Q2 2019 Earnings Call
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First name Michael M. A C H L last name Mcelligott.
I see H.A. E. L E V I C H.
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Our AG.
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In Q, that's a companys air that's A.I.E.R.A.
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Good morning, and welcome to Crown Holdings second quarter 2019 conference call. Your lines have been placed on a listen only mode until the question and answer session.
Please be advised that this conference is being recorded I would now like to turn the call over to Mr., Thomas Kelly Senior Vice President.
Hi.
Financial Officer, Sir you May now begin.
Thank you mentioned 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 vary is contained in the press release and in our SEC filings, including in our Form 10-K for 2018 and subsequent filings.
Earnings for the quarter were one dollar and two cents per share compared to 99 cents in the prior year quarter.
Comparable earnings per share were $1.46 cents in the quarter versus $1.55 cents in 2018.
Net sales were in line with 2018 as increased beverage can volumes were offset by $180 million of unfavorable currency translation.
Segment income in the quarter was also in line with the prior year has improved results and results in Americas beverage offset lower results in European food and transit packaging and unfavorable currency translation.
As outlined in the release, we estimate third quarter 2019, adjusted earnings of between $1.50 cents and $1.60 cents per share.
And full year adjusted earnings of between $5.05 in $5.20 per share.
These estimates assume exchange rates remain at their current levels and a full year tax rate of between 25 and 26%.
We currently estimate 2019 full year adjusted free cash flow of between 725 and $750 million with approximately $440 million in capital spending.
With that I will turn the call over to Tim.
Thank you, Tom and good morning to everyone.
I will try to be as brief as possible and we'll then open the call to questions as reflected in last nights release and as Tom has just summarize overall second quarter performance was about as expected.
Although the results were mixed across the operating segments unit volume demand for food and beverage remained firm through the second quarter.
And was up in most geographies in transit overall volumes were down 2%.
We have summarized the major projects in progress and those recently completed in the release all of which are on the same timing as we described in April .
With the notable addition of the two new lines and New York in Ontario.
And a supplemental table two of the release, we have provided the currency impact on sales and segment income by operating segment.
So my comments will focus on currency neutral performance.
In Americas beverage overall sales units advanced 2%.
With North America up, 1% and Latin America up 4%.
Mainly on the strength of Brazil, and Colombia.
Segment income up $27 million in the quarter continued to benefit from a significantly improved cost structure in 2019.
As well as the higher volume levels.
Lower freight costs and the lack of startup costs in third party can sourcing in the United States compared to 2018.
Or just some of the factors contributing to the improved cost position in 2019.
Can demand in the Brazilian market remains extremely strong.
Which our results to date reflect.
However, we remain sold out and will be short of needed capacity until the new Rio Verde plant comes online late this year.
From already very tight capacity, we have sold 6% more volume in Brazil in the first half and will not have enough production capacity to match last years second half volume output.
There is a new commands can competitor now operational and Columbia.
And beginning July one we will experience a significant reduction in can demand in that country.
The result in income loss as budgeted and expected combined with our Brazilian capacity constraints will flatten income results for the segment in the second half compared to the prior year.
Unit volumes in European beverage improved 6% over the prior year with Europe up 8%.
And the middle East down a half a percent.
Strong performances in eastern Europe , and the UK, coupled with volume from the new facilities in Italy, and Spain, offset softness in Dubai and Turkey.
Segment income up 3% in the quarter reflects the volume increase.
Lower startup costs in Italy, and Spain, compared to the first quarter and the cycling of prior year middle Eastern volume comparisons.
Sales unit volumes in European food.
Increased a half a percent in the second quarter.
Although our mix was unfavorable to income across product categories growth in tomatoes was more than offset by decreases in dairy and fish.
Contributing to a segment income decline of $20 million compared to the prior year.
Selling price realization while positive.
Was not enough to offset inflationary cost increases.
While some of the seasonal props were delayed up to two weeks coming out of the second quarter, we expect an otherwise normal seasonal third quarter pack and production levels, while flat to the prior year in the first half are planned to be up 8% in the second half leading to significantly higher cost absorption than last year.
As a result, we expect second half income performance to be in line to slightly better than 2018.
For the year, However income will be down in the segment as we do not recover the first half shortfall.
Clearly a disappointing result in 2019 following the poor harvest in 2018.
But the business is sound consumer demand for packaged food is strong.
And we will continue to reduce costs in the business.
Segment income and Asia Pacific advanced $5 million in the quarter as double digit volume demand a double digit demand growth in southeast Asia more than offset the volume impact from the closure of the two facilities in China.
Excluding currency sales in transit were down 1.6% in the second quarter due almost entirely to 2% lower overall net volumes as price impacts were negligible.
The impact of volume and negative mix drove the reduction in segment income compared to the record performance in last years second quarter.
While down from the prior year. This is a business that has generated $90 million to $95 million of EBITDA per quarter in nine of the last 10 quarters.
So the second quarter was right in line with our expectations.
Looking ahead to the balance of the year, we are forecasting the third and fourth quarters to be to be in the lower part of that EBITDA band.
So roughly four and a half or roughly $4 million to $5 million per quarter below last year.
And as we make allowances for what could be slower economic activity.
This is a very diverse business across end markets product applications and geographies.
And while more cyclical than cans. It is nonetheless, a stable business.
The business continues to perform well requires very little capital and generates significant cash.
In non Reportables, 6% volume growth in North American food more than offset some softness in the us aerosol market.
And looking ahead it appears that in the markets, where we operate that is the upper Midwest and East coast, all conditions point to a from North American food harvest.
A mixed operating result through six months to noncash nonoperating items currency and pension, which we identified at the beginning of the year.
I've been about a 25 cent per share headwind in the first half or 12 to 13 cents in each quarter.
Operationally demand remains strong across our global beverage businesses.
And we are aggressively moving to install needed additional capacity, which is the main source of the free cash revision.
Food can demand remains firm throughout although below our expectations in Europe following last year's drought conditions.
Transit has performed according to plan in the first half.
And perhaps the team has being overly cautious heading into the back half, but we'll see.
So in summary, continuing from demand strong cash flow.
And several projects underway to continue to service customers and drive future value.
And with that Missy, we are now ready to open the call to questions.
Certainly Sir we will now begin the question and answer session.
I would like to ask a question.
Followed by the number one.
Mute your phone and record your name clearly.
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First question.
[noise] [noise] speakers. Our first question is from the line of Anthony Pettinari of Citi Group.
Your line is now open.
Good morning.
Morning.
Tim and in transit you cited a 2% lower net volumes and I was wondering if it's possible to parse out how the U.S. business did versus the non U.S. businesses, maybe how consumables did versus you know tools and equipment.
And then just sequentially as you went through the quarter and maybe into July did you see trends.
But deteriorate significantly in certain regions or in certain categories any kind of detail you could give.
Would be helpful.
Sure so.
I think if we looked at the consumables.
Versus equipment.
In the second quarter.
Oh, it looks like if were down 2% equipment, maybe makes up 5.7% of that in the consumables or 1.3% of that.
Ex currency and talking.
I would say that.
In July we are on track.
Through the quarter things were.
April was soft may was fairly firm.
The first three weeks of June were from.
The last week of June was was soft.
But July has started off from again, so I think.
I think as we sit here today, we're only three weeks into the quarter, but.
You know the guidance, we've given you for the third and fourth quarters to be to be off about four to 5 million per quarter.
Well you know eight to 10 million for the back half in a 1.2 billion dollar business back half business. So.
You know down a touch but.
But not strikingly down and I think where we're at in July for the first.
17, or 18 days, we feel we feel pretty good about that right now.
Okay. That's helpful. And then just switching to European food is it possible to parse out how much of the Miss was relative to your expectations was this week or mix versus the inflationary cost increases that you referenced and then just more of a big picture question. I think you know two of your large competitors now.
Sold or move food can into kind of a JV structure just any thoughts you have on the business is placed in the portfolio.
So I.
To parse out.
Mix and.
Compared to the prior year, and then I'll give you compared to expectations compared to the prior year volume up a little bit, but mix negative and price while up as I said not enough to cover cost and I'd say that probably of the 20 million.
Let's say.
Eight of its pricing 12 of its mix. If you just won some round numbers and I could be off one or 2 million, one way or the other but you kind of get the.
It just there right.
I think they.
The two transactions that the two competing companies have done in food are are very different.
One was just a north American business.
And a and a smaller business.
The other is a global business in a very large business.
Both have the same both both of the companies.
Accomplishing the same thing they.
They retain a significant interest in the new company going forward, so they're not really exiting the business and they always.
They always retain the option to acquire the business or acquired a controlling stake in the business in the future depending upon what their private equity partner does but but in the near term both.
You know.
Acquiring significant proceeds in the near term.
Either to de lever and door to return to shareholders and you're aware of what each of them are doing.
I would say that.
Our food can business.
You know is.
While it is down in Europe , this year and up in North America.
Currently both of those businesses provide significant free cash flow.
And given where interest rates are today.
Any move in that regard.
Would it be dilutive to free cash flow in that the.
That the interest that you would save.
By paying off low cost debt would not be enough to offset the free cash flow to give up so in the near term.
We like to we always liked the business they are stable businesses, they've got their ups and downs, but there.
More or less stable business.
The European food business is far different than the North American food business.
But there is a place for food cans in both markets and dumb.
No. We don't we talk about sustainability a lot as it relates to beverage cans theres not a lot of talk about food cans.
In regards to sustainability, but one way food canned packaging.
In Tetra flexible in plastic is even more of an environmental burden.
Then I would say plastic bottles are in the beverage world plastic bottles as you've heard me describe are separable and recyclable.
Tetra and flexible are all trash not recyclable in any great way and food can steal food cans are entirely recyclable. So the hope is that there's more momentum.
On the food packaging side to more fully embraced food cans.
From an environmental or sustainable standpoint, and.
And we continue to like the business.
Okay. That's helpful I'll turn it over thank you.
Thank you so much. Our next question is from the line of Scott.
Your line is now.
Hey, guys good morning.
Morning, John .
So I guess first off on the plant conversion can you sort of take us through the logic.
The conversion versus just building a new plant and since you called out the new lines as having the capability to produce specialty cans do we expect further investments on your end to boost your capabilities in North America.
Yes, so so the Weston I saw your note this morning, Ghansham and and we probably didn't make it clear enough in the release so apologies.
The west in plant currently has two beverage can lines in one food can line.
So.
The food can line.
Oh the pieces of the food can line that are are in good shape.
That is the washer.
We'll use that for the beverage line, but but much of the equipment going into the into the third line in Weston for beverage will be new equipment.
And so I would describe to you that.
If we're spending X dollars in Nichols to put a third food can line in that we'll spend X minus 10 or $12 million in Weston.
And that minus 10, or 12 million is the using the washer and I think we're we've got a couple of pieces of equipment that are in pretty good shape from the recently shutdown Lawrence plant that will use but but much of that equipment is brand, new and will and will operate as as if it's a brand new line from front to back.
In west in just as it will in Nichols or any other brand new line. So we perhaps weren't as clear on that.
But it is a beverage can plant its not a food can plant.
And as as you just rightly pointed out it will have the capability both of those lines well the capability to produce.
Sleek and 16 ounce, which.
Which we need in our portfolio in which we have been.
Trying to catch up to the market I think we're up year on year, we're probably up our mix is probably up three to four percentage points.
From last year to this year between standard 12 ounce and sleek and 16.
And we'll continue to look for responsible ways to improve our portfolio and our percentage of those growing portions of the market.
Okay. That's helpful. And then just a broader question on your North American you know sort of capacity footprint.
Pepsi on their call last week seem to indicate that they would push alternative can sizes for their sparkling water brand.
And also start to trial trial still water on the West coast.
I guess I would your current footprint across the U.S. able to supply these type of large customer initiatives, especially for specialty cans I'm just trying to put your 1% volume growth you called out in North America and context as it relates to capacity footprint. Thanks.
Yes, well, 1% volume growth.
Essentially we're sold out right and as we described in April were not sourcing cans from third parties just to sell more cans. We we did.
In an effort to try to correct or significantly improve the cost structure we.
We gave up some business so that we would focus on the business that we could actually produce not just sell cans that we bought from others.
So the additional capacity that we announced last evening will obviously help us grow into contracted volumes that we already have next year beginning in January one 2000 and forward and we would expect.
Much more volume growth next year than the 1%. We just recorded as it relates to supplying customers on a national basis for a variety of these sizes.
Our.
Non.
Standard 12 ounce portfolio capacity portfolio.
Exists in that as we've described before Texas, Mississippi, New York and now Ontario.
And in the future. We'll we'll continue to review is there something we should be doing in the Midwest or or West coast.
To further.
You know broaden our portfolio.
Yes, Thanks, a lot Tim you're welcome.
Thank you so much. Our next question is from the line of Edlain Rodriguez.
Your line is now open.
Hi, good morning, guys.
Morning.
Quick question on trends.
I think last quarter, you talked about pricing competition going on in India industry, Nike cities accelerating and how do you deal with that do you have to compete on price and yourself I'm question last quarter. You said you didn't want to lower prices. So how do you.
Yes, so listen price was the impact of price compared to the prior year was negligible I want to say.
Far less than half a percent in the quarter.
So there was no price impact the.
The situation that I referred to in Q1.
The principal us competitor for plastic strap was sold to private equity.
They were somewhat aggressive as they were in their sale process and so that has that's now behind us and so that situation to settle down but.
It's a very diverse business we don't.
We have not seen any price any negative price consequences other than that one situation.
Okay and in Baskin right are you.
Change in your expectations for growth in like what are your expectations for both in the different markets and are they changing gears Indian development issues that need to be able to answer.
Yeah.
Well I think I think we like you and like many others.
View.
The current environment for beverage cans globally to be the best we've seen in 30, some years and so many of you are new to the industry, but.
For a long time.
Beverage cans were let's be clear, we're not a great business, but this is now a great time to be in beverage cans, and I think thats going to exist for for several or many years to come.
Given.
What we and you and many others see with the environmental sustainability or environmental impacts of the beverage can versus competing packages. We we however are being.
Somewhat cautious.
As we look to installing new capacity.
Until we see.
You know more concrete signs of demand or we get business under contract.
Ahead of putting capacity and so the capacity that we announced last night.
You should fully expect that that is fully under contract and as necessary to meet contract requirements. It is not built on spec.
So we'll continue to review each market, but.
The markets all of the markets.
Southeast Asia.
Europe , Brazil.
North America seem to be extremely firm.
With conversions.
Looking to happen to Ken.
Dependent upon the canned industry's ability to meet that conversion requirement.
And and so we like others are very fortunate and we look forward to many many good years to come here.
Okay makes sense. Thank you. Thank you.
Thank you so much our next question on queue is from the line of Chip Dillon of vertical research. Your line is now open.
Yes, good morning, Tim and Tom.
All the details.
First question is.
It looks like when we look at the growth in Europe , and particularly not including the Middle East I mean, it's really really great 4.5% in first quarter. You said I think 8% in the second can you talk a little bit about what's going on there is that the market itself or are you just happened to be in segments, where it looks like you're gaining share when you look at the overall market.
So I think the market. It chip this is market driven and this is a continuing trend that we've seen for several years or for over a decade 15 years now.
With the exception I think of 2003, the German deposit legislation in 2009, I think every year for the last 15 or 18 years, we've seen two to four 4% to 5% market growth in Europe as the market grows.
Segments of the market continue to grow whether that's eastern Europe Southern Europe , Turkey.
And continuing conversions from glass to can and that's continuing why why are we up so much in the second quarter.
I think as we described the last year we.
We didn't benefit as much as some of the others benefited last year, because we were capacity constrained and at the time. We told you we had two new projects coming on line and.
And then in 2019, if we had an undersized portion of the growth.
Last year that we would get an oversight or more more.
Relevant portion of the growth this year and that's what you're seeing with the new two factories that came online.
Okay. All right got you and then just to be clear on the two new lines in North America. The Nichols third line in the one in the West and I would imagine those would be considered specialty lines and I guess, if you ran them on one or two basic sizes, you could get up to 1 billion can rate a year is that is that ballpark correct.
Yes, I would say the Nichols line clearly could total about 1 billion to.
The west in line think more than the 750 to 900 range I would.
They have the ability to make a variety of sizes.
But chip lets be clear there.
We keep throwing his term specialty around there is nothing special about making a can other than the 12 ounce standard can we.
We and others make them all around the world and in some markets.
The 12 ounce to 11 diameter can doesn't exist anymore its own only sleek cans. So.
These are is a changing marketplace in which the marketers consumer product marketers at the consumer product companies or.
Are always trying to find ways to invigorate their brands and and we're fortunate that we have the flexibility.
And the engineering know how in the industry to be able to accomplish that and.
And so while you may refer them to specialty we just think there there are alternative sizes.
Gotcha and then the last one just looking at the European food can business. It looks like as you mentioned the volumes will be much better this year.
But there won't be a.
An income increase and can you talk about the cost issue is it really just a difference in the matching of the purchases of metal is that the main factor.
Is that last year, maybe you had favorable variances and this year you have unfavorable when you look at the price cost on that yes. So as we look at as we look at the.
The second quarter in the back half of the year volumes will be up compared to last year, but nowhere near what we had expected given how poor last year's harvest was so.
Volume up but down versus expectations, so that clearly that's disappointing.
And then we did get positive price this year.
But steel costs and went up significantly and.
And other costs are always rising whether it's labor or utility. So when you put all of your costs into the cost to manufacture a container bucket, we didnt get enough price to two to fully recover that and Thats also disappointing.
But we'll endeavor to reduce our cost overall and.
Next year is a new year and will.
We'll have to do better next year.
Understood. Okay. Thank you. Thank you.
Thank you so much our next question on queue is from Tyler Langton of JP Morgan.
Your line is now open.
Hi, good morning, Thank you.
Just on that last.
Comment that you made in Euro European food.
Magazine, a lot of visibility at this point that you can kind of.
Overcome this contemplation for next year or just any color there would be helpful.
Yes, I think we have the opportunity to so adjust price we we adjusted price this year.
In the market and.
Clearly that wasn't enough to offset the inflation. So we'll see what the inflationary pressures are going into next year and.
And under contract we have the ability to do that some of that we had a number of contracts reset this year. So thats why it was a.
A little bit more painful, but they do have escalators in them.
And then we do any you know, we'll we'll need to run better and.
And we need to be.
A bit more accurate with our volume forecast, but.
Overall, the market is healthy right that the demand is there for the cans.
Although it's a little lower this year than volume will be a little lower one of the issues as volume is a little lower than we expected.
More or less the harvests look like they're going to be OK and when I say, okay I mean.
Let's say, 90% to 95% of what we expected, which is what a 105% of last year, but last year was down there are some markets, where where the weather was extremely rough. So for example, eastern Europe , Russia. The weather was extremely rough.
That's a very small market for us.
90% to 95% of our businesses in.
Western Europe , Italy, Spain. So these are all items around the edge, which in a tight margin business items around the edge have an impact but.
We'll do better on price realization versus cost next year and.
And we'll see where it brings us but this year has been disappointing.
But again not a it's still a business, we're making I think in the third quarter margins were 13%.
The margin I think in the quarter last year was probably 15 or 16% was a pretty strong quarter last year in the second quarter.
But you know.
Notwithstanding that we are disappointed as we said.
Okay. That's helpful. And then just with trends and I think you talked in the past about maybe doing smaller deals that.
Didn't increase your leverage as you're paying down debt over the next several years.
My guess is that more saggy, maybe more on hold now just given sort of.
Weaker volumes, you're seeing in transit and caution in that space or would you still consider looking at them well I think I think we say smaller deals.
Everybody gets nervous when we say this right I think.
You probably should if we did anything you wouldn't expect us to do total purchase price of more than $20 million. This year. So we're talking.
You know at multiples that are five or six times so.
The multiples are right. It doesnt increase but you are talking extremely low numbers across the balance sheet like ours. So.
But that presupposes, we find the right deal in it it's.
In a market.
That's a growing part of the various markets in that they provide so.
All of the as I've said the business that the transit serves as extremely diverse across end markets and products.
And we would be looking at.
Those products and end markets that are more stable and have growth compared to other markets. So I wouldn't get overly concerned about anything we're going to do there. If we do anything that's going to be extremely small along the lines of the size I just described.
Great. Thanks, so much.
You're welcome.
Thank you so much. Our next question is from the line of Neel Kumar of Morgan Stanley . Your line is now open.
Hi, good morning.
Good morning.
In Brazil, what do you think is driving strong top line growth you're seeing there what do you say that you took last potentially being sold out.
Well glasses sold out currently.
But.
On underneath that there has to be demand growth coming from the consumer.
So I think the.
You know after a very tumultuous period.
With the last administration they had.
They've had some a little bit of stability here.
Politically and economically there, they're doing a little better so.
Consumer confidence.
Much better this year than that over the last couple of years driving.
Continuing consumer demand for growth you do have a size change a size.
Change proliferation occurring.
From what you would describe as a standard 12 ounce can too.
The sleek 9.1 ounce cans so.
When you think about.
Consumer balances for nine ounce cans and ends.
Are now required to meet the same equivalent as 312 ounce cans. So.
A variety of things happening.
And but again, the can well positioned to continue to grow share.
In Brazil, and if we're right around 50% of the beer market.
And if North America is 65% to 70% of the beer market still considerable growth yet to come in Brazil in our opinion.
Great.
That's helpful.
And then in Asia Pacific can you just talk about what drove the 100 gig.
Basis points improvement in operating margin for the quarter and is that level sustainable for second half of the year.
Well, it's it's it's country mix right. We closed two plants in China at the end of last year. So our Chinese business is now.
Roughly 60% of what it was before and the Southeast Asian business continues to grow and.
You you have heard crown and others talk about challenging conditions in China for years and.
So as you move away from China, and you move back towards Southeast Asia, where there is from growth.
You get that that improvement.
In percentage margin.
I think our.
You know the Asians have done well through the first half they have actually exceeded their own expectations and.
We'll see how they do in the second half there they are traditionally pretty conservative in their forecast so.
Im hopeful that we continue to outperform their forecasts.
Great. Thanks.
Thank you.
Thank you so much. Our next question is from the line of work.
Nelson This is one of them.
I'm sorry, just want it then.
Your line is now open.
Great. Thank you.
So it sounds like.
The additions that you've described in North America that would bring another 1% to 2%.
Into the industry.
I can size makes if you look at about 90 billion cans.
I guess is that right and would you see any footprint optimization opportunities elsewhere in your portfolio that would be necessary. Thanks.
So the market I think the markets more like 94 to 95 billion units, but but.
Your.
Youre right its a.
On the order of.
One and a half 2% addition to the market.
Although these are sizes that are different than the standard 12 ounce size and sizes that are required in the market by our customers.
By our contract customers I do not see.
Any necessary portfolio adjustments or.
Or downsizing in our footprint.
And then as a follow up you know if we look out over the next couple of years then.
Does this position you I guess to capture numbers that.
For example, in Q1 that would have been closer to what the industry.
Wouldn't put you in a position to have some extra flex capacity in case growth continues at such a robust pace.
What are your stance on future plans. Thanks.
So it's a it's a.
Part of your question is a great question I'm glad you asked it because I.
We often times talk about here and we forget to talk about it so.
It will allow us to grow our non standard non traditional 12 ounce volume and so if were 16 or 16.5% now in the market is 22 to 24 weaken.
I don't want to say rapidly, but we can.
Responsibly approach industry levels for non standard 12 ounce over the next couple of years.
But but importantly, as you point out.
We have been in a sold out position in North America for several years, we're operating.
Extremely tight and for us not to Miss.
Or to not properly serve customers it requires us to sometimes be too perfect. So this will give us a little a little bit of flex.
So that we're not having to be so perfect.
And that as customers have short term volumes spiked needs, we can meet those needs yes.
And just lastly on this issue.
Where would you characterize Nichols I guess in general from a from a startup standpoint.
You feel that the learning curve is you wouldn't face any issues going forward and what is what are the existing lines kind of running at these days.
Yes, so we you know it.
Good question, we have we like some others from time to time not all startups are equal we have.
Very good experience and a lot of places to startup Nichols is little slower than we like but I wouldn't say it was poor.
But the lines now are fully through learning curve and we are we are above 90% efficiency as we measure it.
So we're quite pleased with where we're at right now at Nichols and I would expect the third line.
To have a much smoother startup in the first two given that we have an experienced workforce.
And plant management and plants supervisory personnel on the ground and they understand how to make cans now.
Great and I'm, sorry, just one last quick one just to clarify that the comment you made on the guidance.
It sounds like you know about a 40 million or so on the free cash flow at the midpoint.
And he can go through the EPS guidance that accounts for maybe about two thirds of that.
And the rest is capex is that right.
It sounded like well I would I would say that.
At the midpoint 40 million, you're probably right Thats right I would say about 30 million of that as capital because we have gone from about four tend to 440 or for 20 to 450, whatever the numbers are.
On the two lines so.
We've moved some things around and capital. So we could accomplish this said.
At a $30 million bump.
And the balance would be the.
The shortfall in.
In.
EBITDA that you mentioned offset by some working capital initiatives.
So thank you know not non capex related about 10 million.
Okay. Thanks.
You're welcome.
Thank you so much mr. Viswanathan again, I do apologize if let's say your last comments.
Okay.
From that.
Thanks.
Our next question is from the line of Mr. Mark.
Bank of Montreal. Your line is now open.
Good morning, Tim Good morning, Tom.
Tim is it possible to give us any sense of sort of the benefit that you're getting in 19 from just contractual changes and any perspective on what you might pick up in 2020.
Oh, it's possible, but you're not going to get me to say it.
Okay thought I'd try.
I'd say a lot of crazy things, Mark, but I'm not that crazy.
Okay.
We are.
Look I mean will you asked the question. So you deserve some kind of answer and I don't mean to be cheeky, but.
There are some things, we're not going to talk about.
But.
You heard me say in April after after a very long time.
Of the can industry.
Doing many great things for its customer base, we make cans at speeds now that were unheard of.
10, 15 20 years ago.
The industry is supplying relatively the same number of cans to its customer base that it's applied 15 years ago with with.
40% fewer lines so the.
The the engineering and the.
The man power.
And the.
Efficiencies that we've all gain that we've we've worked so hard to do.
You know, we deserve to keep some of that and weve given far too much of it and more away to the customer base as an industry, which in short terms means we havent been properly compensated for all we've done for for the customer basin.
And so the conditions are right for us to to have a little bit of strength to try to recover some of that but I'll be quite honest, we're going to recover a lot of that over the next couple of years, it's still not enough in my opinion.
Because we're here to make money for our constituent based not just for the constituents that own the customer base. So.
We are going to do better some of that will come from price some of that will come from terms.
But it always requires us to to meet the customer needs with service and quality and we continue to endeavor to do that.
Okay. Good answer I Wonder just turning to capital allocation you've talked about.
Both share repurchase activity and a dividend in the past and I wondered if you could just update us on your thinking there after you.
Reach an appropriate level of leverage.
So.
We continue to.
State to you that we believe will be a three and a half times leverage by the end of 20, which is where we were before the Signode acquisition. So.
Two years in nine months, we're back to the same leverage level.
And I think at that time, that's an appropriate time.
For our board to consider.
Of capital returns to shareholders as you described.
Okay and Tim.
Just.
Thinking about sort of this ship the world talking about between kind of plastic bottles and.
Aluminum cans.
Do you worry at all about the perception of a lot of growth actually drawing in not only new capacity, but but really new competitors into the market.
Well Mark I worry about a lot of things right you can you can imagine.
You worry about a lot of things there.
There are some things you worry about because they are firmly in the control of.
The management and the teams within the company and.
And there are some things that are not in your control, whether it's legislative or what other companies do.
But.
We have endeavored to make offerings to numerous customers and.
And service those customers over decades.
And they can trust with us.
The ability to provide them quality and service and and a product.
And meet their needs and so we.
We will spend money as necessary to meet those customers' needs, where we have contracts and.
And.
As I've said before I can't worry about what others are going to do.
What they might do or what they might not do.
But I would say that you know the capacity weve.
We've announced is under contract it is necessary for us to supply and service our customers.
But but as you've heard me say, we're being somewhat cautious in all the markets.
On sustainability, because until we see concrete evidence of a.
Of a much larger conversion than we're seeing now that it would be inappropriate for us or others to get too far ahead of ourselves yeah. Okay. The last one I had just in terms of this you know.
View that the market is going to accelerate in terms of growth and we've got the qualities kind of foreign trade issues out there. What are you seeing your suppliers in the can sheet market do where do you see kind of capacity moving there both in North America and abroad.
Well I think.
In North America there are.
You know essentially three can sheet manufacturing locations.
Across four suppliers.
Two of them share of one location.
We're.
Four locations.
Maybe there's four locations.
I would say that.
For the for the guys that are still in can sheet in North America. They are committed the can sheet they understand that as a very stable business.
They understand that.
In a stable business, especially in their environment.
They can budget more appropriately.
I've taken the opportunity to remind them all that if they want to convert to auto sheet and they want to be an auto supplier. They.
They should keep in mind that most of the suppliers to the auto industry are bankrupt or had been bankrupt. So they are far better off supplying the can business and the auto business long term.
But they've got visions of a volume growth with with auto and.
Trucks moving to.
To to aluminum sheet. So they'll continue to look at that but I think they are committed to.
They are committed the can sheet and there's a lot of khannouchi capacity around the world.
Especially in China, we have some.
Trade issues going on there but.
The Chinese have brand new facilities high quality facilities high quality can sheet.
So there is can sheet available.
Okay very good I'll turn it over thanks, Tim Thank you.
Thank you so much. Our next question is from the line of George Staphos of Bank of America. Your line is now open.
Hi, everyone. Good morning.
Thanks for the details, Georgia, how you doing.
I I know what I heard on food Europe , but I just wanted to go over this again.
I think you parsed out 12 million and mix and 8 million from.
Price costs I heard you correctly too.
One of the earlier questions now pricing is set you know more or less annually usually by April .
So what else went wrong in terms of your.
View on pricing and its ability to recover cost relative to what your expectations would have been back in April and then in mix.
You know again this is a relatively stable business you called out dairy called out fish.
Well, maybe the fish didn't swim in the second quarter, but and we know that that happens sometimes in terms of the catch but.
Can you give us a bit more detail because 20 million I don't remember a quarter in a long time and food Europe that was off that much versus the prior year and versus expectations.
I'd stay in line George because you you asked a couple of questions. There. So remind me the first question again.
Well I mean, the first question pricing is usually set by April right. So the big yes, So as I said at one point I described.
You've got comparisons versus the prior year and comparisons versus expectation sort of the big challenge for us pricing was set.
And while volume was up a half a percent in the second quarter versus the prior year. It was far below what we expected in the second quarter and well below be below what we expected in the third quarter, considering how poor the harvest was last year.
Yeah. So.
With lower volume George you get lower recovery right.
Compared to expectations I understand I mean, if you had mentioned it earlier I missed it where were volumes versus your expectations for Twoq, you and as we sit here today Threeq you in food Europe .
So up a half a percent compared to prior year, and probably down about 8% compared to expectations.
And in the third quarter.
We'll be up.
As you know mid single digits I believe in the third quarter, but that will still be down.
Mid single digits compared to expectations just it.
It did not.
It will be it will be it will be some recovery this year compared to last year, but nowhere near what we felt we are going to get.
Okay.
And did your contract negotiations give you any issues in terms of setting price or.
Not really relative to what you are budgeting.
No I think I think.
We might have touched upon this in February or April .
You know the.
There are several smaller competitors and so they.
They may have been on the edges, because they only compete on the edges, but they can.
Hamper issues, they coming out of a very poor volume year last year.
Everybody, including the small guys was trying to ensure they had as much volume this year. So.
It probably was a bit more competitive than we would have liked.
Okay.
I know, it's getting late in the call and maybe some others dialing in I'll try to ask my remaining questions just kind of in one shot to expedited minority interest was up a lot I'm, assuming that's a high class problem related to good volume around the rest of world and beverage, but could you confirm that or give us what the source of that was and then with Signode you gave us guidance for the second half of the year.
What is embedded in that guidance is it the current July rate, which you said was I think quite firm or something below that level. So if you carry July into the back half of the year, there's upside to the to the guidance. There. So on the minority Tom will correct me, if I'm wrong, but very quickly on the minority.
Net minority.
Operating minority is about the same year on year. The difference we had a large.
Tax settlement.
In Brazil, Okay. So the Brazilian partner gets after that but that's that's scheduled out in the.
And that not the reconciliation table that was.
Just.
Yeah, I thought adjusting for that your minority was up even with with that but I'll verify that.
14, or $15 million item NRT is still up George but for the full year. If you take that out you're running about $23 million in the third second quarter, which is about what we would expect in a full year will be low ninetys.
Okay and then.
On transit I, we did the re forecast.
Right at the beginning of July based on.
Activity that occurred in the second quarter and as I mentioned everything is going pretty well into the to the last 10 days of June . So I don't know how conservative the guys were and when I say activity is from in July it's from to the forecast they presented so.
They could be a little they could be a little cautious but.
We'll see I think.
All in all.
As I said, it's a 1.2 billion dollar business in the last half of the year and if were off $8 million to $10 million, it's it's off a little bit.
We're all you guys are sitting with.
With your economic activity glasses on it it's not going to be off as much as you guys are worried about its fairly firm.
And last one from me recognizing you're going to get ultimately more inc. earnings out of the beverage line conversion and west and what is that conversion take out of if you will the food and non reportable segment on an annualized basis. Thank you guys.
We.
We did announce it but we will replace that food can capacity in another location. So.
Mike at the beginning of next year maybe at.
One or $2 million per quarter in the first couple of quarters, but after that we'll be back in line. Okay. Thank you guys.
You're welcome.
Thank you so much. Our next question is from the line of Kyle White.
Your line is now open.
Hey, guys. Thanks for taking the question.
Just curious on Brazil, and called out volumes up 4% in Latin America I was just wondering how that compared to the overall market and the industry. It sounded like maybe you had at least some sales on table just being.
So you can string there.
You are absolutely correct. So we were up 6% in Brazil in the quarter.
The market was up firmly in double digits, but as you rightly point out and as we said we were capacity constrained and.
And we couldn't go any further.
That's it. Thank you that's helpful and then on the new competitor and Colombia, I know they've added some capacity in Brazil as well before I'm just trying to get a sense of your view of this competitor.
Over in Europe , and just how discipline that you found them to be.
Im just trying to get the sense of what kind of risk. There is that there's more moves more investments to kind of take share from this competitor going forward.
No listen there they are a competitor like any other competitor and they have.
Designs on.
On running a global beverage can business and.
They had an opportunity to come to Brazil I'm assuming.
I'll, just say I'm, assuming that's a safe way to put it I'm assuming that the.
That the deal they made to get the Brazil was tied to the Colombian business, we kind of knew that a year ago were a little more than that.
And we'll see where they go.
But there are competitor like any other competitor they are a good competitor.
Okay. That's helpful I'll turn it over good luck and thank you.
Thank you so much your last question on queue is from the line of Adam Joseph.
Your line is now open.
Tim and Tom Good morning wondering.
Tom a couple for you to start just on Capex I know so 19 guidance now is for 40, just given the North American Bev can projects do you expect next year to be similar popped down can you give us any sort of perspective I. Appreciate it's still early days.
Well, we came into the year, saying 400 to 425.
Yes were essentially 440 is not that much off that number so.
Civil or let's say at this point.
For next year Okay.
And then on on working cap for this year any change compared to your previous expectations and same pertains to dividends to minorities on the cash flow statement.
Yes on working capital. We said, we thought we were going to be about flat at this point I'd say, we're expecting some contribution from working capital not real significant that put some contribution.
And our minority dividends in response to George's question, a minute ago, we were talking about the the gain we had in Brazil from the tax.
Because of that gain we have the capacity to pay a bigger dividend the minority dividend, whereas previously we were saying about $75 million.
Perhaps that number is up 10 million or so.
And is that 85, then is that a sustainable number Tom.
To be to be back to 75 or 80, yes, it's over.
Adam It's a.
The tax settlement was a onetime settlement this year.
So the.
Get the money out of the country, so pay dividends got it okay and Tim just one on on Cigna, It's obviously when you announce signode.
But I think part of the rationale correct me if I'm wrong was that beverage can growth was limited at that time and had been for for a long time for that matter.
And now you're ramping up spending on beverage cans, obviously because of that in a recent pickup we've seen in the north American market.
So since that time, you announce signode have your expectations pertaining signode and beverage cans for that matter changed fairly significantly just seems like you go from moving away from Bev cans and now you're kind of moving back to back cans had a time will take notice slowing. So just wondering how your thoughts on those two businesses have changed since that time, so I would say on beverage cans your thoughts.
Over the last 12 to 18 months or.
You know everything significantly more optimistic just given the sustainability environment, we're in and.
But it will require capital and cash too.
To build out.
More capacity in various regions around the world, but thats, all a positive thing thats going to generate.
Future value.
For everybody.
On Signode Nothing's changed I think you know as I said.
Nine of the last 10 quarters, you're describing the business declining nine of the last 10 quarters EBITDA is in the $90 million to $95 million range.
And last year's second quarter for a variety of reasons.
Was far beyond anything they've ever done before and we talked about that last year. Some of the reasons why so I don't think art.
Our view on transit has changed at all it's a.
Remarkably consistent on an EBITDA basis.
In 19 compared to.
Compared to 18 and 17, even in the face of some currency so.
Really generating a lot of high cash flow increases the cash flow yield and provides a lot of necessary cash flow to continue to build out the beverage can business.
Just last question Tim on Signode at the Analyst Day, you talked about taking notes EBITDA going back a decade or more I forget exactly what but obviously you know nine EBITDA was down a lot and then it was up similarly in 10 do you think the economic the sense the volatility and signal EBITDA is.
Is diminished at all from from where it was call. It a decade ago. So in other words in the event we go into it.
Meaningful downturn do you have any reason to think that EBITDA would be.
At least somewhat stable in that business.
So I think two things are different I think.
The global financial crisis of 2008, 2009 was not a.
What you would describe as a normal downturn or an operating recession.
So I I think everybody needs to remember that right that was that was something far different.
But I do think and as we have described.
Signode, while it was still owned by GW and then while it was owned by the private equity firm.
Made incredible strides to try to.
Change the business profile of the end markets. They were they were serving they became much bigger the protective space.
Less reliant on strap much bigger in food and beverage less reliant on the steel industry. So.
The business is far more stable today or were let's say, it's while it is cyclical it is less cyclical than it was then yes.
Okay. Thanks, a lot.
You're welcome.
I missed the I think you said that was the last call. So thank you very much and that concludes the call today. Thank all of you for joining us and we'll speak to you again in October Bye now.
Thank you so much speakers and that concludes today's conference. Thank you all for participating you may disconnect. Your lines at this time.