Ladies and gentlemen, thank you for standing by, and welcome to Ball Corporation's second quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Thursday, August 2nd, 2018. I would now like to turn the conference over to John Hayes, CEO. Please go ahead, sir.
Thank you, Malika, and good morning, everyone. This is Ball Corporation's conference call regarding the company's second quarter 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-K and in other company SEC filings, as well as the company's news releases. If you don't already have our second quarter earnings release, it's available on our website at ball.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. Joining me on the call today are Scott Morrison, Senior Vice President and CFO, and Dan Fisher, Senior Vice President and Chief Operating Officer of our global beverage business. 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 comments on our aerospace business as well as the outlook for our company. Momentum continues across our businesses.
Comparable operating earnings were up 11% year-over-year as we continue to execute our strategies of achieving better value for our products through higher returns for our standard products and higher growth for our specialty products, aggressive cost-out programs in both our fixed and variable costs, and completing several large growth capital projects. Our comparable operating earnings improvement was despite a number of headwinds, including higher U.S. freight rates, an 11-day Brazilian trucker strike that affected shipments in May, soft domestic U.S. beer volumes, and to a smaller extent, currency. Our aerospace business continued to add to its already record-high backlog, and its prospects have only grown with time.
In addition, in this quarter, we announced and subsequently closed on the sale and formation of a joint venture for our U.S. Tin Plate Food and Tin Plate Aerosol business to Platinum Equity, where we received approximately $600 million in after-tax cash proceeds and will retain a 49% interest going forward. This transaction was the right thing for the business and for Ball Corporation, and it will allow us to immediately free up capital that was generating below our 9% after-tax return on capital threshold while retaining future upside in the business. The transaction does not include our global aluminum aerosol business, which continues to win around the globe relative to other substrates. Our LTM comparable EBITDA through June 30, 2018, was $1.87 billion, and we are making progress toward achieving both our EBITDA and free cash flow targets in 2018 and 2019.
Our deleveraging has been ahead of schedule, and we've been actively repurchasing our stock and will continue to do so for the foreseeable future, a commitment we made when we embarked upon the global beverage can acquisition. As we continue to leverage our scale to further promote aluminum packaging growth through sustainability initiatives, I invite you to read our biennial sustainability report scheduled to be released on August 7th. We have an obligation to educate consumers, customers, retailers, and other stakeholders that aluminum packaging is the most sustainable package from an environmental, social, and economic perspective, and the choice for consumers of all generations. Our products are on the right side of the environmental debate, and that is certainly a tailwind for Ball, not only in beverage packaging, but also in our aerospace business, where much of our civil work is focused on creating and disseminating environmental intelligence.
Moving on to the results for the second quarter. Our South American business delivered solid performance despite the trucker strike in Brazil, which cost us approximately $10 million in comparable operating earnings. Our European business continued to sequentially improve on its performance through cost out and volume growth. Though our North American business continued to incur out-of-pattern freight and startup costs related to our new Goodyear, Arizona facility and lower volumes due to softness in domestic beer, other categories like CSD, crafts, sparkling water, import beer, energy drinks, wine, and other emerging categories continued to grow, and we've begun to execute on our value-over-volume strategy to address the long-stated need that our standard products do not generate the appropriate returns for the capital employed. Anticipated cost savings were also realized in our G&A.
Our Spain and Arizona startups and the plant optimizations in Birmingham, Alabama, and Cuiabá, Brazil are complete. Global aluminum aerosol volumes were up 5% in the quarter, and our tin plate food and aerosol asset sale was completed, as I mentioned earlier, this week. Lastly, our aerospace business continued to grow its contracted backlog, and hiring continues at a very rapid pace. While the hiring surge and ramp-up of new programs had a bit of a drag in the second quarter, we expect material operating earnings improvement over the coming quarters. Despite continued U.S. domestic industry volume declines and volatile volumes in EMEA, the strength of our business, its strong cash flow and EVA returns, and the continued progress on our efforts and initiatives certainly offset any such headwinds. We remain confident that certain customer-specific volume softness will in no way impact our ability to achieve our near-term targets.
Within the last two weeks, we also received the good news that Ball was awarded exclusions on U.S. aluminum tariffs for certain countries' can sheet supply. Great work done by our sourcing and government affairs teams. 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, driving more mix shift to specialty containers, actively managing our supply and demand, further developing innovative aluminum packaging products, and expanding aerospace with an EVA and return of value to shareholder mindset. As fellow Ball shareholders, investors can count on us being good stewards of our capital and cash flow. All in, excellent execution by our global teams.
Thank you to all of our employees for delivering on our commitments while dealing with the complexity of numerous projects and process initiatives to position our company for consistent long-term growth and strong free cash flow. With that, I'll turn it over to Dan.
Thanks, John. Our global beverage business operating earnings were up 9% year-to-date. As John mentioned, it was a busy and rewarding quarter across global beverage. Our team completed two plant startups on time and on budget. We kept up with strong demand for beverage cans across Europe, Russia, and Brazil during World Cup, despite a few transitory hiccups outside of Ball's control, like transportation strikes and brief CO2 shortages. Our global specialty mix remains at approximately 40%. Network optimization activities to balance standard can production and geographically position the broader specialty can portfolio in the U.S. are right on schedule with Birmingham ceasing in production at the end of the quarter, and Chatsworth and Longview slated to cease production by the end of the third quarter.
All of this is possible given the successful startup of Goodyear's two lines in the first half and the ongoing startups of lines three and four by the end of August. Note that the U.S. network optimization just described results in no new net capacity. Scott will address the CapEx to fully scale out the Goodyear plant. European process transformation projects to further improve our cost structure continue. Additional network optimization through the closure of one line, our Cuiabá, Brazil plant, will allow us to leverage equipment elsewhere in the South American network. Ultimately, we are aligning with the right customers and markets, expanding into new products and capabilities via our ever-expanding offering of specialty can sizes, leveraging our technical know-how around predictive maintenance, light weighting, and process improvement, positioning our products as the most sustainable in the world.
The economic value creation the can brings our customers is real and growing. Moving to the individual segments, Ball's North American segment profits were up slightly despite shipments being down just over 3%, all consistent with our first quarter commentary. Growth in Mexican imports, craft, sparkling water, wine, and energy is very healthy, but just wasn't enough to offset domestic beer volume declines. Roughly $7 million of out-of-pattern freight and roughly $5 million-$7 million of startup expense in the quarter. Hats off to our North America team. There have been more headwinds than tailwinds this quarter, but that will flip in the second half. July beverage can shipments are strong, and our supply-demand balance is tight.
With this more favorable volume trend and the moderation of startup costs and out-of-pattern freight, the segment is positioned for notable growth in the second half and will also benefit from fixed cost savings in late 2018 and beyond following the previously mentioned plants closing late this quarter. Our South American business wasn't able to claw back all of the impact of the 11-day trucker strike, but given the scale and size of our Brazilian operations, performing $3 million lower in the quarter versus 2017 was an accomplishment. Segment shipments grew nearly 5%, and as we've teed up since late last year, underperformed Brazilian industry trends in the quarter. Overall beer consumption trends in Brazil improved, and our customers continued to emphasize cans across South America. Our business is positioned well for 2019 and beyond.
The timetable for 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. As we have acknowledged the past couple of quarters, we continue to anticipate tougher year-over-year comps in the second half for our Brazilian business due to the profit recorded on the ends manufacturing contract that supported the divestment business going away. Tougher year-over-year volume comparisons and our value-over-volume response that played out in late 2017. Thanks again to our South American colleagues. We appreciate how effectively the team responded to the trucker strike and how quickly the business got back to normal. The European business earnings were up 14% year-over-year and once again saw mid-single-digit volume growth led by Russia and continental Europe.
Our new Spain facility is shipping cans, and near and long-term initiatives to get segment performance back to where Ball's legacy business was are on track. Transformation projects are progressing nicely and will contribute to planned G&A savings in 2019. In EMEA, demand volatility remains. Saudi continues to be difficult, and on the positive side, we are seeing a better operating and demand environment in Turkey and India. Our China business continues to be cash flow positive and will continue to exercise a disciplined approach in this country. In summary, significant projects are up and running, supply-demand is tightening, and contract renewals are on the horizon.
Thank you again to all of our teams around the globe. You're doing a great job. With that, I'll turn it over to Scott.
Thanks, Dan. Comparable second quarter 2018 earnings were $0.58 versus $0.53 in 2017. Second quarter diluted earnings per share reflects solid operational performance across our packaging businesses and lower corporate costs, offset by higher taxes and a slightly higher interest expense. Details are provided in the notes section of today's earnings release, and additional information will also be provided in our 10-Q. Net debt ended the quarter at $6.8 billion, $200 million lower than first quarter, and after a net share buyback of $175 million through the first six months. For 2018, we expect CapEx to be in excess of $700 million, as excellent progress on major projects allows us to bring spending forward.
The increased CapEx, along with the timing of the sale of the U.S. steel food and steel aerosol businesses at the seasonal peak of the working capital build, will put our free cash flow in the range of $800 million for the full year. Full year 2018 interest expense is now expected to be just above $300 million. The full-year effective tax rate on comparable earnings will be approximately 24%, based on our current estimates of the impact of U.S. Tax Reform. Corporate undistributed will be just under $110 million for the full year 2018. Keep in mind that due to the sale of our U.S. steel food and steel aerosol assets versus the timing of using the proceeds to repurchase shares, it will be slightly diluted to the second half earnings, likely in the range of $0.05.
Prospectively, on a full-year basis, the transaction will be neutral to slightly positive relative to diluted earnings per share due to the incremental share repurchase and definitely positive to EVA dollar generation in 2019. Year to date through yesterday, we have repurchased 8.34 million shares, or $318 million worth of our stock. Just over a 2% reduction in diluted weighted average shares outstanding. By year end, we expect our stock buyback to approach $700 million, in addition to paying out roughly $140 million in dividends. It's exciting to be able to ramp up our return of value to shareholders. With that, I'll turn it back to you, John.
Great. Thanks, Scott. Our aerospace business reported higher revenues and slightly lower second quarter operating earnings results, driven by solid contract performance and the continuing ramp-up of new contracts, offset by incremental labor costs, while we rapidly scale up our labor base. Our staffing levels continue to increase. Year to date, we've hired approximately 540 new employees and anticipate adding another 2 to 400 employees over the next 12 months. The aerospace team has done an excellent job managing this large onboarding process without taking their eyes off the execution of our business. We continue to leverage our unique capabilities, world-class technology, and the best talent in the industry to further grow our aerospace business. With contracted backlog at record levels and our won not booked backlog at $4.3 billion, the future looks bright for aerospace for the next three to five years.
As I mentioned earlier, the compressed timing of onboarding such a large number of new employees temporarily compressed second quarter earnings. We expect significant and material operating earnings improvement over the coming quarters. Now as we look forward for our corporation, we are on track to achieve our targets. We are actively managing and oriented our asset base with an EVA accretive approach. We're leading the charge to ensure aluminum packages for beverage and aerosol are the most sustainable packages on the globe. Our aerospace business is operating from a position of strength as we ramp up and scale out our people, processes, and infrastructure. It's been over two years since we closed on the largest acquisition in our company's 138-year history. We've delivered through some pretty interesting global, economic, and political dynamics. It's time to look beyond 2019.
With that in mind, we're having our investor field trip in Colorado on October 1st and 2nd. Please reach out to Ann Scott if you're interested in meeting our broader team and learning more about the, quote, "and beyond," unquote. For now, our balance sheet leverage is where we want it. The capital investments have been made. We're taking seriously the opportunities afforded us through our commercial manufacturing and supply chain activities. The outlook is on track, and we're a buyer of Ball stock. There's probably not much more to say. With that, we'll turn it over to the Q&A. Malika, we're ready for questions.
Thank you, sir. Ladies and gentlemen. Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. One moment please for the first phone question. Our first question on the phone line is from George Staphos with Bank of America. Please go ahead, your line is open.
Hi, everyone. Good morning. Thanks for taking my question. Thanks for all the details. I'll ask a few questions and turn it over and try to come back. I guess, in terms of the outlook and guidance in relation to the transaction with Platinum, I think you mentioned, John, or Scott, that the back half of the year will be diluted about $0.05 just because of timing. Yet you're maintaining your outlook for 2019. Recognizing I'm shifting years a bit here. What within your ongoing fundamentals, your integration of Rexam is going sufficiently well that you can maintain the guidance even though this is a somewhat dilutive transaction initially anyway to earnings and to cash flow.
Yeah, George, why don't I take the kind of 2019 then I'll turn it over to Scott to give more color on the 2018. When we started a couple of years ago, we talked about the $2 billion and $1 billion in 2019. That included our tinplate business, as you know. As part of the transaction, it was announced that for the fiscal year 2017, it reported EBITDA of about $78 million. As you know, 2017 was not a good year in that business, so there was some growth. Embedded in the $2 billion was somewhat south of $100 million of EBITDA that we just divested. Despite that, things are going well. We are accelerating some of the capital that we're going to be able to generate that incremental value in 2019.
We think we can close that gap and still maintain the $2 billion of EBITDA guidance and $1 billion of free cash flow despite losing the just under $100 million of EBITDA and equivalent free cash flow from the food and aerosol business.
The dilutive nature of the transaction is really just timing because we'll start buying stock. We've got a lot of stock to buy in the back half of the year. Once we get to the end of the year, it should all be trued up. On a full-year basis, it really won't be dilutive going forward.
Okay. Appreciate that. I think next question I want to just review is contracts, commercial efforts, and the like. There are a couple of more, I think, references to value over volume in this press release. I know you can't go contract by contract or give a lot of detail, but can you give us a little bit more in terms of the undercurrent in terms of your progress there? I think you mentioned in EMEA, you have a bit more in the way of contract renewals. Did I hear that right? How are those related? Lastly, if you can, Scott, back to the CapEx question, going up $100 million. Can you comment at all, other than the amount of spending increment, where you're putting that capital? Thank you.
Yeah. Thanks, George. This is John. I'll start. That was a mouthful, I think. First, with respect to our commercial strategies, for the past couple of years, we have been very consistent that said that the returns that are generated on the standard containers do not, for us, meet the hurdle rate to continue reinvesting in that. We have talked for a while now about our value over volume strategy. We also talked over the last couple conference calls that we have a couple of rather larger contracts coming up in Europe at the end of 2018 and in the United States at the end of 2019. Nothing has changed at all. We are in execution mode.
I will also say, though, that you also know it's Ball's policy that we don't negotiate nor talk about customer contracts in a granular level on investor conference calls. The only guidance I can give you is we are right in the throes of what we've said for the last two years we'd be doing.
On the CapEx front, all of these things were planned, George. It was just a matter of the timing of them. Our teams have done an excellent job of executing on the big projects that we have going on, so we're able to accelerate the later phases of these programs. Dan mentioned bringing up lines 3 and 4 here in the back half of the year in Goodyear, adding a second line to the Spain plant. We're adding a warehouse in Monterrey to support the growth in that business and to support our aerospace backlog, moving up some of the build-out of some of our test facilities. These are all above-average return projects. Frankly, I'm usually a capital curmudgeon in terms of spending. The faster we can do these things, the faster we'll get the returns, the longer we'll get to enjoy them.
Maybe I can add some color to the capital just for the beverage piece, then I'll address your EMEA contract question. Just to scale it, Goodyear's approximately $250 million. Cabanillas, our Spain facility, is approximately $150 million. We put up a fourth line, mega line to support our 24 and 25-ounce growth in Conroe. That's approximately $60 million-$70 million. You've got ongoing M&R in the range of $100 million-$125 million. It's obviously some significant one-time capital throws, but it's been contemplated. It's being executed against, obviously, it's going to allow us to qualify customers sooner and get after some of the fixed cost savings maybe a quarter earlier than we had anticipated. I'm really pleased with all of that. In EMEA, George, I would frame EMEA similar to contract lengths in North America.
Our EMEA business, as you know, is principally Egypt, Turkey, India, and Saudi. Those contract durations are somewhere in the neighborhood of two to five years. They don't turn over as frequently as, say, China. There's really no substantive changes in that market. It's consistent with where we entered the year and what we had contemplated a couple of years ago in the guidance that we gave.
Thank you very much.
Thanks, George.
Our next question is from the line of Brian Maguire with Goldman Sachs. Please go ahead. Your line is open.
Hey, good morning, everyone.
Morning.
Morning.
Just a question on the trends in North America. A lot of the volume headwinds have been well documented. It seems like your comments imply a little bit of an improvement. I think even July, you said things are sort of improving there. Just wonder if you could expand on that. What are you seeing heading into 3Q, and what gives you confidence that we might flip to growth at some point in the near future in that segment?
Sure. Yeah, you heard correctly. We saw strength in June, then that's followed through in July. It's essentially April and May, there wasn't a ton of promotional activity by the major customers. You've seen a lot of innovation in terms of new products and new categories being pushed, especially in the mega beer customer. We're seeing those, we think there's probably a shift of Q2 softness into Q3 strength. I think it's just a timing issue, if nothing else.
Okay, that makes sense. One question about the announcement on the can plant in Brazil you had to shut down. The volumes have been really strong out of that region. I'm just wondering why they need to close it. I know it's just a one-line plant, so I'm guessing some of it's efficiency gains, but any impact of that to overall volume? Do you think you'll be able to house those customers from other plants? Any color on any fixed cost savings or margin shift from it?
Yeah, you hit it on the head. Really what we're doing is we're taking a one-line can plant, taking the fixed cost out of it, and moving that equipment into other facilities. We're not necessarily losing any capacity. We are taking out fixed costs. In the grand scheme of Ball Corporation, it's not a huge deal. Anytime you can take fixed costs out, that's what we look to do, and that's what we're doing here.
Okay, thanks very much.
Our next question is from the line of Tyler Langton from J.P. Morgan. Please go ahead. Your line is open.
Good morning. Thank you. Just had a question on South America. I guess it seems, at least versus our estimate, doing a little bit better sort of in the second half, especially when you take out the strike. I guess when you think second half and I guess the full year, is it doing a little bit better, I guess, than maybe you previously thought? Just in sort of still in line?
I think it's largely in line. Q2 was so disruptive because of the 11-day truckers strike in terms of volume dynamics. I would say volumes were better in Q1. Hard to distinguish what actually happened in Q2 from a volume trend perspective. Based on what we're hearing from our customers, we think the can will continue to win, and we should do well in the second half. I would just reference my comments relative to the ends manufacturing agreement in the second half for year-over-year comps. I'm just speaking to volumes here.
The other thing I'd add is let's not forget that there's an election in Brazil this fall. Elections, when they happen down in Brazil, they tend to create more volatility. I think the caution you hear from us is really just more about an unknown than anything other than what Dan said that we know. These elections just create greater volatility, and it's not until the beginning of the fourth quarter that we're going to have this election.
That's the top one. I think, Dan, you said in North America, startup costs were $5 million-$7 million this quarter, and freight was $7 million. Do you have a sense of, I know you said it would get better, but in the second half, is just sort of higher freight rates going to cause any pressure? I would think obviously the startup costs go down, but just any details around that would be helpful.
June was definitely a spike in freight rates. I would expect to see some of that continue. In that $7 million out-of-pattern freight number that I indicated, probably two to three of that was self-induced, really because of the startup cost. Think that number would be mitigated somewhat, but we'll continue to see headwinds on freight for the foreseeable future, unless there's any kind of underlying changes. We should get the fixed cost savings like I identified. The startups are going extremely well. Some of the competitors, I think, have recently said they're looking to broker additional cans. We'll be the beneficiaries of that, hopefully as a result of an excellent startup phase. Freight rates will continue probably in line with what we've seen, but we've got a lot of tailwinds heading our way in the second half of the year in that business.
Got it. Thanks. Then just a final question, Scott. I know you're pulling forward some CapEx, and I know you kind of always used sort of $500 million roughly as a placeholder, and I know it's early, but as you sort of look into 2019, do you have any sort of thought on what CapEx could look like?
I think we've been able to accelerate some of these programs that we had planned quite some time ago. I think we'll see a meaningful drop in CapEx as we get into 2019.
I think just to amplify that, Dan did a good job of laying out the really big projects on the beverage side, and that added up to well in excess of $550 million. Later on, we're spending $100 and a quarter in aerospace alone this year on building out our manufacturing footprint here. That's where you can see how we're getting to the $700 million. When you think about, as we sit here today, those big projects that are going on in 2019, most of what Dan referenced will not be there. Aerospace will still have some elevated expenditure, but not to the level it is now. It should come down meaningfully from where it is this year.
I would expect it to be lower than depreciation next year.
Gotcha. Okay. Thanks so much.
Thank you.
Our next question is from the line of Adam Josephson with KeyBanc Capital Markets. Please go ahead. Your line is open.
Good morning. Thanks, everyone. Dan, just one question on your North American commentary. You mentioned your system is tight at this point. The segment was down 3% on volume in the first half of the year, roughly. I know you said July was better, but what exactly is causing the tightness given the volume declines you've experienced thus far?
Yeah. I would say, reference my comments just previously, in April and May, it was just a function. It's promotional spend. You see significant declines in April and May on promotional spend by really the big customers. That spend has come back, in conjunction with them pushing can a number of different new innovative products. All of that needed additional time to be marketed, and that's all selling through. We've seen the benefits both in June, we saw it, and this far through July and into early August. I think it's more of a timing issue, two to three than anything, just because of the promotional activity.
Yeah. Don't forget going forward, Dan also mentioned about the closure of Chatsworth as well as Longview, Texas.
Right. The capacity actions will be neutral to your overall capacity, right?
That's correct.
Okay.
Just, John, one more on, I think what George is asking with the 2019 EBITDA. If you're selling almost $100 million of EBITDA, I know it was $78 million in 2017. I don't know what it is now, but call it $80 million, $90 million. You reference a number of external headwinds that the company's dealt with since you closed the Rexam deal, sounds like effectively increasing your underlying EBITDA guidance by almost $100 million, despite all of these headwinds. I'm just trying to better understand where that's coming from exactly. If there's a particular region that's been kind of going markedly better than expected. Just a little more detail there would be helpful. Thank you.
I think it's excellent execution across all the regions. When I think, off the top of my head, Europe is still on its journey, but is delivering above what we initially expected. I think in North America, we still have a lot of on the come opportunities in terms of the fixed cost savings that Dan mentioned, but things are going well there. I think in South America, I think our sourcing strategies is above we were. There's not just one or two specific buckets. I think across the board, our business has been executing quite well. That combined with the aerospace business is growing faster than what we expected as well. Yes, we have some headwinds. Yes, we're selling off $80 million to $100 million in EBITDA. Yes, we still think we can make the $2 billion of EBITDA in 2019.
I think another point that we've commented on but maybe gets lost in this is, maybe we should be tooting our own horn a little bit more. The project startups in Goodyear and Spain, six lines in greenfield facilities, have gone remarkably well. If those had not gone well, we would be having challenges in out-of-pattern freight qualifications with customers. I think as we sit here today, we're much more on our toes with regard to those two projects, which we banked a lot on in terms of fixed cost savings in 2019.
Thank you.
Our next question is from the line of Anthony Pettinari with Citi. Please go ahead. Your line is open.
Good morning. In the North American business, it seems like you might be set up for a good second half. When I think about last year, you had the hurricane, and then kind of related freight and supply chain costs. Is it possible to decide how much of a benefit you could get from the non-repeat of hurricane and kind of hurricane related costs?
What we said, last year and then it's really playing out and what we're anticipating as well was We had a $30 million headwind, out-of-pattern freight, lost sales, inefficiencies from a production and absorption standpoint. Based on what we know today and what we're seeing out of the North America business, we should recover all of that, and hopefully, things continue to go well from an execution standpoint and volume comes through. We'll see that year-over-year.
Okay. That's helpful. Just switching gears. John, you talked in your prepared remarks about the environmental benefits of cans, and I'm wondering with regards to some of the regulatory and media scrutiny on plastics, maybe especially in Europe, is this something that big customers are proactively coming to you about and you think could really drive incremental volumes this year or next year? Or is it more of kind of a general observation or something that you think could gain traction further on? Just any kind of color you could give there would be helpful.
Yeah, I think it has both short-term and long-term implications. I think the opportunity is probably greater in long-term, because in the short term, intermaterial substitution, you don't see a lot of. This does play into our commercial strategy that we said we're trying to anticipate and really push from a retailer perspective, an NGO and government perspective, a customer and consumer perspective, the benefits of the can. We also have to be in a position to be willing and able to invest in it where the returns are good. On the specialty, we've been doing a very good job there, we need to get the standard up. I think in terms of what specifically what you're talking about around intermaterial shifts, I think in the short term, that it's incremental, but I do think there's long-term benefits here if we play this right.
I encourage you to come to our October 1st and 2nd investor day, because we're going to be talking a lot more about the commercial reasons of why this is in our great interest to be pushing this.
On the long-term front, specific to the major customers, I can add just a little color. What we're doing now, far more than we've done even a year ago, is we're sitting down with our major customers, and we are collaborating with them on science-based targets. Some of the targets have to do with 100% recycled packaging substrate. The targets these customers are putting out are 2025 and 2030. That's why we're saying longer term, absolutely we know. We're putting programs in place. How quickly that manifests itself, we need to just continue to push the message and work, because, especially in Europe, as you indicated, right now it's happening, and the conversations are shifting.
Just to give you a little teaser come early October, we've looked at every major region in which we operate, and whether it's on the soft drink side, the beer side, or the other categories, which is energy and sparkling waters, et cetera, we've looked at what a one percentage point share shift from another substrate to the can means, and it's meaningful bottom-line improvement to our company. That is why the economic case of trying to create these greater profit pools for our customers by using cans can be good for them and good for us.
Okay. That's very helpful. I'll turn it over.
Thank you.
Our next question is from the line of Scott Gaffner with Barclays. Please go ahead. Your line is open.
Thanks. Good morning.
Good morning.
Good morning.
Scott, I just wanted to go back. I didn't quite catch all of your comments on share repo year to date, or I don't know if you gave it by at the end of the quarter. Would your expectation on a go-forward basis be to go back to the, you want to call it, the old methodology where you did most of your share repurchases in one Q on a go-forward basis?
What we've purchased, what's in the Q is $175 million for the year. We've purchased heavy since the end of the— I'm sorry, for the six months. Sorry, for the six months. What we purchased year to date as of yesterday, we put a program in place. We were blacked out for much of the quarter because of the food transaction. Once we were out of that, we repurchased heavy. As of yesterday, we've repurchased $318 million worth of our stock, or 8.3 million shares, just over 2%. For the rest of the year, we plan to approach $700 million. It's another 3% of the shares or 10 million shares that should come out between now and the end of the year, as we basically spend the proceeds of the food transaction and our cash flow.
Going forward, our leverage will be down to a point. We're almost there now. I think we're at 3.6 times at the end of the quarter. We said when we're at three to three and a half times, that we'll turn all of our free cash flow to buying back our stock and our dividend. That's a lot of stock to buy over the course of the year, and we'll be opportunistic, and we'll see how that plays out in terms of the timing early in the year versus throughout the year. You could probably count on more in the first half of the year, but buying throughout the year.
Okay. Maybe splitting hairs a little bit, when you had the announcement on the Steel Food Aerosol JV, you made the comment that the guidance for 2019 was going to be more challenging to achieve, I would say you sound extremely confident today. Is there anything that changed in the last whatever, month and a half, that would give you significantly more confidence than you had at that point in time?
No, is the short answer. I think when we put together two years ago the $2 billion EBITDA target for 2019, there was a lot of unknowns. We have de-risked those unknowns, and we feel more confident. Having said that, when you're taking $80, $90, $100 million of EBITDA off the table through the sale of the food and aerosol business, you have an $80, $90, $100 million gap you need to fill. We have confidence that we have game plans to fill that, and that's exactly what we're doing. There still is incremental risk. We still haven't realized the $50 million net savings here in North America around the three plant closures. That's still on the come, and there's still other programs like that, we have a line of sight to what we need to do. That's the important part.
Yeah, that's a big EBITDA hole to fill. Good luck filling that with some of these improvements. Just lastly from me on the exclusion from the aluminum tariffs, is that an industry issue, or is that something Ball specific that you were discussing there?
Well, that was a Ball specific. The industry cannot petition the Department of Commerce for exclusion. It has to be company by company, we received last week the news that we received an important exclusion.
Okay. Thank you.
Thank you.
Our next question is from the line of Edlain Rodriguez from UBS. Please go ahead. Your line is open.
Thank you. Good morning, guys. Quick question on beer consumption in the U.S. For a while, Mexican imports were offsetting production in the U.S. You saw the article yesterday in The Wall Street Journal regarding how Americans are drinking less beer, with younger people preferring cocktails and wine. How do you position the company for sustained decline in beer consumption? That would include imports and everything else. How do you position the company for something like that.
I guess the data that you're referencing is nothing new over the last decade, I would say that one and two, you're talking about beer literage, you're not talking about the can. The can has disproportionately won share over that period of time. Craft beer continues to grow in the quarter, up 35%. I think we look to things like seltzers, waters, wine we're getting into in a big way, energy. You got to win in the categories that are winning, I think is the answer. The can continues to win from a substrate standpoint. Overall can volume for beer has grown slightly over the last five years, and if we continue to win in the markets that we're participating in, that's how we'll hedge our bet.
Yeah, the only thing I'll add, this is John, is in reference to the article you mentioned, it was describing as a slow decline of traditional beer, and that's correct. As Dan just pointed out, the spiked seltzers and all the alternative categories that the beer makers are really pushing, we can tell you with great certainty that the spiked sparkling category this summer is growing faster than anyone anticipated. Yes, that is taking share from what I would describe as traditional beer. It's still a malt beverage, which is the important part, and the can by far is disproportionately winning in that. When Dan talks about focusing on wine and focusing on these new categories, spiked seltzer is a great example of that.
No, that makes sense. Also, in terms of the profitability of the different products, does it matter to you whether those customers are selling more seltzer and other products versus beer?
Yes. Short answer, they're going into specialty cans, number 1. Number 2, they're being sold in many instances in single serve at higher profit pools. If our customers are selling at a higher price, we have the opportunity to sell to them at a higher price. The economic equation works really well on those introductory new beverage categories.
Okay. Thank you very much.
Thank you.
Our next question is from Arun Viswanathan with RBC Capital Markets. Please go ahead, your line is open.
Great, thanks. Good morning.
Morning, Arun.
Just a question following up here on that same issue. I guess first off, have you noticed any changes? You referred to increased promotional spending. Is that like a structural shift amongst your customers? I imagine that they're not happy, the large brewers, with the volume trends. Have they increased their spending at a sustained level from here on, and do you think that's going to have a material impact on mass beer volumes? Similarly, I think we've noticed something similar on the CSD side. A, has that actually happened, and do you think that's actually resulting in improved volume recovery? Thanks.
I can't comment on the long-term promotional spend, if it's going to be more social media, if it's going to be different outlets, if it's going to be a different dollar spend or a different target. I will tell you that the largest brewer in the world has made a comment that they want to shift their product mix from 80% traditional to 20% alternative. In that 20% space, it will overwhelmingly be new products, and it will overwhelmingly be cans. So I'm more interested in those new products candidly winning and us winning at a disproportionate rate than I am concerned about the promotional spend activity on the core brands. Another major brewer, just to add context, in North America recently made wholesale changes in their marketing department.
That marketing department was not concentrated on core brand innovation over the last handful of years, and their core products declined. So I think there's some rethinking going on, a different thought in some of the major brewers, and we will be there to help them from an innovation standpoint, and they will be knocking on our door first. What happens going forward and where they spend their money is yet to be determined, I think.
Okay, as a follow-up, are there other mechanisms you can take on the pricing side to offset any of the inflation that you're seeing, whether it be non-metal, but like freight and so on? What's the appetite for that kind of initiative? Would it be more challenging given soft volumes in North America and Europe, or is it a potential likelihood that you could actually achieve something like that? Thanks.
Yeah, we've talked about this a lot in past conference calls, and when you're talking about your commercial strategy, it's just not price. It's everything from terms. It's who bears the freight and how that mechanic work. It talks about call-off and having call-off windows that if you're in a 72-hour window, it's at one price, and then there's a surcharge if you want to move it inside of that. So there's a whole host of various things going on. As I said, we're not going to negotiate or talk about any individual conversations with customers on our conference call, but I also said that we are in execution mode as we sit here right now. Thanks.
Our next question is from the line of Ghansham Panjabi with Baird. Please go ahead. Your line is open.
Hey, guys. Good morning. I guess going back to the second quarter, I know we've talked quite a bit about 2019. Specific to Europe, how much of a benefit do you think you realized from the World Cup? How should we think about volumes in the region for the back half of 2018? Also, was there any sort of mix impact during the second quarter that was unfavorable? I'm just trying to reconcile the 6% volume growth with the reported 5.7% sales increase.
Yeah, I would say there was definitely some benefit to us, and I think it had more to do with the fact that it was in Russia and we have a very strong footprint in Russia. That had more to do with it. The other thing that happened in Europe, Ghansham, that you're probably aware of is in the north, the weather was remarkably good. There was a couple elements that really furthered that strength. I think the overall European market was probably closer to the 4%-5% growth, and we were closer to 6%. I think that benefit had to do with our footprint candidly in Russia and the benefit of the World Cup.
Yeah. Ghansham, I'll just point out on the volume versus revenue line, remember that we talked about in the first quarter that we still have a couple of contracts where it's year-over-year price declines that we inherited, and those end at the end of this year.
Got it. That's helpful. Since you last reported, the foreign exchange environment has changed dramatically, particularly as it relates to the emerging markets, some of the countries you operate in, Argentina, Turkey, et cetera. Can you just help us think through any sort of risk in the back half of the year? Are you seeing anything different than the underlying trend in the first half in those two regions?
No, it was definitely more volatile. The markets, John references on his comments, from an operating earnings standpoint, we had some headwinds definitely in Argentina, in Russia, and Turkey in the second quarter. We had some offsetting things as it relates on the corporate side. The net impact was really, when you get down to the earnings per share, it wasn't very much. Going forward, volatility seems to be a little bit less, but we're pretty well positioned to be able to deal with the currencies.
I'll just add one other thing. Obviously, anytime currencies relative to the dollar devalue, it makes our product more expensive because our products are typically dollar priced. You never like to see that. Having said that, when we think about what we see right now in the places Scott just mentioned, Russia, Turkey, and Argentina, can demand continues to be very strong there. Russia was World Cup. Turkey, it still has good economic growth. Even in Argentina, there's a package share mix that's favoring the can there. We keep our antenna up pretty closely to see if there's any adverse demand impact related to this, and we haven't seen anything yet.
Okay. Just one final one. Going back to the comments on beer in the U.S., clearly, it has been impacted by a change in consumer preferences in the U.S. Perhaps it has some parallels with what soft drinks went through over a decade ago in this country as well. How do you think more broadly about portfolio risk, specific to the U.S., with your beer exposure? I know craft beer has been growing, but if the category does start to slow more broadly, including craft beer, how should we think about your ability to perhaps do what you've been doing with tiering your customers on the soft drink side with specialty cans, et cetera? Is that an opportunity for you?
Yeah, absolutely, the specialty can and the new categories. At the end of the day, the major brewers are going to have to figure out, sell products that the end consumer wants, and I think they're learning that pretty quickly. I think your correlation to CSD is a good one. Just looking behind innovation pipelines and what we see and what we're working with those customers on, it looks a heck of a lot like five, six, seven years ago with the CSD folks. The other comment, and some of it just has to do with our exposure to the core brands that are declining. We have a lot less exposure to that just from a structural standpoint in North America because the two major brewers are vertically integrated. A lot of that they're feeling on the backs of their system.
We felt less of it, and the folks, the customers and the categories that we're dealing with, the craft side, et cetera, those continue to do really well. We've gotten out ahead of that aspect or this aspect that we're talking about, and we've got just the vertical integration buffer, if you will, just because of the North American market and how it's structured.
Thanks for all the detail.
You bet. Thank you.
Our next question is from the line of Mark Wilde with BMO. Please go ahead. Your line is open.
Hi. Good morning, everyone.
Morning.
I just wanted to go back to that aluminum tariff exclusion. Does it cover your entire portfolio, and is there any financial impact to you, or is it more to your customers that you would have passed it through to?
First and foremost, we pass it through our customers. It's about making sure that the beverage can is competitive. It is related. It doesn't affect all of our, because the majority of our metal we acquire here in the United States, but there's not necessarily enough capacity to acquire 100% of it in the United States. We procure metal from a particular supplier in the Middle East, and that is what we were given exclusion for.
Oh, okay. Thank you. That makes sense. My other question is the Brazilian trucker strike. Do you expect any carryover impact in three Q or four Q?
I'll quickly handle that. No is the short answer. One of the things that's just a watch-out generally is with these elections coming up, there's going to be a lot of labor issues. We can't tell you what they are, but it just always happens this way when you have the economy in Brazil as it is, and the political disruption as it is. Many of the unions put forth their strong views on certain things, and that's just a watch-out. We know nothing specific, but those things can happen from time to time.
I think for full disclosure, the agreement that was reached was a temporary one, 90-120 day. This all plays into the new election and what happens there. Based on what we're seeing right now and how we're operating, we don't foresee any additional disruptions, but there's always that lingering event out there with the election and the fact that this wasn't a permanent agreement.
Right. Okay. Thank you very much.
All right. Thank you.
Our next question is from the line of Gabe Hajde with Wells Fargo Securities. Please go ahead, your line is open.
Good morning, and thanks for taking the questions. Just one on the Middle East. I guess notwithstanding a lot of the geopolitical or volatility over there, can you talk about sort of just underlying demand as we start to lap the sugar tax over there and any response in the competitive landscape that you can speak of?
Sure. Just to reiterate, our EMEA region is Egypt, Turkey, Saudi, and India. Saudi, I would say, it continues to be incredibly weak. I would have anticipated a little bit more of a surge back to growth via innovation, and that hasn't come to fruition probably as fast as we've seen in other markets. That continues to be a challenge year-over-year. In Turkey, Egypt and India, those three regions are all growing and approaching double-digit growth for us. They're very positive, and the team's doing a great job cultivating can growth and new customers there. Saudi continues to be a very challenging environment for us and more importantly, our customers.
One just on Brazil, I guess bigger picture, your thoughts around sort of underlying demand. I know there was a lot of volatility with the trucker strike and World Cup. Maybe just kind of looking out into 2019, it seemed like the economy down there was on an improved trajectory. Do we still think about a, call it 2%-4% growth environment down there, or is there anything that's changed from that perspective?
Yeah, that 2%-4% is probably like 6%-8% on beer and probably continues to decline on CSD to get to that 2%-4% to give you more color. The can continues to win. The majority player in that market continues to push cans because all of their competition is going after them with cans. From a can perspective, I feel bullish. Obviously, John's commented on the election, the uncertainty there, from our business and the can and the beer segment, things continue to look positive. We're seeing continued investment by our customers in that region. I think your number's a pretty good one.
All right. Thank you. Good luck.
Thank you.
Malika, we'll take one more question if there's any more.
Okay. We do have a question from line of Chip Dillon with Vertical. Please go ahead, your line is open.
Yes. Well, good afternoon almost for us, good morning, Scott and John. A question I have is on, I noticed that the equity income line, which is usually pretty material, eight, $10 million, was zero this quarter. Was there anything new there that we should take into account?
No, it was exclusively the result of one time, mostly timing issues in one of our Asian JVs. It will normalize going forward. The only delta for the full year will be what happened in the second quarter. Nothing to be concerned about on an ongoing basis.
Okay. That was part of the one-time takeaways that made that go down?
Yes.
Oh, okay. I think it was great the detail you gave us on some of the CapEx. I believe you said the Arizona project was $250 million.
Correct
I'm rusty on my recollection, and of course, there's a specialty component, but I thought a can plant was, you build the first line, it was probably under $100 million, and then the second line would be maybe $50 million or $70 million or something like that. Could you just help reconcile those two perceptions?
Sure. This is Dan. I also referenced the Cabanillas plant, 2-line plant, $150 million. This is a 4-line plant for $250 million.
Oh, okay. That is definitely very helpful.
Yeah, if you go back to even the Goodyear plant is more in line with what we would have done in Monterrey too, if you reference some of that a couple of years ago.
Yep, exactly. That's still holding at three lines that are running pretty fully now?
Correct.
Okay. The last thing.
Yeah.
Probably-
Significant in investment, the difference down in Monterrey.
Yeah, I got you. Looking back at aerospace, you mentioned hiring a lot of people, and it should improve in the second half. Would you expect the EBIT margin to get back into that 10%-11% range in the second half?
Yeah. I think 11% is probably a stretch, but certainly, 9%-10% is not unrealistic at all.
Okay. That's helpful. Thank you.
Okay. Thank you.
Malika, are there any other questions?
Yes, sir. We do have two more questions in the queue. Would you like me to go ahead and produce them?
Yeah. Why don't we quickly go through them?
Perfect. Our next question is from the line of Debbie Jones with Deutsche Bank. Please go ahead. Your line is open. Ms. Jones, your line is open. Please go ahead. Please check your mute functions or pick up your handset. We are unable to hear you. Ms. Jones, we are still unable to hear you. We'll continue with a follow-up question from the line of George Staphos with Bank of America. Please go ahead. Your line is open.
Hi, guys. Thanks. I know it's late and feel bad coming in now. The one-way glass volume growth that one of obviously the largest glass companies was talking about in Brazil, are you seeing that have much effect on industry can demand in Brazil? It didn't sound like that was the case given your prior comments. That was my follow-up question. Thanks, and good luck on the quarter.
George, I haven't, and I would just point to the fact it was such a disruptive quarter with the freight issues. We do continue to see the customers push cans, and especially the major customer that does have returnable glass infrastructure. They're continuing to be forced into moving to cans because of retail outlets, et cetera. That's the best info I have right now.
Okay. Thank you, Dan.
Yep.
We have no further question at this time.
Okay, great. Thanks, Malika. Thank you everyone for participating. Again, as I mentioned, October 1st and 2nd, we're having our investor field trip out here in Colorado. Please be in touch with Ann Scott if you'd like to participate. We look forward to seeing you all then. Thank you.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.