Ladies and gentlemen, thank you for standing by. Welcome to the Ball Corporation Third 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, November 1, 2018.
I would now like to turn the conference over to John Hayes, CEO of Ball Corporation. Please go ahead, sir. Great.
Thank you, Melody, and good morning, everyone. This is Ball Corporation's conference call regarding the company's Q3 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 the company news releases. If you don't already have our Q3 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 our CFO and Dan Fisher, Senior Vice President and COO of 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 will finish up with some comments on our Aerospace business as well as the outlook for our company.
Let me begin by thanking those of you who came to our investor field trip earlier in October. It was great spending time with many of you and we appreciate you taking the time to listen to us articulate how and why Ball is uniquely positioned to lead and invest in sustainable growth in its global beverage can, aluminum, aerosol container and aerospace businesses, consistently return significant capital back to our shareholders and grow our earnings diluted earnings per share 10% to 15% over time. For those of you who are unable to attend the field trip, the slides and transcript of the webcast briefing are available on our investor page at ball.com under the Presentations tab. Now turning to Q3 results. Momentum continues across our businesses.
On an apples to apples basis, comparable operating earnings were up 14 percent year over year excluding the sale of the U. S. Steel Food and Steel Aerosol Businesses completed on July 31. This was despite a few headwinds that we'll get into in a moment. In addition, a higher than expected effective tax rate driven by currency movements, which Scott will go into in a few minutes also impacted us.
We continue to execute our strategies of achieving better value for our standard products and higher growth for our specialty products, pursuing cost out programs, completing growth capital projects to fuel future earnings growth and commercializing on the inherent sustainability attributes of metal packaging to provide our customers solutions versus other substrates. In addition, we put $600,000,000 of proceeds from the food and aerosol sale to good work, acquiring stock and paying down debt allowing us to reach our targeted leverage levels ahead of schedule. Now moving on to segment results in the quarter. Volumes in our North and Central American beverage can business were up year over year driven by emerging beverage categories as well as double digit specialty can growth, which Dan Fisher will elaborate on more. In addition, we continue to execute on our long stated need to secure more value for the supply of our standard products.
Offsetting some of this tailwind, we continue to incur out of pattern freight and start up costs related to the final two lines getting up to speed in the new Goodyear, Arizona facility. Our plant optimizations in Chatsworth, California and Longview, Texas are complete with both facilities closing this past quarter. Our South American business delivered solid performance despite the previously disclosed transition away from the ENDS contract and loss certain can volumes in Brazil. This will be more pronounced during the seasonally strong Q4 and normalize as we move into 2019. Our European business continues to sequentially improve on its performance through cost out and volume growth.
We completed the start up of our new plant in Cabanalas, Spain and we announced the intention to close a one line facility in San Martino, Italy and expand our specialty capabilities in our Negara, Italy beverage can plant in the north. While we still have more work to do, we are seeing the margin expansion opportunity in this segment that we articulated upon the completion of the acquisition in mid-twenty 16. In the aluminum aerosol side of our business, global volumes were up over 7% in the quarter and this business continues to operate quite well. Our aerospace business continues to add to its record high backlog, winning additional contracts throughout the quarter and even since our October investor field trip. And lastly, we continue to focus on our G and A costs, which have continued to trend down as a percent of sales and now currently stand at 4% of revenues.
As we go forward, we will continue to execute our long 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. While we're dealing with a few short term factors outside of our control and turning including higher freight rates and tight metal supply in the U. S. And a more volatile global economy and foreign exchange environment overall, Ball's businesses are uniquely positioned for consistent long term growth and strong free cash flow in 2019 and beyond. And with that, I'll turn it over to Dan.
Thanks, John. Our global beverage business operating earnings were up 11% year to date. As John mentioned, our global teams kept up with strong demand for beverage cans across Europe, Russia and North America, a welcome improvement, but one that created incremental freight costs above plan, given both support of an oversold U. S. Industry, while we completed the planned closures of Chatsworth, California and Longview, Texas and the ongoing ramp up of the next two lines in our Goodyear, Arizona facility.
Moving to the individual segments. Ball's North America segment volumes rebounded, up just over 2% in the quarter and profits were up notably given the lack of hurricane disruption versus Q3 2017. New categories led the way with wine, sparkling water, craft and spiked seltzers experiencing double digit growth. Our North America team dealt with an incredible amount of capital projects, plant rationalizations, specialty can growth and freight cost growth through the 1st 9 months of the year. Everyone is looking forward to having the planned operations network move out of project mode and ultimately benefit from fixed cost savings and reduced start up costs in late 2018 and beyond.
Embracing complexity is what we signed up for. It is where the growth is and even more economic value. We also are experiencing some short term supply dislocation from certain metal suppliers that we expect to manage through during the Q4 and which should alleviate by year end. Turning to our South American segment. As expected, our volumes were down 3% in the quarter due to Ball's 2017 decision to forego some can business in Brazil.
During the quarter, we also completed the Inns manufacturing contract required as part of the Rexam transaction. Both of these actions have been discussed since mid-twenty 17, so the business performing only $7,000,000 lower in the quarter versus 2017 was an accomplishment. South American industry trends remain strong with cans being the favorite package in the beer, tea, energy and hard alcohol categories. FX volatility across the region impacted the effective tax rate in the quarter, but did not impact industry demand trends or segment profitability. Our expansions in Argentina, Paraguay and Chile are on track and we're excited about the can continuing to be embraced by customers and consumers across South America.
In short, our business is being very effectively managed and is well positioned for 2019 and beyond. European beverage earnings were up 14% year over year on double digit volume growth. Europe is ground 0 for the war on plastics and we are beginning to see customers alter their package mix away from plastics and into cans. The near term capturable opportunity we discussed during our investor field trip is happening. Tailwinds such as this, the second line ramping up in Spain and the completion of G and A transformation projects will provide additional earnings growth in 2019.
The demand environments in Turkey and India are stable, but were largely offset by anticipated demand anticipated demand volatility across the remainder of our Middle Eastern business. Again in China, the business remains cash flow positive and Ball continues to execute its disciplined approach in this country. In summary, while we continue to deal with a couple of lingering headwinds, the heavy lifting on several of our large global projects is behind us. Supply demand for U. S.
Standard containers and certain specialty sizes is quite tight and we are experiencing progress on commercial initiatives and commercializing sustainability, which will benefit 2020 beyond. Thank you again to all of our teams around the globe. With that, I'll turn it over to Scott.
Thanks, Dan. Comparable Q3 2018 earnings were $0.56 versus $0.52 in 2017. Details are provided in the notes section of today's earnings release and additional information will also be provided in our 10 Q. 3rd quarter comparable diluted earnings per share reflects solid operational performance across our businesses and lower corporate costs offset by the sale of our steel food and aerosol business and a higher effective tax rate, the effect of which was $0.05 year over year. The higher effective tax rate in the quarter was largely related to foreign exchange gains for tax purposes.
This relates to managing our balance sheet in various regions. For 2018 key metrics, we expect CapEx in excess of $700,000,000 free cash flow in the range of $800,000,000 full year 2018 interest expense around $300,000,000 the full year effective tax rate will increase to 25% based on our current estimates of the impact of U. S. Tax reform and currency movements and corporate undistributed is now expected to be in the range of $100,000,000 for full year 2018. We put the July 31 cash proceeds from the food and aerosol sale to good work acquiring stock and further reducing debt.
Given the timing of the sale versus the timing of using the proceeds to repurchase shares, it will continue to be slightly dilutive to earnings in the Q4. Prospectively, on a full year basis, the transaction will be neutral to slightly positive related to diluted earnings per share due to the incremental share repurchase and positive to EVA dollar generation in 2019. Net debt ended the quarter at $6,100,000,000 and we anticipate year end net debt closer to $6,000,000,000 as we continue to actively buy back stock during the Q4. Roughly 86% of Ball's balance sheet debt is at fixed rates and we've reached our post Drexel target leverage level ahead of schedule with net debt to comparable EBITDA at 3.2 times as of quarterend, leaving us well positioned in a rising interest rate environment. The cash flow continues to be strong and year to date through yesterday, we've repurchased a net $525,000,000 worth of stock or 13,800,000 shares.
By the end by year end, we expect our stock buyback to exceed $700,000,000 in addition to paying approximately $140,000,000 in dividends. Looking forward over the next few years 3 years, our plan is to buyback approximately 18% of our outstanding shares by 2021 or approximately $1,000,000,000 of stock annually in 2019, 2020 2021. Once completed, we'll have successfully repurchased the 75,000,000 shares issued to execute the Brazilian JV and Rexam acquisitions. In addition to investing in our businesses, pursuing bolt on M and A and paying quarterly dividends, that's truly putting the cash machine to work for the long term benefit of our fellow shareholders. With that, I'll turn it back to you, John.
Great. Thanks Scott. Our Aerospace business reported higher revenues and operating earnings driven by solid contract performance partially offset by incremental labor costs and the lower accruals related to the startup of many of these new contracts. We continue to expect Aerospace will produce material operating earnings improvement in the 4th quarter as new contracts wrap on. Year to date, we have hired approximately 800 new aerospace employees and anticipate adding another 200 to 400 employees over the next 12 months following recent contract wins.
The team has done an excellent job managing this rapid growth. With contracted backlog levels at a record $2,000,000,000 and our won not booked backlog now exceeding $5,000,000,000 an increase of nearly $1,000,000,000 since our Q2 call, the future looks even brighter for aerospace over the next 3 to 5 years. As a corporation, we truly are positioned for long term sustainable growth. We continue to manage our asset base with an EBA mindset approach. We are leading more efforts on our sustainability initiatives to ensure aluminum packages for beverage and aerosol are properly positioned as the environmental solution for our customers' brand portfolios we're supporting the rapid growth of our aerospace business.
We're controlling the things we can control, managing headwinds and leveraging our strong cash, 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 dollars And in 2019 and beyond, we are positioned to grow our earnings diluted earnings per share 10% to 15% over time. And with that, let's move on to the Q and A. Melody, we're ready for questions.
Thank Our first question comes from the line of Edlain Rodriguez with UBS. Your line is open. Please proceed.
Thank you. Good morning, guys. Good morning. Quick question on Europe. I mean volume, nice peak to up 10 percent.
Like how sustainable is that? Like when you where can growth be in 2019, 2020 as you see in some shift into cans from other substrate?
No, that's a great question. I think 10% had all of us very excited. That was unanticipated heading into the quarter. But mid single digit growth given our footprint in Russia and also the sustainability lift. We're having conversations with customers today and we think that that is a very real tailwind Relative to what we would expect on the PET shift specifically, it is still going to require investment both from our customers and our suppliers to make sure that we can capture all of it and with the speed.
But I think this is a short term, mid term and a 10 year journey that we will continue to benefit from.
Okay. And just one quick follow-up on Brazil, especially like on FX. Most of your competitors seem to be having FX issues over there in the P and L. Like how come we're not seeing those headwinds hitting your P and L?
Our business is really a dollar based business pass through and then we hedge our net working capital position because we're a dollar functional entity down there. So that's why the tax rate was actually higher because we hedged those the balance sheet. And when you get a lot of volatility in a currency in a short period of time, we're going to have gains that are taxable. Rate actually was a little bit higher. But actual transactional FX is not a big deal to us typically.
Okay. Thank you much.
Our next question comes from the line of George Staphos with Bank of America Merrill Lynch. Your line is open. Please proceed.
Thanks. Hi, everyone. Good morning. Thanks for all of the commentary and detail. I wanted to dig a little bit into North and Central America and how the performance trended versus your expectations, particularly is there a way for you to parse for us what the startup freight, out of pattern freight, etcetera, inefficiencies were given your footprint initiatives and given the volume trends that you saw?
Yes, George, this is John. Why don't I quickly start? I know freight, let's just focus on that. On a net freight basis, net of what we pass through our customers, we had a $15,000,000 headwind year over year in the quarter on that alone. So just to give you a magnitude of that.
I know the startup as you know we had started up the Goodyear facility in the Q2. So we had a little bit of tailwind off top of my head. I don't know exact, but it was a few $1,000,000 But I think the biggest part of it was the freight.
I'm sorry. You're saying that was a tailwind or that was a continued inefficiency in the Q3
on the start up? Continued inefficiency. And
we were up 3%.
Some of that was to backstop and we were up 3%. Some of that was to backstop supply disruption from some of our competitors. And so those unanticipated volumes also built on that.
That makes sense. That makes sense. The second question I had, I know it's a little early to talk about 20 19, but I was curious if you could help us a little bit with how the segments should ultimately build out into that $2,000,000,000 EBITDA goal and where we should see the most movement. As we sit here today, I think your LTM comparable EBITDA is about $1,890,000,000 It's probably a little bit of a tail off when we get to the Q4 because last year you had such a strong performance in Latin America. So that $150,000,000 or so whatever the right number is, how should we see that fill out the various segments pro rata?
And could you is Latin America down next year based on some of the comments you're making? Or did I misread that? Thank you guys. I'll turn it over from that.
George, this is John. Why don't I kind of start and let's first talk about Aerospace. We have meaningful growth in Aerospace. And so we've told the world we're going to make in excess of $105,000,000 $110,000,000 in that range kind of this year and we expect 15% growth on that. So there's call it round numbers $15,000,000 right there.
I think as you go into the aluminum aerosol side, we continue to see growth. Now that's not huge, but we're talking call it $10,000,000 So that's $25,000,000 And then when you get in the beverage can business, just the footprint in North America alone all things being equal we've said is $50,000,000 Right. Dan also mentioned and we're going to we expect to get further growth in North America particularly on the specialty side and margin up there at that business. And so we're going to see some improvement in North America related to that. We're actively managing.
And as we've talked about, we're actively managing the freight situation. And so we should be able to eliminate any negativity there. And if we can get some tailwinds around that, that would be a plus. Then you go over to Europe and we have we're closing our San Martino plant. We really haven't gotten any of the benefit from the Cabanilla, Spain startup.
We've got the sustainability that Dan talked about. We also have the G and A that Dan talked about in addition to the continued growth. So that's a big chunk of it. To answer your question specifically in South America, we expect year over year growth in South America. It's going to be a bit muted because of this ENDS contract that we're losing this year.
So remember we had it for the first half of this year or even a little bit longer than that and we won't have it. But we do expect kind of flat to improve growth there. And then in other places, corporate and the others that's the bridge effectively.
Okay. That's very helpful. Thank you guys. I'll turn it over.
Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Your line is open. Please proceed.
Great. Thanks. Good morning.
Good morning.
Yes, congrats on the strong performance. Just wanted to go back to overall beverage can volumes tracking about 3% in the quarter, a very strong result in Europe. It looks like the industry is doing a good job of offsetting mega beer weakness with the mix shift elsewhere and then growth elsewhere. I guess, is that a fair characterization? And as you look out over the next year or 2, do you expect kind of overall global bevpn growth to be in that low single digit range from here on?
And what are the differences between regions? Thanks.
Yes. I'd say first things first. Big beer in North America, we have that at kind of down 1% in the quarter. So not all that significant. Obviously Mexican import is kind of built into that number that helps to offset that.
So as long as that trend with folks like Constellation and Heineken shipping in products continue to grow and we participate obviously heavily with those customers then that helps to offset the declines. And as we've said multiple times on the call, the big beer for one of our customers that's vertically integrated is largely contained into their system as opposed to ours and our competitors. We've kind of earmarked as we're heading into kind of our strat plan season 2% to 4% growth globally. For the beverage can. The one area that's most exciting though to us and it's hard for us really to calculate is the potential share shift substrate penetration in Europe and in North America.
So over the medium to long term, we're bullish in those two regions in particular with the potential for can to PET shift. And then in South America, Brazil was Brazil and Argentina and even Chile were incredibly strong here in the last 12 to 18 months. I suspect that will modulate a bit and get back to kind of historical norms. Southeast Asia will continue to be strong. China will be flattish to slightly up.
But we will obviously we'll take a discretionary approach in terms of capital investment to pursue that. But overall, I think the tailwinds of plastic are going to be a benefit to us going forward. And I think this 2% to 4% growth range is something that we're fairly confident and we're certainly putting plans in and around
that. Great. Thanks. And just as
a quick follow-up,
I appreciate all the detail on George's question. So I guess just curious if your discussion around commercial opportunities in North America is built into those assumptions. You called out, say, $50,000,000 from footprint and some growth above that. Is there a possibility for potential upside there due to the commercial opportunities? Or is that embedded in there?
No. I think you should expect beyond 2019 is when you'd see any of the commercial activities in our North American business. We talked about that in our October Investor Day.
Yes.
Okay. Thanks, John.
Our next question comes from the line of Anthony Pettinari with Citi. Please proceed. Your line is open.
Good morning. Good morning. A couple of questions on North America. Your volumes were up 2%. I was wondering if it's possible to parse that out between U.
S. Versus Mexico. And then you specified metal supply dislocations that you expect to normalize. Just what's driving that? And was there a real impact to earnings in 3Q?
No. And I'll take the metal question. This is 1 mill in North America and we've had our team meeting on a pretty regular basis since kind of 3rd week of September with the team there to kind of work through the production issues that they've been facing. As it stands today based on everything I know we'll be able to manage through this and have a clean slate heading into 2019. Right now not a lot of disruption, but it's certainly something that we're managing and we're keeping a close eye on.
And then on the North America volume side, I'll quickly take that. The U. S. Volumes were flat to up very slightly. And as we said there are some headwinds around big beer.
CSD was relatively flat, but we saw some good growth in energy and water and craft and wine, flavored alcoholic beverages. And then Mexico was really added to get to that 2% growth. Remember Mexico is very important to us, but as a percent of the total North America, it's about 10% of the
volume. Okay. That's very helpful. And then just switching gears, you indicated you're beginning to see customers in Europe alter the packaging mix from plastics to the can? And understanding it's very early days, is it possible to say what beverage categories or countries this occurring in?
And do you have a sense of is this shift really being driven by the beverage producer or the retailer or the customer? Any kind of thoughts you could give there would be helpful.
Sure. I would say customers and products that are heavily weighted to plastic. Those customers are concerned because they're getting pressure from end consumers, retailers and the threat of legislation. And all of those things are certainly being factored into some of the larger beverage customers that do have an overweight to plastic. And obviously they're trying to manage their risk profile going forward.
And the conversations that we're having are about in the medium to intermediate term helping to make sure that we have supply for them. I don't know if I'd see a significant move in 2019, but I think it would be on 2019. Things would start to I think things would start to show up, but specific things even like water and we mentioned this in our Investor Day, we've seen 100% growth in the U. K. Off a small numbers.
But if still water is moving into cans, you can bet that every category is looking at whether the can is a viable alternative and if they can de risk their plastic portfolio.
Okay. That's very helpful. I'll turn it over.
Thank you. Our next question comes from the line of Chip Dillon with Vertical Research Partners. Please proceed. Your line is open.
Yes. Hi, good morning, John and Scott. First question is on the, just tax situation. It sounds to me this higher tax rate tied to working capital was one time, but could you sort of give us an update on how we should model taxes both in the Q4 and next year?
Yes. Well, I said full year rate will be 25%, so 4th quarter will be a little bit lower than that. It is this has happened before, but it's unusual. We had 40% movement in a couple of currencies and that's really what drove the impact in the quarter. So to have a $0.05 impact in the quarter is a pretty big deal.
That is unusual and I would say is not something you should model going forward. It is a bit one time.
Okay. That's helpful. And then just to remind us on CapEx, north of $700,000,000 this year and talking about the $1,000,000,000 in buybacks for 3 years plus the $700,000,000 this year, that makes sense how you get that 76,000,000 shares bought back. How much CapEx roughly should we assume is embedded in that for each of those 3 years?
Well, we've had a big build in the last couple of years. And I think we're when we acquired REXAN, we really had a 3.5 year game plan of things that we wanted to do. And I would say with the latest announcement of a closure, we're kind of getting close to the end of that 3.5 year game plan. But all that could change. So I would expect CapEx to normally fall a decent amount going into next year.
But the sustainability thing is a bit of the wildcard. If that really takes hold and when it takes hold, that could require more capital going forward. But I think we're going to like the result of that capital. So it's a bit early to call that.
I got you. I got you. But in other words, you're either going to have lower CapEx and get the $1,000,000,000 or you might maybe it will slip a little bit because it's such a higher return to pursue some of these projects if you see the sustainability thing take off?
Yes, definitely. We're not going to walk away from good profitable opportunities where we can put capital to work and earn more EVA dollars. Okay.
And then the last thing, just when we look at the aluminum aerosol business, you mentioned it grew 7% in volumes this last quarter, which I think it's been pacing at that rate for a while. Is that something that should stay in that range? Or is it sort of seen an unusual pop right now and then maybe it normalizes, I don't know, low to mid single digits? What would you do as you look out a couple of years?
No. I think we can debate whether it's 5%, 6%, 7%, but in that range and you have to break it down by geography. We're growing very strongly in India. As you know that's a few year old plant. Begins to take hold in India, we're seeing very strong growth.
And our just to give you context, our growth today really hasn't been with the big multinationals. And so we're starting to see a lot more growth with the multinationals. So we think that's sustainable. You go down into Mexico, which services not only Mexico, but also here in North America. And again, it's the same thing.
We've been growing mid single digits, mid to upper single digits in that region off a big base, because of the further continued penetration on deodorant and other categories for all of North and Central America. And then you go into Europe and that's the growth is a little bit lower there because it's more mature and it's more penetrated, but we're still seeing good growth there. So you add all those up. And then if we do anything else on the bolt on acquisition in Greenfield, I think it's only going to accelerate from that 5% to 7%.
Okay. Thank you.
Our next question comes from the line of Tyler Langdon with JPMorgan. Please proceed. Your line is open.
Hey, good morning. Thank you. Just had a question on South America. I know you mentioned volumes were down 3%. Do you know what your volumes would have been like if you excluded the conclusion of the end sales and then that loss of business would have you seen growth?
Well, let me take that. That's 2 different issues. One, we're talking about can demand for us was down 3%. You're talking about ENDS. And remember, because of this contract manufacturing situation, we were selling more ends than we were cans.
So when we talk about volume, we're always talking about cans.
Okay. So that 3% drop excludes the EVNs?
Correct. Correct.
Okay. Got it. And then on Europe, I guess EBIT or comparable operating earnings were up $10,000,000 I think you obviously had the volume growth. Were there any and I guess you're probably some benefits from sourcing and synergies. Were there any offsets I guess from either FX or pricing or start up costs?
Just any details there would be helpful.
Yes. Why don't I quickly take that? A couple of things. Number 1, remember that we had the start up of the Cabanelas plant. So that was a headwind relative to the cost structure.
Just in the near term we're largely out of that. Number 2, remember even in 2018 we had some contracts that still have year over year price decline. So that's a headwind as well. And then maybe I'll turn it over to Dan because then there was a lot of freight and other things because the volume was so high. Yes, exactly.
The last point is certainly didn't anticipate 10% growth and we kept all our customers in cans, but it certainly cost us a little bit with ramping up Cabanelas and not having a full supply chain available to manage that. So there's an element where trigger to a higher growth rate and it becomes hard to kind of leverage and get the flow through on some of that those last cans. We are shipping cans a lot further than we typically do just to keep up with the demand.
Got it. Okay. Thanks so much.
Our next question comes from the line of Scott Gaffner with Barclays. Your line is open. Please proceed.
Thanks. Good morning.
Good morning. Good morning.
First was just a quick follow-up. Scott, on corporate expense. What was the commentary on 2018 corporate expense and how we should think about it going into 2019?
It should run about $100,000,000 for full year for 2018. So it will bump up a little bit in the 4th quarter. We true up a lot of benefit things in the 4th quarter, so I expect it to bump up a little bit, but around $100,000,000 for full year 2018. And then 2019, too early to tell. But we're on a good trend and we would expect that trend to continue into 2019.
We'll see how that goes.
Okay. All right. And then Dan, a little bit of a question on sort of the secondary packaging. I mean, we've obviously focused a lot on the primary package being cans versus plastic PET bottles. But when you look at it, there's also a big push on secondary packaging and maybe in some places getting away from paper based packaging options and moving more towards plastic wrap or glue to hold the cans together.
How do you think about that in relationship to your offering? And is there does that cause any additional complexity in the system that you think about as you move towards 2019 beyond?
Yes, good question. I mean short answer, no. I mean we typically work with is definitely something that's being contemplated about moving away from because that's waste in terms of how the retailers view that. And so I think your comment on glue and even cardboard those would be more sustainable products that are being contemplated. And so we're in those discussions with our customers and shouldn't see an impact on us.
Okay. And last one for me. When you look at it, some of your major customers have run decent sized promotions in 2018. Now how do you think about channel inventories and sell through on some of those newer products? Is it still going strong?
Or should we expect any sort of inventory adjustments as we move into 2019 on those programs?
Pretty North America specific I think is what you're talking about. I'm pretty bullish on the realities we could have sold through a heck of a lot more. Spike Seltzer had the supply chain talked a little bit more. And I think so what we'll do is we've got a number of customers moving away from historical view on just in time inventory, so we can do some pre builds and things of that nature. So we can get folks set up for success in peak season.
So sometimes the shortness and the inefficiencies in the supply chain and the lost revenue for some of our customers allows us to have a better much better dialogue and help them succeed. And that's the kind of conversation I'm seeing right now. So pretty excited to see what happens in peak season next year.
Great. Thanks guys.
Our next question comes from the line of Ghansham Panjabi with Baird. Please proceed. Your line is open.
Hi, good morning. This is actually Matt Krieger sitting in for Ghansham. How are you doing?
Good. Thanks. How are you?
Good, good. So I'm still trying to wrap my head around the metal supply issue. Is this more a supplier having trouble with production? Or is this a contract issue that's specific to Ball? And then what gives you confidence on being able to manage through this during the Q4?
And will there be any incremental costs specific to this supplier situation?
It is with 1 supplier and it was I think specifically their Cast House. And so like I said, we've got a number of folks that have a ton of depth and knowledge with rolling mills and they've been in and they've evaluated the situation. And at this point, we've been managing kind of hand to mouth. It's not we haven't seen a lot of disruptions in terms of line productions, again we're managing through them, but they could be concerning if we don't continue to do that.
Okay. So no expectation a cost impact, correct? No. Okay. And then moving on to Brazil.
So one of the key soft drinks players in Brazil had mentioned a pull forward of volumes ahead of the elections in 3Q. Did you feel any impact from any pull forward in the region? And then how do you feel about 4Q volumes in South America just as we sit today?
No. I'll take the first one. It actually no is the answer. Do we see any pull through? In fact, in the Q3, I know overall industry volumes were down in the soft drink side of the business.
So we don't see any impact. And as we go in the Q4, Dan, you want to take that one? Yes. At this point, I think Q4 and even Q1 peak season down in South America. The only thing we can tell right now is we're running and making every can we can make right now.
So it's a little premature to really understand the sell through kind of tail end of December beginning of January is when those year over year comps and growth rates will start to kick in. But right now we're seeing a really good production build and pull through from our customers and now it'll just be what's the sell through. The one caveat in South America is Argentina we're going to continue to see growth, but we'll just see it at a slightly slower rate than we had seen over the last 12 months.
Yes. That makes sense. That's very helpful. That's it for me. Thanks.
Yes.
Our next question comes from the line of Debbie Jones with Deutsche Bank. Please proceed. Your line is open.
Hi, good morning.
Good morning. Good morning. You guys
talked a little bit about things you might need to do, if you see this shift more aggressively into metal from plastic. But I'm curious how what's happening right now may differ from other shifts to metal that you've seen in the past. You get the impression that this is something that would be more immediate? Or is it kind of similar to past things where there'd be test runs on shipping into the new substrate? And then just trying to understand how flexible your system is to manage this?
This would be Debbie, this is Dan. This would be more pronounced because the level of investment that would be required from our customers to convert plastic lines into can lines, there wouldn't really be an availability to move back and they'd have to set up the retail channels in a way that it would be pretty meaningful kind of that one fail swoop if you will. We would probably see that in Europe first is the reality.
Okay. And then just follow-up on Europe. You addressed the volume improvement, which was pretty nice. I'm just curious, is the 12% margin, is that the right margin? Are you happy with that?
I mean, if I look historically, that's a big improvement. I'm just trying to get a sense of what else there is to do in that region going forward if anything?
No. I think at the outset of the planning phase and where we embarked after the Rexam acquisition. We knew we had a 3 to 5 year journey to kind of get back to where the Ball business was prior to the Rexam acquisition. And we still have some opportunities and some growth from a margin expansion standpoint, stepping more into specialty, becoming more efficient in our manufacturing footprint, making sure we have the right capabilities in the right locations to kind of further diminish the freight disruption, G and A opportunities that we've touched on in the call. So there's still I think a couple of years of margin expansion just by kind of getting back in line with what we would have seen historically in our previous European business.
Yes. Debbie, this is John. If you kind of take a step back and recall that and don't hold me to this number in 16, but the margins in Europe were well below what we expected and they were in the 9 ish percent if I remember correctly. And we said we think we have a line of sight to get to the kind of 12%, 12% -plus margins that we had. I mentioned that because if 2016 was about 9%, 2017 was about 10%, 2018 is about 11% and then 2019 we still have all these cost opportunities that Dan just mentioned.
So there's the runway that we always talked about.
Okay. Thank you. I'll turn it over.
Our next question comes from the line of Adam Josephson with KeyBanc Capital Markets. Please proceed. Your line is open.
Thanks. Good morning, everyone.
Good morning.
Dan, just one on the North American bevcan industry. I may have misheard you, but I think you said the industry is over sold right now. If so, what are industry operating rates compared to historical averages? And why would the industry be over sold if demand is flat to slightly down and when I don't think you've reduced any net capacity?
Well, we have reduced net capacity and we mentioned that in the investor field trip. I think we took out 8 lines and put back in 5. Secondarily, you're talking about more conversion lines. So you lose efficiencies when you're building or you're putting out into the market more specialty products. So your multiple products off of one line, you're making less cans.
So all of that is having an impact on supply demand. Operating rates? Let me take this because Adam, it's the operating rates when you ran standard 12 ounce and random forever, it was a metric that even we used. We don't use that anymore because to Dan's point, if you have I'm just making picking this as an example. If you have one line and you're making 6 conversions in a year and then you have increased demand on the spiked seltzer and all of a sudden you go to 9, you're making a heck of a lot more money than you were on standard 12 ounce, but your operating rates as defined historically are lower than that.
So what I would tell you is, our we are operating given all that complexity, we are operating as good as we have in the past. But by definition, the operating rates are lower.
Got it. John, just a couple of others. On the plastic issue, what are the brand owners, the Cokes and Pepsis of the world telling you in terms of their preference for cans versus PET? I think at your Analyst Day, you talked about the fact that they're actually making more money on PET than can. So what are they telling you in terms of what their preferences are and what their intentions are in terms of shifting among substrates
in the future? Well, I think it's largely what
we talked about at the
side relative to cans. And through the use of specialty cans, we've been able to meaningfully close that. You layer on top of that with what's happening with the consumer and retailer about pushing more of a sustainable product. And that's what exactly what we said at the Investor Day is what our customers are telling us.
Got it. And just one last one. Just in terms of your customers, again, some of your large beverage can customers are struggling pretty significantly to the point that the largest brewer in the world just had to cut its dividend in half last week because of weakness in the global beer market. And to what extent do you think your future growth and success is tied to that of your
largest customers? Well, again, we talked about that at length. Our biggest growth right now is happening in all these other categories. Whether it's wine, whether it's spiked seltzers and other FABs that's where all the incremental growth. And so what we're seeing is, if you think just as a big picture that call it 40% of our portfolio in North America is bigger beer, 40% is soft drink and then 20% is the other categories I just mentioned.
Yes, the big beer is declining, but remember the can is winning relative to overall volumes. So the can this quarter, good example, overall volumes for beer, big beer were down 3 plus percent, but yet the can was only down 1%, because it continues to take share. On the soft drink side through the use of specialty, it used to be declining. It's relatively flat. And then we're seeing double digit if not higher growth on that 20% of the portfolio.
Thanks,
Our next question comes from the line of Brian Maguire with Goldman Sachs. Please proceed. Your line is open.
Hey, good morning, everyone.
Good morning. I just
wanted to come back to the really strong volumes in both Europe and North America on a relative basis. And the spirit of the question is really just trying to figure out if there's some difficult comps that you would have a year from now. But in Europe specifically, was there a meaningful impact from the World Cup? I know it's been a couple of months since it happened. But just wondering if you saw a deceleration in trends sort of as the quarter went on that would sort of make it for a tough comp next year?
And then in North America, you mentioned this year some of the others in the industry probably didn't build inventory to anticipate some growth in some of these sparkling water markets you're talking about. Do you anticipate them to build inventory a little bit differently for next year and such that you might not have some of this spillover business next year?
Yes. Good question. I'll start with Europe first. I would say Q3 was less impacted by the World Cup. I mean very little impact.
I think what surprised us to the good was the replenishment and the sell through that was happening in Russia. The can continues to win there and we're continuing to sell through at a pretty brisk clip. How effective that will be next year and the very good weather that we had through all of Northern Europe and Central Europe, that will be the wildcard for comps. I would say less so than is the can winning, are we securing additional substrate penetration, new category launches, all of those things we're seeing really nice tailwinds on. I would say weather will be the wildcard for us if we're going to have something similar there in the North of Europe for an extended period of time.
And then the U. S, I actually feel pretty bullish about next year because I think we and our customers and if you're following any of the CPG companies in North America, they'll tell you they probably left a little bit on the table this year by trying to manage to just in time inventories as opposed to pre building stock. And so we're having those discussions to set up our customers for success in a more meaningful way next summer. And by all indications, they're feeling pretty bullish about things like spike seltzer and sparkling water and some of the other new categories that you saw, but probably didn't see the extent to which they could have sold through because candidly the supply chain wasn't set up to deliver those products at the amount that the end markets would have pulled. Okay.
That's really helpful. Just a follow-up on costs in North America. I think you talked about next year getting $50,000,000 of year over year improvement from Goodyear and the consolidation that you've been doing on the manufacturing side. Just does that $50,000,000 include the sort of duplicative cost you have by still having those plans up and running this year? Is that sort of an all in year over year benefit you'd expect?
And then on the freight side, some of the spot rates have started to tick down a little bit. It could just be seasonality. But just wondering if you're seeing or expecting any flattening out or even maybe potentially lower freight rates going forward?
I think the $50,000,000 is more or less net once we got full ramp in Goodyear. And there are a number of things that we're working on relative to freight rates both contractually and to your point, yes, 3% growth during a ramp up period of Goodyear and qualifications and additional conversions. We hope that that normalizes and we pick up some efficiencies just by running our system more effectively next year absent startups.
Got it. Appreciate it. Thanks.
Our next question comes from the line of Gabe Hajde with Wells Fargo Securities. Please proceed. Your line is open.
Good morning. Thanks, guys. One last question on Europe. Obviously, you're sort of expecting at least in the near term growth to sort of moderate there. But and I appreciate it depends on where of the growth materializes.
But, when you look at your footprint and assuming growth continues even at a, call it, a 3% to 5% rate, Would this translate into more line additions as it sits right now, looking at the footprint? Or would you be talking about more brick and mortar and sort of asking in the context of looking back to CapEx over the past few years, it was a little bit elevated, call it $500,000,000 to $550,000,000 dollars What type of return capital is embedded in that sort of a CapEx figure versus your sort of your maintenance and safety environmental spend?
Yes. It's a great question. In the near term, it's more lines within existing bricks and mortar. That's the short answer. We've had our folks have gone through every one of our facilities and knows whether it's a full line, whether it's just a couple extra pieces of equipment, how much output can we get within the existing bricks and mortar.
That's our near term focus. I think to both what's bricks and mortar. That's our near term focus. I think to both what Scott and Dan were talking about earlier, if longer term there is a much more pronounced growth that's sustainable, we will look at bricks and mortar. But as we sit here today that is not on our near term horizon.
Great. Thanks. Helpful, John. And then one last one. It seemed like you guys tweaked the language a little bit in terms of M and A pipeline or at least allocating capital that direction, appreciating that those things are more opportunistic or episodic in nature.
But are there parts of the portfolio, I mean, you talked about aluminum aerosol, where you look to, I guess, allocate that capital? I mean, I know the beverage business is pretty well filled out in a couple of different geographies.
Yes. Perhaps, I think you may be reading a little bit too much in the parsing words because nothing fundamentally has changed.
Thank you.
Okay. Melody, why don't we go it's getting near top of the hour. Why don't we just go with one more question if there are any more?
Yes. We do have a follow-up question from the line of George Staphos with Bank of America Merrill Lynch. Your line is open. Please proceed.
Hi. Thanks for taking the follow on. Guys, just a point of clarification. The specialty growth that you saw in the quarter that you said was double digits, was that for North America or was that for the platform globally? That's question number 1.
Question number 2, especially with your beverage customers, how many roughly would you say as a percentage basis have already established yet to establish such goals? Just curious about that. Thank you and good luck in the quarter.
Yes. George, this is John. To answer your question on specialty, it's both. We're double digits both in North America as well as globally across the system. With respect to sustainability, the vast majority of our customers have either put out specific goals by 2025 or 2,030 or they have established an intent over the next years to finalize such goals.
Okay. And George, there's nothing fundamentally specific about substrate mix shift in there. And so that's the difficulty of trying to parse through some of the data relative to when you can anticipate this. That's why with some of our partners, we're getting indications because they're starting to plan and they're doing mindful planning about how many lines, how many can lines and where. And so those conversations like we mentioned in the Investor Day are happening.
They were not happening a year ago. They're happening today.
Yes. I mean our sense is a lot of those initial goals as they were set out, the customers are beginning to be concerned whether they can actually hit them or not. And so that may be one of the reasons that you're seeing the intensified discussion. But anyway thank you and good luck in the quarter guys.
Thanks guys. Thank you, George. And thank you everyone. Melody, I think we're concluded.
Thank you. Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.