Q3 2019 Earnings Call
Our more than 26000 employees around the globe, we're proud to deliver safe sustainable healthy pure brand building glass packaging to and growing global marketplace.
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Good morning, My name is the Venessa and I will be your conference operator today at this time I would like to welcome everyone to the Oh, our third quarter 2019 earnings Conference call. All lines have you play still needs to prevent any background noise. After the speaker's remarks, there will be a question answer session.
If you would like to answer questions right. This time superstar I've got a number one on your telephone keypad.
I would like to his or her question just press the pound ski.
Thank you Mr., Chris Manuel Vice President of Investor Relations you May begin your conference.
Thank you Vanessa and welcome everyone to Awash third quarter 29, Tim Conference call. Our discussion today will be led by Andres Lopez, our CEO and John Hardrick our CFO .
Today, well discuss key business development and provide a review and the outlook of our financial results.
During prepared remarks will host the QNX session.
Presentation materials for this earnings call all available on the company's website at <unk> Dot Com. Please review the safe Harbor comments and disclosure of our use a non-GAAP financial measures included in those materials.
Some of the financials were presenting today relate to non-GAAP measures such as adjusted earnings adjusted free cash flow segment operating profit and net debt, which exclude certain items that management considers not representative of ongoing operations.
A reconciliation of GAAP to non gap can be found in our press release and in the appendix. This presentation now I'd like trying to convert Andreas.
Thanks, Chris Good morning.
Thank you for your interest.
Let me provide an overview of hard just caution on the slide three.
2019 has been a challenging year for like.
Driven by softer than expected demand.
However, I believe Hawaii has a solid but for work to shareholder value creation.
We are taking bold steps to said this pad, which several key initiatives underway.
You know you seem to reviewing our most recent performance we will outline how we are taking action to drive improvement in throw you ski themes for 2020 and how these comes together to provide a compelling investment theses <unk>.
Let's start with recent performance.
Last night, we reported adjusted third quarter earnings So 54 cents.
These results were consistent with our most recent guidance.
Segment profit was down from the prior year.
Keep in mind up most of the decline was due to FX and discrete items that benefited 2018, but did not repeat this year.
From an operational perspective earnings reflect higher selling prices and the contribution from our recent well off analyses.
However, these benefits were more than offset by lower than expected sales volume and higher operating costs.
We are actively court paint capacity to align our supply with lower demand.
Despite lower segment profit is strong cash flow during that period enable wide to reduce net that by nearly 300 I'm $50 million.
The weekly or.
Changing market dynamics is the largest development affecting our business.
This includes the accelerated decline in U.S. beer demand that is started in 2018 Hank has continued into 2019.
More recently, we have seen a broader market has slowed down that's most notable in the U.S., Mexico and China.
With that said, we continue to see good growth in markets, where we added new capacity so chassis in Latin America.
Reflecting a dynamic environment.
Our updated 2019 outlook has been adjusted for continued to softer demand related capacity court failings, Adam favorable foreign see foreign currency translation.
We now expect adjusted he P.S. open between $2.20 and thrown out some 25 cents per chair.
Our outlook for adjusted free cash flow notwithstanding had approximately $100 million.
We have numerous activities on their way to boast third performance.
A few examples include efforts to address complexity following mix changes new problems like Colorado City related cost reduction initiative on our strategic portfolio review.
Importantly, this review will now include kind of on waste went up a strategic alternatives for our <unk> and New Zealand business.
Finally, we will introduce infill use key themes for 2020, which are highly focused on increased cash generation and definitely auction.
Moving to slide four.
Tom It's a backdrop of softer demand we are focused on a number of initiatives to address key challenges as were less capitalized on a number of opportunities.
Lower than expected demand piece, our key challenge.
As noted we are actively court failing capacity, which will continue through the fourth quarter.
Hi, wise, we need to fundamentally address the structural changes in North America, you into secular decline in beer.
Why is this will include a wide range of solutions, including new product introductions, we do anticipate the network optimization efforts in plenty plenty.
During our last earnings call, we just cost the challenges we face we'd increase mixed complexity, which is impacting operating efficiencies.
Okay, then plants across North America on Europe .
Here Diablo is pointing up we are seeing any new sales progress across the focus factories, which is clearly visible in their key performance metrics.
Our resources are fully deployed and we intend to record operating performance to normalize layer is in 2020.
Well I has got penalized some pockets of new opportunities.
We recently completed the acquisition of metal finale, we just strengthens our position with faster growing premium beer brands.
Likewise, we are seeing a strong growth in both Brazil, and Colombia, where we added capacity.
Ongoing projects include that fit for news at our JV with constellation on our brownfield expansion in June quarter, France, where both began production in the first half of 2020.
Our centered at a cost reduction initiatives supported by a center west kicked off during the third quarter.
Scope includes it's as DNA and supply chain cost, that's where less organization structure.
We expect to completely agnostic in the fourth quarter and be in execution of key knees hips delivering tangible benefits next year.
Mike My you say top priority for the light and the first chief Mench from artist reader idled plant, where kind of imports kind of lifestyle.
Third quarter.
The next Mike My line will be located in haulage means in Germany to support R&D efforts and provide incremental supply to growing segments.
They ultimately the line is suspected to give us for their data about my capabilities that we expect will enable three additional lineup vacations in Europe in 2021 2022.
Our portfolio review is critical to properly on nine Howard business to support Ardmore, our strategic customers pickup utilize the enterprise and this bit I'd debt reduction.
We are making good progress with potential proceeds in excess of $200 million and PC paid it around yearend.
Furthermore, we are reviewing strategic alternatives for our <unk> and New Zealand operations.
I will make no further comments on through the process has run its course.
Finally definitely auction is essentially.
Supported by cash flows we threem net debt in the third quarter.
Fourth quarter cash flows along with potential divestiture proceeds we enabled significant debt reduction.
As I mentioned changing market dynamics is the most important development for our business.
Slide five provides more perspective.
Our long term organic sales volume trends are illustrated on the left.
In the top chart, we see you'll see our total company volumes.
Our legacy business has been flat to modestly nowhere.
We have also Chone day volumes of the only network, which include a strategic database, namely with constellation brands and can make one.
They are transferred to the wide network better reflect our efforts to align the footprint to support long term girl.
As you can see wide network volume is stable to slightly positive over the long term.
The Middle chart illustrates our volumes by region.
The Americas, Ned will represent just over half of our business.
Volumes have generally been app modestly over that period.
This is a composite of good healthy growth in Latin America, Mexico, and not be or demand in North America.
However, be achieved Mincy North America article under increasing pressure, that's either straight it in their bottom chart.
In Europe , our demand has been growing at low single digits.
More recently, we have focused on mix madness mean given capacity constraints.
Who enable future growth, we are installing new machine lines as well as the new for news in June .
In Asia Pacific shipments have been down modestly.
More recently these has been a reflection of the significant asset repair activity in the region.
Were they past two years, we have the awareness capacity in China to help surf the unions the market, which was most impacted by repairs.
Actually enough theory of heavily deals, we expect Asia Pacific volumes three Bob.
With this backdrop, let these calls the evolution of our organic volume expectations for 2019.
As illustrated on the right.
Entering the year, we expected, 1.5% sales volume growth.
These reflected nearly 1% growth for movies this agreements and about 1% organic growth, which was adjusted downward for lower U.S. beer shipments.
During our last earnings call, we revised our growth outlook down as we saw 40 year volumes will be flat twist to up slightly.
While new contracts on boarded.
It should be I read it a bit higher than expected base volumes have been negatively impacted by a number of factors.
First the decline of in beer demand in the U.S. is more expensive than we originally projected.
Likewise, the growth in U.S. and they'd be tested slope.
Furthermore, the man was impacted by temporary events like to stream weather in Europe .
More recently, we have noted a brother softening in demand as economic growth has slowed most notably in the U.S., Mexico and China.
This brings us to our current outlook for legacy volumes, which we expect will be down 1% this year.
Now, let's these costs are we going out performance on slide six.
Starting in the Americas segment profit was down 19 million, excluding the impact of FX and a prior gear discrete tax items.
Higher selling prices more than offset cost inflation, while sales volumes were down.
But on volume was off about half a percent, which includes the benefit of Nuevo now.
However, organic volumes were down about 5%, reflecting the factors that we just discussed.
We have seen somebody's head progress addressing mix complexity.
Looking at the fourth quarter, we expect organic sales volume will be flat or up slightly.
While we mtc base up their underlying demand will continue we are on board in some new business this quarter.
Finally, we expect capacity curtailments in the U.S. and Mexico will continue through the fourth quarter in response to lower say.
Moving to Europe segment profit was up modestly, including the impact of FX and prior guercio tool created sale.
Higher selling prices more than offset cost inflation, reflecting meets management.
Sales volumes were down about 1% given current capacity constraints.
Operating costs, where do you lie with prior year by reflect that.
And improvement for the second quarter as we begin to see probably as you know dressing mix complexity.
Overall, we expect similar business strengths in before quarter.
Finally, Asia Pacific segment profit was relatively flat, excluding FX headwinds and a retroactive adjustments 40, new assays contract in 2019.
Without this adjustment higher selling prices offset cost inflation.
Segment volume was down 3% without failure up 4%, which was more than offset by a chart pulled back in China.
Operating cost improve from the prior year as efficiency increased following significant foreigners me real activity.
We expect similar trends will continue into the fourth quarter.
However, we do anticipate significant sequential earnings improvement as we entered the seasonal peak.
Now, let me turn the call over to John will be paid the quarter and outlooks.
Thanks, I understand good morning, everyone I.
I will start with a review at third quarter performance on slide seven.
As we announced third quarter adjusted EPS was 54 cents within our most recent earnings guidance of 52 to 55 cents.
Let's take a look at the reconciliation that compares current third quarter performance with prior year results for both segment profit and adjusted EPS.
As you can see segment profit decline from $255 million last year to 205 million this year.
32 million of this decline reflects unfavorable FX and two discrete items that benefited 2018, but did not repeat this year discrete items include the resolution of indirect tax matter in Brazil, and the sale of Seo two credits that occurred in the third quarter of 2018.
Overall, our average selling prices improved about 2.5% in more than offset cost inflation, so favorable price inflation spread benefited earnings $12 million.
[noise] reflect reflecting 1% lower shipments sales volumes impact results by about $9 million, which includes the benefit of new wave of for now.
Operating costs were also a headwind of around $21 million.
Costs remain remained elevated despite initial progress addressing the challenges from increased mixed complexity and North America and Europe .
Initial efforts to curtail capacity also impacted third quarter costs.
Looking at S., Oh, I generated 54 cents of adjusted earnings this year compared to 75 cents last year.
Currency and discrete items impacted results by 15 cents.
The net effect or changes in segment profit was an eight cents headwind.
Further the company benefited from lower retained corporate costs and interest expense, but these were offset by higher tax rate.
The tax rate reflects the changing regional mix as profits were up in high tax jurisdictions, especially Latin America.
Although our share count added two cents per share.
One final note on the third quarter, we did record a charge to reduce the carrying value of goodwill attributable to our North America business unit, given the accelerated decline in beer demand.
As result of this acquisition of this adjustment, we reduced the Americas goodwill from around $1.6 billion to $1 billion.
This $595 million noncash charge is not considered representative of ongoing operations and has been excluded from adjusted EPS.
Moving to slide eight I'll review, our most current outlook.
We now expect 2019 adjusted EPS of between $2 in 20 in 2025 cents and adjusted free cash flow should approximate $100 million.
Compared to our full year guidance provided during our second quarter call or updated earnings outlook reflects changes in three key factors FX is an incremental headwind based upon current rates.
Given sluggish demand trends over the past several months, we now expect full year sales volume will be down a little over 1%.
Likewise, we are curtailing capacity at a number of furnaces.
Our current outlook includes fourth quarter adjusted EPS guidance of 45 to 50 cents and the chart provides additional details.
We've also updated our view on 2019, adjusted free cash flow compared to our prior outlook of $260 million. We now expect approximately $100 million of adjusted free cash flow this year.
To provide additional details as this is a more significant decline than our revised earnings outlook would indicate.
First currency translation is an incremental $40 million headwind keep in mind that our fourth quarter cash flow is particularly sensitive to FX given the seasonality of our business.
Second our lower earnings outlook impacts cash flows by around $50 million over the second half of the year compared to our prior outlook.
And third we estimate working capital will be a $60 million incremental use of cash.
Most of this increase pertains to a continued shift in regional and customer sales mix, which is increasing our average accounts receivable payment terms. The impact of this mix change is most pronounced in the fourth quarter given seasonality seasonally higher sales in Latin America, which has the longest payment terms.
During our second quarter call. We expected this shift would increase our day sales outstanding by four days.
Based upon our revised outlook, we now expect DS So we'll be up around seven days from prior year.
Keep in mind that one dsos equates to nearly $20 million of higher receivables. So the change in dsos negatively impacting working capital by around $140 million for the year, which is $60 million higher than we had assumed in our prior guidance.
We believe 2019 is an anomaly and not reflective of normal accounts receivable trends notwithstanding changes in macro conditions.
Let me spend a moment discussing capital allocation I'm now on slide nine as we have discussed in the past capital allocation priorities include de risking the balance sheet funding our strategy and returning value to shareholders with that said debt reduction remains our top priority driven by operating cash flow and proceeds from divestitures as it.
Illustrated on the chart seasonality plays a big role and the timing of cash flow generation. The first part of the year is the use of cash in the second half is a strong source.
As you can see the company generated $348 million of adjusted free cash flow during the third quarter of this year.
Last year, we expect strong fourth quarter, adjusted free cash flow, which supports our full year outlook.
South third quarter cash flow supported a $345 million reduction in our net debt a metric we expect to drive down to just above $5 billion by year end.
Any proceeds from our divestiture program during the fourth quarter with support further debt reduction for the levels illustrated on this page.
Consistent with our focus on reducing liabilities the accelerated effort to de risk our us, especially this legacy liability remains on track well, we intend to fund our strategy. We expect 2020 strategic Capex will focus on advancing magma Likewise, the company has de prioritized acquisitions.
Returning value to our shareholders is also a priority in addition to initiating a dividend this year $500 million remains outstanding on our share repurchase program. However, this will be de emphasize until leverage approached three times or do you potentially soften the impact of earnings dilution in the event divestitures become significant now let me turn.
A call back to Andreas thank.
Thanks, John .
Given that we are now in the fourth quarter, let me share some themes for 2020.
Keep in mind that we are currently in our annual budgeting cycle and modest specifics will be provided early next year.
Our top priorities for 2020 include improved cash generation prudent capex spending and enabling definitely auction.
Understanding that 2019 has been impacted by lower than expected sales volumes. We are taking preemptive measures. This year. So test capacity core family and so we can enter 2020 is stronger and in a better policies and to generate cash.
For 2020, we expect Capex should be around 350 to 300 on $75 million focus on maintenance developing magma.
And potentially modest investments to support the accelerated cost reduction initiatives.
While it is too early to a third mean the impact of micro brands under business. We really if you just prudent to focus on price and optimizing mix within our system.
Likewise, we will continue to address the operational challenges following recent improvement in mix.
Given the beer, we remain challenging in North America Entolimod, they impact total that own mixed challenges within this network. We are focused on new product innovation as well as likely footprint adjustments to align capacity.
Cost reduction will remain a priority.
We anticipate our accelerated cost reduction initiative in conjunction with our DSC program will reduce a structural cost.
Finally, we expect significant progress on our portfolio review you need to fees.
Oh it all we really these efforts will result in improved operating performance greater cash generation, which along with divestitures will support meaningful that we auction.
And finally on the Slide 11, we believe Hawaii offers a compelling investment for policies.
As the leading global glass per user Hawaii is in a unique position to serve our blue chip customer base around the world.
Likewise glass is a highly attractive package in the green economy, you any skier sustainability attributes.
We are actively engaged on several initiatives to improve our operating performance that we articulated today.
We are optimizing our capitala structure.
This includes better aligning our business, so our customers needs and priorities, which we need we expect will become penalize. The reason essential for further debt reduction.
Likewise maximum represents a breakthrough innovation that helps remove the historic constraints facing glass and enable future profitable growth.
We are confident.
All of these steps donning concert will drive long term value creation.
This concludes our prepared remarks, and we now welcome your questions.
At this time I would like.
Hi, everyone in order to ask a question tourism the number one on your telephone.
So first for fiscal mystical barbecue many roster.
Your first question comes from the line of George Staphos from Bank of America Merrill Lynch.
Sure.
Good morning, everybody I hope you can good morning.
I wanted to ask a question regarding North America.
To the extent that you can have a view on 2020 Andreas.
And John to what extent, Mike the footprint optimization efforts that you seem to need to do.
Affect negatively youre operating earnings realizing ultimately there'll be a benefit from this but might you lose efficiency as you go through this footprint optimization and then related Lee.
Clearly, we see the GPI data and beer glass is declining.
Got it seems to be declining at a much quicker rate in North America than the market as a whole and other substrates, obviously beer cans why do you think this is occurring.
Than what you view to be.
Advantages of glass versus other substrates from sustainability standpoint, and other factors. Thank you guys.
Okay yard so they were taking proactive action with regards to footprint.
Realignment, we already have started.
We expect that we will have further actions in Q4, so as we feel that we're clearing up the.
The results for the next year from those impact which at this point in time in time or higher we are obviously, taking higher inventories as we prepare for the quarter failed mentioned, we cannot react fast enough to be able to fluid to avoid that.
We're taking higher cost at this point, but as we go into next year would add on.
Well, we're going to have the up as we were going to have lowered costs were going to have the inventories going back down and all that is pending studies related to add would go down with that so that's what we've seen that front with regards to the North America market.
We are seeing the declining be aired as we saw it before I think as Bina said or aided by continued.
Continuing.
Consumer.
Since been changing the market something that we've seen lately is the evolution of higher sales force with the have been growing to stream any fast it's something that happened over the last few months and this is a category, which we have a very very small participation. So at this point in time that volume is going primarily toy packages.
Now when I look at the violence of the market we have a different situation. For example, we're seeing growth into spirits, we're seeing growth in our case for input.
Any BS are growing even though they're growing is at a slower pace and that's why we're changing our projections and wind is quite flat. So he's really concentrated in the year category now, we're not seeing that kind of the dynamic in any other markets around the world. So this is the only one in which we have that and in order to deal with that we're taking as I said be.
For proactive action, we're going to adjusted footprint, but we also have very strong talent in marketing the in the organization, we have very strong capabilities in new product development. So we're working on developing a new proud of breakthrough innovations for beer aswell as for our sales here. So we can enter.
The higher doses category.
In the near future and we can support the volume seem be or in a better way in the future.
The one thing I would add to that as we look to 2020 and any efforts that we need to do on on footprint optimization, we would not foresee that restructuring costs associated with this at this time to be in excess of what we're doing this year.
Collectively as a company because we have taken a number restructuring actions. This year, so something in that $40 million range is what we think this year and we do not expect it would exceed that at this point.
Alright, Thank you very much guys.
Thank you.
Okay.
Your next question comes from the line of Ghansham Punjabi from Baird. Please ask your question.
Thank you good morning, everyone.
Rena and good morning, just following up on.
George's question on North American a beer just just given the weakness there I mean kind of thinking about your customers also showcasing the weakness they have a fair amount of debt on their balance sheets as well as that accelerated.
You know destocking, along the supply chain that you're starting to feel.
In other words as you 5% decline.
How should we think well that 5% decline as it relates to the trend line going into next year versus point of sale and then second in terms of the on the tariffs that have been instituted on certain categories, such as Scotch do you foresee any impact on that as it relates to your European business. Thanks, So much.
Okay. Thank you well they are.
At this point in time by we're considering is that the current trend we're teaching.
Decline of then in a beer.
He's going to continue into next year, that's what we have.
Now we need to see how these other categories that are changing the.
Chair within the year category are going to continue evolving so we've seen a significant warrick growth excuse me in hard sales or.
We need to see how that evolves in the future either a slowdown in September our 80 could be seasonal now about a we need to just keep a very close watching in that category to see what.
What is best to project for the following year as far as the Thirtyth its concern.
Obviously that should have some impact at some point, but we haven't seen that so far so.
We'll see what happens in the next few months, but so far our demand continues to be various strong demand for spirits in Europe is really a strong at this point in time.
We if we had more capacity in that market for that segment, we will be able to sell more as we speak and just some other context is at the North American North American beer business that we have does represent about 6%. The total global volume. So while it's certainly under pressure right now I just want to make sure you understand the context.
Total scope of that business.
Next question please.
Your next question comes from the line of Brian Maguire from Goldman Sachs. Please ask your question.
Good morning. This is the Arthur all made on for Brian .
I was wondering.
Good morning, I was wondering if you guys could provide a little bit more color on what happened with Mexican volumes being down do you view this as an issue with exports to the U.S. more or the Mexican markets themselves being negative could it be a switch to cans and finally do you predict that this could.
Spill over into other Latin American markets. Thank you.
Okay. So the well we're seeing the Mexican market, you say reduction in an AB volumes and this is related to local demand is on its three year end by changes in.
Economic conditions in the country and this is something that happens in these markets when mark when economies as low down.
These related for example to returnable containers when do you guys like these come.
Our customer spend tool reuse the capex spending in this type of where however, what we're seeing at this point in time is our customers preparing to change. These pattern as we go into the following year. So there are the investments a large investments mean plan for 2024 be any be category Mexico.
Now, we're not seeing ano busy Nordic countries. In fact, we're seeing very strong demand in Brazil, and Colombia, where we put additional capacity there year demanding Brasil is quite a strong is driven by premium.
Products growing really fast they're growing year to date at 40% and then is determined by converting from record I would containers to one way glass.
The same is happening, Colombia, where we are seeing a.
Double digit growth or oil in this country.
Thanks, and one final.
I was wondering if you could provide a little color on the capacity closures in the U.S. that you referenced how big would that be relative to total U.S. capacity and to the total U.S. industry and afterwards, I will turn that over thanks.
Yeah, I mean, I think at this point in time, what we're looking at is we had indicated capacity closures across U.S., Mexico and in China.
We had it for competitive purposes, we do not provide any particular details, but the intention is to basically get our inventory levels to be in similar ZIP code as they were last year, so probably within one or two I'd, yes of of prior year levels compared to the higher levels that we saw at the end of the third.
Quarter, and that's about as much information as we can provide a system and the actions we're taking out of not only to correct. The changing demand that we sell through a year, but being prepared to be.
Adjusted we demand not dissimilar Laredo capacity in 2020.
Thank you next question. Please your next question comes from the line Mark.
Moving from BMO capital markets. Your line is open.
Good morning, Andreas John Good morning.
Andreas I'm just curious if this north American.
Slowing in beer.
Is that simply you know the overall beer market or is there also some further shift going on I recall it back in the last recession. There was a big move out of glass and into cancer. Because can beer was just at a lower price point and I Wonder if that's part of the equation at all.
Mark I I said before I think is primarily related to the how the consumer trends are evolving under categories shifting as a consequence of that for example, hard sale tours have been growing really fast and the they already have a have volume that equates to or E.
To 5% of the Partovi or category. So they are the consumption patterns are are changing a new products are emerging.
Those categories that are out an opportunity for glass, though I think the earliest stages cans have been doing quite well with that they had the as Lynn County in the market. They had a smaller sizes are available to customers and those out a very good feed for these category that focuses on wellness and claims a wellness has.
Value.
Now as we I see as I said before we are working on new platforms for glass, we intend to make them available to our customers stool and at some point in time.
Given the importance of branding and differentiation in the market. These gas products will have an opportunity to.
Thank you. Your next question comes from the line of committed to marry from Citigroup. Please ask your question.
Good morning, this is actually Randy tole sitting in for Anthony Good morning.
Good morning.
With the second pilot plant for magma expected to start next year can you give us any additional information on the performance of the first machine at the through your facility are there any metric in particular, but you guys are excited about what that production coming up thank you.
Okay. So the evolution of magma is quite positive very mindful, though we needed to meet or have been quite successful button very encouraging.
The line in the street or East Pro using a we were already to pro used commercial where the quality of the glass that were melting is quite high the quality of the glass that comes out of their machine is quite high to now what we are implementing in Europe . In halls mean, then is a gen. One line, which is expected to we pay.
The evolution of the aligning the straighter and as we said during our opening remarks, we expect these line to give us.
More data for R&D portfolios has where less incremental supply volume to be able to supply.
Segments that are growing at this point in time now based on data, we getting that a.
New line, we're going to make the season with regards to implementation of three additional lines in Europe . So we continue to be very encouraged by the evolution of back manageable and that's we said before Mike My has the potential to change the business model for glass altogether.
Okay.
Thank you next question. Please question comes from the line is keep your line from vertical research. Please ask your question.
Yes, good morning, Andreas Good morning appreciate I appreciate all the details.
You know just wanted to get an idea as we look into some of the.
Curtailments.
That you're talking about I know six months ago, you all we're talking about 10% cumulative volume growth target.
That you'd gotten 80% of the volume I guess secured and I just wanted to know if some of that reversing or is all of what you're losing.
Other key other business that is more or less legacy business.
Okay. So when we talk about those targets. We also mentioned that we were.
Pursuing long term agreements.
And that winds, we where we had those agreements secure we will build capacity.
So we able to support them. So all of those are progressing quite well das or how we are building capacity in Brazil in Colombia, We're building capacity in France, we put on our eastern aligned in Europe . So.
So all of those are going well and they often out west battled the inorganic.
Portion of that which is also on boarded at this point in time monies and he's going well.
Now we have been facing a couple of things one is some temporary events as an example, a wedding Europe impact to be intimately impacting beer demand or we'd been facing the reduction in demand for border the wine exported to China. So those things have been impacting the year.
Now we also have a I've seen some slowdown in demand in some countries and segments within those countries that we just described for Mexico, or China or in a b that man in the United States. So those are primarily driven by macro conditions. So they're not a few things combined.
Now all the large actions that we needed to put in place to be able to drive incremental volumes associated to long term agreements.
Progressing quite well.
Yes, so of that 10% you know we had identified as ascribable activities as Andres talking for 8% in that room that left the remaining 2% really to be organic growth of a fraction of per cent per year and is that base, where we're seeing seeing the shift as Andres was talking about.
Your next question comes from the line of Debbie Jones from Deutsche Bank. Please ask your question.
Hi, good morning, good morning.
Thank you. My first question is that just a clarity question on that I know you're talking about the Asia Pacific business in terms of selling up it wasn't clear to me at the China assets were included in that could you comment on that.
Yes, so as we said in the opening remarks is we referred to agency and we also said at this point in time, we cannot make further comments.
But.
As we said before them we confirmed today, we are focused on under strategic review apart portfolio business as well we are expecting that us we knew that would when I get the.
Some proceeds and those proceeds will be a among other things he used to.
Use that.
Okay. Thank you.
Yes.
Your next question comes from the line of team has been from Wells Fargo. Please ask your question.
Good morning, Thanks for taking the question.
Hundreds can you address or discuss some of the weakness in China, it seem to kind of come out of nowhere.
I'm, assuming it's treated with related but if we do see some sort of fall in the trade War.
Is there risk that imports start to reaccelerate back in the United States and we have.
I'm, a double edged sword things rebound in China, but get worse here in domestically.
Okay. So the the weakness in China is related to economic.
The factors as well as consumption factors I think these yourself acting many industries, we have seen any the news across multiple industries. Many.
Industries are even leaving China and argue there going into southeast Asia for that supply. So there is a significant change going on over there and this is what is impacting demand for beer for us when it comes to imports into the United States called me from China, What we're seeing is exactly the opposite we got reaction so as all of this.
Today Wars have been taking place.
The Chinese suppliers have been focusing more and more in the up into local market. So they're trying to.
We'll see some themselves who are there a lot of the Iwear dot com seen tool United States come from the North of China I want to highlight that we are pressing that sound child of China. So that's important to do how we mined and over there we tend to serve primarily very large.
Multinational companies or global companies.
Your next question comes from the line of Adam Josephson from.
Capital markets. Please ask your question.
Thanks, Good morning, everyone I'm already good morning, Entresto, John just a couple of cash flow questions.
On receivables site. Please correct me if I if I got this wrong here receivables will be a 140 million drag this year and I think you said your total working capital drag will be the same 140. Please correct me if I'm wrong and I know you have there's a regional.
Customer mix issue, whereby I think some of your Latin American customers take longer to pay but you also talked about a customer earnings mix affecting receivable.
Collection. So can you just go into more detail John about what exactly is happening with your receivables and and given that what gives you confidence that next year will be much better working capital Wise and then just also on cash that Capex next year of 350 to 375 that I think thats close to maintenance levels I think you've said maintenance.
It is around 300, so how long can you sustain that level of Capex for before you start to lose some your competitiveness. Thank you.
Sure sure Adam So thanks, I'll, let me address those questions. There. So on the accounts receivable side, yes, we will have something in this $140 million plus or minus impact because of that change and.
Regional change.
I'll touch based on that in a moment. The other element is then on the inventory side given that that we are curtailing right now we anticipate to make substantial progress on that there might still be one or two days of ideas still outstanding in that might add up to about $30 million. So that's kind of the ZIP code of of the pressure that you're seeing on the accounts receivable side.
So the other question then is what's going on with with receivables okay. So.
As we've mentioned before in the prepared comments, we are saying growth this year as expected and the Latin America countries, Brazil, Colombia, where we're expanding it in those particular markets. They traditionally have longer.
Payment terms as as a as a geography.
Compared to for example, where were where we're seeing declines in the sales volume in particular in the U.S., even Mexico in China have slower lower lower terms.
Days outstanding than than other parts of the business, so thats really causing the shift and it gets more.
Significant towards the end of the year because that happens to be the peak seasonal period for Latin America, given southern Hemisphere, and then in the U.S. in Mexico in China being in the northern Hemisphere, it's a little bit slower and when we refer to regional and customer mix. That's the term we use for it we're not trying to distinguish that Theres project.
Our customers being broken out only in that that's kind of an open nomenclature that we refer to there. So this is substantially just a regional change and and that we also say that on the accounts receivable. Our collection process are actually quite quite good and this is just a structural change in the terms.
Given those change.
The other question then is capex. Okay. So 350 to 375 is is the number that we had indicated yes maintenance capital is somewhere in the ZIP code of of a $300 million plus or minus.
So this included.
That investment plus primarily magma investments and some residual carryover effect to some projects that we have underway that were really tied to the growth that we had spoken about some of the new onboarding of volumes and things like that.
You know with this kind of activity, we can maintain our competitive advantage because or cost position because we are maintaining at appropriate levels ultimately down the road you know.
You know the balancing between that and strategic capital for growth is gonna be under review, but especially with on boarding so much of what we just talked about this year and year record at a number of things underway. We're obviously digesting all that activity right now.
Yes, I would like to add that over the last couple of years, we had a substantial investment in growth and capabilities. So at this point in time, we want to focused primarily in optimizing what do we have.
And we mentioned before that magma yeah, he said well being quite well. He is quite encouraging. We believe these has the potential to change the business mostly for glass. So we want to advance these faster.
Not the same time us we focus on optimization, we want to optimize the revenue line, we want to us at a that cost we auction and we got we want to focus on all the things. We described when is like then and the our expectation is that that's going to improve cash flow generation is going to improve our positioning that and at that Boeing would wanna.
Are you able to have a deferring the distribution of our capital allocation.
Okay.
Your next question please.
Yes. Your next question comes from the light of 500, London from JP Morgan. Please ask your question.
Any andres and John .
Morning.
Just had a question on costs I guess, you mentioned that you initiated a cost reduction initiative that you should altogether.
Benefits from the TNC TSC program and 29 2020.
And then also in 2020 I guess.
You kind of expect sort of more progress with the operational complexity and kind of how that return to more normalized levels.
I guess, you provide a little bit more color on these initiatives and kind of I guess what potential savings.
In 2020 from them is any color would be helpful.
Yes, so we've been actively engaged with a a center in.
Yes has been face a far opportunities as we go into anything to 2020.
We are focused on three different area suspending organization on supply chain, we are expecting that by mid two in November we gonna have they result, with all the data assessment and then we're going to move into putting together the action plans for our accelerated because we all tuning 2020. So we suspect that that program is going.
To improve our cost.
In a substantial way and with that is going to improve earnings and cash flow for US now as you mentioned, we're focused on manufacturing performance improvement, we are we able to offset the.
The impact of by increased complexity, we're making good progress in that on as we said before we ought to specked in that business is going to start translating.
As we exit the year and go into the following year and alone that year or should we should expect to see a continuous improvement.
So that's the current situation cost us a duration is one of the critical areas in which we will focus at the SCS has been very good for us, but we see that there is an opportunity to complement those airports us intraday cause we auction improving earnings and cash generation would that.
Just to provide a little bit of extra color. There. We had indicated you consistent with our second quarter comments is that complexity is probably impacting our results by 10 to 12 cents. This year, so while not completely out of the system next year that should be.
Down from that level.
We're also incurring cost to commission new capacity. This year, there's probably another time, there will still be having some costs for a year in court for example, it should be at a lower level and then the curtailment costs were absorbing this year are somewhere between five to 10 cents and really depending on market conditions going forward we can.
See some modification of that level going forward.
Your next question comes from the line of and vis wind assets from RBC capital markets. Please ask your question.
Hi, This is actually David page on for Rune.
Good morning.
Good morning, I just wanted to follow up on a magnet question. So now that you've started to produce commercially.
In terms of rolling it out more broadly in the future how much of your you know I guess ultimate total production.
You expect to pass through the magma process.
Half, 100% adequate or any color you have there.
Well at this point in time is too early to for lighting formation in that respect the as we said.
As we approach toward the lining quotes mean, then their money, which is going to your operating I would say one of the top factories, we have around the world in terms of flexibility on capabilities, we're going to get a lot.
More data with regards to a capability of these lines.
This is an important data point for us we fine.
Our course with regards to three additional line implementations in Europe now oil at all what I can describe for you is we are suspecting that Mike My will influence our current asset base and will influence the ability to grow both in the current asset base, we're going to be able to at some point in time replace.
Existing assets by Mcnamara assets, that's the or at all objective.
And when it comes to supporting growth.
Dave configuration of these line with lower capital intensity expected with lower manufacturing cost perspective, and a lot easier to redeploy them positive to deployed.
He will be exactly what we need in the last thing to see to be able to follow growth.
In a more effective way so thats all that to calm BCC lined with what we said before.
We are expecting to have more data in the near future and at that point, we will be able to provide more updates I think it's important to note that we don't view magma as a niche solution to a small part of our business. We believe it should have broader application and then we're trying to assess how broad that application can can be at this stage.
We have another question from the line of market will be from BMO capital markets. Please ask your question.
John it's impossible to get a just a brief update on as fast as than any limitation on asset sales or use of proceeds from asset sales due to the asbestos liability.
Yes, just a just a bit to comment on that.
Basically the status of the specced as that we've been giving year to date remains the same and you know we're we're focusing on on accelerating that de risking of that given some inflationary pressures we saw in a couple of different jurisdictions in the in the court systems.
That is that is proceeding as you look in the financials a most of the cash proceeds that we anticipated for 2019 have already been paid and so there's a little bit left for the balance of this year and no. There's really no restrictions on the use of proceeds due to the asbestos.
Your next question.
Comes from the line of Chip Dillon from vertical research. Please ask your question.
Yes, Hi, just one quick one here.
Used on the new Capex guide for next year, just looking at the fact that it is actually considerably below what you've done your and in your out when you count Capex plus the restructuring.
Component and so could you let us know what's changed especially given that you are doing a lot of growth investments, especially were magnum is concerned.
Yeah, what I would say is that a in a consistently our maintenance level has been in this plus or minus $300 million range that that the investments that we've been doing here over the last few years have really been focusing on some of the growth opportunities that we've been looking at we've also been investing in some of the cost optimization on.
Some of the earlier or TSC opportunities that we identified I'm going back to some of the comments. We made before is that we've been working to onboard a fair amount of that growth activity in the things that andras was articulating earlier and so we're now in the digestion and optimization mode of those activity.
And so at this point in time, we believe one it's appropriate and secondly, prudent to pull back on the capital expenditures to be basically the ongoing maintenance activity. The ongoing elements of magma in some residual cost to purpose to onboard the capacity for some of the final growth initiatives.
Or the last couple of years, we took a number of I tunes.
To solve this structural lease you have seen these business and we'd add on.
It is a good action to take to optimize what we have now we should have plenty of upside just optimizing and us we do that Dan we continue accelerating development magma.
Drove our balance sheet them with that we should be in a much better positioned to leverage the potential w. technology.
Your next question comes from the line of gave had you from Wells Fargo. Please ask your question.
Hi, John Thanks for taking the follow up you address some of the sort of onetime earnings issues on the income statement side I was hoping maybe you can address some cash flow items.
We've talked about Capex, obviously being down a little bit sounds like restructuring will be similar.
I think asbestos is supposed to go around 20 million, but any other big moving parts that you can help us bridge.
From one is a negative number this year to something hopefully positive next year.
Yeah sure.
Thanks, Gabe, but let me kind of take that in totality there.
So obviously, increasing cash flow is our top priority for next year. We're currently in the middle of the budgeting process, but I can add some color. Let me just clarify some of the PNM almonds and go on into the cash flow in that regard. We do expect continued constructive price inflation spread as we've seen this year in last couple of years a sales volume.
And should benefit from your in court and a full Europe in the way the for now.
Well glass is expected to grow about 1% as a as a backdrop.
So most of this will be probably be offset.
By the headwinds at the U.S. beer demand trends that we've seen.
Of course general market trends are a bit of a wildcard at this at this stage given macro uncertainties.
So.
As I mentioned before operating costs should benefit from the complexity lowered complexity lower it commissioning costs et cetera.
Plus we'll have the benefit you accelerated cost reduction with the TSC, but we do face a few headwinds that FX is a headwind and we do have certain programs. It benefited 2019 that come into it and things like we've talked about in the past like that you energy program in the White Certificate program. So so those are out there that we look at some of those other cash lever.
As you are talking about certainly we got the lower Capex, we do not anticipate working capital will be the very large use of cash that we saw in 2019. We believe that they are element is a bit of anomaly. This year.
So while pension is probably a modest headwind maybe $10 million to $15 million. We do expect the specced is to be down as you mentioned and ideally I'd sure dividends with pension with with the Jbs goes higher because we're exiting some of the major capital investment periods as in particular, we bring on some new capacity there.
And of course divestitures could affect this whole scenario to some degree and we'll have to update you as we get greater clarity there.
Okay, guys I think that was the last question I wanted to thank everyone and that concludes our earnings conference call. Please note that our fourth quarter call is scheduled for February 5th and all we'll look forward to talking to you that thank you.
This concludes our conference for today. Thank you all for participate to hear me all disconnect.
Yeah.