Q4 2019 Earnings Call
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Good morning, and welcome to Grind Holdings fourth quarter 2018 conference call. Your lines have been please listen only mode until next question answer session.
Hi.
I would now like to turn it over to Mr., Thomas Kelly Senior Vice President and Chief Financial Officer, Sir you may begin.
Thank you for style and good morning.
With me on today's call is Tim Donahue, President and Chief Executive Officer.
On this call as in the earnings release, we will be making a number of forward looking statements actual results could vary materially from such statements.
Additional information concerning factors that could cause actual results to very is contained in the press release and in our SEC filings.
Including at our form 10-K for 2018 and subsequent filings.
Earnings for the quarter were 64 cents per share compared to 40 said in the prior year quarter.
Comparable earnings per share one dollar and four cents in the quarter versus one dollar in 2018.
Net sales in the quarter were up 2% versus prior year, primarily due to 7% beverage can unit volume growth.
Segment income in the quarter was up 2% as improvements in both Asia, both Americas and you are beverage were offset by lower results in European food and transit packaging.
As outlined in the release, we estimate full year 2020 adjusted earnings of between $5, a 40 cents in $5.60 per share.
These estimates assume exchange rates remain at their current levels and a full year tax rates of between 20, 425%.
We currently estimate 2020 full year adjusted free cash flow of approximately $600 million surprise approximately $600 million in capital spending.
With that I'll turn the call over time.
Thank you Tom and good morning to everyone as reflected in last nights release.
Overall fourth quarter performance was as expected.
Fair to the prior year period was a bit mixed across the operating segments.
Unit volume demand for beverage cans remained strong with our global volumes up 7% during the quarter and 3% sort of full year offsetting continued weakness in European food and planned activity reduction in transit.
For the full year adjusted earnings came close to the 2018 level, even after absorbing 50 cents per share of headwind.
Noncash pension expense and currency translation.
Free cash flow a record $754 million were $5.59 per diluted share.
Benefited from significant Destocking in transit as we curled activity in light of lower overall manufacturing activity.
In response to the growing global demand for beverage cans, we commercialized for new production lines in 2019.
With at least three new lines and the conversion of two lines from steel aluminum scheduled for 2020.
We have summarize the progress and timing of the announced 2020 projects in last nights release.
As to the announced increase in 2020 Capex.
We'll leave that to Q when a portion of this call.
In the supplemental table, we have provided the currency impact on sales and income by segment. So my comments will focus on currency neutral performance.
And at today's foreign exchange rates. We currently expect currency translation to have little impact in 2020 compared to 2019.
Before reviewing the operating segments, our Tinplate steel price expectations are for mid single digit declines in 2020.
In our steel aerosols and food can businesses, we will adjust selling prices according to contract.
Which will result in margin pressure in the first quarter.
As we work through our higher cost inventories that impact is roughly 20 cents per diluted share in the first quarter split equally among European food and the non reportables businesses.
Today delivered aluminum is about 14 cents a pound cheaper than this time last year.
So as we are on pass through for almost all aluminum. This will result in lower reported revenues in the beverage can businesses, but have no impact on absolute margins.
Turning to the segments.
Because beverage overall unit volumes advanced 8% in the quarter with North America up in the low double digits in Latin American operations up in the mid to high single digits.
The new plant in real Dirty, Brazil began commercial shipments in late November.
And the plant continues to perform significantly ahead of us a learning curve.
The third line at Western Ontario began shipments in late January.
And we expect in early Q2 start up for the third line and Nichols.
Demand remained strong throughout all of the Americas markets and we continue to review opportunities for further capacity expansion.
Segment income up 25% in the quarter and nearly 20% for the year.
Reflects the increased volume and the elimination of excess freight and other cost headwinds faced in 2018.
For 2020.
We expect the segment to post income gains, although not to the same magnitude as in 2019.
And perhaps weighted more towards the later quarters as west in a Nichols works through their respective learning curves.
Unit volumes in European beverage increased 9% in the quarter, primarily related to the two new facilities in Italy and Spain.
Games to the prior year. We're also notable in eastern Europe, France and Turkey.
Middle East demand was from with volumes up half a percent in the quarter.
For the year overall segment unit volumes were up 6%.
Reflecting Europe up 9% in the middle East off 1.5%.
As in the Americas, the supply demand situation remains tight.
While we review expanding capacity, we believe the overall market return profile needs improvement.
For 2020, we expect growth in the segment's income performance.
Although the first quarter will be a bit behind the first quarter of 2019.
As the Seville plant will be down for the entire quarter as we complete the alarm aluminum conversion.
Sales unit volumes in European food improved 1% in the quarter and for the year were up 1.5%.
This is well below the 6% growth, we had forecast coming off a very poor harvest in 2018.
As we've discussed with you in earlier quarters. The 2019, selling price increase was not enough to cover inflationary cost increases including in Tinplate steel.
This negative price inflation combined with negative mix and lower Q4 production levels led to the decline in segment income for the quarter and while we did lower production activity in the fourth quarter.
We still ended the year with far too much inventory, which will be felt in the first quarter of 2020.
As that higher priced inventory runs through the system against the market backdrop of mid single digit Tinplate steel declines.
So underperformance in Q1 of 2020 with the business recovering to a level overall performance for the year.
Asia Pacific continued to benefit from strong demand throughout southeast Asia with unit volume shipments up low double digits for both the fourth quarter and the full year.
And for 2020, we expect performance to be it fit flatter.
Then we've reported in recent years as the full impact of our late 2018 asset repositioning in China.
Takes effect in 2020.
Excluding currency sales and transit packaging declined 7% in the quarter and 2% for the full year due to lower lower overall volumes and the pass through of lower raw materials principally steel.
Net volumes were all 4% in the quarter and 1.5% for the year with declines more notable in protective packaging and tooling.
Segment income in the fourth quarter reflects volume mix and $6 billion of under absorption of fixed costs as the business lowered activity as planned to drive down the working capital levels.
The business had a record operating year in 2018, and a record cash flow year in 2019.
And adjusting for currency 2019 performance is not too far from the business. We acquired at the end of 2017.
Despite a slowdown across a number of industrial end markets and minimal capital investment.
The 2019 working capital reduction plan result resulted in the business generating unlevered free cash flow well above 100% of its EBITDA.
Percentage that I've seen very businesses very few businesses deliver and certainly a significant proportion of the company's overall free cash flow in 2019.
Equipment backlog stands at over 100 million higher than at this time last year and for 2020, we expect segmenting come into business to exceed 2019 levels by $10 million to $15 million and be weighted towards the third and fourth quarters as the comps become more favorable.
Fourth quarter income in the non Reportables businesses benefited from a strong results in our beverage can equipment, making businesses.
And for the full year, North American food cans posted a strong gain over the prior year and combined with the improved results in can making equipment offset overall market softness in global aerosols.
And as described earlier non Reportables will start to your slow in Q1, as we cycle through higher price steel inventories.
The board led portfolio and capital allocation return review is ongoing and.
And it would be premature for us to comment ahead of the board's conclusions.
But we will provide updates as warranted by future board decisions.
So as we stated at the outset, a productive year in 2019 adjusted earnings almost on top of on top of the prior year. Despite 50 cents of headwinds from new off to non operating items record free cash flow deleveraging on target and significant new beverage can capacity commercialized in 2019 with more to come in Htwo.
The 20, all leading to significant value creation for shareholders in the future.
As we've said since at least this time last year the future for beverage cans is very bright.
Customers and consumers alike continue to embrace the candidate or package of choice recognizing its inherent environmental advantages over other substrates.
Offering crown and the industry substantial growth opportunities in the future.
Equally important in food cans and as we said last year, if governments Ngos retailers consumers and others are serious about sustainability and not just giving it lip service then they too should be embracing and promoting the food can.
When it comes to limiting food and packaging waste, increasing recycling reserves recycling rates among the other advantages the food cans should be the package of choice compared to less environmentally responsible packaging such as pouches and thermoformed trays among others.
And with that first all were now ready to take questions. Thank you.
Thank you.
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My first question comes from the line of scheme.
From Wells Fargo Securities.
Your line.
Thank you.
Thanks for all the detail Tim.
Tim you mentioned that the machinery business, it's not something that we talk about very often but my understanding.
Attractive margins is that something that we would anticipate I guess, maybe can you size of that business and the revenue side.
And then something where we would expect to see pretty nice growth over the coming years.
Given a lot of the beverage connectivity.
Yes.
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So always a little careful when we described revenues because we.
We eliminate the revenues, which are sold intercompany among the crown affiliates, but.
Third party revenues on the order of about $100 million.
It's a business that like a lot of.
Equipment, and tooling businesses will run through cycles, and as you point out.
Given the.
You know the extremely positive outlook for beverage cans.
We would agree with your.
Pieces within your question that that business should benefit as we look forward.
Okay.
Then move into the European food side.
The optics.
We look at just the income statement on past five years and post some of these acquisition.
I appreciate there was in two consecutive years of terrible crop yields and growing conditions, but.
Is there anything that you can point us to that gives us confidence that there isn't something structurally wrong in the marketplace.
We should be concerned about.
Well I don't think you know we haven't lost any share.
And we haven't seen the merchant can market lose.
Any notable share to self manufacturing.
Certainly after the Mivisa acquisition.
If I think when we completed the Mivisa acquisition in 2014, the euro was at about $1.33 or $1.35. It's it's on the order of $1.10 now so some of what you've seen in reported.
We reported dollar so some of what you've seen reported is currency related on a euro side. You know this decline is not as significant as you see in dollars.
But nonetheless.
We've had as you rightly pointed out to terrible crops.
And I think as we described earlier in the year perhaps.
We and some others in an effort.
To try to make sure we Oh, we didn't experience volume declines in 19 like we did an 18 with the bad crop perhaps we.
You know the customers reefs received too much advantage in terms of pricing that is we didnt.
We didn't adjust pricing enough in 19 to offset the cost inflation, we had in the business not just steel that but all costs.
I think thats something that we in the team are working on to try to address going forward, but I don't think there's anything structurally wrong in the business.
We've had a couple of disappointing harvests and.
And frankly, we didn't manage pricing very well. So we're we've made a change in the business and.
And it's in comment on the new managers in the business to turn that around.
Thank you.
Okay.
Thank you. Our next question comes from the line of Mark one.
Okay.
Mark.
Thanks, Good morning, Tim Good morning time learning.
Tim I Wonder can we can we talk a little bit about that $600 million in capex and what might be in there. It's a fairly large year over year increase.
A little bit about it or not.
Not a lot. So yes, I think we've historically spent at least for the last.
I say historically, but for the last five years on the order of 400 to 450 million.
And Mark EBIT in a in a number of beverage can plants, not just crowns, but but our competitors and you'll understand that.
Beverage can by its very nature and part of the moat around the business is the the capital infrastructure associated with with making beverage cans. So you appreciate that its you've got to feed the beast, so to say and.
As part of the moat, we enjoy as well so.
As we look at the opportunities we have certainly in North America, and growing Asian business.
We are on the mindset that.
There's opportunity for us to accelerate capital and.
And reap some of the rewards and reposition the business and the most favorable light.
For the future so.
You know as I've said in the prepared remarks, and as you see in the in the news release. So we've described to you the projects that were comfortable.
Announcing at this point.
But there are.
There are a a number I would say two to three to four other projects that we are actively working on that we're not quite prepared.
To public talk about but.
Perhaps we will talk about them in more detail on the April call, but.
I don't think where that far away from telling and what we're working on it just so we're trying to tie up a few loose ends but.
You should consider.
That would embrace North America, and Asia Pacific, Okay, Tim I, just wondered on the other side of it can you talk at all about what you're seeing or what you're expecting in terms of kind of can sheet supply and whether we might see some can sheet supply additions here in North America, I mean, it seems like the kind of trade issues.
Around can sheet of only complicated things over the last couple of years. There's also been an issue with kind of aluminum scrap values. So.
A little color on that issue.
Yes, so I mean, we havent.
I mean aluminum scrap issue is.
Perhaps more specific to somebody else it.
It.
Has to do with.
American producers.
Not wanting to take scrap back.
In in net terms in any great report any greater proportion than the aluminum can sheet they provide so.
If aluminums coming in from other countries, they don't want to be taking.
Any more scrap back and reprocessing than what they need.
Their own smelters.
I think globally, there is plenty plenty of aluminum cans you'd available China is.
Is a leading if not the leading aluminum can sheet.
Supplier quality is.
Is at par or soon will be at par to the other manufacturers in the Americas in Europe.
It's a question of price.
And.
We all try to do our best to.
To to attain the best price, we can for our customers I.
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To the extent is there going to be more can sheet supply.
Created by the manufacturers of can sheet North America will that that's a question for them and.
And the answer that they will give you is as we've said earlier, they probably want to.
They probably want to see some reward to that as well so their businesses is extremely capital intensive and.
But there is plenty of can sheet supply out there.
Okay Fair enough I'll turn it over thank you more.
Thank you. Our next question comes from your line is George.
Your line is open.
Thanks, everyone. Good morning, Thanks for the details as always I want to hit first on on European food, Tim If you could so.
As it was teed up early I think I gave you know obviously, you're coming off a couple of tough harvest, but there have another secular issues within the business on a longer term basis obviously.
This is the business now, earning what you think is a fair return relative your cost of capital can you comment on what dollar amount or what initiatives you need to do maybe beyond pricing, maybe it's just pricing.
You need to get to to be earning cost of capital at a couple of follow ons.
Yeah, well listen I.
We're clearly, earning well above our cost of capital in European food, we don't.
We can discuss whether we spend too much or too little in European food foot for roughly a 2 billion dollar business.
We are spending about $30 million in capital year, So thats not very much.
And a year on year, even with the decline in.
Earnings the cash flow that's generated by the business is tremendous against the backdrop of minimal capex and so we can we can have a discussion as to whether we're not spending up or whether we're spending an appropriate amount, but clearly, earning it's well above its cost of capital that doesn't mean, we're satisfied.
With the earnings.
Profile of the business, it's down significantly from recent years.
Okay. The harvest were disappointing.
Yeah.
But honestly.
We're disappointed in our own performance and.
And we've got to do better.
Now does that mean, we need to do some some restructuring close one or two plants, perhaps but I think we'd like to understand before we do that.
Because we're pretty well balanced with the exception of one or two plants.
Demand has not really.
Decline I think we're going to see some demand pick up this year, but what is more around pricing and appropriate levels of of cost recovery.
So the answer George is we've not done a very good job managing the business, we need to do better.
Understood. Thanks for the Mcandrew on that I guess, the next question I had just going through the list.
Can you give us a bit more color in terms of not this your biggest segment, but why Asia isn't trending better than flat and I forget exactly how you wanted it.
Yes.
The same comment.
Last year at this time that we were going to be flat in 19 versus 18 and.
And they.
When they did about 4% to 5% better.
19 versus 18, I just think that.
We'll we'll we'll feel the full impact of the a repositioning of China in 19 so.
We're going to we're going to take another leg down in Chinese income. This year. So we probably one half of the way down in 19, and we'll go fully the way down.
From what I expected last year in 20, so it will offset the growth in southeast Asia, and then we're kind of than we kind of reset and we start growing again in Asia, but very.
You know a pretty pretty satisfying market overall, it I think we're learning what 15 or so percent earnings and and the business is growing and.
It is competitive, but but we're well positioned than we have we certainly have a very low cost profile compared to the other regional competitors there.
All right My last question and I think I kind of get it just from the press release, but.
Given the growth that you're seeing in beverage cans, obviously, you're ramping capital spending as you noted.
Mark's question and go through some of the projects. The Presley says your other global metal packaging and transient businesses continue to generate significant table free cash flow funding. Your beverage can expansion. So should we take from that that given the growth that you see in beverage cans.
Both the stuff you can talk about now and the stuff that you have on the horizon that.
You arent finding a capital allocation constraint in beverage cans route for the rest of the portfolio and you or or not how would you kind of how to think through all of that thank you and good luck in the quarter.
George you're you're always a clever guy so you're you're trying to get me to talk about the fort process here.
With.
With an interesting question I think.
I think that.
We are fortunate do we have businesses to generate stable and consistent free cash flow.
That allow us the luxury of investing.
In an expanding global beverage business and I think the beverage business and we've described it and others have described that I think it's going to be extremely healthy.
For the next several years, we'll see what happens beyond the next three or four years, but certainly for the next several years.
We're going to have an opportunity.
To continue to build out our footprint footprints modernize the footprint lower the cost.
Cost profile that we can offer the the.
The customers such that the can becomes even more competitive against other substrates.
But that does require require cash.
Among other demands the shareholders one from organizations and shareholders want not only growing businesses, but they want dividends and share buybacks. So.
When you put it all together.
You know the board has is in a process right now and they're trying to understand.
The thesis that's being.
Offered.
As to how should we limit ourselves to a fewer product lines versus.
The separation of those product lines and the leakage that would come from those product lines and the ongoing cash flow afforded to the overall organization to accomplish not only growth and beverage cans.
But the ability to pay dividend and buy back stock in the future. So I think.
The statement in the press releases is pretty straightforward, we believe we're fortunate.
We have a number of businesses in the portfolio that.
Generates stable and consistent free cash flows which at this point in time.
Our fueling a growth in a beverage can business and it's always important to remember this point in time.
Right.
I don't think it's appropriate for me to see anymore than that at this point because the board is reviewing that.
Tim Thank you very much thanks George.
Thank you. Our next question comes from your line.
From.
Thanks.
Hello.
Thank you, Matt good morning, everybody I.
Gotcha.
So I guess going back to the Capex, a 600 million, which would be obviously a record for your company.
You know just from a high level I mean is this a function of spending too little given your leverage post signode and this is sort of no catch up phase normalization, whatever you want to call. It and then I think you mentioned North America and Asia as the likely markets for the increasing capex a into for North America should we think about a new plant or light additions and what about Brazil given outside.
Growth in the reason I mean, obviously you added capacity there, but is that really enough to support the outsized market what we're seeing in the in the region, yes, So I think the.
I was probably pretty clear the additional projects, we're looking at North American Asia.
And it would envision in Asia, a new and a large new plant.
And.
In North America, I think we probably could consider perhaps a new plant and perhaps a line. Additionally, as existing plant.
And I would tell you have gone shawmut's, it's certainly not under spending in any regard.
And I wouldn't.
I wouldn't pollute the discussion with post Signode I think what Signode has afforded us is the opportunity to spend to cash flow and signal, we can come back to signode, but the cash provided by signode affords us to spend more money.
I wouldn't say that Weve under spent in the past I'd say that we've been we've tried to be extremely disciplined market that up until 2019 had shown no gross to negative growth for 15 years. Prior so we're in a market right now that for the first time in 15 years has shown growth.
And Okay, I think we're going to see growth again in 2020, and we'll probably see it and 21 and 22. So we're now prepared to expand capacity but.
Prior to 2019, I think it would have been fairly reckless to throw a whole lot of capacity of market market that up until now hasn't shown any real growth. So.
Certainly not under spending has nothing to do it signode.
Just a reflection of a market.
And.
Our customers and consumers alike.
Demanding more from beverage cans of than they have in the past.
Very clear and then for my second question I guess, the 40 cents increase in EPS between 2020 and 2900 using the midpoint of your 2020 guidance, how does that break down from a.
Hi level bread standpoint operating income.
And then pension and whatever else you want to call out.
Got you have so on an after tax basis will pick up, let's say 15 or 18 cents lower interest cost.
We had will pick up about a few cents on pension that's that's not real material.
Minority will be about flat and.
We're actually compared to where we ended up on this year's tax rate taxes, a bit of a drag if you take the midpoint of the 24.
25% to let's say a five cents drag there and then the rest flows through a operating income, yes, gosh I'm just to summarize I think in the prepared remarks.
By segment.
We said the Americas beverage business would have higher segment income.
Although not to the.
The 80 million higher like we had in 19.
European beverage will be up.
Over 19, as well, although Q1 will be flattish to slightly down because of the Seville conversion in total European food will be flat Asia Pacific flat and transit up about $10 million to $15 million on the year.
Non reportables down just on the steel repricing that we won't recover as we go through the year, So all pope putting all that together.
Segment income up over the prior year.
In total.
Okay. Thanks, so much you're welcome.
Thank you.
Comes from the line.
Okay.
Good morning ordinary.
Tim have you seen or heard this year once you guidance assume any impact to transit or Asia Pac path from the current a virus disruptions and I understand you don't have a huge direct China exposure, but are you seeing any knock on effects, maybe with transit customers supply chains. So in.
The transit business as a very small I think we have 20 million a revenues in China. So it's not a factor.
If anything if there was a prolonged shutdown and we'll talk about that in the second in China.
I would expect manufacturing activity.
In other markets to pick up to offset.
Lower Chinese exports.
And perhaps we would see some benefit of that given that we're we're almost nonexistent from a transit perspective in China.
In beverage we are on mandatory shut down right now as I've heard other companies described this they make it sound like there voluntarily shutting down.
Just so you know Beijing coming out of the Chinese new year Beijing.
Had a mandatory shutdown through February 2nd and almost every other province extended the mandatory shutdown except for critical industries through February 10.
So the three beverage can plants are on mandatory shutdown and will reopen next monday unless they extend the shutdown.
We don't have a very big beverage business in China as we described to you before it's about 95 million in sales.
And and certainly we're expecting lower income this year. So we don't expect.
Any significant and we haven't budgeted anything significant.
For Corona virus, and we'll see how is it manifests itself going forward.
Okay. That's helpful. And then there are few moving pieces in terms of new projects coming online and projects from last year that are ramping up I was wondering if you could provide any commentary on the level of startup costs you anticipate for one Q and then maybe for the full year.
Yeah. So.
I would we always.
I would say when we talked about Asia, we always have a number of product project. So they.
The startup costs are somewhat.
Equal to the startup costs in prior years, but I think.
We will see a little headwind in Americas beverage in Q1, just from the startup of Weston.
And the pre production cost in Nichols line three in Q1.
Real Verde is below and right to their learning curve. So I don't expect that to have much of an impact.
We like others, if we could have the Brazil experience everywhere, we we'd be phenomenal.
I don't.
We will have.
European beverage as I discuss Seville, Seville, which is a very large two line plant.
We will not be making cans in Q1, because the conversion is being completed we.
We probably begin making cans on the one line at the end of March and the other line early April so we have some preproduction there.
But but the the workforce is an experience can workforce.
And aluminum cans are easier to make and steel cans, so I expect them to come through learning curve.
Fairly rapidly in Q2, but to really Americas beverage, a little bit with Weston and Nicholson nothing else.
Okay. That's helpful I'll turn it over thank you.
Thank you. Our next question comes from the line.
From Deutsche Bank your line.
Hi, good morning.
I will ask about where we know livens graphic coming on the back or that compatibility hobbies from your customers.
Hi, Ken.
For the standard can.
Where do you think people.
Sure.
Hi can go from here.
I guess any the math you think about like.
Longer term talk rather than a standard.
Yes, Greg.
Capital for that.
Sure.
Alright.
So it's a great question.
I think.
Real quick for that for some of the newer customers the newer products.
We're seeing that in slimmer sleek cans, and some 16 ounce formats for the existing customers I think it's both I think there.
They are dealing the big hootie existing big customers are they are dealing with a number of jurisdictions nationwide which are.
Pushing back on one way plastic packaging and.
And they are certainly looking to.
Gain more shelf space in and.
So more of their products and they're looking to do it across a number of formats. So they are being you know they are ramping up their promotions of sleek and slim.
But at the same time from a sustainability standpoint, we're seeing more demand for 12 ounce standard as well.
Okay, and then I wanted to ask specifically on your App.
Okay, great mentally ill mention broadly speaking several years of grouse.
That your expectation.
And your appetite is that just the sustainability soy are there other things driving that allow.
So you're right I think the middle east good to excluded because its price flatter demand the region will grow but our profile our profile we flatter.
We expect European beverage.
Again, as you say to continue to grow and.
The market.
I think the market Tom you have a number here I just just as a reference point.
Just bear with me off.
What we think the market did.
It's a good jumping off point I think we think the market in Europe.
Was up 4% to 5% both in the fourth quarter and for the full year.
And I think that's not an unreasonable level of grows to expect.
Over the next several years for the market in total.
Which requires.
On a full output basis, one the one and a half can lines per year.
So I don't expect that to subside I think we're going to continue to see growth in European beverage.
As I said in my prepared remarks however.
We have 600 million a capitals, a big number for us.
And that will be.
Dedicated to markets, where we believe the return profile.
Is more favorable right now the European beverage refill profile needs to improve it so.
It's a it's a very healthy market.
And it will grow but.
We'll wait to see.
The return profile grow before we throw anymore capital that market currently.
Thank you I'll turn over thank you.
Thank you.
Comes from your line.
Keith.
Okay.
Yeah.
Tim and Tom Good morning, Good morning, Adam.
Tim on on transit packaging, you talked in the your prepared remarks about just how much cash generated last year and then in the Q and now you talked about how it's enabling u. Its funding a lot of the beverage can expansion that that you're doing.
And when you bought the best and when you announced the acquisition a couple of years ago. You said much. The same thing that look this generates a lot of cash and much more so as a percentage of EBITDA than the rest of our business.
There are some investors out there who obviously.
I think that it doesn't have a place in the portfolio and that its dragging down the multiple of what you trade.
Obviously, you're saying on this call is generating a ton of cash and it's doing what we wanted it to do so can you just talk about that perception that among some that its dragging down your multiple doesnt belong in the portfolio et cetera.
Oh here, you're also a clever guy you're trying to get me to talk about the board process before we do it.
So so what I would say and I think I was as George said I was pretty candid on European food, where we have not done a very good job managing the business.
I would say just the opposite in transit the transit team has done an exceptional job.
Managing the business.
Within the scope of a a manufacturing environment across a number of end markets, whether its auto steel.
White goods et cetera, which are are down and.
I think the EBITDA up.
In 19 adjusted for currency is within four or 5% of what we bought in 2017.
And the cash flow.
As you note and as we've said is extremely high. So we've we've described this business in the past as a a conversion cash conversion business in the 90% range and that's basically EBITDA minus capex divided by EBITDA.
And what the business accomplish this year is even well beyond that they are free cash flow on levered, so considering capex considering taxes compete considering working capital well above 100% of its EBITDA.
So.
The market has a view.
Of whether the business through belongs in the portfolio or not.
The board's looking at that.
The board's looking at a number of things in.
The.
There are other.
Packaging companies beat a food can companies or beverage companies that also have other.
Other assets and we.
We like they.
To separate those businesses.
We're trying to review how much leakage there is and before we we entertain the prospect of what a single line beverage can company multiple might trade for in the future of the first the first thing and creating value is not destroying value and I think thats something some management team is working closely with the board on right now.
And as I said I think it's probably premature for me to comment any further.
Just want one other question along the signs 10 that you have slower growing businesses that generate a disproportionate percentage of your cash flow. So are you have the mine that if you read yourself of these really good cash flow businesses and become a more capital intensive company you would for whatever reason trade at a higher multiple even though your capital intensive.
He is much greater.
I don't know listen Adam I don't know, what the multiple albeit it might be a higher multiple today, what I said earlier at this point in time, yeah, what will it be in two years.
While we're on the topic you know I refer to you as the.
Michael and [laughter].
No the dark the freight so darkness, so your [laughter] your.
You are a bit more negative on the space and.
Across all the packaging space than than others and were very positive on the outlook for for beverage cans globally.
But it does take cash to fund the beverage business now in time.
Perhaps the growth in beverage cans, three or four years will slow down and we'll start to harvest more of the cash out of the beverage business, but for now we need to feed the beverage business to grow it and.
I think gum.
If we want to you want to trade assets for a point in time beverage multiple that's.
That's one thing I think as we said, it's premature to talk about but we're trying to understand.
The process of creating value and that first means don't destroy value in the near term Yep understood and just one on your transit packaging EBIT guidance for 20, I think you said it was a it'd be up 10 to 15, how much of that is driven by the inventory reductions at year end versus whatever market out like you have I assume you're not expect.
And manufacturing activity globally to get too much better in 2020, so I'm just trying to separate demands. There I think if you look at if you look at the economic indicators in the.
And some of the economic forecasts.
That are out there by by a number the large banks, including your own they point to.
The back half of the year, perhaps economic economic activity kind of stabilizes and maybe we see a slight pickup so and then certainly our comps get easier in the back half of the year. So.
Perhaps so on a comparable basis, a little soft in the first half and stronger in the back half, but but up $10 million to $15 million overall so.
But the the Weve the team has done an exceptionally good job and.
In reducing the inventory.
And and not only that but they have.
They have.
Plans that are well advanced to reduce overall cost so.
I think we're we're certainly more bullish on the outlook for the income performance than than you would be from the outside not understanding the business.
Sure. Thanks, a lot of time Youre welcome.
Our next question comes from your line of Tyler Langton from JP Morgan.
Hey, good morning to the time, thanks, Marty good morning.
Just had a question I think you said in Europe, you kind of your bed unit volumes and grow sort of 4% to 5% sort of this year with the market I guess the question is if you hold off on investing in new capacity.
I guess sort of given we knew what sort of installed so far meaning when you looked at sort of 2021.
Would you not be able to sort of grow and that sort of mid single digit rate and I guess you know how do you think about sort of you sort of that and sort of.
Losing share versus you know sort of higher returns.
Yeah.
Right.
It's possible that if we don't invest.
And at the market keeps growing and others invest will lose a little bit of share, but I I.
I think I'd, rather see us raise price on race raised the margin profile than than just invest for the sake of share.
And Thats my message to the team and.
And hopefully thats them their message.
To the customers in their markets that.
If you want us to invest to support your growth plans and.
And your sustainability plans, we need to we need to have a better return profile in that market.
Okay. That's helpful and then on.
Can you just give a little bit on the for free cash flow to some of the other components assumptions like working capital pension restructuring.
Our next for 2020, yeah versus 2019, yeah, the cash pension should be similar at $15 million to $20 million.
The real moving piece is Capex, obviously, we talked about that but beyond that working capital was we had some benefit in 2019, let's say 20 to 30 million.
2020, we expected drag as we.
Build up the beverage can capacity.
When these increased working capital to support the growth. So we're probably looking in a drag of about 75 million in working capital in 2020.
But we'll try to do better than that.
Great. Thanks, so much.
Thank you.
Thank you. Our next question comes from your line of.
From RBC capital markets.
Great. Thanks, Good morning, I guess first off because many of my question in the guidance. So just just getting your thoughts on the range that you provided it seems like a pretty tight range. I guess are we to assume that you know FX maybe isn't as impactful.
As a factor in 2020 and similarly.
Many of the other factors around beverage can growth.
You know transit and European food or dialed in or how are you thinking about the range that you provided on EPS. Thanks, It's a road, it's a 20% range I think weve.
Typically provided a 20 set ranges.
Hard to provide you with anything greater than that without you having any level of.
Comfort or we adding any comfort and what we're doing.
Currency as we sit here today currency should be much more muted the impact and 20 versus 19 that it wasn't 19 versus 18, Tom described pension its.
It's a few cents benefit in 20 as opposed to a large headwind in.
In 19.
I think we've described.
On the call here.
Pretty much.
In detail, what we think each of the segments is what we believe at this point each of the segments is going to accomplish.
In terms of its segment's income.
Anything could happen.
But I think as we sit here today its a.
It's kind of the range, we kind of the range, we feel comfortable with we don't we don't want to start forecasting for what we don't know so for what we do know that's that's kind of where we're at.
Okay. That's fair and then just on the portfolio review I guess I I understand the the notion that are both your food can and cigna businesses do provide quite a bit of cash flow and would agree with that I guess I'm. Just again curious just a you know just there hasn't some trends.
Actions and within food can does the board process look into <unk> board process examining a potential transactions as well as you know as part of this review and.
I would there be a scenario, where you could you could do something creative whether it be jvs are selling the portion of either business. Thanks.
Well I think I think you should expect.
And I think we've said it that the review is comprehensive.
I'll just leave it at that.
Okay I personally think we're ready for the next question.
Thank you. Our next question comes from the line of Mike from Barclays.
Thanks, Good morning, guys.
I guess higher level question on the overall beverage can market I appreciate the market's growing very rapidly today and you and your major competitors are investing to fill this demand, but I guess when you're going through the your capital approval process. How do you get comfortable with the risk that market demand Doesnt continue at this new outsized rate.
In kind of reverts back to the no growth longer term trend mine and we're stuck with overcapacity again, I mean, I guess, just how do you think about the risk reward there.
Thank you for asking that.
It's a it's the question we always wrestle with its a.
I think in response to gone jobs question earlier.
What I tried to say was that the.
The additional spending in two.
2020 to forecast it spending in no way as a reflection that we under spent in the past its.
It's a reflection that the market and the growth in the market that was negative.
Did not warrant.
Any spending so what we see today is.
As growth in I think we we foresee in North America growth for the next couple of years.
Unfortunately for US we are we are positioning ourselves, where we are underweight.
In specialty cans to becoming more in line with the market and specialty so we have.
I'd to spend in that regard as well.
I don't want to say without regard but.
But alongside the market growth. We are we are more appropriate aligning ourselves in the north American market.
With the specialty can growth in the market.
As opposed to the rest of the world, where we are at market levels or even higher on specialty cans proportion of our sales.
And then the additional spending in Asia.
Market continues to grow and so that that's never going to.
In issue, but what's your question is the right question and I.
I think for the next couple of years as we've said Mike we.
We think growth is going to be a.
Very favorable, especially in light of recent growth or negative growth trends.
But.
19, we had growth and that was the first your growth in a long time and we'll have it in 20 and 21 its.
And.
As I've said in the past and.
Hopefully, we're all somewhat responsible here.
Got it no no. That's helpful. And then just on the strategic review process. I. Appreciate there is nothing you're going to report at this time, but just in regards to timing is there a rough timeframe you're targeting to wrap up this formalized processed by it and would you anticipate making announcement even if there was all of the Board review is no change to the overall.
Portfolio.
Well I think you know when we when we made the initial.
Announcement, we talked about a number of things we talked about capital allocation.
We talked about portfolio review and we've talked about refreshing the board of directors. So the board.
The initial board refreshment has occurred.
Board members retire from time to time and that's an ongoing.
Process.
I think you should expect that whatever the outcome of the portfolio review is that the board will publicly report.
It's conclusions and.
I would suggest to you that it's probably.
Regardless of the rumors in the marketplace, it's probably more appropriate.
That you expect that to be sometime in the April to late April timeframe.
Got it. Thank you. Thank you.
Thank you our next question comments, Brian Maguire.
Yeah.
Hey, good morning, guys.
Just wanted to come back to the 600 million Capex guidance should we assume that if the the two to four on named projects don't materialize or go forward than the Capex number could be materially below the $600 million and.
As it related to that time, we think the right capex level beyond 2020.
Well I think I think if the projects were discussing don't materialize then yes, we would be.
Back in the 430 to 450 range.
I think we're pretty comfortable that.
That were that they're going to materialize. We're just not prepared to tell you right now will probably be prepared to tell you in April a lot more.
So I think you should for your modeling purposes, you should conclude.
That we're going to be closer to the 600 million dollar number because I think we're going to be successful and.
And we'll come back and tell you a couple of months here, what we're doing.
What's an appropriate amount of capital for a for a growing business.
Great question I think if the business continues to grow.
We'll continue we will continue to feed the needs of the business if the business.
The growth slows down and then we'll slow the capital down I don't think at this isn't a government budget, where we spend our budget every year we.
We try to start every year.
Understanding our base maintenance needs and then from there you build on growth so.
But thats where were at right now.
Okay.
In the last couple of months there was no news.
New entrant into the Continental U.S. market in Florida, I wondered if you had anything any thoughts on that.
And just kind of in general you talked about barriers to entry when you talked about your capex spending earlier.
Can you talk about how you see those barriers and.
Or whether you think that all the growth that we're seeing and the capital flowing into the industry could start to attract whether or not.
Well.
Theres lot of growth.
Theres a lot of positive momentum around the sustainability argument.
Theres a lot of money available out at very cheap rates. So anybody is capable to do anything.
You hate to.
Hey to comment on speculation I don't see the.
The new factory in Florida, having a big impact on the North American market I think a lot of those cans or.
We're going to be headed back into the Caribbean.
We'll see what they do it that factory going forward we're not.
We don't have manufacturing in the Florida market, so it doesn't directly impact us, but but everything impacts you indirectly overtime.
Theres may come to the market, but as I said I'd hate to speculate on that because I don't know I think I do think Theres a.
Enough growth right now to absorb what we any others are doing.
And I think our our.
But France, we in the existing can makers, we have national footprints.
And were better better able to service the needs of the.
National and regional customers and somebody to comes in with one or two plants.
A region.
Okay last one for me just a quick one I know how your biggest market.
Vietnam, They put in a pretty strict DWI law to start the year I've seen some reports that beer consumption is down 25% or so in that market as if that's something that you're seeing play out in is that part of that sort of flat EBIT guidance in Asia. This year.
So I hope I think what you just said you need to tell everybody around the world and they they should Ics, they should expect that and they shouldn't come to Vietnam with anymore can't capacity I agree no honestly.
We've seen no impact of what you just described in the Vietnamese market.
It is a.
It continues to be a rapidly growing market.
The beer industry is dominated by two principal beer companies there.
One is currently 80% contains 20 in glass. The other is just that reversed 20 and glass or 20 in cans.
80 in glass so.
A growing.
On a growing market a growing middle class and extremely well educated population closing on a 100 on 100 million people.
Yes, the flat.
Flat performance were describing in Asia has nothing to do with Vietnam is it has to do with China. So they'll Vietnam I saw one of the comments earlier today.
One of the pre recall reports, but we've not seen any impact from that law.
Great. Thanks, very much you're welcome.
Our next question comes from the line Neel Kumar from Morgan Stanley.
[music].
Great. Thanks for taking my question I think you mentioned low double digit volume growth in North America.
What allowed you to realize both in North America, and the fourth quarter and given the capacity constraints, you've been facing and you're bringing on the new line of less than last month.
Well, it's it's typically a very low quarter for can't so.
On the second and third quarter, we are over sold as a company in an industry you build cans.
In the first quarter, sometimes you even build them in the fourth quarter ended the first quarter for sale in the second and third quarter. So.
Just being a lower demand quarter.
You have more cans available to sell in the fourth quarter that it's just it just math.
Okay.
That's helpful. And then just a follow up in your comments on the European beverage return profile.
That comment just totally different Terry to your 12 ounce cans and then given that you had a similar issuing the pass in the U.S. and then started getting price increases in 2019, you think you could see similar movement in Europe, given the tight supply and demand environment and then give any contracts that are up revenue on near term in Europe.
Well, there's always contracts that are up for renewal, there's always contracts that rollover I won't say anything else commercially.
Other than that the team has been tasked with the.
The job of of improving the margins and until we see margin improvement.
We're looking at behaving similar to how we behaved in North America.
Pre 2018 2019 as it relates to two capacity.
I would love to see the.
The margin profile improve I think it.
Whether we're talking about 12 ounce or 33 cents, a leader 50 cents, a leader where sliman sleek cans and 15 20 and 25 sell leader.
As an overall market return profile that needs to be improved.
That's helpful. Thank you. Thank you.
Thank you.
Okay.
Hello.
Just a couple of quick follow ons, one I wondered if you could talk about what you're seeing in both Brazil and Colombia.
Well I'm just kind of curious we've got.
Hi building there for standpoint, there and I know in Colombia, you felt the impact from my campaign coming in and then the second thing I wondered if you could talk about it's just sort of generally what you have seen come out of these renegotiations in North America I know there were a lot of can contracts, but repriced at the start of this year I think.
It would be helpful to all of US if we had some understanding of kind of.
Where you were getting price versus where you were getting like terms or the ability to pass other costs through.
Yes, Mark on your second question I'm going to allow you to ask that question Tomorrow, you're gonna get a chance that tomorrow and we'll see if they want to answer it but frankly I want to answer that I don't see any advantage to answering that.
On the first question.
Yes, we we lost a significant chunk of business in Colombia.
Competitor came in at the market and.
We describe that in the third quarter its.
We'll cycle through that.
Q3, Q4 of 19 Q1 in Q2 of a 20 and then we're back on our way, but the businesses rebuilding itself with other customers.
Notably the partner, we have there, who who feels cans and distributes can beverages, both beer and soft drinks.
In Brazil, the market continues to grow.
And again just to.
Sure the kept my finger on it but you're here we are.
Our our estimate is that the industry grew at about 14% in.
In 2019 over 18.
And.
We were up for just because it capacity now we were up.
8% in Q4, and we'll be up a lot more in in 2020, just because the capacity came on.
I think there's enough growth in the market that it's going to absorb.
The new plant that you described as well as the new capacity we put in.
And any other marginal capacity anybody else puts in its a.
It continues to be an exciting market for beverage cans. So just Tim and just rough terms and you're really talking about a market grew by something like 4 billion gains last year, yes.
Alright, thanks, very much good like the rest of year you're welcome.
Okay Crist all I think thank you very much first all I think that concludes the call today and we look forward to speaking with you all again.
In April thank you very much.
You're welcome and thank you.
Thank you.