Good morning, welcome to Crown Holdings second 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 Kelly, Senior Vice President and Chief Financial Officer. Sir, you may now begin.
Thank you, Missy, 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-K for 2018 and subsequent filings. Earnings for the quarter were $1.02 per share compared to $0.99 in the prior year quarter. Comparable earnings per share were $1.46 in the quarter versus $1.55 in 2018. Net sales were in line with 2018 as increased beverage can volumes were offset by $180 million of unfavorable currency translation.
Segment income in the quarter was also in line with the prior year as improved results in Americas Beverage offset lower results in European Food and Transit Packaging and unfavorable currency translation. As outlined in the release, we estimate third quarter 2019 adjusted earnings of between $1.50 per share and $1.60 per share, and full-year adjusted earnings of between $5.05 per share and $5.20 per share. These estimates assume exchange rates remain at their current levels and a full-year tax rate of between 25% and 26%. We currently estimate 2019 full-year adjusted free cash flow of between $725 million and $750 million with approximately $440 million in capital spending. With that, I'll turn the call over to Tim.
Thank you, Tom, good morning to everyone. I'll try to be as brief as possible, we'll then open the call to questions. As reflected in last night's release, as Tom has just summarized, overall second quarter performance was about as expected, although the results were mixed across the operating segments. Unit volume demand for food and beverage remained firm through the second quarter and was up in most geographies. In transit, overall volumes were down 2%. We have summarized the major projects in progress and those recently completed in the release, all of which are on the same timing as we described in April, with the notable addition of the two new lines in N.Y. and Ontario.
In a supplemental table to the release, we have provided the currency impact on sales and segment income by operating segment. My comments will focus on currency neutral performance. In Americas Beverage, overall sales units advanced 2%, with North America up 1% and Latin America up 4%, mainly on the strength of Brazil and Colombia. Segment income up $27 million in the quarter continued to benefit from a significantly improved cost structure in 2019, as well as the higher volume levels. Lower freight costs and the lack of startup costs in third-party can sourcing in the U.S. compared to 2018 are just some of the factors contributing to the improved cost position in 2019. Can demand in the Brazilian market remains extremely strong, which our results to date reflect.
However, we remain sold out and will be short of needed capacity until the new Rio Verde plant comes online late this year. From already very tight capacity, we have sold 6% more volume in Brazil in the first half and will not have enough production capacity to match last year's second half volume output. There is a new can competitor now operational in Colombia, and beginning July 1, we will experience a significant reduction in can demand in that country. The resultant income loss, as budgeted and expected, combined with our Brazilian capacity constraints, will flatten income results for the segment in the second half compared to the prior year. Unit volumes in European Beverage improved 6% over the prior year, with Europe up 8% and the Middle East down 0.5%.
Strong performances in Eastern Europe and the U.K., coupled with volume from the new facilities in Italy and Spain, offset softness in Dubai and Turkey. Segment income up 3% in the quarter reflects the volume increase, lower startup costs in Italy and Spain compared to the first quarter, and the cycling of prior year Middle Eastern volume comparisons. Sales unit volumes in European Food increased 0.5% in the second quarter, although our mix was unfavorable to income across product categories. Growth in tomatoes was more than offset by decreases in dairy and fish, contributing to a segment income decline of $20 million compared to the prior year. Selling price realization, while positive, was not enough to offset inflationary cost increases.
While some of the seasonal crops were delayed up to two weeks coming out of the second quarter, we expect an otherwise normal seasonal third quarter pack and production levels, while flat to the prior year in the first half, are planned to be up 8% in the second half, leading to significantly higher cost absorption than last year. As a result, we expect second half income performance to be in line to slightly better than 2018. For the year, however, income will be down in the segment as we do not recover the first half shortfall. Clearly, a disappointing result in 2019 following a poor harvest in 2018. The business is sound, consumer demand for packaged food is strong, and we will continue to reduce costs in the business.
Segment income in Asia Pacific advanced $5 million in the quarter as double-digit demand growth in Southeast Asia more than offset the volume impact from the closure of the two facilities in China. Excluding currency, sales in Transit were down 1.6% in the second quarter, due almost entirely to 2% lower overall net volumes as price impacts were negligible. The impact of volume and negative mix drove the reduction in segment income compared to the record performance in last year's second quarter. While down from the prior year, this is a business that has generated $90 million - $95 million of EBITDA per quarter in nine of the last 10 quarters. The second quarter was right in line with our expectations. Looking ahead to the balance of the year, we are forecasting the third and fourth quarters to be in the lower part of that EBITDA band.
Roughly $4 million - $5 million per quarter below last year, as we make allowances for what could be slower economic activity. This is a very diverse business across end markets, product applications, and geographies, and while more cyclical than cans, it is nonetheless a stable business. The business continues to perform well, requires very little capital, and generates significant cash. In non-reportables, 6% volume growth in North American food more than offsets some softness in the U.S. aerosol market. Looking ahead, it appears that in the markets where we operate, that is the upper Midwest and East Coast, all conditions point to a firm North American food harvest. A mixed operating result through six months.
Two non-operating items, currency and pension, which we identified at the beginning of the year, have been about a $0.25 per share headwind in the first half or $0.12 - $0.13 in each quarter. Operationally, demand remains strong across our global beverage businesses, and we are aggressively moving to install needed additional capacity, which is the main source of the free cash revision. food can demand remains firm throughout, although below our expectations in Europe following last year's drought conditions. Transit has performed according to plan in the first half, and perhaps the team is being overly cautious heading into the back half, but we'll see. In summary, continuing firm demand, strong cash flow, and several projects underway to continue to service customers and drive future value. With that, Missy, we are now ready to open the call to questions.
Certainly, sir. We will now begin the question- and- answer session. If you would like to ask a question, please press star followed by the number one. Please unmute your phone and record your name clearly together with your company name when prompted. Those information will be used to introduce your question. To withdraw your request, please press star followed by the number two. One moment, please, while we wait for questions to queue up. Speakers, our first question is from the line of Anthony Pettinari of Citigroup. Your line is now open.
Good morning.
Morning.
Tim, in Transit Packaging, you cited 2% lower net volumes. I was wondering if it's possible to parse out how the U.S. business did versus the non-U.S. businesses, maybe how consumables did versus tools and equipment. Just sequentially as you went through the quarter, and maybe into July, did you see trends deteriorate significantly in certain regions or in certain categories? Any kind of detail you could give would be helpful.
Sure. I think if we looked at consumables versus equipment, in the second quarter, looks like if we're down 2%, equipment maybe makes up about 0.7% of that and the consumables are 1.3% of that. Ex-currency, I'm talking. I would say that in July, we are on track. Through the quarter, April was soft, May was fairly firm. The first three weeks of June were firm. The last week of June was soft. July has started off firm again. I think as we sit here today, we're only three weeks into the quarter, the guidance we've given you for the third and fourth quarter is to be off about $4 million-$5 million per quarter, $8 million-$10 million for the back half in a $1.2 billion back half business.
Down a touch, not strikingly down, and I think where we're at in July for the first 17 or 18 days, we feel pretty good about that right now.
Okay, that's helpful. Just switching to European Food, is it possible to parse out how much of the miss was relative to your expectations? Was this weaker mix versus the inflationary cost increases that you referenced? Just more of a big picture question. I think two of your large competitors now have sold or moved food can into kind of a JV structure. Just any thoughts you have on the business' place in the portfolio.
To parse out mix, compared to the prior year, then I'll give you compared to expectations. Compared to the prior year, volume up a little bit, but mix negative and price, while up, as I said, not enough to cover cost. I'd say that's probably of the $20 million, let's say eight of it is price and 12 of it is mix, if you just want some round numbers, and I could be off 1 million or 2 million, one way or the other, but you kind of get the gist there. I think the two transactions that the two competing companies have done in food are very different. One was just a North American business, and a smaller business. The other is a global business and a very large business. Both of the companies accomplishing the same thing.
They retain a significant interest in the new company going forward, so they're not really exiting the business, and they always retain the option to acquire the business or acquire a controlling stake in the business in the future, depending upon what their private equity partner does. In the near term, both acquiring significant proceeds in the near term, either to delever and/or to return to shareholders. You're aware of what each of them are doing. I would say that our food can business, while it is down in Europe this year and up in North America, currently both of those businesses provide significant free cash flow.
Given where interest rates are today, any move in that regard would be dilutive to free cash flow in that the interest that you would save by paying off low-cost debt would not be enough to offset the free cash flow that you'd give up. In the near term, we always like the business. They are stable businesses. They've got their ups and downs, but they're more or less stable business. The European Food business is far different than the North American food business, but there is a place for food cans in both markets. We talk about sustainability a lot as it relates to beverage cans.
There's not a lot of talk about food cans in regards to sustainability, one-way food can packaging in Tetra, flexible, and plastic is even more of an environmental burden than I would say plastic bottles are in the beverage world. Plastic bottles, as you've heard me describe, are separable and recyclable. Tetra and flexible are all trash, not recyclable in any great way. Steel food cans are entirely recyclable. The hope is that there's more momentum on the food packaging side to more fully embrace food cans from an environmental or sustainable standpoint, and we continue to like the business.
Okay. That's helpful. I'll turn it over.
Thank you.
Thank you so much. Our next question is from the line of Ghansham Panjabi of Baird. Your line is now open.
Hey, guys. Good morning.
Morning, Ghansham.
I guess first off, on the plant conversion, can you sort of take us through the logic of the conversion versus just building a new plant? And since you called out the new lines as having the capability to produce specialty cans, should we expect further investments on your end to boost your capabilities in North America?
Yeah. I saw your note this morning, Ghansham, we probably didn't make it clear enough in the release, apologies. The Weston plant currently has two beverage can lines and one food can line. The food can line, the pieces of the food can line that are in good shape, that is the washer, we'll use that for the beverage line. Much of the equipment going into the third line in Weston for beverage will be new equipment. I would describe to you that if we're spending X dollars in Nichols to put a third food can line in, that we'll spend X minus $10 million or $12 million in Weston.
That $-10 million or $12 million is using the washer, and I think we've got a couple pieces of equipment that are in pretty good shape from the recently shut down Lawrence plant that we'll use. Much of that equipment is brand new, and we'll operate as if it's a brand-new line from front to back in Weston, just as it will in Nichols or any other brand-new line. We perhaps weren't as clear on that. It is a beverage can plant. It's not a food can plant. As you just rightly pointed out, both of those lines will have the capability to produce sleek and 16 oz, which we need in our portfolio and which we've been trying to catch up to the market. I think we're up year-on-year.
Our mix is probably up 3 percentage points- 4 percentage points from last year to this year between standard 12 oz and sleek in 16. We'll continue to look for responsible ways to improve our portfolio and our percentage of those growing portions of the market.
Okay. That's helpful. Then just a broader question on your North American capacity footprint. Pepsi on their call last week seemed to indicate that they would push alternative can sizes for their sparkling water brand, and also start to trial still water on the West Coast. I guess, is your current footprint across the U.S. able to supply these type of large customer initiatives, especially for specialty cans? I'm just trying to put your 1% volume growth you called out in North America in context as it relates to capacity footprint. Thanks.
Yeah. Well, 1% volume growth. Essentially, we're sold out, right? As we described in April, we are not sourcing cans from third parties just to sell more cans. In an effort to try to correct or significantly improve the cost structure, we gave up some business so that we would focus on the business that we could actually produce, not just sell cans that we bought from others. The additional capacity that we've announced last evening will obviously help us grow into contracted volumes that we already have next year, beginning in January 1, 2020 and forward. We would expect much more volume growth next year than the 1% we just recorded. As it relates to supplying customers on a national basis for a variety of these sizes, our non-standard 12 oz capacity portfolio exists in, as we've described before, Texas, Mississippi, New York, and now Ontario.
In the future, we'll continue to review, is there something we should be doing in the Midwest or West Coast to further broaden our portfolio?
Yeah. Thanks a lot, Tim.
You're welcome.
Thank you so much. Our next question is from the line of Edlain Rodriguez of UBS. Your line is now open.
Good morning, guys.
Good morning.
A quick question on transit. I think last quarter, you've talked about pricing competition going on in the industry. Is this accelerating, and how do you deal with that? Do you have to compete on pricing yourself? I think last quarter you said you didn't want to lower prices. How do you deal with that?
Yeah. Listen, the impact of price compared to the prior year was negligible. I want to say far less than half a percent in the quarter. There was no price impact. The situation that I referred to in Q1, the principal U.S. competitor for plastic strap was sold to private equity. They were somewhat aggressive as they were in their sale process, and so that's now behind us, and so that situation has settled down. It's a very diverse business. We have not seen any negative price consequences other than that one situation.
Okay. In bev can, what are your expectations for growth in the different markets, and are they changing given the environmental issues that need to be addressed out there?
Well, I think we, like you and like many others, view the current environment for beverage cans globally to be the best we've seen in 30-some years. Many of you are new to the industry, but for a long time, beverage cans were, let's be clear, were not a great business. This is now a great time to be in beverage cans, and I think that's going to exist for many years to come, given what we and you and many others see with the sustainability or environmental impacts of the beverage can versus competing packages. We, however, are being somewhat cautious as we look to installing new capacity until we see more concrete signs of demand or we get business under contract ahead of putting capacity in.
The capacity that we announced last night, you should fully expect that is fully under contract and is necessary to meet contract requirements. It is not built on spec. We'll continue to review each market, but all of the markets, Southeast Asia, Europe, Brazil, North America, seem to be extremely firm with conversions looking to happen to can, dependent upon the can industry's ability to meet that conversion requirement. We, like others, are very fortunate, and we look forward to many good years to come here.
Okay. Makes sense. Thank you.
Thank you.
Thank you so much. Our next question on queue is from the line of Chip Dillon of Vertical Research. Your line is now open.
Yes. Good morning, Tim and Tom.
Good morning, Chip.
Appreciate all the details. First question is, it looks like when we look at the growth in Europe, particularly not including the Middle East, it's really great. 4.5% in the first quarter. You said, I think, 8% in the second. Can you talk a little bit about what's going on there? Is that the market itself, or are you just happening to be in segments where it looks like you're gaining share when you look at the overall market?
Chip, this is market driven. This is a continuing trend that we've seen for several years or over a decade, 15 years now. With the exception, I think, of 2003, the German deposit legislation in 2009. I think every year for the last 15 or 18 years, we've seen 2%-4%, 4%-5% market growth in Europe. The market grows, segments of the market continue to grow, whether that's Eastern Europe, Southern Europe, Turkey, and continuing conversions from glass to can, and that's continuing. Why are we up so much in the second quarter?
I think as we described to you last year, we didn't benefit as much as some of the others benefited last year because we were capacity constrained. At the time, we told you we had two new projects coming online. That in 2019, if we had an undersized portion of the growth last year, we would get an oversized or more relevant portion of the growth this year, and that's what you're seeing with the new two factories that came online.
Okay. All right. Gotcha. Then just to be clear on the two new lines in North America, the Nichols third line and the one in Weston, I would imagine those would be considered specialty lines. I guess if you ran them on one or two basic sizes, you could get up to, what, a 1 billion can rate a year. Is that ballpark correct?
I would say the Nichols line clearly could go to about 1.2 billion. The Weston line, think more of in the 750-900 range. They have the ability to make a variety of sizes. Chip, let's be clear. We keep throwing this term specialty around. There's nothing special about making a can other than the 12 oz standard can. We and others make them all around the world, and in some markets, the 12 oz, 211 diameter can doesn't exist anymore. It's only sleek cans. This a changing marketplace in which the marketers of the consumer product companies are always trying to find ways to invigorate their brands. We're fortunate that we have the flexibility and the engineering know-how in the industry to be able to accomplish that. While you may refer to them as specialty, we just think they're alternative sizes.
Gotcha. The last one, just looking at the European Food can business, it looks like, as you mentioned, the volumes will be much better this year, but there won't be an income increase. Could you talk about the cost issue? Is it really just different in the matching of the purchases of metal? Is that the main factor, that last year maybe you had favorable variances and this year you have unfavorable when you look at the price cost on that?
Yeah. As we look at the second quarter and the back half of the year, volumes will be up compared to last year, but nowhere near what we had expected, given how poor last year's harvest was. Volume up, but down versus expectation. Clearly that's disappointing. We did get positive price this year, steel costs went up significantly, other costs are always rising, whether it's labor or utilities. When you put all of your costs into the cost to manufacture a container bucket, we didn't get enough price to fully recover that's also disappointing. We'll endeavor to reduce our cost overall, next year is a new year, we'll have to do better next year.
Understood. Okay. Thank you.
Thank you.
Thank you so much. Our next question on queue is from Tyler Langton of JPMorgan & Chase. Your line is now open.
Good morning. Thank you. Tim, just on that last comment that you made in European Food, I guess, do you have a lot of visibility at this point that you can kind of overcome this cost inflation for next year? Or just any color there would be helpful.
I think we have the opportunity to adjust price. We adjusted price this year in the market, clearly, that wasn't enough to offset the inflation. We'll see what the inflationary pressures are going into next year. Under contract, we have the ability to do that. We had a number of contracts reset this year, so that's why it was a little bit more painful, but they do have escalators in them. Then we'll need to run better, and we need to be a bit more accurate with our volume forecast. Overall, the market is healthy, right? The demand is there for the cans, although it's a little lower this year. Volume will be a little lower. One of the issues is volume is a little lower than we expected. More or less, the harvests look like they're going to be okay.
When I say okay, I mean, let's say 90%-95% of what we expected, which is, what, 105% of last year, but last year was down. There are some markets where the weather was extremely rough. For example, Eastern Europe, the weather was extremely rough. That's a very small market for us. 90%-95% of our business is in Western Europe, Italy, Spain. These are all items around the edge, which in a tight margin business, items around the edge have an impact. We'll do better on price realization versus cost next year, and we'll see where it brings us. This year has been disappointing. Again, it's still a business. We're making, I think, in the third quarter, margins were 13%. The margin, I think, in the quarter last year was probably 15% or 16%.
It was a pretty strong quarter last year in the second quarter. Notwithstanding that, we are disappointed, as we said.
Okay. That's helpful. Then just with Transit, I think you had talked in the past about maybe doing smaller deals that didn't increase your leverage as you're paying down debt over the next couple of years. I guess, is that more a strategy maybe more on hold now, just given sort of the weaker volumes you're seeing in Transit and caution in that space, or would you sort of still consider looking at-
I think, we say smaller deals. Everybody gets nervous when we say this, right? I think if we did anything, you wouldn't expect us to do total purchase price of more than $20 million this year. We're talking at multiples that are 5x or 6x . The multiples are right. It doesn't increase, but you're talking extremely low numbers across a balance sheet like ours. That presupposes we find the right deal, and it's in a market that's a growing part of various markets and that they provide. As I've said, the business that Transit serves is extremely diverse across end markets and products, and we would be looking at those products and end markets that are more stable and have growth compared to other markets. I wouldn't get overly concerned about anything we're going to do there.
If we do anything, it's going to be extremely small along the lines of the size I just described.
Great. Thanks so much.
You're welcome.
Thank you so much. Our next question is from the line of Neel Kumar of Morgan Stanley. Your line is now open.
Hi, good morning.
Good morning.
In Brazil, what do you think is driving the strong can volume growth you're seeing there? Would you say that's due to glass essentially being sold out?
Glass is sold out currently. Underneath that, there has to be demand growth coming from the consumer. I think after a very tumultuous period with the last administration they had, they've had a little bit of stability here politically and economically. They're doing a little better. Consumer confidence, much better this year than over the last couple of years, driving continuing consumer demand for growth. You do have a size change proliferation occurring from what you would describe as a standard 12 oz can to the sleek 9.1 oz can. When you think about consumed ounces, 4 oz, 9 oz cans or N ends are now required to meet the same equivalent as three 12 oz cans. A variety of things happening, but again, the can well positioned to continue to grow share in Brazil.
If we're right around 50% of the beer market, if North America is 65%-70% of the beer market, still considerable growth yet to come in Brazil, in our opinion.
Great. That's helpful. In Asia Pacific, can you just talk about what drove the 180 basis points improvement in operating margins for the quarter? Is that level sustainable for the second half of the year?
Well, it's country mix, right? We closed two plants in China at the end of last year, so our Chinese business is now roughly 60% of what it was before, the Southeast Asian business continues to grow. You have heard Crown and others talk about challenging conditions in China for years. As you move away from China and you move back towards Southeast Asia where there's firm growth, you get that improvement in percentage margin. I think the Asians have done well through the first half. They've actually exceeded their own expectations, we'll see how they do in the second half. They're traditionally pretty conservative in their forecasts, so I'm hopeful that we continue to outperform their forecasts.
Great. Thanks.
Thank you.
Thank you so much. Our next question is from the line of Arun Viswanathan.
Viswanathan.
Capital Markets. I'm sorry, Viswanathan. Your line is now open.
Great. Thank you. It sounds like the additions that you've described in North America would bring another 1%-2% into the industry on a can size basis if you look at about 90 billion cans. I guess, is that right? Would you see any footprint optimization opportunities elsewhere in your portfolio that would be necessary? Thanks.
I think the market's more like 94 billion-95 billion units. You're right. It's on the order of 1.5%-2% addition to the market, although these are sizes that are different than the standard 12-ounce size and sizes that are required in the market by our contract customers. I do not see any necessary portfolio adjustments or downsizing in our footprint.
As a follow-up, if we look out over the next couple of years, does this position you, I guess, to capture numbers that, for example, in Q1, that would have been closer to what the industry saw? Would it put you in a position to have some extra flex capacity in case growth continues at such a robust pace? What are your sense on future plans? Thanks.
Part of your question is a great question. I'm glad you asked it because we oftentimes talk about it here, and we forget to talk about it. It will allow us to grow our non-standard, non-traditional 12 oz volume. If we're 16% or 16.5% now and the market is 22-24, we can, I don't want to say rapidly, but we can responsibly approach industry levels for non-standard 12 oz over the next couple of years. Importantly, as you point out, we've been in a sold-out position in North America for several years. We are operating extremely tight, and for us not to miss or to not properly serve customers, it requires us to sometimes be too perfect.
This will give us a little bit of flex so that we're not having to be so perfect, and that as customers have short-term volume spike needs, we can meet those needs, yes.
Just lastly on this issue, where would you characterize Nichols, I guess, in general, from a startup standpoint? You wouldn't face any issues going forward and what are the existing lines kind of running at these days, if you could help?
Yeah. A good question. We, like some others from time to time, not all startups are equal. We have very good experience in a lot of places to start up. Nichols was a little slower than we liked, I wouldn't say it was poor. The lines now are fully through learning curve, and we are above 90% efficiency as we measure it. We're quite pleased with where we're at right now at Nichols, and I would expect the third line to have a much smoother startup than the first two, given that we have an experienced workforce and plant management and plant supervisory personnel on the ground, and they understand how to make cans now.
Great. I'm sorry, just one last quick one just to clarify the comment you made on the guidance. It sounds like about a $40 million or so cut on the free cash flow at the midpoint. If you go through the EPS guidance, that accounts for maybe about two-thirds of that, and the rest is CapEx. Is that right?
Well, I would say that at the midpoint, $40 million, you're probably right. That's right. I would say about $30 million of that is capital, because we've gone from about $410-$440 or $420-$450, whatever the numbers are, on the two lines. We've moved some things around in capital so we could accomplish this at a $30 million bump. The balance would be the shortfall in EBITDA that you mentioned, offset by some working capital initiatives.
Thank you.
Non-CapEx related, about $10 million.
Okay, thanks.
You're welcome.
Thank you so much, Mr. Viswanathan. Again, I do apologize if I say your last name incorrectly earlier.
That's okay. Most people do.
Thank you. Our next question is from the line of Mr. Mark Wilde of Bank of Montreal. Your line is now open.
Morning, Tim. Good morning, Tom.
Good morning.
Good morning.
Tim, is it possible to give us any sense of sort of the benefit that you're getting in 2019 from just contractual changes and any perspective on what you might pick up in 2020?
Well, it's possible, but you're not going to get me to say it.
Okay. I thought I'd try.
I say a lot of crazy things, Mark, but I'm not that crazy.
Yeah. Okay.
Listen, you've asked the question, so you deserve some kind of answer, and I don't mean to be cheeky, but there are some things we're not going to talk about. You heard me say in April, after a very long time of the can industry doing many great things for its customer base. We make cans at speeds now that were unheard of 10, 15, 20 years ago. The industry is supplying relatively the same number of cans to its customer base that it supplied 15 years ago with 40% fewer lines. The engineering and the manpower and the efficiencies that we've all gained, that we've worked so hard to do, we deserve to keep some of that.
We've given far too much of it and more away to the customer base as an industry, which in short terms means we haven't been properly compensated for all we've done for the customer base. The conditions are right for us to have a little bit of strength to try to recover some of that. I'll be quite honest, we're going to recover a lot of that over the next couple of years. It's still not enough, in my opinion, because we're here to make money for our constituent base, not just for the constituents that own the customer base. We are going to do better. Some of that'll come from price, some of that'll come from terms. It always requires us to meet the customer needs with service and quality, and we continue to endeavor to do that.
Okay. Good answer. I wonder, just turning to capital allocation, you've talked about both share repurchase activity and a dividend in the past. I wondered if you could just update us on your thinking there after you reach an appropriate level of leverage.
We've continued to state to you that we believe we'll be at 3.5 times leverage by the end of 2020, which is where we were before the Signode acquisition. Two years and nine months, we're back to the same leverage level. I think at that time, that's an appropriate time for our board to consider capital returns to shareholders as you've described.
Okay. Tim, just thinking about sort of this shift that we're all talking about between kind of plastic bottles and aluminum cans, do you worry at all about the perception of a lot of growth actually drawing in not only new capacity but really new competitors into the market?
Well, Mark, I worry about a lot of things, right? You can imagine. You worry about a lot of things. There are some things you worry about because they're firmly in the control of the management and the teams within the company, and there are some things that are not in your control, whether it's legislative or what other companies do. We've endeavored to make offerings to numerous customers and service those customers over decades. They entrust with us the ability to provide them quality and service, and a product, and meet their needs. We'll spend money as necessary to meet those customers' needs where we have contracts, and as I've said before, I can't worry about what others are going to do, what they might do or what they might not do. I would say that the capacity we've announced is under contract.
It is necessary for us to supply and service our customers. As you've heard me say, we are being somewhat cautious in all of the markets on sustainability, because until we see concrete evidence of a much larger conversion than we're seeing now, that it would be inappropriate for us or others to get too far ahead of ourselves.
Yeah. Okay. The last one I had is just in terms of this view that the market is going to accelerate in terms of growth. We've got all of these kind of foreign trade issues out there, what are you seeing your suppliers in the can sheet market do? Where do you see capacity moving there, both in North America and abroad?
Well, I think, in North America there are essentially three can sheet manufacturing locations across four suppliers. Two of them share one location, or four locations. Maybe there's four locations. I would say that for the guys that are still in can sheet in North America, they are committed to can sheet. They understand that it's a very stable business. They understand that in a stable business, especially in their environment, they can budget more appropriately. I've taken the opportunity to remind them all that if they want to convert to auto sheet and they want to be an auto supplier, they should keep in mind that most of the suppliers to the auto industry are bankrupt or have been bankrupt. They're far better off supplying the can business than the auto business long term.
They've got visions of volume growth with auto and trucks moving to aluminum sheets, they'll continue to look at that. I think they are committed to can sheet, and there's a lot of can sheet capacity around the world, especially in China. We have some trade issues going on there, but the Chinese have brand-new facilities, high-quality facilities, high-quality can sheet. There is can sheet available.
Okay, very good. I'll turn it over. Thanks, Tim.
Thank you.
Thank you so much. Our next question is from the line of George Staphos of Bank of America. Your line is now open.
Hi, everyone. Good morning. Thanks for the details.
Hi, George.
Hey, Tim. How you doing? I know what I heard on European Food, but I just wanted to go over this again. I think you parsed out $12 million in mix and $8 million from price cost, if I heard you correctly.
Yes
one of the earlier questions. Pricing is set more or less annually, usually by April. What else went wrong in terms of your view on pricing and its ability to cover cost relative to what your expectations would've been back in April? In mix, again, this is a relatively stable business. You called out dairy, called out fish. Maybe the fish didn't swim in the second quarter, and we know that that happens sometimes in terms of the catch. Can you give us a bit more detail? Because $20 million, I don't remember a quarter in a long time in European Food that was off that much versus the prior year and versus expectations.
All right. Stay on the line, George, because you asked a couple of questions there. Remind me the first question again.
Well, the first question, pricing is usually set by April, right?
Oh. The big, yeah. At one point I described you've got comparisons versus the prior year and comparisons versus expectations. The big challenge for us, pricing was set, and while volume was up a half a percent in the second quarter versus the prior year, it was far below what we expected in the second quarter and will be below what we expected in the third quarter, considering how poor the harvest was last year.
Yeah.
With lower volume, George, you get lower recovery, right? Compared to expectations.
I understand. If you had mentioned it earlier, I missed it.
Yeah.
Where were volumes versus your expectations for 2Q and, as we sit here today, 3Q in Food Europe?
Up a half a percent compared to prior year, and probably down about 8% compared to expectations. In the third quarter, we'll be up mid-single digits, I believe, in the third quarter, but that will still be down mid-single digits compared to expectations. It'll be some recovery this year compared to last year, but nowhere near what we thought we were going to get.
Okay. Did your contract negotiations give you any issues in terms of setting price? Or not really relative to what you were budgeting?
No, I think we might have touched upon this in February or April. There are several smaller competitors, they may have been on the edges because they only compete on the edges, but they can hamper issues. Coming out of a very poor volume year last year, everybody, including the small guys, was trying to ensure they had as much volume this year. It probably was a bit more competitive than we would've liked.
Okay. I know it's getting late in the call and maybe some others dialing in, I'll try to ask my remaining questions kind of in one shot to expedite it. Minority interest was up a lot. I'm assuming that's a high-class problem related to good volume around the rest of world in beverage, but could you-
No
Confirm that or give us what the source of that was? With Signode, you gave us guidance for the second half of the year. What is embedded in that guidance? Is it the current July rate, which you said was, I think, quite firm, or something below that level? If you carry July into the back half of the year, there's upside to the guidance there.
On the minority, Tom will correct me if I am wrong. Very quickly, on the minority. Net minority, operating minority is about the same year-on-year. The difference, we had a large tax settlement in Brazil.
Okay.
The Brazilian partner gets half of that is scheduled out in the reconciliation table. That was just a tax item.
Yeah, I thought adjusting for that, your minority was up even with that, I will verify that.
$14 million or $15 million out of the minority.
Yeah. It is still up, George. For the full-year, if you take that out, you're running about $23 million in the second quarter, which is about what we would expect. In a full-year, we'll be low nineties.
Okay.
On Transit, we did the re-forecast right at the beginning of July based on activity that occurred in the second quarter. As I mentioned, everything was going pretty well until the last 10 days of June. I don't know how conservative the guys were. When I say activity is firm in July, it's firm to the forecast they presented. They could be a little cautious, but we'll see. I think all in all, as I said, it's a $1.2 billion business in the last half of the year. If we're off $8 million-$10 million, it's off a little, but where all you guys are sitting with your economic activity glasses on, it's not going to be off as much as you guys are worried about. It's fairly firm.
Last one from me. Recognizing you're going to get ultimately more earnings out of the beverage line conversion in Weston, what does that conversion take out of, if you will, the Food and non-reportable segment on an annualized basis? Thank you, guys.
We didn't announce it, but we will replace that food can capacity in another location. At the beginning of next year, maybe one or two million per quarter in the first couple of quarters, but after that, we'll be back in line.
Okay. Thank you, guys.
You're welcome.
Thank you so much. Our next question is from the line of Kyle White of Deutsche Bank. Your line is now open.
Hey, guys. Thanks for taking the question. Just curious on Brazil, I think you called out volume's up 4% in Latin America. I was just wondering how that compared to the overall market and the industry. Sounded like maybe you had to leave some sales on the table just being capacity constrained there.
You are absolutely correct. We were up 6% in Brazil in the quarter. The market was up firmly in double digits. As you rightly point out, and as we said, we were capacity constrained, and we couldn't go any further.
Thank you. That's helpful. Then on the new competitor in Colombia, I know they've added some capacity in Brazil as well before. I'm just trying to get a sense of your view of this competitor. You competed with them over in Europe, and just how disciplined that you found them to be. I'm just trying to get the sense of what kind of risk there is that there's more moves or more investments to kind of take share from this competitor going forward.
No, listen, they're a competitor like any other competitor, and they have designs on running a global beverage can business. They had an opportunity to come to Brazil. I'll just say I'm assuming. That's a safe way to put it. I'm assuming that the deal they made to get to Brazil was tied to the Colombian business. We kind of knew that a year ago, or a little more than that. We'll see where they go. They're a competitor like any other competitor. They're a good competitor.
I think that's helpful. I'll turn it over. Good luck in the quarter.
Thank you.
Thank you so much. Our last question on queue is from the line of Adam Josephson of KeyBanc. Your line is now open.
Tim and Tom, good morning.
Morning.
Morning.
Tom, a couple for you to start. Just on CapEx, I know so 2019 guidance now is $440. Just given the North American Bevcan projects, do you expect next year to be similar, up, down? Can you give us any sort of perspective? I appreciate it's still early days.
Well, we came into the year saying 400-425. 440 is not that much off that number, so similar, let's say, at this point.
For next year, okay.
Yeah.
On working cap for this year, any change compared to your previous expectations, and the same pertains to dividends to minorities?
On the cash flow statement?
Yes. On working capital, we've said we thought we were going to be about flat. At this point, I'd say we're expecting some contribution from working capital, not real significant, but some contribution. On the minority dividends, in response to George's question a minute ago, we were talking about the gain we had in Brazil from the tax. Because of that gain, we have the capacity to pay a bigger dividend. The minority dividend, whereas previously we were saying about $75 million, perhaps that number is up $10 million or so.
Is that 85 then, is that a sustainable number, Tom?
Could be back to 75 or 80.
Yeah.
Adam, the tax settlement was a one-time settlement this year. To get the money out of the country, we'll pay a dividend.
Got it. Okay. Tim, just one on Signode. Obviously, when you announced Signode, I think part of the rationale, correct me if I'm wrong, was that beverage can growth was limited at that time and had been for a long time for that matter. Now you're ramping up spending on beverage cans, obviously because of the recent pickup we've seen in the North American market. Since the time you announced Signode, have your expectations pertaining Signode and beverage cans for that matter, changed fairly significantly? Just seems like you go from moving away from bev cans, and now you're kind of moving back to bev cans at a time when Signode is slowing. I'm just wondering how your thoughts on those two businesses have changed since that time.
I would say on beverage cans, the thoughts over the last 12 -1 8 months are everything's significantly more optimistic just given the sustainability environment we're in. It will require capital and cash to build out more capacity in various regions around the world. That's all a positive thing. That's going to generate future value for everybody. On Signode, nothing's changed. I think, as I said, nine of the last 10 quarters, you're describing the business declining. Nine of the last 10 quarters, the EBITDA is in the $90 million-$95 million range. Last year, second quarter, for a variety of reasons, was far beyond anything they've ever done before. We talked about that last year, some of the reasons why. I don't think our view on Transit has changed at all.
It's remarkably consistent on an EBITDA basis in 2019 compared to 2018 and 2017, even in the face of some currency. Really generating a lot of high cash flow. It increases the cash flow yield and provides a lot of necessary cash flow to continue to build out the beverage can business.
Just last question, Tim, on Signode. At the Analyst Day, you talked about Signode's EBITDA going back a decade or more, I forget exactly what, but obviously in 2009, EBITDA was down a lot, then it was up similarly in 2010. Do you think the volatility in Signode's EBITDA is diminished at all from where it was, call it a decade ago? In other words, in the event we go into a meaningful downturn, do you have any reason to think that EBITDA would be at least somewhat stable in that business?
I think two things are different. I think the global financial crisis of 2008, 2009 was not what you would describe as a normal downturn or an operating recession. I think everybody needs to remember that, right? That was something far different. I do think, and as we have described, Signode, while it was still owned by ITW, and then while it was owned by the private equity firm, made incredible strides to try to change the business profile of the end markets they were serving. They became much bigger in the protective space, less reliant on strap, much bigger in food and beverage, less reliant on the steel industry. The business is far more stable today or let's say while it is cyclical, it's less cyclical than it was then, yes.
Okay. Thanks a lot, Tim.
You're welcome. Missy, I think you said that was the last call, so thank you very much, and that concludes the call today. Thank all of you for joining us, and we'll speak to you again in October. Bye now.
Thank you so much, speakers. That concludes today's conference. Thank you all for participating. You may disconnect your lines at this time.