Ladies and gentlemen, thank you for standing by. Welcome to the Ball Corporation 4th 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. As a reminder, this conference is being recorded Thursday, January 31, 2019.
I would now like to turn the conference over to John Hayes, CEO. Please go ahead.
Great. Thank you, Chris, and good morning, everyone. This is Ball Corporation's conference call regarding the company's full year and Q4 2018 results. The information provided during this call will contain forward looking statements, including estimates related to the impact of the U. S.
Tax Cuts and Jobs Act. Actual results or outcomes may differ materially from those that may be expressed or implied. Some factors that could cause the results or outcomes to differ are in the company's latest 10 ks and in other company SEC filings as well as company's news releases. If you don't already have our Q4 earnings release, it's available on our website atball.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 and Chief Financial Officer and Dan Fisher, Senior Vice President and Chief Operating Officer, Global Beverage. I'll provide some introductory remarks, Dan will discuss the Global Beverage packaging performance, Scott will discuss key financial metrics, and then we'll finish up with some comments on our Aerospace business as well as our outlook for the company. 2018 was a strong year for Ball and its shareholders. Strong global demand for our aluminum beverage and aerosol packaging products, growth in our Aerospace business and a strong long term focus on earnings and cash flow performance allowed us to return approximately $850,000,000 to our shareholders, which was well above our original expectations dating back to 2016.
Our 4th quarter results were slightly below in our own expectations due to some transitory issues in our North and Central America beverage segment that Dan Fisher will comment on. Yet as we look forward, we like the position we're in. We have good momentum in terms of our volume growth. We will begin to reap in earnest the footprint activities that we have implemented and largely completed. We have a clear line of sight to achieve the $2,000,000,000 in EBITDA and $1,000,000,000 in free cash flow that we set out as a target in 2016, we just need to execute.
And all of our free cash flow will be returned to our shareholders in the form of dividends and share repurchases. During 2018, we continued to actively adjust our overall manufacturing footprint. And since we closed on the Rexam acquisition, we have rationalized 8 facilities globally with 4 in the U. S, 2 in Brazil, and one each in Germany and in Italy. We started up 3 state of the art beverage can facilities in Arizona, Spain, and our joint venture in Panama to cost effectively meet growing demand in these regions.
We've installed or are installing additional specialty can capacity with new lines in our existing facilities in Argentina, Chile, Switzerland, Serbia, Texas and Mexico, in addition to a number of other smaller speed up projects. We've grown our aerospace backlog 26% to over $2,200,000,000 while also growing headcount by over 35 percent to approximately 3,700 people, and the company continues to expand our aerospace infrastructure to meet growth in this important segment. We've divested our U. S. Steel Food and Aerosol Business into a 49% owned joint venture and realized approximately $600,000,000 in cash, and we announced the sale of our Chinese beverage can business.
As we look more deeply into 2019, we are on the cusp of achieving better value for our standard beverage can products as a majority of our negotiations for the next 18 months are largely concluded, which much of this value to be received beyond 2019. We are well invested to capture global growth for our specialty product portfolio. We are benefiting from the final phase of initial acquisition related cost out programs. We are embarking on additional efforts to streamline global processes. We are commercializing the sustainability benefits of aluminum packaging to provide our customers solutions versus environmentally challenged substrates, and we are initiating additional products to further expand our aerospace infrastructure and testing capabilities.
As we go forward, we will continue to execute our long term strategy of growing earnings over time through increasing revenues above our cost growth by focusing on our value over volume strategy in standard containers, driving more mix shift to specialty containers, further developing innovative aluminum packaging products and expanding aerospace, all with an EVA and return of value to shareholders' mindset. Ball is uniquely positioned to lead sustainable growth in global aluminum packaging and aerospace, while also continuing to return significant capital to shareholders following the Board's recent $50,000,000 share repurchase authorization, as well as achieving the 3.5 year plan we laid out in mid-twenty 16 of comparable EBITDA and free cash flow of $2,000,000,000 $1,000,000,000 respectively. Thanks to all of our employees who helped our company achieve these results as well as win numerous customer awards and recognitions, including inclusion on the Dow Jones Sustainability Index and the recent humbling recognition of being ranked number 1 on Forbes Magazine's list of America's Best Employers for Diversity. All of this is possible because of our people and our culture. We're proud of our 139 year and we'll continue to do what's best for Ball and shareholders' long term success.
And with that, I'll turn it over to Dan.
Thanks, John. Our global beverage business comparable operating earnings were up 3% year over year on full year global volume growth of 2%, offset somewhat by plant start up costs, higher freight and the late year plant inefficiencies. Our global teams kept pace with notable growth in Europe, Russia and North America, which at times also created some operational and logistic inefficiencies given an oversold U. S. Industry and strong demand in the UK, Nordics and Russia.
We left some money on the table in 2018 and with new plants now 80% to 90% up their learning curves, that should flow through in 2019. Moving to the individual segments. Ball's North American segment volumes were up 4% in the quarter. New categories led the way with wine, sparkling water, craft and spiked seltzers experiencing double digit growth, and 2018 was truly a tale of 2 halves. Demand lagged in the U.
S. During the first half as mass beer slowed, while in contrast, other customers struggled to properly gauge consumer demand for new product introductions during the busy summer selling season, ultimately leading to tight supply demand for specialty cans in the second half, leaving little room for air. At the same time, we were experiencing such growth. U. S.
Aluminum suppliers struggled to provide quality metal to us and this issue wasn't resolved by year end 2018, leading to plant network inefficiencies late in the year, resulting in our North American business producing lower than expected results despite strong volume growth. So far this year, the suppliers delivering metal we can run and our plant and efficiencies in the affected plants are improving. In order to ensure that this does not occur again, we have focused our efforts on ensuring that our metal supplier is doing the necessary things to deliver quality metal on time, exploring other metal options despite the aluminum tariff situation and by working with our customers to lay down safety stocks in this seasonally slower part of the year and ahead of what we anticipate will be a very strong year in North America. Given our customers' current demand profiles, we anticipate selling 2,000,000,000 more units in 2019, while also reaping the net cost savings following the successful decommissioning of 3 plants and ramp up of our 4 line specialty plant in Goodyear, Arizona. Turning to our South American segment.
As expected, our Brazilian volumes were flat versus the industry being up 6% in the 4th quarter. Ball's 2017 decision to forego some can business in Brazil and the completion of the INS manufacturing contract required as part of the Rexam transaction led to lower 4th quarter and full year earnings. Looking forward, the second half twenty eighteen trend will continue in first half of twenty nineteen until we anniversary these items. Overall, the South American industry trends remain strong with cans being the favorite package in the beer, tea, energy and hard alcohol categories. Our expansions in Argentina, Paraguay and Chile are on track and we are excited about the can continuing to be embraced by customers and consumers across South America.
With these expansions benefiting second half twenty nineteen, full year 2019 should be roughly in line with full year 2018 performance. European beverage earnings were up 29% year over year in the 4th quarter and 21% for the full year. Volumes increased 10% in the 4th quarter and 8% for the full year. Cans are winning as customers shift their package mix away from plastics and into cans. Tailwinds such as this, the new facility in Spain coming online successfully and the closure of our one line San Martino, Italy facility earlier than planned led to a strong finish in 2018.
As we look forward, continued good market growth, the addition of 2 new lines in Switzerland and Serbia, along with several other specialty line conversions scheduled to be brought online in early 2019, the year over year impact of our 2018 G and A improvement and plant cost initiatives will provide further earnings growth and margin expansion in 2019. Turning to EMEA and Asia, the demand environments in Turkey, Egypt and India improved, but were offset by regional volatility and poor operating performance in our Saudi joint venture, which led to meaningfully lower volumes in the region and operating earnings down by more than $20,000,000 year over year. And in China, the business remains cash flow positive and Ball continues to actively manage the business ahead of its sale to ORG, which following regulatory approval should close in the second half of twenty nineteen. In summary, global beverage can demand remains robust in our 3 key regions of North and Central America, Brazil and Europe. Supply demand for U.
S. Standard containers in certain specialty sizes is tight and commercial and sustainability initiatives will benefit Ball going forward. Thank you again to all of our teams around the globe. With that, I'll turn it over to Scott.
Thanks, Dan. Comparable full year and Q4 2018 earnings were $2.20 $0.55 respectively. Details are provided in the notes section of today's earnings release and additional information will also be provided in our 10 ks. 4th quarter comparable diluted earnings per share reflects solid operational performance across our businesses, a lower effective tax rate than expected and slightly lower corporate costs offset by the sale of our U. S.
Food steel food and aerosol business and lower year over year performance in North and South America as Jan just outlined. From an overall cost perspective, our people have been doing a great job with our SG and A as a percent of sales an industry leading 4.1 percent for the full year. Also we mentioned on prior calls the timing of the U. S. Steel food and aerosol sale versus the timing of using the proceeds to repurchase shares was slightly dilutive to earnings in the second half of twenty eighteen.
Net debt ended the year at $6,000,000,000 and we anticipate year end 2019 net debt to remain around $6,000,000,000 as we continue to actively buy back stock and pay dividends throughout 2019. Close to 90% of Ball's balance sheet debt is at fixed rates and we've reached our post Brexham target leverage levels with net debt to comparable EBITDA at 3.3 times as of year end leaving us well in a rising interest rate environment. Our 2018 stock buyback exceeded $700,000,000 and we paid approximately $140,000,000 in dividends. In 2019, we expect to buy back $1,000,000,000 of stock and pay roughly $135,000,000 in dividends. As of yesterday, we have already acquired roughly $100,000,000 of stock in 2019.
Looking forward and including 2018, our plan is to buy back approximately 18% of our outstanding shares by mid-twenty 21 or approximately $1,000,000,000 of stock annually in 2019, 2020, and 2021. Once completed, we will have successfully repurchased the 75,000,000 shares issued to execute the Brazilian JV and Rexam acquisitions. As we think about 2019, we continue to expect full year comparable EBITDA of $2,000,000,000 and free cash flow in excess of $1,000,000,000 after CapEx in the range of $600,000,000 full year interest expense of approximately $300,000,000 and the full year effective tax rate on comparable earnings will be in the range of 24% for all of 2019 and corporate undistributed should be roughly flat with 2018 levels. By investing in our businesses, pursuing bolt on M and A, repurchasing stock and paying quarterly dividends, we continue to put the cash machine to work for the long term benefit of our fellow shareholders. With that, I'll turn it back back to you, John.
Great.
Thanks, Scott. In 20 18, our Aerospace business reported 21% revenue growth and 15% operating earnings growth on solid contract performance, partially offset by the start up and ramp up of many of these new contracts and new hires. As part of this, we welcome 900 new aerospace employees, of which 42% were diverse hires. Given recent contract wins, we anticipate adding at least another 600 employees over the next 12 months. The entire management team has done a great work to ensure our new people are on boarded, mentored and trained.
Our existing people feel part of this success. Our facilities are fit and ready for the added throughput and our processes are redesigned and resilient enough for the higher standards expected, all while delivering on our financial commitments. Looking forward, Aerospace is poised to grow earnings in the range of 15% in 2019 and with contracted backlog levels exceeding $2,200,000,000 and our won not booked backlog at $4,700,000,000 the future looks bright for at least the next 3 to 5 years. As a corporation, I truly believe we are positioned for long term sustainable growth. We continue to manage our asset base with an EVA mindset.
We are leading more efforts on our sustainability initiatives to ensure our aluminum packages are positioned as the environmental solution for our customers' brand portfolios, and we are supporting the rapid growth of our aerospace business. We're controlling the things we can control, managing headwinds and leveraging our strong free cash flow to invest for the long term and consistently return value to shareholders via share buybacks and dividends. We continue to reaffirm our 2019 goals of $2,000,000,000 of comparable EBITDA and free cash flow in excess of $1,000,000,000 And in 2019, we look forward to exceeding our long term 10% to 15% diluted earnings per share growth goal. And with that, Chris, we're ready for
questions. Thank you. Our first question comes from the line of Anthony Pettinari with Citi. Please go ahead.
Good morning.
Good morning.
I was wondering if it's possible to quantify the impact of the supplier issue in North America for 4Q and maybe for 1Q if there's an early view there? And then you spoke about steps you're taking to kind of guarantee supply going forward with your suppliers. Do those initiatives is that does Ball incur costs as a part of those initiatives or just any kind of color you can give there would be helpful?
Sure. In the Q4, as I said in the comments in the Q1, I don't anticipate any ongoing inefficiencies. This was really marked by late October, November. One supplier and it's a total relationship with the customer, Approximately $10,000,000 of the impact is centered around that. Now we are in we're in discussions with this particular supplier and the customer and hope to kind of reconcile that issue.
And the only issue there was we couldn't get to the proper accounting and treatment in the Q4 to recognize the offset.
Yes. And I'd just add on to that. Those are the direct costs and there's many other indirect costs because it forced freight rates to be higher because various plants were down as a result of that. And so that's just the direct cost, but I think it probably had twice the double that was for the full impact of what happened to the Q4.
Okay. So it sounds like there was still an impact for out of pattern freight in 4Q. I guess same question for 1Q, is that kind of dissipated or is there still a freight headwind in 1Q?
No, not ongoing in 1Q. And I guess to answer your other question, it's we do have people that are certainly supporting the ongoing efforts there, but you're talking about 4 to 5 folks and there's no ongoing cost by us to help support that initiative. Okay.
Okay. That's helpful. And then maybe just one quick one for Scott. I'm sorry if I missed this, but for the full year free cash flow guidance, is there assumption on working capital embedded in there?
There's not much. We've gotten tremendous benefits in the last couple of years, so there's not much benefit expected from working capital on those numbers for $1,000,000,000 of cash flow in 2019. It's really the earnings growth, kind of tax effect the earnings growth and then a couple of $100,000,000 less in CapEx from this year to 2019 gets you to the $1,000,000,000 or over $1,000,000,000
Understood. I'll turn it over.
Our next question comes from the line of George Staphos with Bank of America Merrill Lynch. Please go ahead.
Thank you. Hi, everyone. Good morning. Thanks for taking my question and thanks for all the details. Congratulations for the year.
I guess the first question I had is around growth. And so in the last quarter, we saw some interesting patterns in terms of can shipments and some of the end market data. One of the things that we had heard recently is you're seeing some pickup in beer consumption, partly driven by the new labeling, as consumers are starting to sort of look at beer versus alternatives, are you hearing that or not really from your customers? And then relatedly in terms of growth, there was a big pickup in can growth in the 4th quarter in non alcoholic. It would seem that most of that was around the newer beverages categories that you cited.
But how much of that is also at least a part of it was, but and how much of that do you think is being driven more by sustainability and the shift out of plastic to cans, specifically within North America? And I had a couple of follow ons.
Sure, George. This is Dan. I would say we didn't see any in North America specifically in big beer versus craft beer versus the other beer categories, we didn't see anything markedly different than candidly what we've been seeing for the last several years. Craft beer continues to grow, cans continue to win share there. I would say the new alcoholic categories and the new non alcoholic categories and product launches, those are disproportionately launches even 18 months, 24 months ago.
We would believe that sustainability influenced. Our customers aren't telling us that specifically, but everything would indicate they're launching new products in specialty can sizes. They're garnering better price points. And I don't know why that we continue to build on an already huge issue for a couple of the large CPG companies by launching new products in PET. So that's our view, is that is a sustainability move.
I think it's fairly significant. But that way, and we think that's got a lot of tailwind for a longer period of time.
Okay. I mean, it remains
to be seen, but we're hearing that even the mega beer guys are starting to see some pickup in demand. We'll see if it plays out actually or not. In terms of John, if you
could Definitely in other parts of the world. We're definitely seeing heck the leader expansion for the first time in Russia, for the first time in Brazil. And I think they're putting more dollars behind the promotional and advertising in big beer in North America, tail end of Q4 what we've seen at the start of year. But whether that trend continues or how long, that will be something we'll keep our eye on.
Okay. Thank you. John, if you could
repeat again what you were saying about your value over volume efforts, the commercial activity, the progress, I think that you've seen so far. I think you mentioned that some large percentage of your contract renewals for the next 18 months are largely done. Can you go back over the details there that you had in your formal comments and what implications we should be drawing from that to the extent that you can related to our own forecasting entries, forecasting of Ball's results?
Yes. George, as I said, I think I'll be repeating myself, but the vast majority of our contracts that come due in North America over the next 18 months are largely concluded. And we signed the agreements? Not necessarily, but we've reached commercial agreement, and now we're getting to the documentation thereof. As you know, many of those kind of kick in at the end of 2019 going into 2020, and that's why I said the majority of the value of that will come after 20 19.
Fair enough.
Let me leave it there and I'll turn it over to the rest of the Scott Gaffner
with Barclays. Please go ahead.
Hi, Scott Gaffner with Barclays. Please go ahead.
Thanks. Good morning. Good morning. I think you said before that your freight transportation costs in the U. S.
Had flattened out. But when we look at the recovery from 2018, you had fairly significant headwinds on freight costs. Are you able to recover meaningful amounts of that in 2019 based on the current pass through mechanisms you have? Or do you have to wait more until 2019 when you get contract resets?
No. Scott, this is Scott Morrison. We have PPI escalators in our contracts, specifically in North America that will there's a catch up to it. So we'll catch up with the PPI escalation and we're seeing moderation of those other headwinds.
Okay. Dan, when you mentioned some weakness in Saudi Arabia, I mean, I think you said Turkey, Egypt, India all improved, but Saudi was still weak. Is that a new trend? Or is that just a continuation of the sugar taxes that were put in place or soda taxes that were put in place in Saudi Arabia over the last year or so?
Just a yes, just a continuation of the sugar tax degradation in that area. Everyone else is and it's we feel like it's stabilized in Q4 and starting off on a decent foot, but just a stabilized environment. We're not going to any appreciable uplift in that country or our JV relationship there for a period of time still.
Yes. And Scott, this is John. I'd just financially, I'd just point out, you can clearly see that in the equity line where that you'll see the negative impact of that. And Anne can provide you more details.
All right. Last one for me. Just in the prepared remarks, you mentioned 2,000,000,000 units of volume growth in North America. Can you remind us what the 2018 number of units in North America were? And then on that volume growth, should we assume that most of that is actually coming in specialty versus 12 ounce?
Thanks.
Yes, I think it will continue to be a similar composition from a specialty standard can, probably a little richer on the specialty is those are the new lines that we put in place. We were kind of mid- to $46,000,000,000 approximately in terms of unit volumes sold. So you put 2 on top of that in North and Central America.
Okay. Thanks guys. Good luck in the quarter.
Thank you.
Our next question comes from the line of Ghansham Panjabi with Baird. Please go ahead.
Hey, good morning. This is actually Matt Krueger sitting in for Ghansham. How are you doing?
Good. Good. Thanks. Good,
good. So my first question is, can you provide a bridge from the $1,830,000,000 in EBITDA generated during 2018 to the projected $2,000,000,000 for 2019, just in terms of any major puts and takes like volume contribution or cost given
their growth, we expect them to be up $30 plus
1,000,000 in EBITDA. Given their growth, we expect them to be up $30 plus 1,000,000 in EBITDA. So you're starting at $1,830,000,000 so that's 30. North and Central America, we talked about $50,000,000 of fixed cost savings on a full year basis, dollars 2,000,000,000 more units of volume with better mix and the rest is the PPI pickup that I mentioned earlier, moderation of headwinds. All that toll should be something in the neighborhood of 125,000,000
dollars on a full year basis.
Europe, we've been able to they've done a great job of improving their margins year on year. We'll get probably another $40,000,000 of growth in EBITDA from both cost out and volume growth. South America is probably pretty flat. And then EMEA and Asia up a little bit, so kind of a slight positive when you combine those together. And then aluminum aerosol up probably $10,000,000 and a little bit of upside in corporate costs.
And then you have the absence of the tinplate business for 7 months. So all that tolls to a little bit over $2,000,000,000
That's very helpful. Thank you. And then just expanding a little bit on the cost savings programs, how should we expect the $50,000,000 in cost savings to flow through the North America business kind of on a quarterly cadence? And then can you detail any of the other cost savings initiatives that we should expect to impact 2019 region by region in a similar fashion?
Yes, I would say in North America, all of the facilities are shuttered and our Goodyear facility is probably closer to 90% through the startup phase. So absent any kind of marginal cost impact in Q1 as the continued ramp up for our Goodyear facility, you should see that almost on
an annualized basis streamline throughout the year, the $50,000,000 And then maybe qualitatively on the other cost initiatives, as we go through Europe, as Scott and Dan had mentioned, Europe has done a very good job from a cost out within the plant perspective. We have San Martino that came down towards the end of the year and we also have a lot of transformation from a G and A perspective. And as Scott alluded to, we've done a very nice job overall as a corporation on the G and A and particularly in Europe. So kudos to all of them. I think in South America, we are lapping, as Dan said, some headwinds in terms of that BNs contract as well as foregoing some of the business that we were benefiting in the Q1 and even first half of last year.
But they've done a great job on the cost side. And I think we're going to have some headwinds year over year in the first half of this year, but you're going to see it reverse in the second half of the year. So I think that's going well. We talked about EMEA and the issues
going on there and there's a lot of
effort and focus and working with our joint venture going on there and there's a lot of effort and focus and working with our joint venture partner in Saudi to right size that business and really participate in the growth of Turkey, Egypt and other places, like you said. And then lastly, North America, Scott mentioned the Scott and Dan mentioned the $50,000,000 We also have been putting a lot of effort on making sure that from an efficient supply demand point of view that we're minimizing any of that outer pattern freight that we experienced last year.
Great. That's very helpful. I'll leave it there. Thanks.
Our next question comes from the line of Neel Kumar with Morgan Stanley. Please go ahead.
Hi, good morning.
Good morning. Good morning. I was
wondering if you could talk about what plants in particular were impacted by the aluminum issue? And you still generated 4% volume growth in North America despite the downtime at the affected plants. So how are you able to increase production at your other plants given that they were likely already running at capacity from the oversold industry?
Well, we number 1, to answer your question, we drew down inventory to do that. We're not going to go into specifics of what plants were affected. That's not what we do. But recall that we only have a limited number of metal suppliers. And so any given metal supplier probably serves multiple plants and you should think about it that way.
Okay. That's helpful. And then in terms of the commercial opportunity, you've talked in the past about some contract renegotiations in Europe in 2019. Could you give an estimate of what percent of contracts could be up for renegotiation there?
Well, we at the I'm sorry, what year at the end of 2019 did you say?
For the end of 2018 into 2019.
Okay. Yes, approximately a quarter or so of our European volume was renegotiated, and we're pleased with where we are right now.
Okay. Thanks.
Our next question comes from the line of Tyler Langton with JPMorgan. Please go ahead.
Good morning. Thank you. Just had a question on European volumes and I guess up 8% this year. Could you just talk a little bit about, I guess, what was Russia, what was Europe and then just kind of thoughts for this year? It's tough comps, but I guess you're still seeing good growth and benefiting from substitution.
So, just some color there would be great.
Sure. Russia, as you recall, had the World Cup and strong summer and benefited from actually some legislative actions in Russia moving away from some larger PET. And so they grew at approximately 20% for the year. In Central and Eastern Europe, we had one customer, large, large customer that grew nearly 10% that we have a sole supplier relationship with. And then we stepped into the new Cabanelas facility.
We stepped into a new contract. So in the second half of the year, you saw Iberia grow year over year north of 10%. That was contractual volume. But you saw solid growth, low to mid single digits in the Nordics and the UK and other parts. But the 3 large areas that really drove our volume were Iberia, Central and Eastern Europe and Russia.
Yes. Just to add on to that and it gets to an earlier question about the whole sustainability. Some of the bigger what's perceived as more mature markets, just to give you context. And I think about the U. K, I think of France, I think of Germany.
In the Q4 alone, the U. K. Was up 7 percent, France was up 7.5 percent and Germany was up around 20%. So that is on relatively flat overall liquid consumption. So I think that strength does reinforce our belief around this whole sustainability movement.
Got it. Thanks. And then Scott, could you just update us, sort of the shared services savings? I don't know if those were lumped in sort of the segments when you provided the sort of the EBITDA bridge before, but just what you're expecting there?
It's really kind of spread everywhere. So there's some of it shows up in corporate, but some of it shows up in the business. So we don't really break it down that way. But that's part of the improvement across the board when you look at the operations. John mentioned the cost out that they've done in South America and Europe and North America as well.
So it's kind of spread across
the board.
Got it. Okay. Thanks so much. Thanks.
Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please go ahead.
Great. Thanks for taking the question. You guys had talked about kind of 2% to 4% bevcan volume growth over the next little while. Obviously, there were some issues in Q4 related to metal. But how do you feel about that forecast?
Any potential upside or downside given some trends in non-twelve ounce? And maybe you can just give us your view and also tie that in with your regional expectations? Thanks.
Yes. The yes, it's a great question, I would say. My lean would be based on what we saw in the second half of the year, what we saw in Q4 and particularly in conversations with our customers and anticipated forecast going into next year and even through our strap wound period, there would be reason to believe that we could grow at an accelerated clip above what we've kind of historical norm would have been. So and I think a lot of that is just probability affecting and assessing the impact of sustainability and how fast that will move. That's the biggest question mark, but we're certainly excited about it and believe we've got more tailwind there than anything else.
Yes. As Dan had mentioned, just the full year, our global volumes were up a little over 2%, but in the Q4, they were up 4%. So, think that's a good proof point in terms of the momentum we're seeing.
Appreciate that. And just as a follow-up in Brazil, have you noticed any changes in the market? Have things gotten better or worse? And any thoughts around political shifting that would affect that? Thanks.
We've been actually reasonably encouraged by the political shift. We know that and from an overall market, you have the new entrant, but with the growth rates that are there, and I think John's commented on this historically, it doesn't take much growth outside of 4% or 5% in the market to start absorbing all the excess capacity that was introduced. So we think heading into 'nineteen and the planned period here, that market is definitely tightening and there's reason to believe that is margin expansion opportunities going forward.
Okay, thanks.
Our next question comes from the line of Brian Maguire with Goldman Sachs. Please go ahead.
Hi, good morning guys.
Good morning. Good morning.
I just wanted to come back to the comments around the 2,000,000,000 can production growth in North America in 2019. I'm just wondering if you could give a sense of how much of that is just replenishing the inventories you drew down in the quarter due to the aluminum sheet issue. And I ask us, it seems like the end markets probably aren't growing that much and even with the upsurge we saw in 4th quarter, can shipments in the U. S. Were up less than $1,000,000 this year.
So just wondering if that comment is indicative of you guys expected to take a little bit of market share here in 2019? Or are you expecting the market growth rate to kind of meaningfully pick up from where it has been in the last couple of years?
Yes, I would good question. I would look at it as keep in mind in 2018, we shut our 3 facilities. We stood up a new 4 line can plant. We added some additional specialty capacity in Conroe, all within the eye toward contracting that volume, which we have done historically. So there's a piece of this where we're stepping into increased specialty volume.
It's been contracted. There's good line of sight there. We do think the market is going to grow at an accelerated rate in North America versus what we saw in 2018, largely on the basis of the second half movements and new product introductions. The 2018 versus 2019 for us, we will grow at an accelerated rate versus the market. But again, those are contracted volumes that were initialized by our footprint.
Yes. And I'd just layer on top of that. Remember, over the last several years, we've put an extremely large focus on specialty and we can go West Coast to East Coast, North to South and we have a network and footprint that we think is better than any of our peers. And as a result of that, as these new product introductions and the shift from standard containers to specialty, it falls right in the sweet spot of what we've been focused on.
Okay. I appreciate that. Just as a follow-up, this one might be a little bit of an accounting one. But Dan, I think you mentioned the $10,000,000 impact in the Q4 from the aluminum issue that there was a tolling customer and there was just some of the accounting didn't let you recognize maybe offsetting compensation in the quarter. So do you get $10,000,000 back in 20 19?
Is there some kind of a pass through or compensation from the customer here?
We have to wait until we resolve the issue and then we'll let you know.
Okay. But anything embedded in the 'nineteen outlook or the $50,000,000 kind of comment of fixed cost savings? I guess that would be separate, but just anything embedded in the 2019 outlook for that? No. No.
Okay. Appreciate that.
Our next question comes from the line of Debbie Jones with Deutsche Bank. Please go ahead.
Hi, good morning. I'm going to be another person asking on the $2,000,000,000 can number you threw out there. But could you comment on is this really being driven on the specialty side by a couple of customers shifting into specialty or using it? Or are you seeing this as very broad based? And then also how much of the growth in 4Q and the number that you're throwing out for 2019 do you think is related to the sustainability efforts of some of your customers?
Tough to parse out the sustainability one, but for it could be 1% to 2% of growth in specific markets where this is a bigger issue and it's more broad, it's in Western Europe, it's in the UK and it's starting to manifest in the U. S. The other question was on specialty. And I would just Debbie, I would reference the fact that in North America, we have 800 customers. So it's across the entire breadth of those customers.
It's not a singular focus of 1 or 2, it's everyone's moving.
Yes. And as in the Q4, our specialty was up 13% in North America. And when you look, it's everything Dan just said, It was traditional CSD, it was spiked seltzer, it was beer, it was energy, it was all new categories emerging, wine, seltzer waters, etcetera. So it truly is broad based.
Okay. And second question, there has been an announcement of a new chem plant in Europe, I think in Belgium with the new entrant. And we've received a lot of European industry is growing enough to absorb this, but I think investors are a little confused as how to think about it and how it might impact some of the larger players there.
Yes. Well, I might point out a couple of things. The overall can industry in Europe grew by in the range of 4,000,000,000 units or so in 2018. It's our best understanding that this new entrant is a small one line facility in the Benelux region focused on one customer that's going to be using standard containers. So you have to put this in context.
I do think as we look forward, we've as Dan had mentioned, we have some new capacity, obviously, Spain coming up, but we've put some new lines in Serbia as well as Switzerland. And so we've been growing. And so we fully anticipate other people that are going to be investing to meet the demands of the market.
Okay. Thanks. I'll turn it over.
Our next question comes from the line of Adrian Rodriguez with UBS. Please go ahead.
Thank you. Good morning, guys. Just one quick one. I mean, you seem pretty confident in achieving your targets for 2019. But when you look
at everything that's going on, like what do you see like the most risk in achieving those targets? Well, this is John Hayes. Maybe I'll take this. I think a lot of what Scott Morrison laid out in the bridge is in our control. Obviously, we had some metal issues in late 2018 were out of our control.
We have been very so that we have a plan B if something like that were to happen. Obviously, this whole sustainability provides big tailwind for us. But if for some reason there's a big dislocation in the demand side of our business around the globe, that could have an impact. But I will point to the financial crisis of 2,008 when our volumes in the worst quarter were down 4%. So we don't expect that to happen.
I think really the biggest risk to us is our ability or inability to execute on what we have in front of us right now.
Okay. That makes sense. That's all I have.
Our next question comes from the line of Chris excuse me, Chip Dillon with Vertical Research Partners. Please go ahead.
Yes. Good morning, everyone. I thought I'd be the first one perhaps to ask a question about your one of your fastest growing businesses, which is aerospace. And you mentioned some pretty large growth initiatives there, including the employee growth and I believe you said the income growth of 15% 2019 versus 2018. However, it looks like looking at your backlog that we could see either several years of that kind of growth or maybe it could even accelerate in 2020 2021.
And so obviously not knowing everything, but just given your current line of sight, what kind of progress do you think we will see in 2020 2021, especially given the 30% plus increase in the employee base?
I think your the logic you just laid out is sound and we would agree with that with one caveat. Our government, we rely on our government to be operating efficiently and funded effectively and we just have come out of the longest furlough in the history of the U. S. Government and there's potentially that going forward. It has not affected us to date, But strategically, when you're running the deficits that we are, something's going to give.
We that's why we talk about both funded backlog, which is money good, and then one not booked. And as we said repeatedly over the last 6 or 9 months, the one not booked, we feel good about, but there's some risk to that going forward and that affects the 2020, 2021, 2022 time frame. And so as we sit here today, the thing I would be focused on the most is about that, because the rest of it's in our control.
Got you. Okay, that's very helpful. And then just quickly as you guys give us great data for example on volumes And periodically, you tell us your mix with specialty versus standard. It just seems with especially the categories that are growing that you're seeing so much more growth now in the specialty area. And I didn't know like for example, if we took just the 2% company wide growth last year, was it fair to say standards were down, I don't know, mid single digits and specialty way overtook that?
And just so that we get a better view or sense of what the mix is doing.
Yes. Chip, I'll tell you this, our specialty globally grew for the year at around 9% and are over and it's approximately 39% or 40% of our mix. So when you do the math, you can see standard had declined. That's why, to Dan's point, we took out 3 facilities in North America in 2018. That's why we closed the San Martino, Italy plant, which is a standard container.
So we've been managing this mix shift as we go forward, and that's why we've been investing on all these specialty lines.
Okay. And last one quickly, as you look out past 2019, you're giving CapEx is coming down. You've listed a lot of growth opportunities you wanted to jump on top of. Again, based on your line of sight, is $600,000 something we would would be a good best guess for 2020? Or are there reasons it could go up or down from what you see today?
Yes. Chip, I would use 600. I think it's a good proxy. We really there's a lot of growth in there. It's probably up $50,000,000 from where we were months ago in terms of accelerating things and kind of bringing them to the left to take advantage of some of this growth.
I would use that as a decent proxy. But if the sustainability thing really takes off, we could spend more money. But we're going to do it just like we've always done with the mindset of putting capital to work where we're getting the right returns.
Okay. Thank you.
Our next
Thanks, everyone. Dan, just a couple of questions on the sustainability topic again. I think Brian was asking about your outlook for the U. S. Market.
It was up 0.6% last year and you're expecting that to accelerate and you saw the acceleration particularly in the Q4. Do you tie that directly to this sustainability move that you're talking about? Is there any other reason why you think shipments meaningfully accelerated in the Q4 and that you're expecting them to accelerate in 2019 versus 2018?
Yes, it's a good question. I don't think I have the answer, but my thesis would be it's largely because of sustainability. I mean, we know that the large CPG players, in particular, they don't have a very attractive mix shift. I mean, some of their CEOs were getting beat up pretty good over in Davos a week ago. And the one thing we can point to, Adam, I just keep coming back to new product launches are we're seeing much more activity in and around innovation from a can perspective when we're dealing with the marketing groups and the large CPG companies, and we are attributing it to in North America, Western Europe, the UK, the Nordics to sustainability being a fairly significant driver of that.
Just one little proof point, this is on more of the alcohol side, but craft beer is our best estimation that for the first time ever, cans as a share of the package mix is now over 40% in the craft market. Our volumes in craft are still up well in excess of 30% despite overall volume of craft, meaning liquid volume up only about 1%. So is that sustainability? We can't point to any specific fact to tell you that's the case, but I do think that there is a consumer trend out there that's much more focused on
Thanks. And Dan, just on Europe, I think you said volume was up 8% for the year if I'm not mistaken. And forgive me for missing this, did you give any expectation for 2019 in terms of European volume? And again, how much of that how much of whatever growth are you expecting would you attribute to that same sustainability movement?
I would think it's going to be a little off that. I mean, keep in mind, it was unprecedented weather conditions in a lot of big beer drinking jurisdictions, but I could see mid single digits. And again, I think where we play and where our network is, we may grow at a faster rate than the overall market just because of our customer mix. Russia continues to be incredibly strong. We'll lap our Iberian new contracts and the stand up of Cabanelas.
But I'd say market 4% to 5%, we could do better. That's certainly our plan and our hope.
Thank you.
Our next question is from the line of Deanna Stottler with Ball Corporation. Please go ahead. Yes. Looks like the line has disconnect.
Yes. Chris, unless there's any other questions, I'd recommend
we conclude.
Okay. We do have one more question in the queue from the line of Mark Wilde with Bank of Montreal. Please go ahead.
Good morning, John. Good morning, Dan. Just curious to come back to Europe, how much capacity do you have or how much could you grow in 2019 just given your capacity base?
Yes, it's a good question. We have, as indicated in the prepared comments, we have added a couple of lines, one in Serbia. That just came online actually last week. I was over there earlier this week. Another line in Central and Eastern Europe, that one is ready to go.
We haven't flipped the switch on. And then ramp up curves and basically in Spain, stepping into improved efficiencies there and improved efficiencies across the rest of the jurisdiction. But we're certainly tight. We've got a couple of pockets of opportunity to continue to grow. But keep in mind, historically, we've always got speed up opportunities.
We've got a laundry list of areas where we can spend minimal capital. And we've waited for tailwind and it's here now. And so we're not going to miss out on volume opportunities at the right price.
Okay. And Dan, I'm just curious over in Europe in terms of bottled waters or whatever picking up. I know that you've got a lot of people that are interested in looking at the format, but I wonder whether capacity constraints right now make it hard for some of those customers to make a large move. So what kind of conversations are you having? And is there a potential that we could see 1 or 2 very large moves over there at some point?
Or do you think it will be just more kind of incremental?
Yes, there will absolutely be the opportunity for large moves. The constraints not necessarily on our end, it would be some of those major customers making filling investments in their infrastructure. So we wouldn't be the deterrent for those moves. I mean, we're in front of a number of them right now as they're contemplating shifts. There's an awful lot happening from independent startups that are driving that inertia from some of the big CPG players.
I do think that that is something that we're having conversations on, something that we believe will happen. It will probably start at the high end of the water market. But depending on what legislation hits and single use water bans that are popping up, that conversation is happening everywhere now. Something will be a catalyst for a major move and we will have enough time hopefully to move into that in a meaningful and a smart way.
Okay. And then if I could, Scott, you mentioned that PPI escalators. I'm just curious, PPI, I think, has been moving up maybe 3%, 3% plus but you might have had a much bigger move in freight costs. So will the PPI really catch you up for freight this year fully?
Good morning, Mark. It probably won't offset the if you would look back, kind of probably what time frame you're looking back. But if you look back at our incremental freight costs, all of 2018, the PPI will offset a large portion of that, but not all over.
Okay. That's helpful. Thanks very much. Good luck in 2019.
Thanks. Thank you.
Okay.
Chris, I think we're concluded. So thank you all for participating, and we look forward to having a successful and productive 20 19 and talking to you 3 months from now. Thanks everyone.
Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation and ask that you please disconnect your lines.