Q2 2019 Earnings Call
Greetings and welcome to the Ballpark Corporation second quarter earnings Conference call.
During the presentation, all participants will be in a listen only mode.
Afterwards, we will conduct a question and answer session.
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As a reminder, this call is being recorded today Thursday August 1st 2019.
I would now like to turn the conference over to Mr., John Hayes CEO . Please go ahead.
Thank you Lisa and good morning, everyone. This is ball Corporation's conference call regarding the company's second quarter 2019 results.
The information provided during this call will contain forward looking statements actual results or outcomes may differ materially from those that may be expressed or implied.
Some factors that could cause results or outcomes to differ or in the company's latest 10-K and in other company FCC filings as well as company news releases.
If you don't already have our second quarter earnings release, it's available on our website at ball Dot Com information regarding the use of non-GAAP financial measures May also be found in the notes section of today's earnings release.
The release also includes a table summarizing business consolidation and other activities as well as a reconciliation of comparable operating earnings and diluted earnings per share calculations now joining me on the call today are Scott Morrison Senior Vice President CFO , and Dan Fischer Senior Vice President and Chief operating Officer Global beverage I'll, probably provide some introductory remarks, Dan will discuss the global beverage packaging performance.
Scott will discuss key financial metrics.
And then we'll finish up with some comments on our aerosol and aerospace businesses as well as our outlook for the company.
Growth in our businesses continue at or even above our expectations overall global beverage volumes were up approximately 5% and our aerospace revenues were up more than 30% across the globe can demand continues to increase its sustainability progresses from a special interest initiative to a mainstream lifestyle and innovation and execution drive more customers to see gas solutions and all of our divisions.
To say this is an exciting time to be at our company and we said before maybe an understatement.
With this strong growth we have experienced short term cost to serve this growth, particularly in our north and Central America, and South America beverage can businesses. In fact, we probably left appointed to a volume growth on the table as were unable to deliver two and service our customers at the level, we typically expect of ourselves.
To stay on top of this growth and mitigate our line conversions out of pattern freight and other short term headwinds we plan to deploy additional capital to de bottleneck existing lines and build new capacity in order to provide for even greater growth and flexibility to supply our customers needs at the levels that they demand Scott Dan will discuss our investment opportunities to grow profitably across our various geographies and businesses.
In aerospace the team continues to deliver on its growth ambitions contract performance is strong hiring is up and we expect to pursue further investments in this business to keep up with the strong growth that we continue to see.
Now from an earnings perspective, our results were up despite tough year over year comps given the 2018 steel food can business sale and conclusion at the end sale agreement in South America as I mentioned, our North and Central America segment was challenged with previously discussed us aluminum scrap headwinds and six sequential project startup costs. All other segments were at or above our expectations. We expect these near term cost headwinds to mitigate as we progressed through the second half of the year and continue to expect year over year improvement in each of our main geographies.
Now key highlights for the quarter include as mentioned previously overall global beverage can growth of approximately 5% driven by 13% specialty can growth in fact growth in our three key regions, North and Central America, Europe , and South America grew 6% when you exclude the declines we experienced in Asia, Dan will get into this later today specialty cans represent over 42% of our mix on a global basis.
The growth was prevalent in our largest markets with north and Central America up approximately 4% year over year, South America up 12% in Europe up 7%, while EMEA was down slightly due to continued difficult macroeconomic issues in this region.
We received antitrust approval for the sale of our China beverage can business and we expect the transaction to close later in the third or fourth quarter, depending on other governmental approvals around tax Closeouts and foreign exchange flows.
Our aerospace revenues were up over 30% and operating earnings were up 55%. While we don't expect this level of growth to continue we do expect revenues to be up nearly 25% for the full year and operating earnings should continue to grow at revenue growth rates and aluminum aerosol was up low single digits with new product innovation were continuing.
We continue to focus on raising awareness on sustainability, the benefits of aluminum packaging and proactively investing in and offer an aluminum packaging solutions to our customers. One interesting note regarding our growth is that while many new products continue to move in the cans. Our growth to date has not been meaningfully impacted by any conversions of existing brands from plastic or other substrates to aluminum beverage cans, particularly the non alcohol categories, including CST in water that said there have been several public announcements regarding such conversions that Dan will discuss and they will begin to hit the market. Later this year early next year.
In addition, this fall we will launch our new infinitely recyclable grandevo aluminum cups that will make their commercial the debuts in college and professional stadiums during the fall football season, with an addressable market of over 90 billion units globally, a third of which are in the US. We're incredibly excited about this new innovation product launch stay tuned for further media announcements. So in summary, we continue to see strong growth across our various businesses and while we have been challenged for short term cost to serve this growth. We believe these headwinds will begin to moderate and dissipate as we move through the second half of the year, we have many exciting opportunities in front of us that set us up well.
As set our business up well going into 2020 and beyond we will continue to execute our long term strategy of deploying capital in support of growth opportunities, increasing aviate dollars in earning overtime through higher revenues above our cost growth driving more mix shift to specialty containers growing new innovative aluminum packaging products like the cup and expanding aerospace all with the return of value to our shareholders mindset and with that I will turn it over to Dan.
Thanks, John .
Across our global operations, our team is navigating tremendous growth complexity and incredibly tight supply demand conditions.
Sustainability in new categories are fueling customer demand and looking ahead when existing products convert from single serve PTC to cans in 2020 and beyond given the recent announcements by two of the world's largest beverage brands the growth for beverage cans will accelerate.
In the near term.
And until we have more assets up and running.
Cost to serve the surge in growth dampen North Americas performance, given the U.S. aluminum scrap situation, we called out last quarter, and pushing our existing plants and new ones to the Maxim to keep customer and cans.
Turning to growth.
Our second quarter global beverage can shipments were up 5% and excluding declines in China and EMEA global volumes were up 6%.
However, comparable operating earnings were down slightly year over year due to exclusively to the previously disclosed us aluminum scrap issues and continued use lineup is inefficiencies.
Completion.
Of the South America ends manufacturing agreement macroeconomic issues in EMEA and some euro FX earnings translation headwinds.
All in these issues impacted comparable global beverage earnings $55 million in the quarter.
With roughly $35 million and then in the North America business $14 million in South America, and $5 million in Europe .
Across the globe, our teams kept pace with tremendous growth in Europe , Brazil, and North America.
Which as John mentioned is still experiencing operational and logistical inefficiencies given a tight us industry and higher than anticipated growth in Brazil.
The unfavorable impact of use aluminum scrap logistics and customer ordering ordering complexities have largely been addressing contracts renewing in 2020 and beyond.
Before I move on to the segment commentary.
A brief update on some internal talent moves.
After decades of successful leading numerous ball regions. We recently brought Colin Gillis over from Europe , and he will now be leading our North America operations and Collins European role will be backfill by Ron Lewis, who is joining ball from Coca Cola European partners, where he was their chief supply chain officer.
Ron worked in the Coke system for nearly 20 years, and we have known him throughout that time.
His experience and leadership will be a great addition to our team.
Moving to the individual segments balls, North American segment volumes were up 4% in the quarter, continuing double digit growth in spike Selzer's wine craft beer, new water brands and developing categories of fitness energy drinks and spirits and Premixed cocktails.
And cans led to year over year growth in specialty.
Inventory levels for our specialty portfolio are low and every plant and our.
Network is running at maximum utilization.
Given the combination of strong growth the upcoming transition of traditional products such as Stillwater from single serve plastic to cans.
The demands on our existing operational assets are such that we will not be able to sustain current growth rates without additional investment.
Conversions wind speed up in additions that is existing facilities in Georgia, and Texas are in process, we look forward to offering new products in more specialty aluminum cans and bottles capability to support our customers' growth.
Following these investments our plant teams will gain some operational breathing room across the system, allowing us to get costs in line and with previously negotiated contracts Favourably resetting at the beginning of 2020.
I fully expect strong earnings momentum across North America in late 2019 and beyond.
Turning to our South American segment.
Volumes were up 12% in the second quarter led by incredible strength in Brazil.
As mentioned earlier the completion of the ends manufacturing contract required as part of the Wrexham transition transaction led to just slightly lower second quarter earnings.
Higher than anticipated Brazilian volume growth led to incremental logistics costs.
Comps will improve as we move towards the fourth quarter, which is the seasonally strongest quarter for South America.
Our expansion in Paraguay is on track for a late 2019 startup and the 2018 expansions of Argentina, and Chile are performing to expectations.
And similar to North America overall, South American industry trends remained strong with cans.
New product and brand launches for beer wine energy and Stillwater and cans as well as multiple brewery expansions will support additional investment across the industry and specific to ball a new customers multiple brewery expansions will support additional capital in Brazil, including and Multiline Greenfield facility.
European beverage earnings were up 16% in the second quarter due to volume growth and improved year over year operational performance. Despite a $5 million unfavorable operating earnings translation impact in the quarter.
Volumes increased 7% in the second quarter, despite mixed weather during the quarter.
Cans are winning and customers operations continue add new can filling lines for 2019 contributions from our new lines. The euro over impact of our 2018, Gionee improvement and plant cost initiatives will provide further year over year earnings growth and margin expansion as we progress through the balance of the year.
Looking ahead, we will leverage our existing Continental Europe network with near term line speed ups, while in Russia, we are executing a capacity expansion strategy in the short and medium term to support in country can growth.
Turning to EMEA and Asia, the demand environment was softer than anticipated as middle eastern conflicts escalated in the quarter.
Operationally the plants have lower their costs and focused on controlling what they can control and as John mentioned in China fall has secured antitrust approval and has begun the multi stage closing process for the Chinese manufacturing plant sale to RG.
In summary, global beverage can demand momentum has continued in our three largest regions of north and Central America, Brazil, and Europe supply demand globally for cans is tight and our commercial sustainability in recent talent moves will benefit ball going forward.
As John mentioned earlier, the amount of growth, we are seeing today and our securing into the future is amazing.
We will invest wisely with an eye on EBITDA and returns and a proper pace relative to customers long term needs.
Thank you again to all of our teams around the globe with that I will turn it over to Scott. Thanks, Dan comparable second quarter 2019 diluted earnings per share were 64 cents versus 58 cents in the second quarter of 2018.
Second quarter 2019. These results reflect four cents comparable earnings.
For share dilutive impact of the July 2018 sale of our U.S steel food and steel aerosol business.
Details are provided in the notes section of today's earnings release.
An additional information will also be provided in our 10-Q.
Second quarter comparable diluted earnings per share reflects strong global beverage can shipments and solid aerospace contract performance, a lower effective tax rate and lower corporate costs offset by the sale of our U.S steel food and aerosol business and low lower year over year and sales in South America, and use scrap and startup costs that Dan just outlined.
Net debt ended the quarter at six and a half billion dollars.
And reflects our typical seasonal working capital build and ongoing share buyback. We continue to anticipate year end 2019, net debt to remain around $6 billion as we buyback stock and invest in our businesses and pay dividends throughout 2019.
Close to 90% of balls balance sheet debt is at fixed rates and we've reached our post Brexit target leverage levels.
Falls balance sheet is healthy and provides ample opportunity and flexibility to service growth and shareholder value return needs. As we think about 2019 or 2019 financial goals. Originally laid out in mid 2016 are largely intact.
With the North American scrap and operational headwinds that we faced in the first half that makes the full year $2 billion of EBITDA challenging to hit having said that our second half expectations Havent changed as the scrap and operational headwinds begin to moderate in our unit volume growth continues to show strength.
We will exit this year on a $2 billion EBITDA run rate.
Given all the excellent growth opportunities and dependent on the pace of Capex spend an incremental incremental pension funding, we see 2019 free cash flow being in the range of $1 billion full year interest expense will be a little bit north of $310 million.
Full year effective tax rate on comparable earnings will be in the range of 19% to 20% and corporate undistributed will likely run just under $75 million representing benefits from strong overall cost management and the benefits of our shared services structure.
We anticipate benefiting from this low cost structure in 2020 and beyond.
Year to date, we have executed nearly $400 million of repurchases of stock and paid out approximately $80 million in dividends. The excel accelerated stock repurchase program that we announced earlier this year continues to be executed.
Following the year to date run up in the stock we get asked a lot about capital allocation plans.
A significant long term growth opportunities, we have in Cannes Cups in aerospace will require incremental growth capex over time and despite this growth Capex, we will continue to flow meaningful amounts of free cash flow like always we will manage for the benefit of our long term shareholders. When you invest in volume invest with us.
With that I will turn it back to you John Great. Thanks, Scott in our aluminum aerosol business, which is now reflected in other non reportable results and as I mentioned earlier global volumes grew 1% in the quarter.
Industry dynamics are beginning to change and we continue to see opportunities to broaden our global footprint either through bolt on M&A or Greenfield investment. These opportunities vary by geography, we are proud of the progress the team is making on innovation and sustainability initiatives.
As mentioned, our aerospace business reported a 31% revenue growth and 58% operating earnings growth and solid contract performance, partially offset by incremental labor costs. In addition, we have welcomed nearly 600, new aerospace employees year to date, and we anticipate adding at least another 600 employees by year end total aerospace head count recently surpassed 4200 people our focus remains firmly on Onboarding. These new employees further expansion of our Colorado facilities and executing on our strong backlog.
Looking forward the two the new two year US budget agreement further underpins the growth that we see and aerospace now has the potential of growing its earnings in excess of 20% 2019, and with contracted backlog levels exceeding $2 billion and our won not booked backlog at $4.8 billion. The future continues to look bright for the foreseeable future.
While we have made great strides towards our 2019 financially goals originally laid out mid 2016, our longer term prospects have never been brighter well is uniquely positioned to lead an investment sustainable growth and global aluminum packaging and aerospace while delivering significant value to our shareholders. We look forward to exceeding our long term, 10% to 15% diluted earnings per share growth goal in 2019 and over the next several years.
While we are striving in the short term to manage cost and squeezes. Many cans out of our existing operations were completely immersed in our long term growth plans and increasing value creation for our shareholders. Our ability to succeed is because of our people our culture EA mindset, our healthy balance sheet and exceptional products and technologies, we will continue to responsibly invest in our businesses for the long term and do what is best for Paul and our shareholders long term success and with that Leila we're ready for questions.
Thank you Sir.
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One moment please for the first question.
Our first question is from the line of Anthony Pettinari with Citi.
Please go ahead.
Hi, good morning.
Good morning, John John the view that you'll be able to grow earnings beyond the 10, 15% EPS range over the next few years I guess, what kind of volume assumptions underlie that on the Bev can side and can you give us any detail on maybe customer commitments youve secured that give you confidence that you'll be able to three so that volume number.
Leo first Firth respect to volume growth as we said in the first quarter. You know historically, we always thought this business to be plus or minus globally about a 2% unit volume growth around the world and we think it's double that.
We we've been outperforming that relative and I think in the very short term. We can continue to see that but I think over the long term, 4% unit volume growth is a good way to think about it and if there is upside to that we're going to be spending more capital on that because we assume it's going to be good return projects to meet our customers needs in terms of specific customers in the contracts, we don't get into anything but for example, the new plant. We are building in Brazil is secured by a new long term customer in North America here, we've been as I mentioned in my comments, we've been leaving growth on the table, because we havent been able to serve incremental so that that demand certainly is there we just need to get our our supply caught up so we can get a little breathing room and give our operational folks.
More opportunity kind of slowed down the conversions that they've been experiencing which have been increasing the short term, which have been increasing these short term headwinds that we talked about.
Got it got it very helpful. And then Dan you talked about 55 million of headwinds in the quarter from operational inefficiencies and you broke that out between North America, Europe , and Latam any view on what that number could look like in three Q.
And then just Directionally would you expect those headwinds to abate in all three of the regions that you mentioned or could they intensify or or be relatively stable any view on that in threeq.
But I think we're.
I think we're very hopeful that the 35 in North America in particular will will dissipate and we've got plans in place on the metal scrap issue that will that will.
Start to trend in a more favorable direction, it'll still be a headwind year over year, but it will be less of a headwind than we saw in the first half.
The performance in and are inefficient lines, we had two conversions that took place in the quarter and then we still have.
We're still a little behind on two lines in the Goodyear startup, we're seeing progress there.
So I think that momentum will continue through the quarters I don't know if it dissipates entirely in Threeq you, but it will continue to.
To progress in the right direction heading into certainly the beginning a 19.
And then really Europe is FX that we described I, probably can't give you much guidance, there and the 15 million that I quoted to the $14 million.
In South America is.
That will dissipate in the second half of the year the lapse as it relates to the our dog amortization.
Okay. That's helpful I'll turn it over.
Our next question is from the line of Ghansham, Punjabi with Robert W. Baird and company. Please go ahead.
Hey, guys good morning.
First off on the 13% increase in specialty can volumes into Q. John can you just sort of break that out by region.
And then you also mentioned growth came in above your expectations for the second quarter and I'm, sorry, if I missed this but which region in particular.
Surprise you to the upside.
Well I think I think the momentum continues to answer your question first in North America specialty volumes were up single upper single digits as I said, they could have been higher but we just didn't have enough cans to to get out in the marketplace. I know South America was very strong it was low 20% growth in the specialty and even in Europe .
We're seeing a lot of what fundamentally what's driving this is you're seeing all these new categories and all these new products moving into specialty containers and that's what we get most excited about ghansham as you know over the past five to 10 years, we've really been a put a focus on putting supply of specialty containers into our system and that only continues to accelerate.
I think to answer your broader question about where were we surprised I just think overall global growth in a very seasonally strong quarter.
Up 6%, if you exclude China and when you think about that and we left we left growth on the table for it we could vary if we had the capacity we very easily could have replicated the first quarter, but we did and Thats why you were talking about putting more capital in.
Okay, and then just based on your current projects that you have announced including line speeds.
Speedup than de bottlenecking, how much incremental capacity will your footprint generate in the developed markets going to 2020, and then up the new categories that you are benefiting from how is the filling location dispersion different relative to your legacy customer I'm, just trying to get a sense as to how logistics costs are different for these new customers and also it may impact your.
Capital allocation plans related to any new capacity going forward.
Yes, I would say by mid 2021.
What what we're signaling here is somewhere between four to 5 billion of additional capacity and the reason 2020 is a difficult.
Comment for US is I think in Texas, specifically that is the most difficult environmental permitting area that we deal with anywhere in the world. So you can't even start civil engineering projects until the permitting is officially signed off and that could take as long as a year. So 2021 I've got good line of side that the new facility. The two lines in the speed upset or all in process will be up and running and we should be executed against those by mid 2021.
Maybe 60%.
Of what I've described falls in the second half of 2020.
Yes, so the best way to think about it if you break it into line speed up versus new lines versus new facilities kind of a third a third a third is best way said line speed ups will that we'll be able to help us out for most of 2020, certainly the summer selling season in North America, and as Dan said the line the two lines or putting in North America. One we have a pretty good line of sight that should be able to help.
In the second half of next year and then the other one in Texas is dependent upon the permitting and then as we go into South America, I think thats really more for 2021.
Yes definitely benefiting from.
New categories in North America and.
The one of the investments will be.
Targeted to a new filling location.
The rest of the incremental investments will be falling into existing filling locations.
And Ghansham as you know, we don't talk about specific customers.
Contract Shandra growth plans, but we are aware of of a variety of specific customers that are adding filling can filling capacity, whether it's in North America, whether it's Europe and were Dovetailing, our geographic investments with those and so there have been some customers that have been having to.
By cans from us in one geographic location ship them across country to another one where they fill it we're aiming in looking to work with them on streamlining a lot of that so it will not only help us but it will also help them.
I think I understood. One my one last one last question on the new category expansion or one that comment is.
We absolutely are looking at what products and what customers.
Our winning in the market and which ones we want to be with.
And those definitely played into some of these expansion and investment call outs.
Thank you Dan John .
Thank you. Our next question is from the line of Edlain Rodriguez with you before.
Thank you and good morning, guys.
John quick question for you I mean are you will be adding new capacity.
Your main competitor is adding more capacities like any concerns that Dan just be maybe you tracked in too much too soon or do you still that volume will be strong enough to fall.
Over the next couple of.
We feel pretty pretty darn strongly that the growth in the in the various markets is more than sufficient to cover that up as as I mentioned could just give you context here in North America. It's approximately a $100 billion can market has been growing at 4% Thats 4 billion cans right. There alone in any given year you'd multiply that over a couple of years and next thing you know you are looking at a $12 billion.
Of new capacity and that eight to 12 new lines.
That is why we're getting out ahead, we as you all know we've invested.
Depends on where you look but across the our whole system globally. We've invested in 11, new lines over the last 18 months and we've been able to keep up with a lot of that growth, but not completely all of it.
And so what we're doing is this is just the next phase of trying to get out ahead.
Okay and in terms of capital allocation.
So thats, new and all the investments you make in are they going to be coming at the expense of share buyback. What do you think you can still do that $1 billion that you've talked about over the next couple of years share buyback.
Well, here's the way I would think about it.
And I'll turn it over to Scott a minute, but when you talk about this growth as we all know we've talked about this art DNA is approximately $550 million and we said our maintenance no growth capital is in the range of $250 million. We've also said people have asked over time, saying how much does it cost for a new line and it varies tremendously by region and what capacity as you want to put it but if you say up roughly a new line is approximately $75 million and you get anywhere from 800 to 1 billion cans on depending on.
How many swings you have in that that means to keep up with this growth on a.
On a global basis, you're talking about.
Growth for us on a base of 105 plus billion cans is growing 4% that's about four new lines a year and if it's at $75 million that is about 300 million. So you layer on top of that you get the 250 maintenance plus 300, a growth that gets about DNA. Then you layer on the growth that we have for aerospace and then you grow on cups and other things you can quickly see how we get to kind of $700 million if that global beverage can growth continues and we need to put more in we have the capacity to because then I'll turn it over to Scott now even with all this elevated capex, we're still generating a tremendous amount of free cash flow. Yes, I think we're going to continue to invest in our business on all these projects, where we can grow uva dollars grow our earnings.
We're going to continue to be buyback our stock paying dividends here I think the 50% increase.
Earlier this year is pretty strong evidence of that.
Dan I think will be both kind of cuts a consistent buyer of our stock, but also an opportunistic repurchase of our shares and take advantage of volatility. So that means that any quarter. Two we may buy more or less depending on that volatility, but we're going to continue to invest in our business and return a lot of capital back to the shareholders. Yet let me just reiterate over the last 20 years, we have done that exact same model, we've invested in our business and we've generated a tremendous amount of our shareholders.
Value for our shareholders by being consistent allocators of capital back to our shareholders. Yes, we have elevated capex, which is exciting because that's going to provide the growth and we also have the flexibility to be consistent and over the long term and returning value to shareholders.
Okay. Thank you.
The next question is from the line of George Staphos with Bank of America Merrill Lynch. Please go ahead.
Hi, everyone. Good morning.
Thanks.
The commentary I just wanted to.
Ask a question kind of a point of clarification to start the additional four to 5 billion cans of capacity. Dan you said, you think you'd get to.
On an annualized basis by mid 21 does that include.
Capacity does that include within the number for aluminum cups or does it not and similarly.
I thought it would have but given John's commentary earlier does that include anything for any of these stillwater conversions or not.
Yes, so what would those ad habits.
Cups.
No it's not in there.
In Stillwater conversions.
That's that's a we don't have much built into that $5 billion and as you would imagine George we're having very different conversations with the customer base.
All the three major markets are incredibly tight and so if there was going to be a move in the water and there are certainly conversations about that it will require.
Some significant collaboration between us and our customers to make the supply chain. They will have to invest in billing they'll have to invest and potentially different logistics structures and warehousing and we'll have to add capacity for.
And so those conversations would be in very early innings.
Right now.
And I would take it it's probably not prudent to size, what the opportunity could be either four cups or for Stillwater, maybe not 21, but 20 223, because you'd obviously.
So you don't have a full agreement yet on the water side you can't.
Bring in permitting you can't bring in Capex, yet, but is there a way to size what it could look like maybe 22 or 23.
Yes, I'll I'll I'll, let John comment it would be difficult. It's a massive market I think single serve water is 500 billion units in global Kansas 300. So.
2% moved 3% move would require a very different investment pattern for us.
On the Cup side, we are.
Commercializing the product it will be in sporting venues now the thing that we're trying to get our head wrapped around is exactly the output that will come from.
A massive line or footprint expansion, we're working through those and those details right now so given you commentary on this specific volumes for the investment still little premature.
But we'll know that in the next 60 to 90 days I think yes, George just to amplify on the Cups I completely agree on the on the water side just on the Cubs as I mentioned in my comments around the world in terms of the addressable market for this over 90 billion units a third of which are in the United States. This this will come at a premium aluminums not inexpensive.
But what we see is so far is a very strong willingness to pay a premium for a sustainable product, particularly as.
As college campuses in professional sports venues go plastic free.
Understood I thought that some of the investment.
And lines that you're talking about now would include.
Some capacity for comps is that incorrect. So if if I know you're commercializing youre doing some pilots. This this coming fall season.
Am I mistaken that if you really go full force with this that the investment really hasnt been lined up yet for that for that those revenue streams.
That is correct that is correct. We have already put in a pilot line that were currently serving for this fall, but to really scale. It out it requires a new investment that we have not announced yet.
Okay. Thanks for all the back and forth on that.
Last question on investment and will have one.
Shorter term one I'll turn it over just out of fairness. So the return on capital that you are seeing out of these new investments.
Is there a way to say whether it's.
Perhaps a lesser rate than what you've seen but you're getting so much growth you're willing to take a lower return than what you've seen in the past are the returns on these new projects equivalent or above what you've seen with.
Returns on your last two or three years worth of growth Capex, and then separately and.
Maybe shorter term.
Given all the growth you are seeing what gives you confidence which in the investor takeaway is why we should be confident that the startup costs and all the other variable expense that's been sort of a every quarter has been something that will dissipate by 2020 is it mostly in the contracts or is it the learnings that you're getting from the from all of the.
The conversations that we're having with our customers are very different.
I think John's indicated this.
And that is resulting in at least all the projects that we have approved thus far already.
North of historical norms returns on these projects.
In in Europe , North America, and South America.
The markets are tight and so the conversations are and many of those markets that used to have excess capacity. There is very different and so we should be we should be doing better from a return threshold standpoint at this point.
Fair question and I think when John indicated the three buckets of capital investments for how we will get units.
The the easiest units to get our speed ups and conversions.
The second most difficult or our full line expansions in the third or Greenfield and where we have admittedly struggled.
Whether its monterrey or its good year as cabin analysts over the last couple of years.
We've we've generally had an 18 month time horizon on seeing the.
Commercialization of the products and getting up to a run rate.
And I think it's probably going to take a little longer than that.
And we will probably communicate that.
More more explicitly one thing that we do know that we have to spend and hell of a lot more time on training.
The other thing in some of these markets. These are the first in North America Goodyear is really the first market, where we built a greenfield plant and 30 something years, So we will get better at it.
And I think we'll hire better I think we'll train better.
And we're fully committed to that.
Thank you very much.
Thank you. Our next question is from the line of Tyler Langton with Jpmorgan. Please go ahead.
Hi, good morning, Thank you.
I think you just mentioned from the sustainability you really have it sort of seen benefit. Yes. Then you kind of mentioned just in northern Europe , you're starting to see some customers convert from PC to cancer can you just.
Let's talk about how significant.
That move is or just provide a little more color on that.
Yes will this is John maybe I'll turn it over again, which we did say we have got a better from sustainability. All these new products I think are being driven by sustainability, what we haven't seen in any meaningful way is existing brands that are already in existing substrates converting to a little.
We.
There have been some public announcements by customers. We are obviously aware of other investments that they are making for those conversions and thats what gives us.
Some conviction as we look forward into it I do think that many brand owners are struggling as their retailers are demanding more sustainable products and a reduction of their footprints, both environmentally and from a greenhouse gas perspective, and they are turning to products such as aluminum and that's what I was talking about you are absolutely right in Europe , you're seeing it I think you're starting to see it North America I think someone asked a question earlier about how big could that be we're in early innings. So it's it's too early to tell but so far so good in terms of what we've seen.
Okay. That's helpful and then.
In terms of the corporate expense and Scott I guess, I think 16 million. This quarter had been a low twentys is that 16 million kind of a good run rate.
Going forward or is that mainly from sort of the shared services initiatives.
It's a ton of different things, but that run rate should be pretty good I said end up kind of just under 75 million for the full year.
We're benefit we're doing a lot of things whether its restructuring legal entities.
Some of the things Weve done a pension is shared services is all those things that are adding to that.
Basically lowering our costs that we will get the benefit of not just this year, but into the future.
Let's not forget a couple of years ago, we talked about over the 2018 release last latter how 17, we're going to actually be making investments in standing up shared services and we should start to get the benefit as we get into the second half of 19, and that's exactly what we're seeing but to Scott's point. That's just one of it theres theres hundreds of different projects that all incrementally may not look that exciting, but cumulatively they start to add up.
Okay. That's on the final question in terms of Capex.
Next will mostly for these to these these projects will most of that.
In 2020, and how to think about Capex for this year.
Yes, I think capex than we initially set are up 600 million for Capex I think it could be more than that I think next year could be a little higher than this year.
All of these projects, we just approved at our board meeting a week or so ago $350 million of capital to be spent over the next 18 to 24 months to add capacity across our beverage system and another 150, and our aerospace business to keep up with the growth of that business. So I think we could spend a little more than 600. This year and I think we'll spend a little bit more than that next year.
Great. Thanks, so much.
Our next question is from the line of Ron Let me split then with RBC capital markets. Please go ahead.
Great. Thanks, good morning.
Good morning, I wanted and.
The outlook statement EPS growth of greater than 10% to 15%.
It sounds like volumes potentially trending a little bit better than you thought.
You also discuss contract renegotiation in the statement in the release and what you have experienced quite a bit of costs. So implicit in that statement.
That.
Contract renegotiations and pricing improvements in mix is going to more than offset the logistics issues and the cost that you are.
Placing that you're experiencing.
Or is it a greater pivot to buybacks.
As well or maybe you can just size what kind of drove that statement.
Well qualitatively I am not going to pass through all the numbers I think weve in one way shape or form talked about them already but number one we've had a variety of headwinds that we said, we're going to dissipate certainly as we get into the back half this year, but more importantly going into 2020. So that's that's a source a year over year improvement. We also have unit volume growth that is much stronger than we had historically have seen and or anticipated and the mix of that more in specialty is a kicker on top of that so thats, a big data point relative to.
Our historical 10% to 15% you think about the growth in aerospace that we've been going its been growing much stronger than we historically have.
Theres other things as well, but those and then you talked about the new capital, we're putting in and were an EPA companies. So we better darn well be generating the returns on that so you put all that together.
And absent just normal share repurchases you can see a line of sight of why we feel bullish about the next few years.
Okay.
Thanks, Thanks for that and then just from a from a.
Another perspective I was just wondering now South America, you guys experiencing very strong growth there has been some extra capital it's come in there though.
Any concerns that growth there could slowdown eventually and with new entrants in that little more capacity. Thanks.
Yes, probably less concerned about the new entrances just more concerned with the volatility the region, but the reality is the movement.
And I think things we've talked about this historically boat.
What you are seeing an accelerated growth rates in North America and then.
Europe is a sustainability impact.
What you are seeing in South America.
Which is a real tailwind and it should continue for some period of time.
Obviously, given the macro environment.
It remains somewhat healthy is it's a shift from returnable glass by the largest income it to cans meaningfully and they're making significant filling investments to support that they have lost share over the last two to three years in that marketplace by Premiumization, a beer and all of that going into specialty aluminum packaging and so they have made a conscious decision.
To move from away from Returnable glass and so that's why you're seeing these accelerated growth rates in that marketplace and they are committed as best we can tell to doing that for a long period of time. So we like that we like the growth trajectory in in that market. In particular, yes also further underpinning it over that last few years, we've actually seen very strong growth, but that was despite overall consumption of beverages to be down I can tell you year in the second quarter 2019 beer total beer consumption irrespective of what package type. It was in was up by 2% soft drink was also up by 2%. That's the first time in a long time those have been positive and so if we had good growth underpinning.
With negative overall volume and now let's turn positive then you layer on what Dan said Thats why we feel constructive over the next several years.
And.
Okay last follow up on free cash flow, assuming that you do grow yes in the 10% to 15% or above range.
Given that your investments.
You know look like increasing your capex outlook.
Would you expect slightly lower free cash flow growth and how should we think about that thanks a lot.
No not necessarily because I think we'll get as Dan talked about the projects that we're investing in and the mix of those projects gets better and the I think the earnings acceleration.
Will offset some of the growth in capital over the next few years. So I don't necessarily see free cash was taken a big hit as we go forward, yes, and the other thing I'd point out is actually cash flow from operations is going to be growing quite strong.
When you really think about free cash was a function of the cash we generate from running your business.
Less the maintenance Capex, you need to support that business, and then plus or minus growth capital that growth capital could be M&A it could be.
Greenfield investments as we talked about so we actually over the long term that growth investment is a one time type of thing and so yes in 2019 or 2020 or 21, we may have an elevated capex, but it's onetime growth capex that is going to accelerate the free cash flow from operations.
Thanks.
Our next question is from the line of Kyle White with Deutsche Bank. Please proceed.
Hi, good morning, Thanks for taking my questions.
Just curious if you guys what kind of volume impact you saw from the weather conditions in the quarter and then what have you seen in July any impacts from kind of the heat waves that we're seeing.
No no issues in North America, I assume thats, where the questions coming from but we did see in.
In the second quarter kind of some dissipated as good as our volumes were in Europe . The weather wasn't on our side and that has certainly turn so.
But from a weather perspective.
As long as it is.
Not.
Over 95, consistent people people are going to drink can products I mean, that's kind of the the temperature range, we easily see yet as Dan's point in Europe , we did qualitatively the volumes were quite strong, but we do think that.
They were more muted than they otherwise would have been because of bad weather you go into July it's actually got incredibly hot so it's almost too hot where people stay indoors.
But having said that volumes continue along the growth pace that we've always talked about so there's there's for different reasons, it really hasnt impacted it.
Over the longer term, but you're going to have short term dislocations because whether it's good both good and bad.
That's helpful and then turning to aerospace continues to grow nicely.
The won not booked backlog close to about 5 billion can you just provide some details on these backlogs in kind of the typical timeline that we should expect them to materialize into a one contracts and materialize into actual sales.
Yes, it's truly across the board when you look at the won not booked we have we have things such as I'll. Just give you two bookends we have on one hand, the shorter term.
In that is contracts, we have won for specific satellites with specific customers in classified arena that because the government didnt have a budget. They could sign an agreement now that that budget is behind us it significantly improves the prospects. It over the near term that we will go on contract and that will move from one not booked into a funded backlog status on the other extreme we do all the sensors.
That are on the fuselage wings of the F 35 that contract will go out to 2030 or 2040 in the various lots that we have produced some of them will move in the short term to from won not booked to funded backlog others will stay out there for a number of years as these planes continue to be built. So those are just two extremes and there's there's hundreds of programs in it that have similar characteristics within that.
Those parameters I just laid out.
Got it. Thank you good luck in the quarter.
Thank you.
The next question is from the line of Neel Kumar with Morgan Stanley . Please go ahead.
The line of Neel Kumar with Morgan Stanley is now open and interactive. Please proceed with your question.
Oh, sorry, I was on mute.
I just had another question on aluminum cops do you have a preliminary sense, what the receptivity of customers is two cups and aluminum versus plastics and are there any other new revenue opportunities outside of beverage cans that you're considering.
Maybe I'll take the first one.
We've done a bunch, a quantitative and qualitative research that says this could be very.
There could be a lot of upside here I think what we've seen at a high level that people see the experience of the container as as much better than all the existing alternatives to see a colder they see a sturdier they see a willingness to pay more as a result of that and so everything that weve seen says, yes, there could be a lot of interesting upside in the year and as it relates to other innovations we always have other innovations, but they can consistently revolve around the markets in which we currently serve and so this is for beverages I would not anticipate us going into food for a week, which consciously made a decision to exit that but we have a lot of things in the pipeline I don't know Dan you one of the thing that I would say I mean, obviously, you're presenting this in kind of the entertainment space and Foodservice basin.
Look we are a 100 for 100 in terms of the percent of showing this cup through a customer potential customer and then wanting to place an order right now.
We're returning we're turning down or allocating is what we're doing but where you will see this is entertainment venues and you'll see it in sports venues, where there is a massive push too.
I have a green facility.
At this level and further helps leverage us on the college campuses for example, because when when college campuses in terms of sustainability that is probably the greatest area. When you think about demographics and you think about.
People 18 to 25 years of age of those are probably the those that are most conscious about sustainability and when college campuses talk about going plastic three yes. They can they can convert their soda, yes that can convert their beer, yes are starting to convert their water, but they never had an alternative for on premise in terms of comps now they do and so that's what we've been talking about them using this as an opportunity to accelerate going classic free that their customers being the students are asking for.
Great that makes sense.
And I was just wondering if you can also update us on how sustainability conversations with customers.
Had been progressing aerosol I recall, you mentioned those conversations started surfacing in space in that in the first quarter of this year. So any update there would be helpful.
Yet you know as I said in the first quarter and kind of continues there is discussion, but its further behind the beverage category I think the I think sustainability in recycling in the personal care space is far more difficult you have many more residency of many more colors within those ranges and so as they try and think about how they're going to deliver their products in a sustainable world. It's just taking longer it's much I won't say easier, but you can see a have a much more clear line of sight when youre talking beverages, and you see what you need to do I think it's a little bit more challenging when you get to the.
The aerosol side, but we still think there is great potential. It's just we cannot point to you right now any specifics like we can in the beverage.
Any specifics on the aerosol side that we said that is a direct result of sustainability.
Okay, and then just lastly, what specialty can growth of 30% and global volume growth of 5%.
Your portfolio mix of about 43% seems to imply that traditional can volumes.
Came down during the quarter is that generally at their conversation that all the growth came in specialty cans.
Yes, so yes overwhelmingly yes, I mean relatively flat some slight declines, especially in EMEA and Asia contributed to that foot almost overwhelming we all the growth came from specialty and that's what that's what was reflected in that mix.
Great. Thank you.
Next question is from the line of Brian Maguire with Goldman Sachs. Please proceed.
Hi, good morning, everyone.
John back at the Investor Day.
It seems like a long time ago now back in October .
You talked about you know just one of the challenges in.
Adoption of the Kansas directly was just the difference in the price point at the retail level between.
Beverages bottles in PT for example versus aluminum cans.
Just wondering as you've seen this take off in growth. How you think customers are getting around that and presumably the input costs are up you're doing a arrow job of renegotiating contracts to capture the value you guys create.
Do you see customers being able to kind of price appropriately to maintain or improve margins on cans and.
Just a general kind of how do you see the growth in specialty helping customers with that price conversation.
Yes, Hey, this is Dan good question I think this lends itself to when I think in John's describing this is really talking about kind of core brands shifting out of high margin packaging and it was established because higher retail prices they put on those packages in plastics.
The growth that we're seeing is coming in specialty packages.
New products.
Those are still being launched by the large CPG companies.
And they are being launched at a far greater rate and I think we've been touched on it's basically two X the amount of new product launches in both North America and parts of Western Europe that are going into cans versus the historical rate of about 35%.
Those products are.
They are able to garner a higher price point, which is not been much of a conversation because they are in some of these emerging categories like fitness energy Spike Selzer's.
So they're able to step into cans with new products at really nice margins.
And.
Although they probably won't say this.
Then we'll say it publicly they also don't want to compound an issue in their supply chain by putting more plastic into that supply chain and Thats why were inferring theres, absolutely a correlation to sustainability yes.
And the only thing I'd add on top of that is even with the existing brands, which I was specifically talking about Dan's actually read the vast that's why specialty growth is is going so much but let's not forget that many of our existing brands. They have put packaging, whether its a seven and a half ounce here in North America, our 250 ml or 150 ml in Europe , and they've been able to ride that price curve up to reduce and or eliminate the.
The retail price for fluid ounce delta between their plastic offerings and their specialty can offerings.
And your comments just about the forward look on an opportunity to maybe take some share from other substrates in those traditional markets.
Are we at the point, where the concerns around customer perception on sustainability overwhelm the more challenging retail price point or the fact that cans costs more than plastic.
You mentioned you havent seen much benefit to date comes Thats paid substitution, but the forward look sounded positive. There are we just seeing your in your conversations with customers that really sustainability is trumping economics.
And these these decisions.
They won't they wont sell they won't necessarily say that directly but what we do know is the investments in Cannes filling lines are happening at a massively accelerated rate versus historical norms.
And we also know that some of our major customers are putting in a lot more cans filling capacity over the next two years. So the combination of those two would suggest that theres absolutely contemplation that they need to get out ahead of us for a potential move whether its regulation or they are willing to take a slight margin dilution by moving into aluminum.
I think Theres. In addition to all that I think there's a recognition that the consumers are acquiring that's the most important thing.
Got it thanks very much.
Okay, Lila if we could maybe just have one more question.
I'm very well in that case and a final question is from the line of chip Dillon with vertical research partners.
Please go ahead.
Yes, thanks for taking my question.
I just had a quick one on the a cup.
Thanks.
Introduction that you're going to roll out.
Obviously, the water bottle is very similar to.
An aluminum beverage can for beer, let's say, but the cup is a different concept and I. Just didn't know if you were able to use similar machinery or if you've had to go out neither put something together on your own or or by a different type of technology or or set of equipment to make aluminum comps.
Yes, great question, what I'd say is through parts of its similar but a good chunk of it is very different this has been in development for nearly seven years within ball and we think Theres a lot of proprietary newness to this that we'd rather not disclose but.
It's very easy to make comps when you are banging out it.
100, or 200 per minute, but the key is to do it at scale to get to a price point that actually opens up the market. We think we've done that and Thats why we started with a pilot we wanted to test that were three or four weeks in the pilot things are working well with brand new technology on some parts of it and so I think it's and that's what gives US a lot of hope big but it is it's similar but different than making a beverage can.
Okay very helpful. Thanks very much.
Okay. Thanks.
Okay. Leila will thank you very much for everyone's participation and we look forward to a great second half 2019 and as we go forward. Thank you all for your support.
That does conclude the conference call for today, we thank you all for your participation and ask that you. Please disconnect your line.