Q3 2019 Earnings Call
Greetings and welcome to the Ball Corporation third quarter earnings Conference call. During the presentation, all participants will be in listen only mode. After which we'll conduct a question answer session.
Time, if you have a question pieces to one follow up with the floor on your telephone.
Anytime during the Konstantin could each operator, please press star zeal. As a reminder, does complex is being recorded Thursday October 31st 2018, I would now like to turn to come because over to John Hayes CEO . Please go ahead.
Great. Thank you moly gotten good morning, everyone.
As Bob Corporation's conference call regarding the company's third quarter 2019 results. The information provided during this call will contain forward looking statements actual results or outcomes may differ materially from those that may be expressed or implied some factors that could cause results or outcomes to differ or in the company's latest 10-K and another company.
Do you see filings as well as the company news releases.
You don't already have our third quarter earnings release, it's available on our website a ball dot com.
Information regarding the use of non-GAAP financial measures May also be found that the notes section of today's earnings release.
The release also includes a table summarizing business consolidation and other activities as well as a reconciliation of comparable operating earnings and diluted earnings per share calculations.
Joining me on the call today, or Scott Morrison Senior Vice President CFO , Dan Fischer, Senior Vice President and Chief operating Officer, Mark Global beverage businesses.
I'll provide some introductory remarks, Dan will discuss the global beverage packaging performance.
Scott will discuss key financial metrics and then we'll finish up with some comments on our aerosol and aerospace businesses as well as our outlook for the company.
Growth in our businesses continue to exceed our expectations and our demand outlook heading into 2020 and beyond remains quite strong during the quarter overall global beverage volumes were up 4%. Our aerospace revenues were up more than 30%, we successfully launched or lightweight aluminum cups business, we completed the sale of too.
Underperforming businesses, and we consistently executed share buybacks, including dividends and as of today. We've returned an excess of 900 million to shareholders during the quarter and year to date, our volume growth in our beverage can business has actually been hampered by tight inventory levels tight capacity conditions in some manufacturing inefficiency.
Across the globe, we are actively investing in new aluminum packaging production to serve increasing demand for aluminum cans bottles and now cups in our earnings press release, we announce additional beverage can expansion plans that Dan will get into shortly.
New product introductions, its and sustainability or the key drivers for us as customers seek out aluminum packaging solutions.
In an environment of strong demand, particularly in our portfolio, especially can sizes as well as tight inventories. We continue to experience short term cost of services growth, particularly in our north and Central American packaging business and we're focused on building out capacity catch up with this growth.
Our customers plans to convert more packaging to aluminum and consumers environmental consciousness are supporting our decision to deploy it high returning capital at a responsible pace scotton, Dan will discuss these opportunities across our various geographies and businesses and aerospace the team continues to deliver on its growth ambitions hiring is up.
Backlog is up and additional capital investments are ongoing in this business to keep up with the strong growth.
From an earnings perspective, our comparable results results were up 25% despite tough year over year comps given FX headwinds. The July 2018 steel food can business sale and wind down of the and sales agreement in South America, our North and Central American segment continued to feel the impact of previously discussed U.S.
Aluminum scrap headwinds and product project startup costs, all other segments were at or above our expectations. We continue to expect year over year improvement in each of our main geographies going forward.
Key highlights for the quarter include.
As mentioned previously overall global beverage can growth of approximately 4% was driven by 10% specialty can growth today specialty cans represent over 42% of our mix on a global basis. The growth was prevalent in our largest markets with north and Central America up approximately 3% year over year.
<unk> up 5% and Europe up 4%, while a meal returned to growth we completed the sale of our China beverage can business and we expect to receive the cash proceeds in the fourth quarter.
We announced the sale of our Argentine.
Deal aerosol business and subsequently closed on the sale in late October .
Our aerospace revenues as I mentioned were up over 30% and operating earnings were up 35%. While we don't expect this level of growth to continue in the fourth quarter due to a difficult year over year comp, we do expect Irish favorite <unk> revenues and earnings to grow over the next several years its strong double digit rates.
And aluminum aerosol was up low single digits with investment for new product innovation work continuing.
Our focus areas continue to be maximizing the value and performance of the investments we've made to date in order to capture as much growth as we can manage continuing to proactively investing our beverage can business the service the growing needs of our customers.
Hiring training and mentoring the most talented people to capture this growth in all of our business and lastly, raising awareness and educating consumers governments and other stakeholders on the facts, the sustainability, including but not limited to the infinitely recyclable nature of aluminum products as well as carbon footprint prep benefits.
That recycled aluminum has over all other substrates. So in summary, we continue to see strong growth in at the company and while we continue to have some previously articulated short term cost challenges to serve this growth. We believe these headwinds will moderate over time as additional new assets ramp up going into 2020 and beyond.
We will continue to execute our long term strategy of deploying capital against growth opportunities, increasing aviate dollars and earnings over time through higher revenues above our cost growth driving more mix shift, especially containers growing new innovative packaging products like the cup and expanding aerospace all with the return.
No value to our shareholders mindset and with that I'll turn it over to Dan.
Thanks, John as John alluded to new product launches and substrate conversions to aluminum packaging in the beverage industry are still in the early stages.
In addition to multiple customers announcing trials of Stillwater in cans and or publicizing an increase of aluminum packaging in their overall beverage portfolio mix, we successfully launched our new infinitely recyclable Randall aluminum cups with an addressable market of 93 billion units globally.
A third of which are in the US we're incredibly excited about this new product and our recently announced multiyear investment plans to construct the dedicated aluminum Cup manufacturing plant in Rome, Georgia with the first commercial cups expected off the line within 12 to 15 months.
Across our global operations, our team continues to manage tremendous growth complexity and incredibly tight supply demand conditions.
As we prepare for an acceleration of products converting from PC to cans, while supporting to the best of our ability new categories, leveraging aluminum packaging, we're providing additional resources to our plant operations in the areas of talent training and mentoring.
As John said until we have more assets up and running cost to serve the surge in growth may linger over the next quarter or two in north America's performance, given the U.S. aluminum scrap situation and leveraging the fourth quarter to rebuild inventory levels heading into 2020.
Further investments will be required to overcome the greater than anticipated specialty growth.
Of approximately 10 plus percent over the past 18 months, our operations need a bit of breathing room to return to historical operational leverage on incremental sales. We believe the expansion announcements in our Q2 release, along with today's announcements will get us there over the course of the next 12 to 24 months.
Turning to growth, our third quarter global beverage cans shipments were up 4% and comparable operating earnings increased only slightly year over year, given the unum us aluminum scrap continuous us lineup inefficiencies final wind down of the South America ends manufacturing agreement as.
Well as Euro FX earnings translation headwinds and Argentinean peso volatility.
All in these issues impacted comparable global beverage earnings 40 to 45 million in the quarter.
As we mentioned last quarter, the unfavorable impact of us aluminum scrap logistics and customer ordering complexities have largely been addressed in contracts renewing in 2020.
Moving to the individual segments falls North American segment volumes were up 3% in the quarter.
Buildout customer conditions in Spike Selzer's double digit growth in wine craft beer, new water brands energy drinks spirits in Premixed cocktails and cans led to 4% year over year growth in specialty despite tight conditions for cans.
We're thankful we made the investments we did in 2018 and year to date 2019, we just wish we would have done more.
Inventory levels continue to be low and every plant in our network is running at maximum utilization.
Conversions line speed ups in additions at existing facilities in Georgia, and Texas are largely on track as John noted in our press release, we are excited to announce the construction of a new facility.
She has me a new specialty beverage can manufacturing facility in Glendale, Arizona to support the new can filling facility for a major customer as well as other third parties.
Initially a high speed to wind facility. We expect this plant to come online in early 2021, and we will have the capability to be further scale as demand dictates.
We are finalizing plans for new capacity in the northeast and actively exploring further capacity expansion across the region as our customers continue to invest in their can filling businesses.
We look forward to the multiyear opportunity up offering new products and more specialty aluminum can bottle and cups capability to support our customers growth. Following these investments are plant and sales teams will gain some headroom across the system, allowing us to get cost in line better serve our existing and new customers and.
With previously negotiated contracts Favourably resetting at the beginning of 2020 I fully expect strong earnings momentum across North America, as we close out 2019 and accelerate profitability in 2020 and beyond.
Turning to our South American segment, our volumes were up 5% in the third quarter year over year quarterly earnings were impacted by the final wind down of the ends agreement FX headwinds related to the Argentine peso startup costs related to our new plant in Paraguay, as well as incremental warehousing and logistics costs.
Related to customer mix and preparedness in advance of the seasonally strong fourth quarter.
Operating earnings are expected to improve year over year in the fourth quarter.
Our new plant in Paraguay started up on schedule in late October Chile is performing in line with expectations and despite economic volatility in Argentina can demand is holding up well in the region.
And similar to North America overall, South America industry trends remained strong with cans, new product and brand launches.
For beer wine energy and Stillwater in cans as well as multiple brewery expansions will support additional investment across the industry.
European beverage earnings were up 7% mid third quarter due to volume growth and improved year over year operational performance.
Despite a 4 million unfavorable operating earnings translation impact in the quarter on a constant currency basis comparable operating earnings were up more than 12%.
Volumes increased 4% in the third quarter, despite mixed weather during the quarter our customers operations continue to add new can filling lines, which will benefit industry growth in 2020 and beyond.
Looking ahead, we will leverage our existing Continental Europe network with near term wind speed ups and we are in the process of finalizing a near and long term capacity expansion strategy in Russia in other areas of Europe to support customers growth.
Turning to EMEA, the demand environment met expectations in the quarter operationally the plants continue to focus on their cost and post the sale of China, We will continue to assess opportunities to prudently invest if the economics justified.
With all the growth across our largest regions will be laser focused on prioritizing capital for the best long term economic outcome and on improving execution.
In summary, global beverage can demand momentum has continued in our three largest regions of north and Central America, South America and Europe .
Supply demand globally for Kansas type.
Sustainability commercial engineering and talent management teams have a full court press on supporting our plant teams.
Aligning with the right customers leveraging our innovation product portfolio.
Returns improvement.
Managing it proper pace of spend relative to customers long term needs and building out a complete cups business make for interesting and exciting work.
Thank you again to all our teams around the globe and with that I'll turn it over to Scott.
Thanks to add comparable third quarter 2019 diluted earnings per share were 70 cents versus 56, so the third quarter 2018.
Sales are provided in the notes section of todays earnings release and additional information will also be provided in our 10-Q.
Third quarter comparable diluted earnings per share reflects strong global beverage cans shipments very solid aerospace performance, a lower effective tax rate and lower car corporate costs offset by the sale of our us steel food and aerosol business.
Our earnings translation headwinds and lower year over year end sales performance in South America us costs, the Dan just outlay.
Addition, global beverage revenues reflect a 6% unfavorable impact from a pass through of lower costs a little bit.
Net debt ended the quarter at $6.5 billion and reflects our typical seasonal working capital build an ongoing share buyback. We continue to anticipate year end 2019 that to remain around $6 billion as we buyback stock invest in our businesses and pay dividends.
Most to 90% of balls balance sheet debt is at fixed rates and Weve reached our target leverage levels. Both balance sheet is healthy and provides ample opportunity and flexibility to service growth and shareholder value return.
As we close out 2019 to prepare for 2020, our comparable EBITDA will exit this year on essentially the $2 billion run rate in the quarter, we made an incremental 75 billion dollar contribution.
Through our pension plans that along with higher than initially anticipated capex spend to support our growth. We've seen that we see 20 nicely in free cash flow now being in the range of $900 million.
For your interest expense will be a little north of $310 million and the full year of technical effective tax rate on comparable earnings will be in the range of 18% IP teen percent and corporate undistributed will likely rod just under $60 billion, representing benefits from a strong overall cost management some favorable FX impacts.
True ups for various benefit the compensation plans in the quarter.
Through today, we have executed nearly $800 million of that share repurchases and paid out approximately $130 million in dividends.
Continue to flow meaningful amounts of free cash flow, we have great opportunities to invest in cans cups in aerospace, which will require more capital than we thought a year ago like always we will invest capital with an eye on returns managing our balance sheet, effectively and consistently repurchasing stock and paying dividends for the benefit of our long term shareholders.
With that I'll turn it back to you just great. Thanks, Scott and our aluminum aerosol business global volumes grew nearly 4% in the quarter. We continue to see operate opportunities to broaden our product and customer portfolio and global footprint through either bolt on M&A or Greenfield investment, we look forward to being able to discuss additional innovation.
Sustainability initiatives as we move forward.
As mentioned, our aerospace business reported 30% revenue growth and 35% operating earnings growth on solid contract performance, partially offset by incremental labor costs year to date through nine months Weve Welcome 840, New aerospace employees and we anticipate by year end total aerospace head count will increase by 1000 employees.
Onboarding new employees, providing mentors further expanding of our Colorado facilities, whether it be offices manufacturing test and leave room space and executing on our strong backlog continue to be the main focus.
Looking forward. The programs recently won are vital to the intelligence reconnaissance and surveillance as well as the climate change and whether prediction needs prediction predict and prediction excuse me needs of our country.
These projects provide valuable challenging work for our incredibly talented employee base over the next few years, where should we should be able to grow profitability in excess of 15% per year. During that time. In addition, there are either even greater future program opportunities that we are pursuing that would position us even more nicely if we're able to secure.
Them.
Our long term prospects have never been brighter Paul is uniquely positioned to lead and invest in sustainable growth in global aluminum packaging and aerospace while delivering significant value to our shareholders. We look forward to driving our business to meet or exceed our long term diluted earnings per share any VA dollar growth goals.
If you have her as you've heard me say before our ability to succeed is because of our people our culture, our mindset, a healthy balance sheet and exceptional product technologies. We will continue to responsibly investors do what is best for ball and our shareholders long term success and with that Malacca, we're ready for questions.
Thank you, ladies and gentlemen, if youd like to just your first question. Please press star one positive put on a telephone you will hear SK Telecom technology request. If your question has been answered and you would like to enjoy your registration. Please press the one follow where the team once again, ladies and gentlemen, the following you may present, one floor to ask a question.
And our first question is from the line of George Staphos with Bank of America. Please go ahead. Your line is open.
Thanks, everyone. Good morning, Thanks for all the details.
I just wanted to get to the growth that you're seeing and the line speed up activity that you are seeing relative to what you were talking about last quarter and this is before.
The new plant in Glendale, and the potential plant and.
The northeast I think you said last quarter that you were looking at an additional four to 5 billion can by mid 21, and if I read or heard correctly. It's now an excess of 5 billion and 12 to 18 months, which would suggest that year ahead of schedule in numbers and also in terms of timing is that correct.
Or am I missing something there and where are you finding that incremental capacity related Italy, the new plant in Glendale, the one you're looking at perhaps in the northeast.
Can you comment to the extent possible how much of that volume might be.
Committed to already or would be presumably committed to but with an existing customer to contracted such thats not spot capacity and the market and how you're using that to leverage and commercial opportunities and I had a couple of follow ons. Thanks.
Sure George I guess relative to the northeast we're in the final legs of contract negotiations, we don't regularly talk about customer negotiations, but.
Safe to say, we wouldn't be we wouldn't be contemplating a greenfield facility. If we didnt have line of sight into a large portion of that volume and that would also were also contemplating a scalable facility as well there much like what we've.
Indicated in the comments here relative to Glendale, and your 5 billion 5 billion plus excess comment I say, yes, I think we see line of sight into growth rates and capacity expansion that would.
Get in excess of 5 billion and a lot of it just simply has to do with the growth rates that continue to outpace.
Candidly our expectations, specifically on the specialty can growth side.
But but Dan is it sort of.
Assessment you some other invention. So that's the demands commend you have found ways to tweak the lines.
I guess more quickly and to create a little bit more incremental capacity you thought you'd have otherwise or just want to get a little bit at where that delta has come from.
Yes, I think more of its just relative to the investments that we're contemplating and suggesting I think.
Yes. This is we can do something certainly in a lot of our facilities.
To increase efficiencies, but to get in the neighborhood of 5 billion additional Kansas is going to kind of going to come from new capital overwhelmingly and George I'd, just add onto that there's a lot of speed up that we do in our existing facilities. So we don't regularly talk about that's also included as well and so were deemed de bottlenecking every every week.
Unseasonable line in our system.
Okay.
My two last fall onto Alaskamen sequencing turnover I know you that'll have a lot around the questions.
Can you comment at all in terms of what.
Market data, what consumer reaction, what your customers are saying about the aluminum CCOP and what's seemingly viable enough sufficiently viable free to build a new plant in Rome, Georgia as consumer see it and then there was a fairly big swing in working capital quarter on quarter on a year on year basis on this.
Moving some of that's the pension funding, but if you could provide a bit more detailed there Scott I'd appreciate it. Thank you.
Yes on the Cup side, George I would say.
Well, there's definitely line of sight into kind of on premise large venues concerts the cups already.
As you probably are well aware in NHL and be a.
At Bell venues concert venues on college campuses.
Does that customer base is a handful of really large.
Customers that manage tens of thousands of venues and we're having very productive conversations there for this product and I think John is probably alluded to this at times for this to be a.
A much bigger business, then you're going down the retail Avenue and we're starting conversations there those are early early innings, there, but we feel really good about.
The amount of capital were put in place in room and the.
The customer activity in the fact that we're going to have.
A pretty full line in pretty short order.
And on the working capital fried towards the pipes is part of it but the biggest part year over year as was the impact of the sale to Tinplate business last year, where we essentially collected all that working capital in that business is sold less than two systems.
Okay. Thank you Scott Thanks, guys I'll turn it over.
Thanks George.
Thank you. Our next question is from the line of Brian Maguire with Goldman Sachs. Please go ahead. Your line is open.
Hi, Thanks for taking my question.
Absolutely, yes, you laid out a little bit differently than you thought.
Right.
Yes, 2019 guidance many years ago that close to hitting pipe falling a little bit sure I just wondered if you could provide a little bit.
Just update us now and kind of where we said some of the issues.
Thank you had in 2019 that are nonrepeat.
And really just trying to set us up for kind of what we should be expecting and in 2020, obviously you have the pricing kicking in the volumes.
Yeah, a lot of these onetime costs will be gone just trying to kind of sift through some of the noise and get a better sense of kind of how you're thinking about 2020 shaping up at this point.
Sure well I think probably helpful. When we put those numbered out there what is up 2016.
The world's changed a lot of such that we would be exiting this year in about $2 billion run rate. If you look at what will generate go back half of the year.
If you look since 2016 via the sale the Tinplate food business about China, we have the collapse of the adjusts jipson economy, a few years ago Global FX volatility. So we're pretty happy where we're at we've had scrap issues. This year and some more startup costs I think we've talked about the scrap issues getting fixed new contracts as we enter two.
40, 20, new volume and so I see nice growth ahead, I think we're at a point here, where some of the headwinds that we've had are going to be behind us and as our plants are running better we start to sell more put more of this capacity. It we're going to like the results of that so nice improvement next year forward earnings and cash flow standpoint.
For example.
Okay, great. Thanks.
Last question for me just.
I know the big two big Stillwater brands have been Trialing cans.
Moving from Pts and I'm sure there's been other customers looking at that also just wondering if you have any early feedback on.
Yes that those customers in particular, but just generally what the.
Feedback as Dan on watch Stillwater in cans, and then related to that I see in any other beverages that are traditionally been NTT started preseason trials in cans.
Whether its juices are sports drinks or things like that.
Yes, I would say on the.
On the trials in cans and I think we've commented on this a couple times.
Probably over the last three or four quarters.
One metric that.
Really.
Lends itself to more products and more categories moving into cans is new product introductions in the new product introduction number in North America from a substrate composition.
As cans historically, new products would come out about 35% to 40% of the timing cans and in the last quarter were north of 70%.
We are having conversations with more brand teams and more marketing teams.
About.
About moving more products.
In a bigger way in the cans now.
Not they're not a 100% in plastic or a 100% on a substrate, but we're seeing more and more appetite to move.
Move product into cans with some of the larger CPG customers.
On the still waterfront.
We're seeing a lot of aggressive product launches by a number of emerging brands in the Stillwater space and I would say.
That will be the catalyst for more of the larger folks to move they will force. They will force the move the of the larger CPG companies, we're having.
Some intensified conversations in Europe , probably even more so now than than North America, but continue to see an awful lot of Stillwater brands emerging brands coming out and there are coming out in all all different shapes up cans and bottles, because it's such a disruptive space right now.
But a lot of momentum there still small volumes, but I would I would see that that momentum continuing to build yes. Brian . This is John just put a finer point on the first part of Dan's answer I'm looking at some market data here in every category. The Kanas CSD, it's up big beer, it's up energy, it's up water, it's up craft is up wine.
So fnbs up and so we're seeing a broad base.
Across the board migration and that's why we're excited about where we are right now.
Okay I am in the context of capacity constraints that that's all very impressive yep. Thanks again for taking the questions.
Thank you. Thank you.
Thank you. Our next question is from the line of Ghansham Punjabi with Baird. Please go ahead. Your line is open.
Hey, guys good morning.
I guess in your press release in your comments you noted.
Specific North America, they had very tight.
Low inventory levels I guess on that how you adjusting production schedules as you think about 2020 to give you system more flexibility and I guess on that are you changing some of the contract terms for newer customers to bias towards take or pay versus requirement on the past you've talked about customers changing ordering patterns last minute.
And I'm wondering how thats changed if at all given the tight supply in the industry.
We will work intended to adjust contracts to try to buy a little bit more level load little bit more discipline from the customer in terms of.
Last minute requirements last minute orders.
Requirement contracts are starting to become a thing of the past we need all of those two to kick in and unfortunately, it'll take us a handful years to get all of that and sync and yes, we are definitely having conversations more akin to kind of take or pay with our customers, which is a massive step change from even two years.
Ago. So all of that's in the fall, but the reality is.
Those are getting as incremental benefits and with growth, especially on the specialty side of 10 plus percent, we just need to get some significant.
Capacity put in place or over the next 12 to 24 months before we can really.
Get get kind of the breathing room, we need to to operate efficiently.
Okay, and I guess.
Going back to John your comments on category growth.
Just kind of stepping back what do you think the regions are going to shake out from a growth standpoint on the major regions for 2019 from a volume standpoint, I mean looks like Brazil exploded to the upside and so on and how are you thinking about 2020 from an industry standpoint, and then how should we.
Kind of overlay the capacity you have coming on over the next 12 to 18 months.
Well you know its dance year that 2019 question first as you know anything north of.
Equator is a seasonally slow quarter. So we got to put that in context and what we're we're doing is actually using this opportunity Dan mentioned in his prepared remarks that because it is a seasonally slower we're using that trying to kind of rebuild our inventories we knew going into third quarter that we were already low on inventory and so you can my point as you.
Can only sell what you actually have on the floor or can make and so as we go into 2019, we don't we don't see any appreciable differences in the fourth quarter in terms of the growth rate. So we've been seeing and as we go into 2019 I think growth is just a function of how many cans were able to make and as Dan had mentioned.
We're trying to keep up as much as we can but this kind of caught us off guard to the upside and I think if theres any if we're able to get our manufacturing.
Efficiencies back to where we are that's where a lot of focus is going on right. Now I think the growth rates that you've seen in 2019 are going to be the same in 2020 with the bias to the upside if we have the Kansas sell.
Okay. Thanks, so much.
Thank you. Our next question is from the line of Anthony.
Today with Citi. Please go ahead your line is open.
Good morning.
Walter.
The last quarter's release, I think you'd cited mix as being a potential driver of earnings in North American the second half.
I think today, you referenced that as a headwind and I'm. Just wondering is something sort of change relative to expectations or if you could quantify the mix hit and if this negative kind of mix impact linkers and the for Q.
Yes, I would say.
I don't expect it to linger moving forward.
The low inventory levels that we entered into Q3 were largely in and around the growth categories. The higher margin categories in the specialty cans and we just didn't produce at the rates that we hope we were anticipating those inefficiencies I think Scott's commented on dive comment on John's comment Thats the combination of the enough.
Visions, either facilities translate into adverse customer mix.
Versus what we anticipated.
Okay. That's helpful and then on the aluminum comp are there any thoughts you can share on maybe expected returns are margins relative to.
Greenfield that can plant.
And then.
Hi line of how long you'd expect the ramp up in Rome.
To go for and maybe kind of startup costs relative to a bit can plant any anything you can share there.
I think first on the return side. This is as you know this is a proprietary technology and we expect this to be among the higher return projects that we have on our plate right. Now obviously, the it's it's as much about the ramp up of that and given it's a new product that we're trying to be as balance and realistic as possible in terms of the learning curve and ramp up.
And so Thats why Dan had mentioned earlier that Theres really two end markets is going to be service servicing number one on the foodservice side, which is the big venues on premise think of it that way in the second one is retail.
I think it's probably premature to talk about what this specific learning curve will be but I would not expect as we sit here right now it to be two appreciably different than say specialty can line, but we'll we'll update people more as we get into this because where we're making it as you know in their test lab right now and we have does.
And and we are starting to execute on the building move Fullscale facility.
Okay. That's helpful I'll turn it over.
Thank you.
Next question is from the line of Tyler Langton. Please go ahead and your with Jpmorgan. Your line is open.
Thanks, Good morning.
Dan just had a question on cost I think he said.
Hello, and scrap cost of sort of high growth and an FX was kind of a 40 to 45 million hit.
In the quarter do you have a rough sense for I guess, just for the aluminum scrap and the cost side, what that was in the quarter and kind of rough estimate kind of what you stack for the year for those items.
Sure I think.
11 million 10 to 11 million on the scrap in the quarter and thats level loaded throughout the balance of the year. So it will be it'll be in the area of 40, when we exit 19.
Manufacturing inefficiencies in North America alone, we're probably in the neighborhood a $20 million then we talked about the South America ends.
That contract running out of approximately five and then net net net $7 million from FX in the quarter.
Great. That's helpful and then Scott on free cash and I think you said free cash for this year of around.
900 million units are detailed on sort of sort of working capital Capex.
They are being that assumption.
Yes, I think a capex will be over 600 billion.
Is why that's in part why.
Free cash flow numbers coming down.
Then.
Working capital will be a slight it'll be close to a push for maybe a slight use of working capital.
By the end.
And then just 75 million pension contributions this year, you, what's kind of central with the normal run rate going forward.
That was around year to year, but.
That was really just incremental to what our initial plans were that we laid out in January .
But in total will plus like a 150 billion.
Full year.
Got you okay. Thanks, so much.
Thank you. Our next question is from Glenn Adam Josephson with Keybanc capital markets. Please go ahead. Your line is open.
Good morning, Thanks, everyone for taking my questions I appreciate it.
Scott I was just following up on one of the last questions about the Onetimers for this year excuse me Dan I think you said 40 45 million of scrap cost 20 million of manufacturing.
Efficiencies and then there were a startup cost this year that presumably will mostly go away next year. So 40, 20, and then something else so the startup.
The scraps 40 I was.
40 for the year, but the 20 for North America inefficiencies was a quarter number.
The bridge to the 40 that we discussed.
So the startup costs with Paraguay, and some other things related to good year plus the inefficiencies.
It's probably closer to the $40 million to $50 million number.
Okay, plus the scrap afford a so you're talking one timers of close to 100 million this year.
Yes, I would I would also suggests that going forward.
Good.
Startup costs will continue as we put new facilities in place.
I don't necessarily think those are one time and the balance of year on year.
And then I guess similar on the inefficiencies I think you said, Dan bleed into one Q.
There will be in Fourq and bleed into one Q, but presumably thereafter, they will lessen in magnitude is that right.
This is Scott I would just look at it different buckets. So we have slumping efficiency, but theres also some startup costs startup costs are necessarily going to go away because starts and do flat next year too so that sticks around the inefficiencies in the system auto pattern freight those kinds of days not having the right inventory the right places those kinds of things. We think we could get ahead as we.
Get into next year, but the startup costs will continue to highlight startup costs as we go forward because I think it will become we'll have it as we build these new plants.
Right yes.
I think you talked about some of your contract favorably resetting next year I know you talked at the analyst day about a year ago about capitalizing on commercial opportunities with 15% to 20% of your contract volumes to be renegotiated by the end of this year can you go into any more detail about that Dan in terms of the impact on next year.
No I think it's still consistent with what we've said over the last couple earnings calls, it's still in the neighborhood of 20% year on year.
Okay.
Just one on the foodservice.
Expansion. So it's typically a low margin or a lower margin business for packaging companies.
Plastic cop margins for example are quite low and their hardly any public packaging companies that are in that business. So.
What kind of margin business do you expect this to be for you just given that it seems to be a fairly low margin business for that packaging industry as a hall now it will maybe but not not in this case number. One. This is this is priced at the economics of a Compostable Cup number one number two it has billboards are they.
Our customers meeting the venues can sell sponsorship on that so it's a net revenue generator for them and all of our experience to date, where it has been in market. They have been extremely happy with that the demand for has been extremely strong and I stand by that my words, I said earlier from a return project perspective for.
All corporation that will be among the better return projects that we have on our plate right now.
Thanks, Jeff.
Thank you. Our next question is from the line of Chip Dillon with vertical Research partners. Please go ahead. Your line is open.
Yes, Hi, good morning, John It's Scott.
Thanks for all the comments.
We first question I had his deep you could just verify I think it was mentioned that the volume growth in Europe was up four then I think I've heard 7% was that the specialty component.
Yes, Europe was up for the quarter, 4%.
No I think in terms of year I'm, not sure where the 7% came from.
Okay. Okay must have just miss heard that and then I.
I know in the second quarter call you said the backlog in aerospace was up a little over 2 billion now it's up to 2.2 that's contracted.
Back then you said the non I guess the won but not contracted was 4.8 billion.
And I guess two questions where would that number stand now and secondly, I just want be clear. That's in addition to what is contracted so for example in the second quarter, you actually had visibility of.
The 7 billion if you if all the won but not contracted turns into.
Actual business that is correct. It's we break it out in the to the contracted backlog is money good as I'd like to describing because its contracted and then the one not book is we have one programs, but they had we haven't we havent signed the contract shut in total you're absolutely right. It's about 7 billion.
Number quarter over quarter really hasn't changed all that much in total the differences the funded backlog the money good is actually up a little bit and the one not booked is down just a little bit only because we didnt there weren't any big contracts that we that we were awarded in the third quarter, but yet some of the ones.
We are awarded previously we have now signed the contracts.
Okay and last one and good morning, Dan I think I think Dan you mentioned that the.
The market for I guess couples I think you mentioned, a 90 billion unit number I just wanted to make sure I heard that right, what you're referring to I think when you were in your prepared comments about the new rone plant and finally or do you have a capacity figure for that plan that you can share with us.
Not right now we're still transitioning from pilot too.
To fully engineered plant, but you can you could say its.
Probably close to a standard.
Output for a standard line maybe less.
The net the 93 billion units as a total global.
Non re usable cup volume and a third of that is in the domestic U.S. and Thats, primarily our focus right now than one clarifying comment on specialty growth in Europe .
It was.
15 plus percent in the quarter.
Hi, guys and again for the company overall, it was 10% Thats correct everywhere, Okay Gotcha very helpful. Thank you.
This is Scott just to clarify Adam's question before on the startup costs and efficiencies. If you think about it we've got like $50 million. This year in North America scrap $40 million to $50 million in scrap and another $40 million.
Manufacturing efficiencies a good chunk of the scrap will go at most of that scrap will go away and then a good chunk of those manufacturing inefficiencies should reduce next year just to clarify.
Thank you. Our next question is from the line of.
At least one item with RBC capital markets. Please go ahead. Your line is open.
Frank.
Just wanted to follow up on that last point.
With let's say you get a good portion of this step back.
How is that coming back with senior project.
Earlier.
Let's say you do get a good portion we got back.
So from making startup costs.
Will the volume kind of covered the rest of the shortfall.
Essentially make whole or how should we think about that thanks.
So on the on the scrap issue, yes overwhelmingly it'll be contractually fixed starting in 2020 in the moving forward.
And then the inefficiencies are simply.
I think as we indicated previously Goodyear is probably about six months behind where we thought in terms of a ramp up curve that coupled with.
Kind of unplanned double digit growth on specialty.
We lost basically five to six month the peak season.
Created more turnover more label changes inventory in the wrong spots and we think that we're running right now and good year.
And the investments we're putting in place, we'll be able to better manage our portfolio at our network going into next year. So those inefficiencies will subside.
I guess the volume growth would that essentially covered the rest of that hundredr. So.
No.
What you saw this year.
Not sure we understand the question.
You mentioned about 100 million headwind from these items as far as scrap and consistency on the startup costs.
The volume rent that Youre seeing next year.
If you see some 70 or 80 million offset that 100.
Does the volume cover the other 20 or 30 million shortfall the since this year.
Volume covered well.
Here's another volume.
Next year, yes.
Yes, and the volume growth, we're spending this capital to actually get out ahead, because we don't have we don't the inefficiencies are created by this volume growth. So it's in some ways. Its embedded it's actually servicing this volume growth at a much more efficient way I think thats, what Dan was saying a minute ago.
And there are real and Scott comment on this and I attempted account there are real startup costs associated with building new facilities.
Hiring people in advance of actually put the putting to work on commercialized product those costs as we lay in more new lines and we built greenfield facilities.
I'm not entirely sure the growth will offset all of those startup costs were going through our strategic planning period right now we'll know more over the next 90 days, but.
Given the size and scale the investments we're making.
Those startup costs could very well be bigger going forward in the next couple of years at least some I think thats, what Scott was alluding to that what we experienced this year just from the magnitude of the capital investment.
Okay. That's helpful.
Just on the cost side.
Well maybe.
Hi, good cash flow.
Well the pain given growth opportunities.
Assessment for plenty plenty.
Our tax rate of asset for this year should they be 380% to 90%, we don't see meaningful differences, we start to look at next year.
I was asking about the cash flow.
However, we're not paying any grills us tax right now.
I'm not exactly.
Cash flow, how the cash flow outlook is changed given.
In greater investments.
Oh going for.
Yes.
I think we'll have we'll continue to have capital spend.
In excess of 600 million dollar for the next couple of years. So I think we're going to have elevated capital.
We've gotten a lot of benefits out of working capital last couple of years, that's kind of run its course I don't see that continuing so I think there'll be a little bit more pressure, but what I think also the earnings are going to pick up nicely. So.
A little too early to give you specifics, but big picture that's the direction.
Okay. Thanks.
Thank you. Our next question is from the line of Neel Kumar with Morgan Stanley . Please go ahead. Your line is open.
Hi, good morning, Thanks for taking my question.
Given that you have several different competing uses of capital, including cans cops in aerospace can you give a sense that higher treating the price prioritize your capital and do you think you'll still be able to reach your target of $1 billion in buybacks at the higher capex.
Yes. This is John let me, let me take it.
We think about this in the long term and our job is pretty straightforward, it's a generate as much operating cash flow as possible and then invested where we think the greatest returns are that could be in capex in any one of our businesses were and or it also can be giving it back to our shareholders and theres always a balanced.
Between all those various things because you want to make sure that you're you're investing for growth while at the same time, you're giving back to your shareholders and we tend to do both of that so we're talking on the margin here I think in terms of our Capex, we see in all of our businesses on the aluminum side as well as aerospace side we.
See great growth opportunities and we've mentioned many of those things already whether it's the Glendale facility, whether its continue speed up stand had mentioned in his prepared remarks in Russia that we're looking to make investments whether it's on the cup side and building the new grown facility as well as balance spending $100 million. So on the Colorado Cam.
With us for the aerospace.
So once after all that then we take the free cash flow there and give it back to our shareholders in terms of dividends and share repurchases and so it's up right now as we sit here today I think we have a little bit more as Scott said elevated capex because of all these growth opportunities, but rest assured that we're going to be giving back all the capital after.
These capex projects back to our shareholders.
All right that's helpful and and then just said good year can you talk about whether you've seen any progress with the to finalize ramping up there as it currently operating levels that you want.
Yes, when the the last nine weeks we've seen.
It returned to our expected or planned efficiency level. So I think heading into the fourth quarter and a 2020 were in a good spot.
Hi, Thank you.
Thank you and our next question is from the line of Mark Wilde with BMO capital markets. Please go ahead. Your line is open.
Good morning.
Morning.
Dan I wondered if you can just help us with this sort of 5 billion of additional capacity over the next 12 to 18 months I just want to understand kind of what the big buckets are there I assume that things like this plant in the northeast are not included in that.
Correct.
So I would say the announcements we made.
In the previous earnings call in so you're seeing great great growth in Brazil continued.
Substrate penetration there theres, probably in the neighborhood, a 20% of that number would be coming from their.
60% of it will be coming from North America, and the other 30% is going to come from Europe .
Okay.
And then I wondered Dan we've we had an announcement a couple of months ago from a customer that's going to do some self manufacturing in Brazil, and I just wondered what you make of that how we should read that.
Yes, a great question I think they have threaten that myriad of times and they've even had press releases over the last four three to four years, saying they were going to do that.
Early stages I don't think it's going to be a large scale facility based on what we know.
But the biggest.
The biggest issue for that particular customer is they have a dominant returnable glass position in that country and they are moving appreciably toward cans and I think it's us in its in a surety of supply play more than anything just making sure that they can continue to move at the pace they need to.
In cans.
And so I think it's early innings here and we'll see how it plays out with that particular customer in the marketplace.
Okay, all right Thats helpful last one I have John .
The aluminum comp expansion I assume that because you're dealing with some big on premise.
Providers that you can make recycling of those aluminum comps pretty efficient can you can you talk about any.
Any particular moves you're making to make sure that these comps are not just recyclable, but actually our recycled.
Well as you know aluminum as scrap value so by definition, they're going to be recycle, but the one of the beauties of out of the on premise.
Experiences there are receptacles right. There. So your point that they actually control. So it's not like going to a owed to a gas station buying a container and then you don't know where it goes it is very contained and so as part of the rollout whether it's at the college University as we've done so far or the NVCA.
The NHL that we've done so far they have very.
As part of the whole.
Rollout they have worked with their waste management companies to make sure that their capturing the value of the aluminum that is being recycled because effectively and less people are taking those cups home.
They are going to be recycled on our they're going to be.
Collected on premise there and so they can capture it in a much more efficient way.
Okay. That's helpful I'll turn it over.
Thank you. Our next question is from the line of gave Haiti with Wells Fargo Securities. Please go ahead. Your line is open.
Good morning.
I was looking at Latin America, and I. Appreciate you guys don't necessarily we'll get it this way, but if I compare TTM earnings versus the same period of the prior TTM, it's down to the tune of around $90 million and I know at this end contract had.
Come to close.
But I was curious if you can address if theres any other structural issues within I.
I guess, the geography and then.
From margin perspective, again, I know you guys don't necessarily think about it directly by margin because of the impact from aluminum on revenue but.
Is there opportunity for that to improve going forward.
Yes. This is John I'll take that I think the vast majority of that was related to the end sales remember it wasn't only just end sales in the economics around that there were some also some accounting adjustments related to the amortization of those and sales. So I think between the two I don't have the number off the top my head, but it was the bar and with the vast majority of it.
I think as we go for it now that it's more at a steady state baseline, particularly going into the fourth quarter, you're going to see it's going to be a function of the volume growth and the regional volume growth, whether it's in Brazil, part why Chile, Argentina and in the pricing and mix there up.
Okay. Thank you and and Scott two part question on taxes, I know, it's a fluid subject, but can you talk at all about the potential impact to your global tax strategy.
Brexit scenario.
What that might look like and then working capital you had mentioned that there could be some pressure there I'm assuming given the growth that you are experiencing that can in fact be a use of cash or do you think you can hold the line there.
And keep it flat.
Yes.
The second part of that question, you mean as it relates to tax.
Or no two mutually exclusive questions. One is working capital given the growth that you're seeing okay.
We have reasonably expect that to be a use of cash and then separately given Brexit and I think your overall global tax strategy.
Could that change.
No. The Brexit, we don't really think as much of an impact unless they completely changed rates later on but we're not expecting Brexit to have any particular impact from a tax perspective, the working capital fraud.
We've had really good at getting a lot of money out of the working capital last several years I mentioned I think we're done with that but as the supply chain gets more complicated in terms of number of battle programs that we have around the world as the business grows I could see some growth in working capital but.
We should we read this point.
Thank you good luck.
Thanks.
Thank you.
Our next question is a follow up question from the line of George Staphos with Bank of America. Please go ahead.
Hi, everyone. Two quick questions for me the first one I just I missed the point, you're making about rebuilding inventories when you're going to given the opportunities from a see how standpoint.
Commenting about South America, we're obviously going into a busier period now and I, just wasnt clear where that was going then I had a follow on if you can buy a bit more detail on that I'd. Appreciate it yeah. George. This is this is John and I got a separate into northern hemisphere in southern have hemisphere, because as you point out there they're different seasonality spud in the northern hemisphere.
Fair as we went.
Take a step back and go back nine months, we started late.
Late 2018, and going in 2019 was stronger than expected.
Volume growth and as we went in the second quarter. It was even stronger and as results. Our inventories were depleted as we're going in the very busy summer selling season, and so literally the inventories were extremely low and we were making.
Literally shipping what we are making at that time, that's why we knew as we looked in the third and fourth quarter, we didnt have any inventory to sell and we're making what we were selling and so the inventories are quite low as we go into the fourth quarter now we have a little bit more breathing room with some of these new lines in the speed ups coming along as well as the seasonally slow so we're able to.
Rebuild working with our customers on specific labels were able to rebuild begin to rebuild the depleted inventories in northern hemisphere, and I really mean, Europe and North America. There. The opposite is the true in South America over the last six months or so it's been more of the winter the volumes has been quite strong.
So inventories in a perfect world are not as high as we would like them, but we used the summer to kind of rebuild as best we can and South America. The startup hardwired plays a part of that and that's important so as we go into the fourth quarter in first quarter, which is they're busy summer selling season, it's really a function of.
How fast the markets are going to be growing and relative to where we are in inventory is that helpful.
It was thank you I appreciate that if you Ron as you would like.
And I know thats abroad sort of term or phrase there because who's to say.
Nonetheless, what kind of volume growth should we see globally in beverage cans for bulk orphaned 2020 .
Good question and I would say probably in the four to 5% to 6% range that we're seeing and it really depends so much upon mix George because we also Falcon specialty is just.
A different there's 30 plus different sizes in specialty so 12, sleek 16 ounce 20 frown for very strong. This year, we expect them to be next year, but with the new emerging categories about water and other things it very well maybe a different type also so it is a function of mix.
Whether we're at the upper end and then a lower end.
My last quick one I'll turn it over I will call from last quarter's call. The 4.5 to 5 billion of 5 billion plus did not include anything appreciable.
Our water Stillwater conversion is that correct correct collection and given some of the projects that you've now announced today.
Do you expect that will change and Stillwater actually could be an appreciable amount of your new capacity and new volume going forward. Thank you and good luck in the quarter.
Your recollections correct not a lot built in there some but not a lot it's still over the next two to three years.
Could be wrong.
But it doesn't we're not planning on an appreciable move ins Stillwater, we're definitely looking at a number of different customers and different can sizes, but for it to be appreciable, we would probably announced that along with with a facility expansion.
Understood. Thank you Dan yes.
Thanks, Blake one more question, we'll take one more question. There is perfect. Our next question is from the line of Davy Jones with Deutsche Bank. Please go ahead. Your line is open.
Hi, good morning.
Just one question for you guys repeated theme here is the growth for you in the industry and I imagine why the challenges.
And navigate through this and and bringing people into the company to startup these facilities.
And then retain them and this is much bigger cason, maybe it has been passed since I'm just wondering how you do that.
Do you do things differently than you were doing before and how you kind of.
Sure that year to sound cliche to preserve the culture at Bob.
Yes, a great question, let me start by saying, where we're actually working more than we ever have across phase one ball in the aerospace side as you know.
50% of the people at all in the aerospace business Werent here two years ago, and so we that we talked earlier in our prepared remarks, a lot about training and development, but also about mentoring and instilling the bulk culture, we're taking that mindset that we've done over last couple of years and aerospace in bringing it to the beverage cans.
Side. So we are in a much more proactive way than we have bring people on earlier show one of the lessons learned in terms of good year for example is.
We cannot think about bringing people on three four months ahead of time and no I think that they're going to be able to manage this complexity. So we're looking at 6%, bringing them six to nine months and and using a sister plant concept from entering perspective, and really using that as the opportunity to instill the values that we.
Values and skill sets that we think are critical to the future.
Thank you.
No.
Okay Mollycoddle. Thank you very much we thank you all for your participation and and we look forward to very.
Healthy fourth quarter and good start to 2020.
Thank you.
Thank you, ladies and gentlemen that does conclude today's call with thank you for your participation and losses you. Please disconnect your lines.