And I appreciate the color. And then just, Tim, just one quick follow-up. Just regarding to the last comment on October volumes holding up. Where do you see them trending -- I know we’re only a couple of weeks into the fourth quarter but where do you see them those volumes for 4Q trending? And then last question, just quickly, when did you actually start to notice customers adjusting their order patterns? Because when I look through your comments last quarter, you mentioned some slowing demand for some products. I don’t know if that you actually called out which products but it sounds like you started to see slight demand but progressively got worse as you could see it through the quarter. So when did you start to notice this change? What products and markets experience changed? And is there a particular reason that you noticed with this change.

Yes. So when we talked to you in July, I think we were -- we probably talked to you about a week earlier in July than we're talking to you now. So we only had a couple of weeks of data. And I think at that time, we were seeing weakness specifically in craft beer and craft beer weakness has continued here through the third quarter, at least the craft customers that we supply. But I would tell you that beginning in early September and accelerating right through the end of September and quickly accelerating through September. We saw broad-based customer reductions in order placements across all products and specifically for us, CSD. So caught us off -- I would -- you never hate this -- you never like to say we're caught off car but I think we were really -- we were surprised by how quickly the customers started to adjust their order patterns in September. And Mike, I'm sorry, there was a question you had before that in between.

Yes. Apologies. Just a little last. Just -- so you’ve seen though, doesn’t side that order parts got any worse thus far in October over 4Q and the first couple of weeks, right? So sort of the order that you’re seeing thus far in 4Q are in line with your revised lower expectations?

No. I think so far in October, as I said, we're only a couple of weeks in and what we see looking out, it does appear that orders are holding up to our revised forecast and more importantly, to our customers' revised forecast. Certainly, that's significantly below where we thought we'd be when we talked to you in July. But as we've reforecasted the numbers that we've just -- that Kevin just provided you were we look like we're holding on to those fairly well right now so.

Next question is from the line of Ghansham Panjabi of Baird.

Just as a follow-up to the last question, Tim, in terms of the customer feedback you’ve been receiving. I mean, obviously, there’s been a pretty significant change in the month of September. I just kind of look back and connect with your customers, is it just previous shortages that maybe let your customers do over-order? Is it more pronounced consumer elasticity that they’re seeing? What can you share with us on that?

Yes. I don't think this is a -- we -- let me start that again. I -- clearly, I think we came out of COVID and perhaps the COVID benefit to the beverage can was a bit greater than we thought. So coming out of COVID, perhaps we didn't understand or anticipate lower beverage can sales for at-home consumption. I think the bigger piece of this, Ghansham, is elasticity and we talked a little bit about that last time. And I think I used the phrase that beverage cans were not inelastic and maybe there's more elasticity than the phrase, not inelastic. But I think the consumer knows a lot more about where they stand than we do. And certainly, the consumer in most parts of the country understand their situation better than perhaps the folks in Washington and New York. And I think we're seeing that right now, at least in our business. And as I said, though, I think we're -- hopefully, we've got a reset on inventories and forecasting. And it's really early in this quarter but it does appear that we're tracking better to the new forecasts.

Okay. And then just for my second question, maybe a 2-parter. Just one in terms of the metal loss for 3Q and 4Q, can you sort of size that? And I also assume you're -- there's going to be worse fixed cost absorption in the fourth quarter just as you rightsized inventories. If you could just size that for us as well. And then just lastly, as you think out to 2023 and if you just set aside your comments on volumes, what are the major variances that we should think about ‘23 versus ‘22? And I guess I’m referring to FX, interest expense and also the price adjustment that you’re pursuing in Europe as well as the positive areas.

So stay on the line, Ghansham, because you're -- you just asked a bunch of questions. Let me explain the metal issue. This is a raw material issue for us. So in -- it's not a North American issue for us because we're tied up pretty well with the customers. We have some customers in Europe and certainly the large majority of customers in Asia, where we have pricing formulas whereby we price cans to them based on a formula that includes, let's say, the LME price 1 month, 2 months, 3 months prior from when we deliver the cans. So we'll have procured metal at a period of time and then we'll sell the cans after converting in the future. And that -- generally, that conversion and that contract, if you want to use m minus 1 or m minus 2, 3, month minus 1, if you follow me, generally lines up pretty well. And as I said, coming out of the last couple of years where we've had significant supply chain concerns around aluminum and expecting higher volumes, specifically in Asia, we would certainly not have wanted to miss ships to customers. And we procured the metal we thought we needed to make deliveries. And when those call-offs began to become lower or disappear, we now have more raw material at prices that reflect the LME in May, June, July, August. And now we're not going to deliver those cans on an m minus 2 or m minus 3 basis. We're going to deliver them 4 or 5 months out now when the LME is 10% to 15% to 20% lower. So that gives rise to the cost headwind we're describing for you. If we had to put a bucket around at how much it was in the third quarter, think about $15 million to $20 million. And perhaps in the fourth quarter, think about another $20 million to $25 million, something like that, as we try to work down this metal and get it behind us here in 2022 and not have anything exposed going into next year. So was that clear?

Yes, very clear.

And then, I'm sorry, the other part of your question?

The fixed cost absorption for 4Q as you rightsize the inventories and then also…

I don't -- we don't -- so the raw material issue and we didn't -- it was one of these things -- I just went through an explanation on the LME issue for you. And it's a -- it was a difficult explanation to try to put in writing in the release and that's why we didn't do it. I prefer to do it here. So, we don't have a tremendous fixed cost absorption issue in the fourth quarter. We will have lower absorption in the North American Beverage business this year in the fourth quarter than last year because last year, we were running flat out. This year, we'll have a little bit more slack in the system which, as I said last time, isn't a bad thing. But not a -- there's a little bit in Asia. I wouldn't describe it as is our primary concern. Our bigger concern in Asia and a little bit in Europe is this LME issue. And then, frankly, the bigger concern in North America is the lower volume than we expected. And I appreciate you asking the absorption question. We're going to do our best to work down inventories but the finished inventories are not our problem right now. It's the raw inventory.

Okay. And just on the 2023 variances?

Yes. You did ask a lot of questions. I think the -- as I said, as we sit here today, the opportunity for significant EBITDA improvement is right in front of us. And I know you're not going to like this because it's a wide range. I'm going to tell you a $100 million to $200 million EBITDA improvement. And I think the swing factor in that is not really currency or our ability to recover cost under our contracts. I think the 2 big swing factors are we're looking at -- we're estimating, let's say, 6% volume growth for next year and will we have 4%, 6% or 8% and then -- globally, I'm talking. And then, the other thing is we have inflation pass-throughs in the contracts. So we’re going to get to recover inflation through this year. We haven’t forecasted further inflation or any inflation abatement next year. So that could swing one way or the other as well. But they would be the 2 big ones. I think Kevin gave you that’s EBITDA. And certainly below the line, we’re going to have a headwind from kind of a funky accounting thing on retirement benefits which if you want to discuss it, Kevin can and interest expense. Kevin gave you a feel for incrementally if you think about current rates and projecting another Fed hike or to what our interest expense might have been this year on a full year basis at current rates versus what we currently project. And so you can see that as a headwind next year. But on -- at EBITDA, significant improvement, yes.

Next question is from the line of Phil Ng of Jefferies.

On some of these levers for 2023 to get to that $100 million to $200 million, can you kind of give us a little more color, particularly on the price recapture piece? I believe North America, a big part of that is the nonmetal escalators. Can you kind of size that up? And then on Europe as well, how much progress we should expect in terms of your ability to kind of recoup some of the inflation you’re seeing?

Yes. I think that the two segments, almost all of the increase that we're going to have next year will be in the Americas and European Beverage businesses with Asia Transit offsetting the non-reportable. So I don't have in front of me nor would I probably feel comfortable telling you on an open line but inflation recovery and volume, both significant. More inflation recovery -- or I should reword that. Contract adjustment, whereby we reset prices and carve out certain costs in the contracts in Europe. And then in the United States, it's inflation recovery and volume growth. But I don't -- as we sit here today, we're -- we've got pretty good visibility into the amounts on those. I don't feel comfortable talking about it on an open line.

Got you. Okay. And then, Kevin, you gave an update on CapEx coming down to $850 million. Is there an early look for 2023 how we should think about? And some of these unannounced projects that you guys are taking off the table, any color if that’s any market in particular? And when you kind of reassess your footprint more broadly, whether it’s North America or Brazil, are there any facilities that are potentially suboptimal that you may take a hard look at, Tim, as you kind of look out -- reassess based on the current growth outlook?

Yes. I think that globally, we've been in a situation where we've been capacity-constrained in almost every market over the last several years. And certainly, some facilities are better than other facilities. The newer facilities certainly have the potential long term to be great facilities. The older facilities in the near term operate much more efficiently than the new facilities. You've got equipment that's adjusted perfectly after 20 or 30 years and you've got workforces in those facilities that really understand how to make cans and change designs over and change sizes over and the existing workforces are really tremendous operator. So, I wouldn't describe anything as suboptimal. And I would describe for you when we're expecting 6% volume growth on a year-over-year basis, we don't have the ability to take any capacity out. We were -- I don't want to -- I got to be careful how I say this. I'll just say that I think we were very responsible over the last couple of years, specifically in the North American market, not to announce or size plants bigger than we thought they needed to be, certainly, in light of the contracts we were able to garner. So we don't see any need for that. As we look ahead to next year, one of the -- we sold the European food can business last year and one of the provisions of that sale was that we would relocate our beverage can operations from the Braunstone U.K. facility to another site. So we're in the process of building another facility in the U.K. because we have to be out of that facility by mid-'24. And so incrementally, it's a little bit of a capacity increase but it's not a lot of capacity increase because you're going to build a 3-line plant to replace a 2-line plant. But the cost of construction of a new beverage can plant is certainly much higher and has grown to be much higher over the last couple of years than previously anticipated. So a big portion of our CapEx that we see in '23 is the Peterborough site in the U.K. which is really nothing more than a replacement of the Braunstone move. But if you wanted to pencil a number in for next year, it's the money that we're spending to finish off Mesquite and it's the money that we're spending to finish off the line additions in Italy and Spain and 1 or 2 projects in Asia as well as a big chunk of money in Peterborough. And you're going to get back up to a number like $900 million or $1 billion again, short of us adjusting it when we get into the year next year.

And Tim, some of the unannounced projects that you guys are pushing out indefinitely, any color which region in particular?

That's why they were unannounced. So they will -- they'll stay unannounced and they may be unannounced forever, right? They may never come back. But at one point in time, you think they're okay based on where you see the world going and the world changes. So we change. And so perhaps they come back in the future, perhaps they don't. But I don't think it would do us any good to tell you what we are thinking about.

Next question is from the line of George Staphos of Bank of America.

I guess first question I had for you, you might have mentioned it but I didn’t see it in my notes. Did you cite an expectation for volume growth in North America for the fourth quarter? You said you’re running in aggregate much more in line with your reforecast. Could you tell us what North America is expected to be at in that reforecast? And I had a few follow-ons.

I would say that North American volumes, we expect to be up a couple of percent in the fourth quarter.

Okay. And that would be stronger, it sounds like -- well, let me ask you, where is the strength coming from on a relative basis in that 2% by end market?

We're largely a carbonated soft drink and sparkling water supplier in North America.

Okay. Yes. We knew that but okay. Understood. So I guess second question I wanted to ask you is, do you see any potential challenges over the next two years in terms of your demand outlook, what you're seeing for the market and where you see capacity coming on? You talked earlier to one of the questions about you're going to need the capacity that you're bringing on because you see 6% growth but -- and recognizing that. Where are you perhaps a bit more pensive in terms of that supply-demand balance hanging in within any one region? And could you remind us, across your regions, do you have any important years we should remember in terms of contract renegotiations or qualitatively, how do you stand over the next two to three years across the regions on that front?

I think I'll take the second one first. I think in North America, contractually, where we feel like we're in a pretty good position for the next, I'll just say, 2 to 3 years. Depending on customer, it could be longer than that. Brazil, I believe, we're out a few years. And the market that's more of an annual market would be the Asian market but we have some pretty big shares in most of the countries there and we tend to do well. It's more a function of how much volume growth we get, how much cost we can take out in dealing with the competitive pressures from new entrants or threats of new entrants. But -- and then Asia -- I mean, I'm sorry, Europe, as we've described to you over the last probably 12 months, we're in the process of renegotiating several contracts this year and next year. Doing quite well with it trying to restore margins such that -- actually, thankfully, we had the opportunity to renegotiate some contracts. So -- but that largely will be done by the end of next year and that will take us out a few years from then. So on the factors, George, I think the unknown factor is if -- I don't know how much further the Fed is going to go. And there's an argument to be made that perhaps they waited too long and they've got to do what they've got to do and we're all going to need to pay the price to get inflation under control. And listen, I think inflation is a terrible thing for people at the bottom of the economic ladder. And it's probably not fair to them if the Fed does not get inflation under control because they don't benefit from the stock market gains and everything else. They really struggle when they go out to buy product. So I think the Fed does need to get inflation under control. How much further they go and how much demand destruction that causes in the near term before things level out and start to reaccelerate, I can't answer that for you. But as we sit here today, based on what our customers are telling us for next year, what we have under contract, we can see significant volume growth next year and that's what we're trying to elaborate on here.

Understood. On that point, I’ll ask one quick one and then I’ll turn it over just to be curious. So have you haircut to a larger degree what customers are telling you relative to the experience this year? Or you’re more or less baking in what customers are telling you in terms of your volume expectation for next year? And then maybe for Kevin, can you just give us that quick update on the retirement issue and what that’s going to mean at the bottom line for ‘23?

Thanks, George. So the answer, yes, George, you should expect that we've grown certainly much more skeptical with customer forecasts.

So George, yes, we've been amortizing through about $15 million of unrecognized gains related to postretirement changes we made back probably more than 10 years ago. They're going to disappear next year. We also see some potential higher below-the-line pension costs. So we're probably looking at it in the neighborhood of $30 million.

Kevin, is the $30 million inclusive of that $15 million or that would be additive for the $15 million?

Inclusive of the $15 million, George.

So just to summarize that, George, we made significant changes to our postretirement medical benefit programs a decade ago, resulting in large gains which the accounting universe requires us to amortize over a period of time as opposed to booking at the time you make the change. That amortization period has run out.

Next question is from the line of Mark Wilde of Bank of Montreal.

Tim, I wonder just toggling away from beverage can for a minute. Can you just talk with us about what you’re seeing right now in terms of both volume and then kind of price/cost issues in the Transit Packaging business? It seems like global economy is slowing down. How is that manifesting itself in Transit Packaging?

So as we said in the prepared remarks, Mark, we saw a blended average volume decline of about 6% in the third quarter. We certainly anticipate volumes to continue to decline in the fourth quarter and into next year. As you would expect, when economic activity picks up or ticks down, our Transit business follows that pretty well. We've been working pretty hard this year to correct and rightsize a steel inventory imbalance. And perhaps we've had bigger volume declines this year than we should have had as we try to bring inventories down and change the way we order and we sell through to customers. And that will largely be behind us this -- or it will be behind us this year. But no, we're going to -- we're with you. We think that economic activity, specifically in Europe over the next year, has the prospect of being quite dim. And we're looking at all ways, including the headcount-reduction program we announced for you back in July, to rightsize our cost. And then certainly, on the pricing front, we know volume is going to be down but we cannot afford to take and carry any of the inflationary costs. They have to be passed through. And if we sell less product because customers don't want to pay for the inflation, well, we're going to sell less product. But we're not going to sell products in that business just to sell product and take losses. But no, we are forecasting in the fourth quarter and next year in the prepared remarks that we described lower volumes in that business, largely offset in the fourth quarter and more than offset next year by price and cost reductions.

Okay. Just two other real quick ones, Tim. One, can you just -- can you give us any kind of updated thoughts on impact of recession across both beverage can and food cans, how you think about that? If we go back to '08, '09, beverage cans actually did pretty well because of some share shift mix in that period. And then also in food cans, I wonder if you could just give us a sense of kind of where we're at with the ramp-up of new lines and new facilities that you put in.

Somebody here in the company reminded me, somebody I respect a lot, recessions don't bother the can business. What bothers all businesses, including ours, is inflation. So the big difference between today and the 2008 financial crisis is the level of inflation we have. So inflation is the thing that destroys demand. The recession doesn't necessarily destroy demand. In fact, as you're trying to get to, we typically perform better in a recession because our products are priced much more advantageously to deliver product to the consumer. But inflation is the big differentiator here, I think. And so that's why I said in response to George's question, a little difficult to understand -- hard to envision inflation is going to get much worse from where it is today. But certainly, if it persists, there has to be a breaking point at some point either on input costs or in consumer demand. I'm not smart enough right now to tell you that. But that will be the -- that's the big difference, Mark.

Okay. And then just that food can ramp-up, Tim?

So we brought up the Hanover facility. We -- I think the third line in Owatonna starts up sometime in November. So we'll have -- all of our 2-piece food can needs will be met by our own internal production going into next year.

Next question is from the line of Mike Leithead of Barclays.

First, just a couple around capital deployment. You talked about finishing a few projects off that gets you to about $900 million to $1 billion next year. But just should we expect that to start kind of normalizing or falling off after that? Or is that a fair run rate? And just related to that, just given the macro, what not, EBITDA is obviously a little bit lighter. But is there any change to your framework or thinking about target leverage of 3x to 3.5x EBITDA?

So two great questions. I think post 2023, as we sit here today, we would expect capital to come off significantly from that $900 million to $1 billion number. A little early to say because we're not there yet and we don't know what the world is going to bring us in terms of opportunity but it's not out of the question to think that, that number couldn't fall to something like $600 million. On the balance sheet, as Kevin said, given a rising interest rate environment and we're expecting that the Fed is going to probably do something in November and maybe even another hike in December, we're more committed than ever to maintaining a strong balance sheet. And so we've typically described for you target leverage in the 3% to 3.5% range. We -- I think we have a Board meeting later this week and we'll have a significant discussion with the members of the Board, take on their experience from past inflationary times. And it wouldn't surprise me if they want us to earn towards the lower end of that target range and be closer to 3% than 3.5% [ph].

Fair enough. And then second, maybe for Kevin. I apologize going back to it but I just wanted to kind of tie up around what you’re telling us around earnings outlook for next year. It looks like EBITDA call it up $150 million or so. And then obviously, there’s a wide range. If I take some of your net interest comments, it looks like it could be a net $80 million headwind or whatnot for next year and obviously, pension. So I guess just net-net, when we add up all the different pieces, should we still -- I would expect EPS to still be up next year. Or just kind of how should we think about all the below-the-line items there?

Yes. Mike, it's -- you're a little early right now -- we're a little early in the process. I think you're identifying all the right issues. When we think about the other variables that are out there is what's going to happen with our tax rate and some of that really is depending on when you -- where you make the money and how it rolls up. So it's a little early to say where we're going to be but you're hitting on all the major items that we see. The only thing I would say is, right now, we're assuming SOFR rate of like 3% -- excuse me, 4.35%. So if the Fed goes out and raises rates more next year, you can see interest expense actually be even a little bit higher than what you’re quoting there. So until we kind of get a little further along, I don’t want to commit to where we’re going to be on an EPS basis.

Next question is from the line of Arun Viswanathan of RBC Capital Markets.

So I just wanted to go back to an earlier comment that you made, Tim. Did you say that most of the improvement on the segment EBIT level would be in Americas and Europe Beverage and then some improvement in Signode or Transit would offset non-reportables in APAC? Is that what you said?

Yes. So we gave you a very wide range of EBITDA improvement. And if you consider that there'll be some smaller gains in Asia in Transit, they'll offset the decline in other. And so pretty large gains in the Americas and a large gain proportionately in Europe as well.

Okay, that’s helpful. And just considering all of that and considering your comments on volume growth and some uncertainty there, I know that you have a customers’ outlook that leads you to believe around 10% for next year. But would you say that the fixed asset base in certain of these locations is carrying too much cost? I mean, is there an opportunity for rationalization, especially when you look at Europe, as you said, could be continuing to be weak next year materially and maybe some other areas as you’re doing in Transit?

No. Listen, I -- as we sit here today, we're -- we've got customers who have given us requirements contracts, for the most part, saying that they expect a certain amount of volume next year and we're committing to supply them that volume. We've largely been capacity-constrained over the last several years. And if things accelerate, we could be capacity-constrained next year. So, I know you'd like to hear it but we don't see our ability to take out any beverage can capacity on a global basis right now. The only market where we have open capacity next year will be in the Middle East. And we've used the Middle East from time to time as our sponge to supply other markets when we've been short in other markets. So -- but as you think about North America, broadly the Americas, growth in Asia and Europe where we've been significantly capacity-constrained, we have no ability to take capacity out right now.

And then just a quick one, if I can. On non-reportables, I know there was a $35 million-or-so metal gain. So we’ll take that out. But then you’d likely be down from that -- beyond that as well just given some of the extraordinary equipment sales that you guys achieved this year. Is that right? So maybe back out.

I don't think we'll see -- listen, I wouldn't describe anything in our equipment business as extraordinary. I think the -- if you were putting the pieces together for the other segment, I would say it's the inventory gain we had last year and it's the expected decline in aerosol can sales next year versus the full year this year. Equipment might be down a little bit but it's not going to be down that much. And as I said, that decline in the other businesses from those two primary areas will be offset by growth in Transit in Asia.

Next question is from the line of Christopher Parkinson of Mizuho.

If we just take a step back on the euro energy costs, is there any way to quantify the extent of that headwind going back to the beginning of the year and what the cumulative rate is year-to-date and then also what you’re expecting for the fourth quarter? And just any incremental information we could utilize to help us assess the cushion from the contractual renewals for 2023?

Okay. So on the energy front in Europe, we had expected some increase in European energy costs when we started the year. Once the Ukraine war hit and the natural gas stopped flowing from Russia, as you know, the prices have skyrocketed. So right now, when we look at it on a full year basis versus our original guidance, we think the number is probably in the range of $52 million, $55 million year-on-year. That's up a little bit from our previous guidance but largely in line. From a fourth quarter perspective, we're looking at probably a hit of around $20 million. We do have some hedges but we still probably think that we're in the $20 million range. The TTF is a little bit lower right now than we expected. So maybe we pick something up there but it's too early to tell if you go back and look at the history of this TTF. So that's where we're at. The number in the third quarter was a similar hit to what we've seen in the fourth quarter.

Got it. And just circling back to your comments about North American demand. I mean, clearly, some things were a bit rough in the second and third quarters and you have a bit of an inflection in for the fourth quarter. Just -- and this question is more pertaining to kind of the outlook for '23. But what in particular are you hearing from your customers? I mean you've mentioned some reluctance to trust others but is there specific such a substrate outside of soft drinks or seltzer that gives you the confidence to say, hey, we're going to at least bounce back a little bit and kind of get back in -- albeit a lower growth rate but back to growth as we approach '23 and hopefully thereafter? Is there something in ready-to-drink or moderation in the declines in hard seltzer? Just any additional color based on product substrate would be very helpful.

So we’re not a very large supplier to the hard seltzer market. I think that, as you think about big volume moves, we -- I don’t know what the exact number we shipped but we’re certainly north of 25 billion units in North America. So when you’re talking about moving the needle on a percentage basis on a $25 billion or more base -- ready-to-drink is nice and it’s a growing category and perhaps it has opportunity for the future in an incrementally positive world. But to move the number that we’re describing to you, it’s got to come from your bread and butter and the bread and butter for us is carbonated soft drink as well as sparkling water. So they’re the markets that we see coming back and they’re the markets where we’ve garnered additional business under contract next year versus this year.

Next question is from the line of Angel Castillo of Morgan Stanley.

Tim, I was just wondering, as you think broadly in terms of strategies, there are a number of things that have been an impact. So we talked in this last question about energy hedging and maybe some of that playing a factor in the fourth quarter. How are you thinking about your level of hedging for next year? And then more broadly, as you think about sourcing, obviously, metals has been a bit of a headwind here in the second half. How are you thinking about your strategy evolving? Are you buying less or changing as you see the kind of the macro be a little bit more difficult?

So I'll do the metal and Kevin will come back on hedging our thoughts around hedging. On the metal, yes, listen, I think we're going to take a different approach. We went through the early pandemic and post-pandemic fighting through supply chain issues, trying to get as much material as we could to meet growing customer demand coming out of the pandemic. And it kind of caught up with us here this summer and we're left with too much material at higher prices. We're going to take a different approach and we're going to order what we think we need. And if we're short, we're short. But we cannot afford, especially in markets like Asia and in markets like Europe, where we don't have specific back-to-backs with customers, to take the risk. So what I'm saying is if we're short of material and customer demand is greater than we forecast after taking into account their forecast, then that's going to be where it is. But we can’t afford to take the risk that volumes don’t materialize as we initially thought or as we were initially told. So that will be a change and that change is already happening. I think that’s the question you’re asking. That change is already happening for the fourth quarter right now. We are bringing in much less material. And so we haven’t talked about the procure your thing on a cash flow statement but as you bring in less material, you have a much lower accounts payable balance. So the liquidation of payables, in a strange way, reduces your cash flow because it’s just -- it looks like you’re utilizing more working capital than you’re utilizing. But the right thing for us to do is bring less material in and have less payable as we go into next year. Kevin, do you want to take the energy?

Yes. So on the hedging front for next year, at this point, we're very limited in terms of the number of hedges that we have in place. I think we've been pretty clear in terms of our overall strategy in terms of covering the energy cost is you can hedge from 1 year to the next. But in terms of overall risk, our view is that this isn't something that we can absorb at any time. So our view is that we need to pass this on to the customers. We've done a number of things and renegotiated a number of contracts to actually get the pass-throughs put in place and we think that that's the best way to handle this. So I wouldn't expect to have a material amount of hedges for next year.

Got it. That’s very helpful. And then in terms of capital allocation, could you just remind us how you’re thinking about buybacks? I think you had outlined a $1 billion number for this year. So can you just help us understand, I guess, how to think about that this year and next year in terms of repurchases?

Yes. So I think we described earlier for you in this interest rate environment and depending on what we see the rates due after the next several Fed meetings, we'll certainly take a closer look. But as I said, we have a Board meeting later this week. We have another one in December and we're going to take some good advice from our Board members as to where they think the appropriate level of leverage should be and that will directly impact the amount of shares we buy back this year and next year. So to be determined.

Next question is from the line of Gabe Hajde of Wells Fargo Securities.

Maybe I’m getting a little too precise but if -- I think coming into the year, there was an estimated, I want to say, $40 million headwind or so in Europe Beverage as it relates to aluminum conversion costs that were supposed to be rectified over the next 2 years. So I’m curious, you also called out $1 of headwind in your press release that was related to interest, Europe energy and higher or what was the other component I see here.

FX.

Oh, yes, FX. So, I think FX was $35 million interest as we’re seeing is around $25 million or so year-on-year, so $50 million for energy. Is the rest this aluminum issue that you’re talking about? And then -- no?

So Gabe, I'd just go through the pieces. FX is about, call it, between $40 million and $45 million. The interest guide, the beginning of the year, we expected interest expense to be around $210 million. And that was really -- if you think about last year, we took the proceeds from the tinplate sale and paid off it was like $1.8 billion of bonds. So we fully expected interest expense to be at a much lower number coming into the year and really throughout the year. So when we think about the guide, we're really up from $210 million to $270 million. So it's a $60 million hit. And then energy is in the $50 million to $55 million range.

Okay. But the aluminum conversion issue should be resolved with contract renegotiations for next year. And sort of an extension of that, Tim. We’re reading some articles here about labor inflation next year in Europe. I’m just curious how your contracts are positioned to deal with that. And I want to say it’s around labor is typically, I don’t know, 12% or 15% of the cost structure. Just any thoughts there?

So just -- so the aluminum conversion issue would have been included, the outlook or the headwind that you mentioned would have been included in our earlier guidance. That's why Kevin didn't include it in the dollar reconciliation he was just giving you. And that is one of the components of contract renewals we're dealing with as we go forward. Labor, as you point out, yes, I think labor is going to increase everywhere. We don't have specific carve-outs for labor but they are included in our inflation adjustment features within contracts.

In both the U.S. and Europe or…

Yes.

Yes.

Okay. And one last one, if I may. Tim, you made a comment about your customers potentially choosing to fill other substrates versus the beverage can. I’m curious if that was just a hypothetical or if, in fact, maybe as we’re seeing consumers move to more on-the-go consumption that that’s something that you’re getting through your commercial discussions? And does it take anything away from the can winning?

No. No. It was purely hypothetical as it relates looking forward and the unknowns as we look forward. I don't think we've seen any of that right now. I don't think we've seen any negative substrate shift away from the can, in fact, just the opposite. But as we think about volume growth and inflation and the consumer going forward, just purely hypothetically, you don't really know what the customer is going to do.

Next question is from the line of Kyle White of Deutsche Bank.

But I’m curious about Europe. Volumes there continue to hold up quite well. Any concern that, that region might see a similar situation to the U.S. with a sizable drop-off like you experienced in September just given the inflationary pressures on the consumer? Are you concerned about that risk? And then anything you can to do to prepare for something like that?

Well, if you think about it, I think the European market -- I think the U.S. market, there's perhaps a little correction here that happened in late in the third quarter and get ourselves rebalanced and we move forward. Certainly, the U.S. market, perhaps not just for beverage cans but a lot of products, a lot of reasons is much more resilient than the European market. The European market would be a market -- if I was looking at from the outside in any industry, I'd be more concerned about the European market than the U.S. market. So we are -- we agree with your premise that Europe could be under more pressure as you look forward than the United States. Again, we've been capacity-constrained. However, we -- as part of contract renewals, we picked up an incremental business with a large customer and we will need to supply that. So as I said earlier, to Arun's question, I think that we don't have the ability right now to take any capacity out. We're we would look at our situation next year in Europe and elsewhere around the world with the exception of the Middle East as being capacity-constrained again.

Got it. And then on the U.S., understanding that you have some incremental business that you regained you used to serve previously next year, just curious what kind of underlying market growth you need to see in the U.S. for next year in order to reach your 10% target.

I would think that underlying market growth for us to achieve our target is low single digits.

Speakers, Kyle is our last question. You may proceed.

I’m sorry, Nicole, did you say that was the last question?

Yes.

Oh, I'm sorry. Okay. Thank you very much then, Nicole and thank you, everybody, for joining us. That will conclude today's call and we'll speak with you again in February. Bye now.

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.