Good morning, and welcome to Crown Holdings Third Quarter 2019 Conference Call. Your lines have been placed on a listen only mode until the question and answer session. Please be advised that this conference is being recorded. I would now like to turn the call over to Mr. Thomas, Senior Vice President and Chief Financial Officer.
Sir, you may begin.
Thank you, Joe, and good morning. With me on today's call is Tim Donahue, President and Chief Executive Officer. On this call, as in the earnings release, we will be making a number of forward looking statements. Actual results could vary materially from such statements. Additional information concerning factors that could cause actual results to vary is contained in the press release and in our SEC filings, including in our Form 10 ks for 2018 and subsequent filings.
Earnings for the quarter were $1.36 per share compared to $1.23 in the prior year quarter. Comparable earnings per share were $1.56 in the quarter versus $1.71 in 2018. Net sales in the quarter were down 3% versus prior year largely due to the pass through of lower aluminum costs and $64,000,000 of unfavorable currency translation. Segment income in the quarter excluding currency was down 3% as improvements in Americas Beverage were offset by lower results in European Food and Transit Packaging. As outlined in the release, we estimate Q4 2019 adjusted earnings of between $0.93 $0.98 per share.
These estimates assume exchange rates remain at their current levels and a full year tax rate of between 25% 26%. We currently estimate 2019 full year adjusted free cash flow of approximately $725,000,000 with approximately $450,000,000 in capital spending. And with that, I'll turn the call over to Tim.
Thank you, Tom. Good morning, everyone. I'll be brief and we'll then open the call to questions. As reflected in last night's earnings release and as Tom just summarized, overall Q3 performance was as expected, although the results were mixed across the operating segments. Unit volume demand remained extremely robust for beverage cans globally, while another poor harvest dampened food can demand in Europe.
And in transit, overall volumes were up 0.25% although the mix was unfavorable. The major projects in progress and associated timing are summarized in the release and in a supplemental table to the release, we have provided the currency impact on sales and segment income. So my comments will focus on currency neutral performance. In Americas Beverage, overall sales units declined 1.5% primarily due to the loss of a customer contract in Colombia as previously discussed with you. North American volumes were up marginally to the prior year as we remain sold out and are not sourcing cans from other suppliers as in the prior year.
We look forward to the commercialization of the 3rd production lines in both the Weston and Nichols plants over the next 6 months. In Brazil, can demand remains extremely strong with the market up low double digits. However, we remain sold out and we did not have enough production capacity to match last year's Q3 unit shipments. The new plant in Rio Verde is nearing completion and will begin shipping cans to customers over the next several weeks providing much needed capacity for our customers' growing requirements. In Mexico, volumes were up 7%.
Segment income up $10,000,000 in the quarter benefit from numerous cost improvement initiatives offsetting the decline in volumes. Unit volumes in European Beverage improved 5% primarily from the 2 new facilities in Italy and Spain offsetting softness in Turkey and the UK. Both Italy and Spain continue to progress through their respective learning curves. However, their efficiencies and cross performance are not yet at the level of the more mature plants in Turkey and the UK yielding negative mix. And we expect that continuing uncertainty surrounding a looming Brexit and the weakening Turkish economy will again offset expected volume growth in the 4th quarter.
Sales unit volumes European Food were down 2.5% in the 3rd quarter and after 9 months stand at plus 1.6% to the prior year well off the 6% growth we had anticipated this year after last year's poor harvest. This year's high heat and poor growing season were particularly notable in 2 of our bigger food businesses that is in France and the UK. As described to you in July, selling price realization was positive in 2019 but not enough to cover inflationary cost increases. And this accounts for the $6,000,000 decline in segment income in the Q3 as our cost reduction efforts offset the impact from lower volumes. For the year, cost reductions and volume contribute positively but not enough to offset the negative price inflation.
A disappointing result again in 2019 especially when compared to a poor 2018 growing campaign. However, we continue to improve our cost profile through a variety of initiatives and believe we are well positioned to benefit from future harvests which are more in line with historical growing patterns. Asia Pacific benefited from double digit demand growth in Southeast Asia more than offsetting the volume impact from the closure of the 2 facilities in China. And to remind you of the scope of our Chinese beverage can footprint, we now operate 3 beverage can lines across 3 plants as compared to 6 lines across 5 plants last year with annual revenues approximating $95,000,000 to $100,000,000 not so significant to a roughly $12,000,000,000 company. Excluding currency, sales in transit packaging were down 2% in the and less protective packaging and tooling.
Hello? I don't know. Okay. Never mind.
Hello? Okay.
Here we go. Okay.
Go ahead.
Joe, are we back on?
Yes, Mr. Kelly, we are live.
Okay. So sorry about that everybody. I'll start over on transit and apologies for that. Excluding currency, sales in transit packaging were down 2% in the quarter representing the pass through of lower raw materials principally steel. Volumes were up a 0.25% in the quarter although the mix was unfavorable as we sold more strap and less protective packaging and tooling.
Segment income down $7,000,000 to the prior year reflects the product sales mix and $2,000,000 related to lower absorption of fixed costs as the business drives down its working capital levels. Adjusting for absorption, 3rd quarter results were in line with our earlier estimates. Overall demand for our transit packaging products has been relatively stable despite declining underlying industrial demand across a variety of sectors steel, auto, white goods, construction among others. In Tom's estimate for the full year, we have taken approach to contracted customer equipment shipments as it relates to deliveries in December versus what might be pushed into January. The business continues to perform well, capital requirements for the base business remain low and cash generated remains a significant proportion of the company's overall free cash flow.
In non reportables, 4% volume growth in North American food was offset by timing related shipment delays in our can making machinery division. Aerosol volumes in the U. S. And Europe were level to the prior year in the quarter. As we identified you at the beginning of the year, 2 non operating items, currency and pension are approximately a 50% share headwind for the year.
So through 9 months about $0.37 per share headwind. Operationally results have increased versus the prior year but have been mixed across the businesses which from time to time happens in a company with diverse product offerings. Demand for beverage can remain high and we believe it will remain so for some time. And with several projects nearing completion, our ability to service our customers' growing requirements and our own growth prospects for 2020 and beyond are quite strong. And so with that Joe, we're now ready to open the call to questions.
Certainly. We will now begin the question and answer session. Our first question is from Ghansham Panjabi from R. W. Baird.
Your line is now open.
Hey guys, good morning.
Good morning Ghansham.
Good morning. So I guess first off on America's beverage, the decline of $37,000,000 or so in terms of our sales basis year over year in 3Q. Can you just reconcile that for us? How much of it came from the loss of share in Columbia, aluminum pass through? Any insight you
can give us there beyond the volumes you already gave us? Yes. I don't have the what I can tell you, Ghansham, on the aluminum let me just tell you what aluminum prices are today versus they were a year ago and you'll get a feel for it because I don't have anything specific other than volume down 1.5% which is all Colombian cans. Everything else kind of nets out. The growth in Mexico is netted out by Brazil.
But last year at this time, if you took LME plus the premium, we were at about $1.11 a pound for aluminum. Today LME plus premium is $0.95 So you're talking about a 15% reduction in aluminum before conversion. So not insignificant year on year. So more or less it's a little bit of volume down offset by higher pricing, real pricing and then offset by lower aluminum pass through.
Okay. That's helpful. And just I know you gave us the North American beverage can volume numbers from your standpoint for 3Q. But just based on the CMI data, up 3% so far this year, kind of based on what you're seeing at this point in terms of discussions with customers and so on, do you think that 3% type number is a reasonable sort of base case assumption for industry growth in 2020 in North America?
I do. I think that the reason it's 3%, let's I'll make this statement. We were flat because we have no capacity. The reason the market was 3% because the market has no more capacity than 3%. I believe firmly that in the Q3 and even in the Q2 this year that the can market could have been up 5%, we could have been up 5% except nobody has any more capacity than what you're seeing.
So the demand is there. It is actually demand is absolutely astounding right now. You've covered packaging now for 20 years. I've been around for 35 years. I've never seen demand numbers like this except in the mid-80s.
And the only thing holding back our shipments as a company, as an industry is our capacity to meet customer requirements. Okay, awesome. Thanks so much. Thank you.
The next question is from Anthony Pettinari, Citigroup.
Good morning.
Good morning. In transit, I was wondering if
you could maybe contrast the performance in Americas, which I guess is about half the business versus Europe and Asia. And as you went through the 3 months of the quarter and into October,
I wonder if you
could give maybe a little bit more detail on Europe in terms of the trends you're seeing there specifically?
Yes. I mean earlier in the year remarkably Europe was very stable. The business slowed down a little in September in Europe but it had very little impact on the income. We were looking at it the other day and high single digit volume decline yielded less than $500,000 of segment income decline. So we've described to you before the business is extremely diverse and you need a combination of a lot of factors to move the income numbers up or down in either direction.
But it's been income performance has been remarkably stable given what you would expect whether it's underlying industrial demand across sectors I mentioned earlier or overall general PMI indices that you're seeing. I know the German PMI right now is like 43 which is unbelievably low. I think we're about 47 in the U. S. And despite that the business is relatively stable.
Asia has been weak all year principally the steel markets Australia, India extremely weak. But again the incomes the business is diverse enough and it's a different business than it was 10 years ago in terms of other products that we offer protective and equipment. So it's not just so focused on steel as it used to be in the past. So that's why I said in the prepared notes that despite what you would have expected given underlying industrial demand across so many different sectors, the performance has been relatively stable. So we are pleasantly surprised by that but we're obviously we are cautious as you might be and we're cautious because we can see some of the buying habits from our customers are a little bit cautious.
Okay. That's very helpful. And then in North American, Bev, you're sold out, you're bringing on Weston to nickels. Can you just remind us when those will ramp? And then given the strong demand that you're seeing, I mean, would you expect to be close to sold out shortly thereafter those additions come online?
And then just regarding this demand that we haven't seen demand like this in 30 plus years, Are there, I don't know, 2 or 3 categories that have really surprised you or really driving your business that you would have been surprised by a year ago?
So I think in the release we talked about we're going to Weston should be up early in the Q1 and I would hope that Nichols is ready early in the Q2. We will be sold out in 2020 again. Even if the plants were fully through their learning curve, we would be fully sold out next year. And we're that volume is contracted. We are very comfortable, very confident that we're going to be fully sold next year which yields a question later on are we considering other capacity.
And obviously we'll continue to consider a variety of things but understanding that we prefer to have things under contract as opposed to building on spec. The categories we've seen the sparkling water category growing over the last several years and there are more entrants now in the market including the big beverage, the big CSD guys that have their own brands of flavored water, flavored sparkling water that are entering the market. And if you're one of the smaller independent flavored guys, you might be a little worried about the big guys getting to the market. But in fairness what it's doing is the large promotional budgets they bring to that category actually pushes it rises the tide for all the boats in the ocean. So it's been very healthy.
Energy drinks, juices, teas, I mean it's across everything. What we don't know and I kind of hinted at it in Ghansham's to Ghansham's question, what we don't know is how much bigger could the growth be and how many other categories could we be seeing remarkable growth if there were more cans available. So there is a move underway and clearly more new products are being introduced in cans as we've said than in the past. And so it's
a good time to be
in the beverage can business.
Okay. That's helpful. I'll turn it over. Thank you.
The next question is from Arun Viswanathan from RBC Capital Markets. Your line is now open.
Good morning. Thanks guys.
Good morning.
Good morning, Rupa. I guess, so first off on European Food, you'd addressed some issues around pricing last quarter, which has been insufficient to offset inflation and potentially some structural headwind there. I guess has that persisted? And what's kind of the outlook looking forward here? I mean this business was doing kind of 250,000,000 in segment EBIT for a while, maybe down to the 220s this year.
Is that kind of the structurally new level of earnings power that we should be expecting in European Food going forward?
Yes. So on the pricing front, no incremental changes to pricing between the 2nd Q3. All the pricing was set at the beginning of the year understanding that we were expecting underlying growth to be 6% and it's only materialized to about 1.5% through 9 months. So we didn't get enough growth just given the harvest. So you've got 2 ways to look at this going forward.
Clearly the results are not satisfactory. We're not happy. You're not happy. I can assure you our folks in Europe are not happy compounded by the fact since we're not happy we're making their life really miserable and we're going to continue to do that. Structurally nothing's changed in that demand for canned food in Europe is not declining as it has in the United States over the last 15 or 20 years.
There still are a variety of different food products packaged in cans and preferred by consumers in Europe much different market than we have here. What we have is 2 poor growing seasons in a row and we've not been able to offset inflation with pricing. So as we go into next year, we're going to have to take a real look at appropriate levels of pricing to get the income number back up to the number you just mentioned which historically it's been there. And so the customers aren't going to like that. They're going to but listen, we're not and this isn't a charity, right?
They have the ultimate pricing power to the consumer. We don't. We have to recover the costs.
Okay. And then as you look at just trying to think about the future here and you cited really robust growth continuing for the next or for some time. So if you would be sold out in North American Beverage next year, even with the 2 new lines, and the industry data is still in that 3% range, I guess, would you be in a position to report numbers in that range? Or would it be kind of I guess you'd be up by the amount of the Weston and Nichols line?
So we're adding about on a full run rate basis. The plants won't be at full run rate next year. But on a full run rate basis we're going to add close to 2,000,000,000 cans on top of our 22,000,000,000 can footprint in North America, Canada, call that 9%. And as I said earlier, I firmly believe because they're under contract that if we were at full run rate, we'd sell that entire 2,000,000,000 cans next year and so we'd be up 9% next year. We under indexed the market this year because we're sold out.
So it will be our turn to catch up only because it's basically when capacity comes in by supplier. But let's say we as the plants come to the learning curve and they only come up in the 1st and second quarter that instead of 2,000,000,000 incremental cans we manufacture 1,000,000,000 that's 5%. We're going to be up 5% next year in North America at least. Regardless of what the market does, if the market's up 10%, we can only be up 5% because we don't have any more cans than that. If the market's up 2%, we're going to be up 5% because we're under contract.
Okay, that's great. And that gets to my follow-up which is your food can businesses and Signode do provide or transit do provide quite a bit of free cash. So what's kind of the decision making process to, I guess, go out with more capacity, whether it be in North America or elsewhere? I know that you'd like to build on to contract rather than spec, but why not consider greater investments at this point from what you're seeing?
Well, I think just general prudence, right? We've not seen and you've heard me say this. Listen, we're extremely excited about the current conditions in the beverage can market as you are and many others are. But this is something that's not been seen for 35 years in the can business. This is since the mid-80s.
And what we don't want to contribute to is an over exuberance in which we all put too much capacity in and we're faced with a different situation in 3 or 4 years. I firmly believe for the next 3 or 4 years we have very little risk in that regard. But beyond that we don't know. So we're trying to allocate capital appropriately without getting too excited and too ahead of ourselves. But my, how times have changed.
A year ago everybody wanted everybody to delever and be responsible. Now you want us to throw capital at it. So I think we're trying to do this in a measured fashion. We're going to continue to delever. You are right to point out that the food can business and the transit businesses are the cash cows.
They're the providers of the capital that are going to allow us to expand the beverage business, modernize the beverage business to the customer's requirements. Once that installation is in place then the beverage can business returns to being a cash cow as well, right? So we're just trying to do this in a measured fashion. We are committed to delevering. We've told you by the end of 2020 we're firmly entrenched to get back down to 3.5 times leverage which is where we were at before the acquisition.
And, but I think we're able to do all that and expand the beverage can business at the same time. But even if we threw more capital at the project starting today, we're still 12 to 15 months away from more capacity coming on. So we're evaluating it just like everybody else is.
Okay. I'll turn it over. Thanks a lot.
Thank you.
Our next question is from Tyler Langton from JPMorgan. Your line is now open.
Good morning, Tim and Tom. Thanks. Just on European Beverage, I guess, volumes have been pretty solid this year, but profits, I guess, have been impacted by e bulking of sort of currency and start up costs. I mean, do you have a sense as to exactly what those impacts have been sort of when they should lap and just kind of how you think about going into next year?
Well, I think currency we give you in the release, right? So you can see that it's starting if it's $5,000,000 through 9 months, it was only $1,000,000 in the Q3. So we're starting to get closer to where the currency rates were last year. So maybe it's another $1,000,000 in the 4th quarter. Start up cost was big impact in the Q1.
It's subsiding through the year. The bigger difference you have now is that the volume as I tried to describe it, you guys are not manufacturing guys. But keep in mind we're a manufacturing company. So for us it's all about absorption and efficiency and cost performance. And while the plants in Italy and Spain are rapidly coming up learning curve and actually performing quite well compared to their curve.
They are not as efficient as the more mature plants that we have in the system. And so we've got 2 plants in the UK and 2 plants in Turkey. All four of those plants are fairly large and fairly efficient. But you have lower volumes in those markets for 2 different reasons, Brexit and a weakening economy in Turkey offset by higher volumes, more than offset by higher volumes from the new plant. So you just have a negative cost mix right now until we cycle through till 1 of 2 or both things happen that Turkey and the U.
K. Stabilize and or the time at which the cost performance in the new plants catches up to the cost performance in the more mature plants. Okay. But again nothing is fundamentally wrong with the business. Things are progressing quite well.
Okay. Yes, that's helpful. And then just a question on sort of the demand growth. I mean, I guess the strong demand, can you please provide some color? Is it more being driven right now by sort of new products going into cans?
Just I guess growth of existing products sort of in cans? Are you starting to see some substitution away from other materials sort of into cans? I'm just
it's new products coming into cans. So certainly more new products are being introduced in cans than have been historically. And it's the growth of existing products. For example, in the United States, mass beer was up I think 3% in the Q3. And so for the last several years, mass beer has been down.
So we are starting to see growth in existing products. I don't yet think we're seeing substitution other than new products being introduced more in cans than historically because we're still seeing I think we're still seeing underlying plastic growth just not at the levels that in the past. So the introductions of new products might be very similar in cans versus plastics where in the past it was much more skewed to plastics. But pure substitution from plastic back to can I don't think we're quite seeing that yet? And one of the reasons we're not seeing that is there is no can capacity to meet that potential demand yet.
It could only be because the can industry is limited by the amount of cans we can supply.
Perfect. Thanks so much.
Thank you. Our next question is from Gabe Hajde from Wells Fargo.
Good morning, gentlemen. Thanks for taking the question. Good morning. 1 on Europe Food. After, I guess, kind of this 2 years of poor weather, is there any risk that some customers could go away or I guess AR collectability or anything like that, that we should be thinking about, and or might it necessitate, you guys having to move some capacity around or something like that?
We look at AR, I don't want to say on a monthly basis because I think we look at it even more often than that. But we haven't seen we're not yet through the season, right? So the collectability for a number of the customers we start collecting in Q4, but we haven't seen any weakness in customer collections as regards to your question yet, but we are mindful of that. I don't think we might have I know we have one plant we've talked about rightsizing in the European food footprint. But we've done so much reorganization in that footprint over the last 15 years.
We're actually in a pretty good place as it relates to the industrial footprint. And to do any more than that would limit our capabilities when the volume returns for the next good harvest. So I think we're in pretty good place. It's really about we need some volume. And then importantly as I said earlier, we do need price to offset some of the inflationary costs that we've had.
Understood. Thank you, Tim. Switching gears to transit and always try to give you an opportunity to take a run-in our models. It was actually a couple of million better than what I was expecting this quarter. But if I look at TTM EBITDA of around 365, I think this is actually holding up pretty well given all the headlines that we read.
But coming into the year, you were talking about $390,000,000 to $400,000,000 I think of EBITDA. Couple of questions. One, can you parse out for us how much of the difference between where we are and or where we may end up, and what you're looking for to FX versus sort of some of the unfavorable mix that you talked about as well as maybe a little bit lower volumes versus again kind of expectations coming into the year?
Yes. So in fair I could say FX, but in fairness we would have modeled the FX. So the 365 that you're modeling plus or minus you're in the range and that's kind of right about what the performance was in 2017 understanding last year was a record year. Not making excuses, but just to the point it's been very stable. But the biggest there's a in your model for example the absorption is probably going to be about $6,000,000 or $7,000,000 this year and I'll explain that very quickly for you.
Obviously, we're all well aware of what we've talked about today, the decline in our European FoodCam performance largely around volume as it relates to harvest. Obviously, the cash flow comes down with that. However, with the growth in beverage, we don't have the ability in beverage to do anything from a working capital standpoint to make up the shortfall in European food cash flow given the growth that we have in beverage. So the only place we can go to make up the European food shortfall from a cash perspective is transit. So as we rapidly drive down transit working capital to offset food there is an under absorption issue and that's about $6,000,000 or $7,000,000 So we're using transit to fill the hole from European Food on a cash point.
Not an issue because if you do believe in a slowing economy you'd rather begin the slowing economy of lower inventories than higher. So it kind of works for us. But the biggest item is volume. And we had a remarkably strong Q2 last year which we didn't match this year. Q2 this year was similar to the Q2 of 2017 and that's the biggest reconciling item from last year to this year is the Q2.
We had a normal second quarter not a record second quarter and that revolved around volume. Price has been very stable. Demand has been stable although I will tell you that the mix is a little different. Customers we are selling equipment and tooling. Customers are being very cautious and perhaps they're buying equipment and tooling without all the bells and whistles on it.
They're buying the lighter model as opposed to the heavier model. So there's less margin in that. But all in all, it's stable. It's just not the last year's record number. And generally revolves around last year's record Q2.
Thanks for all the transparency, Tim.
Thank you.
The next question is from George Staphos from Bank of America Merrill Lynch. Your line is now open.
Hi, everyone. Good morning. Thanks for taking. How are you doing, Tim? Thanks for taking the questions.
Tom, how are you? I want to come back to a question or comment you made about Food Europe. And I just wanted to make sure that I interpreted it correctly. Were you suggesting that based on the volume outlook you had in Food Europe going into 2019 that there were certain commercial decisions that were made that in retrospect you probably could have or should have tried to get different commercial terms and maybe a bit more robust in your pricing given what ultimately transpired with volume or would it not really have worked
like that at all? If you could
provide a little bit more detail around that color that would be helpful.
So we anticipated that volume would be up much more than it actually was up this year. Some of the the 2 large food can suppliers in Europe make up about 2 thirds of the market and the balance is made up of a variety of smaller regional players from country to country or region to region. And many of those smaller guys were quite aggressive coming into this year just given how poor the harvest was last year. And then we felt at the time it was appropriate that we don't risk losing any business and that the income shortfall from making the commercial decision would be offset by the volume growth that we would experience as we return to a normal harvest. I think that was the right decision.
I'm not suggesting that we should have done anything different coming into this year. What I am suggesting is that we need to take a much harder look at commercial decisions and appropriately recovering cost through selling price as we enter next year.
Okay. That's clear. I guess would that then not suggest perhaps you take and this I know you're always looking at the footprint, Tim, so I don't want to suggest that. But does it maybe suggest you take an even harder look at the footprint? I think you mentioned to one of the other questions, there's one facility that you've been looking at, But why not perhaps be a bit more aggressive from where we are right now in terms of footprint so that you have the leverage if you need it to get a better commercial outcome than we saw this year?
Well, I think if we take a different commercial strategy and we have lower volume, but we have higher income, We believe that's the right answer. And that lower volume translates into lower capacity needs, then we'll look at it from that standpoint. But it's as we look at our at the demand we have in a normal harvest scenario, we don't really have any excess capacity from specification to specification, region to region. So as you know, food can specifications are far different than beverage can specifications. But I think there's a variety of things we need to look at and we're going to have to have an understanding and our customers are going to have to have an understanding that if they expect Crown and perhaps the other large food can supplier to be the leaders in the industry with innovation and performance and other things, they're going to have to start paying for it or we're going to go to a model where we skinny a lot of things down and they don't get us to perform a lot of things that we perform for them currently.
Understood. I guess my last one on this one and I'll have one final and I'll turn it over. Again, I forget who was asking the question, but ultimately, where would you see normalized profitability be for Food Europe? I know it's kind of a touchy subject to get into partly because you're now beginning these discussions with your customers. But is in a normal year, normal harvest, I recognize there's always going to be variability in the harvest across Europe.
Is $250,000,000 a reasonable place to be from a modeling standpoint if things go normally for you?
Well, I think we were what, 265,000,000 or roughly in 2017. So back off maybe a back off $15,000,000 or whatever the currency number has been over the last couple of years. I don't really know off the top of my head. It's $12,000,000 this year. So if it's $12,000,000 this year maybe it was a few last year.
So $245,000,000 $250,000,000 that's kind of a normal is a funny word to use, but let's just use the word normal. That's kind of what you would expect. Can we get back there? I don't know. We're going to have to change some things and make sure that our team in Europe and our customers in Europe understand that this is a business and we expect to be compensated for what we do for them.
Understood. My last question is kind of a 2 parter. As we look at Signode and Transit Packaging and certainly we're expecting given what's been a bit of a fade in the business, not surprisingly, Is next year likely to be more of a flat to down year, Tim, based on what customers are doing in terms of mix and order patterns? Or do you think, given the world that we're in that Signode can actually show an up level of profitability? And given that, do you still anticipate getting to your leverage goals, the 3.5x and in that regard being able to maybe start buying back some stock as we get later into 2020?
Thank you and good luck in the quarter.
Thank you. I think it's probably too early to describe any of the businesses for next year. And as it relates to Signode, I think we've used the word stable to describe Signode's performance this year, relatively stable given what's happening in underlying demand. But let's I think we really need to see we need to get through the budget process and we need to understand how 4th quarter demand looks, specifically 4th quarter demand right now looks in that business before we comment on next year. Whether we get to 3.5 times or we get to 3.58 times you might worry about the 0.08 times.
I won't worry about it. We're going in the right direction. And at that level, we have a much different conversation with the Board as it relates to capital allocation which may or may not include more shareholder friendly uses of our cash. But that's the direction we're headed in.
All right. I'll turn it over. Thank you, Tim.
Thank you.
Next we have Mark Wilde from Bank of Montreal. Your line is now open.
Good morning, Tim. Good morning, Tom.
Good morning,
Mark. Is it possible for either or both of you guys to help us think about the give and take next year between the benefits of having this new capacity in the market versus the startup costs that are going to be involved at all of the different plants? And what's the net benefit look like for next year from an EBIT standpoint?
Look, I'm not you're talking about America's beverage specifically because that's where the big capacity is coming on and 2 in the U. S. And Brazil. The answer is up. And so inside there, yes, there are startup costs inside there, but it's overwhelmed by the contribution from higher volume.
Okay. And then just staying on America's beverage, Tim, I think that's just a single line plant down in Colombia. And so for it to kind of pull the overall segment down by 1.5% suggests that volume is down quite a bit down there. Can you just tell us how you're thinking about handling that situation going forward? Do you need to rationalize capacity?
What are your options in Colombia?
Roughly the volumes in Colombia were down
I hate to
give you numbers. You're talking about 170,000,000 units off a base of 9,000,000,000 that's roughly 1.5%. And so the volumes in Colombia were down more than 50% in the quarter compared to last year because it's a up until now or the last couple of years it's been a one customer market. It is a joint venture. We are a joint venture partner with a bottler who has another relationship with other global bottlers and global beverage beer companies.
So we're going to run the plant and we're hopeful that our partner and his partners continue to promote cans and grow the promotion of cans for their businesses and over time we'll build the plant back up. But it's up in for the last 30 years, it's been a one customer market. There are other brewers now in the country. So but you know who the brewer is.
Okay. Just turning to capital allocation since you brought it up. In the past, you've talked about both share repurchases, but also the possibility of a dividend. Can you just give us your kind of current thinking on the relative merits of the 2?
Well, I think you hit the leverage back in the 3.5 times range and you're generating circa $700,000,000 of free cash flow after the minority dividend, you've got the ability to do a variety of things. And there are a whole list of companies out there that pay a dividend, buy back stock, make acquisitions from time to time inside all those numbers. Dollars 700,000,000 of free cash flow is a lot of money. I think we have the ability to do a lot of things. So we'll continue to evaluate that.
And as we move towards the leverage goal that we have, we'll discuss that at the Board meeting. But there should be no reason why you can't do all of the above.
Okay. All right.
Last one for me. I just wondered, you've had some contracts that got redone for this year. You've got some contracts that are being redone for next year in America's beverage. Is there any way for you to just help us size sort of what the impact of that might be as we go into 2020?
There is, but I'm not going to. I don't mean to be cheeky, but I don't think it's helpful for us to do that. What I will tell you is that you see significant improvement in segment income in the Emeritus Beverage segment from 2018 to 2019 and you'll see significant improvement from 2019 to 2020 maybe some of that's price. Certainly a lot of it's going to be volume from the new facilities and we're going to continue to become more cost effective. We really did a good job on cost this year whether it was rightsizing our freight, not sourcing cans from others, performance improvement in Nichols and we're going to continue to do that.
I don't know if the Americas Beverage Group going to be up $40,000,000 or $50,000,000 this year compared to last year and would it be up $40,000,000 $50,000,000 next year? I don't know, but it will be up a significant number. So I'll leave it at that.
Okay, fair enough. Good luck in Q4.
Thank you.
Our next question is from Debbie Jones from Deutsche Bank. Your line is now open.
You mentioned some of the revenue not coming through in 3Q. Does that shift into 4Q or 2020? And then I was hoping you could just talk about that business in general, given the growth we're seeing in the industry. I imagine it's going to drive some growth in that non reportable segment going forward.
Yes. So we as you know, we have a can making machinery business in the U. K. And we while we don't make all the equipment from front to back on a beverage can line, we make much of the equipment front to back on a beverage can line. And so we source equipment for ourselves from that subsidiary and many of our competitors also source equipment from that subsidiary depending on price competition as you would expect versus the other major supplier and versus the equipment they might have in a facility if they're trying to match equipment on one line to another line within a facility.
So as with any machinery business, delivery dates sometimes slip either because we slip in our process or the customer isn't yet ready for the equipment because they might have a building manufacturing delay or some other delay. But I think we'll pick up the shortfall in Q4 and some of it slips into next year, but much of the shortfall will pick up in Q4.
Okay. Thanks. And then my second question, I know it's been addressed on prior calls, but if we think about the growth in the industry, especially in Europe and North America that could occur in the next couple of years, do you have enough metal supply in, let's say, 3 to 5 years? And what kind of steps do you have to take to ensure that, number 1? And then 2, what are the considerations you have to make for some of the suppliers outside of the U.
S. And Europe, whether it be kind of trade considerations or CO2 emissions and things like that?
There's plenty of metal out there. Now depending on whatever trade deal we cut with China, some of the metal may carry a tariff and some may not. We can currently source metal from a variety of countries that are not tariff impacted. So there's plenty of metal out there. The other thing is as we've talked about before, I think some of our aluminum suppliers and suppliers of other products are looking at the growth in the business and they want to be rewarded as well.
So it'll mean that conversion costs for from ingot to can sheet is going to be more in the future and that's going to have to be borne by our customers because again as I've said they have ultimate pricing power of the consumer. We do not. We can't absorb those kind of costs and but there's plenty of metal available. Okay.
Thanks. I'll turn it over.
Thank you.
The next question is from Adam Josephson from KeyBanc Capital Markets. Your line is now open.
Tim and Tom, good morning.
Good morning.
Tim, one on just kind of your portfolio of businesses. I know you're getting asked more about perhaps emphasizing one over the others and specifically a beverage cans now or the kind of the sexy fast growing business, your closest bev can competitor is trading at a very high multiple. And so some investors want you to double down on that business and I think deemphasize 1 or more of the others. As you pointed out earlier though, circumstances can and do change pretty quickly. So can you talk about your portfolio mix and how you think about keeping it the same or changing in the future based on what you're seeing today?
First thing I'd say is that I don't think we want to become a single product line company. There was a single product line company in the beverage can space and they were acquired a couple of years ago and the mandate is not to sell the company. The mandate is to increasingly try to generate returns and grow the business and reward shareholders in that regard. I don't think it's very difficult to be a single product line company because as you rightly summarized things can change. And if they change in that one business things don't look too good.
But we talked about earlier the business is diverse. From time to time, you're going to have some ups and downs across a variety of the businesses. Fortunately, we have 2 businesses in food and transit which require very little capital and generate a mountain of cash and that provides a lot of stability to the overall enterprise. I think anytime you generate cash, things are okay. Things can be a lot worse if you're not generating cash.
You generate a lot of cash, things are pretty good. To Mark's question we talked about what we might do with all that cash in the future. It's a great problem to have what we might do with all that cash in the future. But we're going to continue to look at the allocation issue into the beverage can business globally with more capital. We're trying to do it in a responsible way and we're trying to do it in a way in which we get the appropriate returns and the capacity is appropriately spoken for before we put it in.
And we'll continue to look at it. Beyond that, I don't have much to say.
Just one more on that, Tim. How do you think about the incremental return profiles in each of those businesses? Because obviously bev cans are growing the most quickly now, but they also require by far and away the most capital.
It kind of depends on what you sell the cans for. The selling price is not very good and the returns are not very good. One of the challenges you have right now, it's real easy to make decisions in beverage cans because you're looking at the demand profile going forward and you're thinking price is going to continue to get healthier and healthier that can change. And you look at your food can business and you see what's happening in the food can business and you talk yourself out of doing anything incremental in food cans because you can't believe you might improve price there. So you've got to take a balanced view and remember you're in a business and you're trying to always remain relevant in the businesses you're in which from time to time requires you to do things that may not have the returns that you would otherwise like, but are quite necessary.
I appreciate that. And just one on CapEx for next year while we're on the subject. Tom, so you're guiding to $450,000,000 this year. Based on the projects you have in the pipeline, do think it will be up much or even down for that matter next year? I know it's early days.
I think it's inappropriate for us to comment at this point because we haven't had the budget approved yet by the Board. I would say it's not going to be lower than that.
Right.
Thank you, Tim.
Thank you.
Next, we have Chip Dillon from Vertical Research. Your line is now open.
Chip, are you there? Joe, I think we've lost Chip.
This is Al Tortiano filling in for Chip. How are you?
Okay. Go ahead.
Great, great. Thank you very much. Just a little bit to wrap up here. How essentially, as we look a little bit in Brazil, Southeast Asia, Can you provide us a little bit with the same data you provided in the Americas where you mentioned you have kind of contracted volumes of around 5% and you could see 9% total growth. Can you just provide some clarity with regard to the other regions?
Yes. Listen, Brazil the market in Brazil this year I think is through 9 months is up 13% or 14% 16% through 9 months. And this is after many people, many of the analysts have remarked that they don't see can growth in Brazil continuing. And so again another unbelievable year. I think we're up through 9 months maybe only 5% or 6% only because we're capacity constrained.
So we're going to bring a new line on that has the ability to produce a little over a 1,000,000,000 cans and depending on how quickly we get the lineup and how we get through learning curve, we're going to sell it all. And so we could be up on the order of 10% to 12% next year if we can make all the cans. I know one thing, we're going to sell every can we can make. Southeast Asia, I think Southeast Asia again up high single digits or low double digits through 9 months this year and that's our business. And depending on the market, the country you're in whether it's Vietnam, Cambodia, Singapore, Malaysia, Thailand, Indonesia, Myanmar, you name it, they're all different by country.
But again, no reason to believe that the markets aren't going to continue to grow at very healthy rates and we're not going to continue to participate in that healthy growth rate.
Great. Thank you very much.
Thank you.
The next question is from Neel Kumar from Morgan Stanley. Your line is now open.
Hi, good morning. Thanks for taking my question.
Good morning.
We've seen several announcements of Stillwater Brands moving into cans. I was wondering if you could just talk about what kind of impact that can have on in shape volume growth next year, do you think the supply chain can handle a large scale shift?
I think I've answered that already. The supply chain in 2020 cannot handle a large shift or even a small shift. We are all rapidly looking at ways to add capacity and trying to understand if this is real and how much capacity we add. But there is limited capacity for us to handle a large ship. We're quite happy to handle it.
There are roughly 100,000,000,000 beverage cans in North America. There's probably 150 PET bottles in North America. But if you look at the volume of liquid in bottles versus cans, it's even a greater distortion than that because you have 2 liter and 20 ounce and for the most part were 12 16 ounce in cans. So the volume disparity is greater than the 50% unit disparity. So we are as an industry we are sold out currently for the products we have.
So there's no way we could handle I know I'm repeating myself, I apologize. There's no way we can handle a large scale shift and we're all trying to understand how we can handle that more appropriately if we believe it's real. But certainly there is an extremely large opportunity there as marketers and fillers of beverage products understand the sustainability benefits of the can versus the competing products.
Thanks. That's helpful. And then just in Transit Packaging, could you just give us a sense of how backlogs are tracking currently versus, let's say, the end of Q2 or beginning of the year?
Well, I think the backlogs are a little lighter today than they were 6 months or 9 months or 12 months ago, but they're not shockingly lower. I keep using the term relatively stable and I say that because listen we're as cautious or as concerned as you might be given what's going on in the market and there are other packaging companies that are in the industrial packaging space that may or may not see the same trends that we're seeing, but we're cautious. But things are a little bit more stable than we anticipated. So that's positive. But as I said, we really need to get through the Q4 before I can give you any more color.
So far things are pretty good. I just we're a little cautious because we don't know what's going to happen with equipment pull here in the Q4 compared to the Q1 of next year. Thanks.
That's helpful.
Thank you.
The next question is from Brian Maguire from Goldman Sachs. Your line is now open.
Hey, good morning, Tim. Good morning, Tom.
Good morning, Brian.
Just wanted to follow-up on some of the questions that were already asked about the leverage and progress on getting there and the portfolio just sort of combining the 2. It sounds you're happy with the portfolio the way it is in general. Just wondering if there's any I know Signode itself was a bit of a roll up and maybe any unique businesses within there that might make sense to try and bring to market? It seems like maybe the end markets are a little depressed, but multiples are still pretty good on those businesses. Like you mentioned, it throws off a lot of good cash flow, interest rates are low.
Just wondering if there's any like select smaller pieces within it that might make sense to try and monetize and accelerate the deleveraging?
Well, if it's small, it doesn't really accelerate the deleveraging. I mean, if you sell a business for $200,000,000 okay it reduces debt by $200,000,000 but on a leverage base when you lose the associated income with it, it doesn't move the needle a whole lot on your leverage. You might go from 4 times to 3.97 times. So I think what we're really looking at is a business which when you look historically back was assembled mainly by a very large industrial conglomerate. But in this regard, in this silo that they had transit packaging, they had a strategy that they were trying to put together businesses which made sense in terms of offerings to customers to protect and package goods for transit.
So in a lot of regards, there are a lot of synergies in terms of commercial strategies that perhaps were not exploited well by the prior owners, but we're going to try to do. Now that doesn't mean that there isn't a product or 2 that you wouldn't look at and say that we don't really need this, but it's we're focused on running the business as best we can and delevering. We're not going to get sidetracked by trying to spin a business off that might generate $70,000,000 of sales proceeds because in the near term that's not what's really important.
Okay. And just a question on the impact of the lower aluminum scrap prices. Just wondering if that was material on the Americas EBIT or margins and any expected like full year impact from that you could quantify?
Well, I think it's in the number, but it's easy to point it out when your numbers are going the direction you want. We've got some businesses where the numbers aren't going the direction we want, so we point out some of those things for the reasons. But in a business like America's beverage where everything is going well, it just gets absorbed and we got demand is very strong. The commercial aspects are better than they have been in the past we made significant progress on the cost performance this year. So no real sense to talk about something that's just getting absorbed by all the positive things.
That's just positive things generally absorb negative things and so that you want more positives and negatives. So I don't really have a quantification. Yes, there's some impact in there, but it's being overwhelmed by all the good guys.
Yes. Impressive performance given that headwind. Just last one for me. I just wanted to try to make sure I understood the movements on the free cash flow. I think think, Tom, you explained that the sort of maybe the weaker EBITDA result in Europe Food would be offset by maybe extracting some added working capital out of transit.
Just wondering as we think about bridging to 2020, would we expect that to consume some cash back as you restock early next year to kind of rebuild that?
No, not necessarily. I think we'll be at this point kind of looking flattish on working capital next year but too early to say.
Too early to say but Brian why don't we just say this on cash flow next year. Let's start with our number this year. Let's hope we have some EBITDA improvement across all the businesses. I'm not saying that it's too early but working capital flat and then the swing factor is going to be capital. How much capital do we believe is appropriate and does the Board agree it is appropriate to throw at this growing beverage demand issue and that will be the swing factor.
But I think we firmly believe we're going to have an EBITDA growth next year. And so with working capital flat, you would expect higher cash flow next year. It will depend on CapEx.
Okay. That makes a lot of sense. All right. Thanks for the time guys.
Thank you. Well, Joe, it sounds like that's the last call. So thank you, Joe. And that will conclude the call for today. Thank all of you for joining us.
And we'll speak with you again in February. Thank you very much.