morning, and welcome to Crown Holdings Second Quarter 2019 Conference Call. 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, 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 point $2 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 $180,000,000 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 Q3 2019 adjusted earnings of between $1.50 $1.60 per share and full year adjusted earnings of between $5.05 $5.20 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 between $725,000,000 $750,000,000 with approximately $440,000,000 in capital spending. With that, I'll turn the call over to Tim.
Thank you, Tom and good morning to everyone. I'll try to be as brief as possible and we'll then open the call to questions. As reflected in last night's release and as Tom has just summarized, overall Q2 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 Q2 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 2 new lines in New York and Ontario. In a supplemental table to the release, we have provided the currency impact on sales and segment income by operating segment, so 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 $27,000,000 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 start up costs in 3rd party can sourcing in the United States compared to 2018 are just some of the factors contributing to the improved cost position in 20 19.
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 UK 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 start up costs in Italy and Spain compared to the Q1 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 $20,000,000 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 2 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 the poor harvest in 2018, but 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 $5,000,000 in the quarter as double digit volume double digit demand growth in Southeast Asia more than offset the volume impact from the closure of the 2 facilities in China. Excluding currency, sales in transit were down 1.6% in the 2nd 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 Q2.
While down from the prior year, this is a business that has generated $90,000,000 to $95,000,000 of EBITDA per quarter in 9 of the last 10 quarters. So the 2nd quarter was right in line with our expectations. Looking ahead to the balance of the year, we are forecasting the 3rd and 4th quarters to be in the lower part of that EBITDA band, so roughly $4,500,000 to $5,000,000 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 offset some softness in the U. S. Aerosol market. And 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 A mixed operating result through 6 months, 2 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 to $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.
Boot can demand remains firm throughout, although first half and perhaps the team is being overly cautious heading into the back half, but we'll see. So in summary, continuing firm demand, strong cash flow and several projects underway to continue to service customers and drive future value. And with that Missy, we are now ready to open the call to questions.
Certainly, sir. We will now begin the question and answer session. Speakers, our first question is from the line of Anthony Pettinari of Citigroup. Your line is now open.
Good morning.
Good morning. Good morning.
Tim, in transit, you cited 2% lower net volumes. And 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? And then 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. So I think if we looked at consumables versus equipment in the second quarter, it 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. Things were April was soft, May was fairly firm.
The 1st 3 weeks of June were firm. The last week of June was soft, but July has started off firm again. So I think as we sit here today, we're only 3 weeks into the quarter, but the guidance we've given you for the 3rd and 4th quarters to be off about $4,000,000 to $5,000,000 per quarter, dollars 8,000,000 to $10,000,000 for the back half in a $1,200,000,000 business back half business. So down a touch, but not striking down. And I think where we're at in July for the 1st 17 or 18 days, we feel pretty good about that right now.
Okay, that's helpful. And then 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? And then just more of a big picture question, I think 2 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?
So to parse out mix and compared to the prior year and 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. And I'd say that's probably of the $20,000,000 let's say 8 of its price and 12 of its mix, if you just want some round numbers and I could be off 1 or 2,000,000 one way or the other, but you kind of get the gist there. I think the 2 transactions that the 2 competing companies have done in food are very different. 1 was just a North American business and a smaller business.
The other is a global business and a very large business. Both have the same 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. But in the near term both acquiring significant proceeds in the near term either to delever and or to return to shareholders And you're aware of what each of them are doing.
I would say that our food can business is while it is down in Europe this year and up in North America, currently both of those businesses provide significant free cash flow. And given where interest rates are today, any move in that regard would be dilutive to free cash flow and 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 give up. So in the near term, we like 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. And we don't 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. But 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. And food cans steel food cans are entirely recyclable. So 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.
Good morning, Ghansham.
So, 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 year end to boost your capabilities in North America?
Yes. So the Westin, I saw your note this morning Ghansham and we probably didn't make it clear enough in the release, so apologies. The Weston plant currently has 2 beverage can lines and 1 food can line. So 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, but much of the equipment going into the 3rd line in Westin and for beverage will be new equipment.
And so I would describe to you that if we're spending X dollars and nickels to put a third food can line in that we'll spend X minus $10,000,000 or $12,000,000 in Weston and that minus $10,000,000 or $12,000,000 is the using the washer. And I think we've got a couple of pieces of equipment that are in pretty good shape from the recently shutdown Lawrence plant that we'll use. But much of that equipment is brand new and will operate as if it's a brand new line from front to back in Westin just as it will in Nichols or any other brand new line. So we perhaps weren't as clear on that. But it is a beverage can plant.
It's not a food can plant. And as you just rightly pointed out, it will have the capability both of those lines will have the capability to produce sleek and 16 ounce 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, we're probably up our mix is probably up 3 to 4 percentage points from last year to this year between standard 12 ounce and sleek and 16. And 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. And 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 Stillwater 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 call that in North American context as it relates to capacity footprint? Thanks.
Yes. Well, 1% volume growth essentially were sold out, right. And as we described in April, we are not sourcing cans from 3rd parties just to sell more cans. We did 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. So 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.
And 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 ounce portfolio capacity portfolio exists in as we've described before Texas, Mississippi, New York and now Ontario. And 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.
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 like last quarter you've talked about that pricing competition going on in the industry. Like 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. So how do you deal with that?
Yes. So listen price was the impact of price compared to the prior year was negligible. I want to say far less than 0.5% in the quarter. So 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 has that's now behind us and so that situation has settled down. But it's a very diverse business. We don't we have not seen any price any negative price consequences other than that one situation.
Okay. And in bevcan, like are you changing your expectation for growth in the like what are your expectation 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. And so many of you are new to the industry, but for a long time beverage cans were let's be clear we're not a great business. But this is now a great time to be in beverage cans and I think that's going to exist for several or many years to come given what we and you and many others see with the environmental 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. And so the capacity that we announced last night, you should fully expect that that is fully under contract and is necessary to meet contract requirements.
It is not built on spec. So we'll continue to review each market, but the markets 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. And so 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.
Thank you for taking all the details.
First question is, it looks like when we look at the growth in Europe and particularly not including the Middle East, I mean, it's really, really great 4.5% in the Q1. 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 happen to be in segments where it looks like you're gaining share when you look at the overall market?
So I think the market Chip this is market driven and 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 2,003, the German deposit legislation and 2,009, I think every year for the last 15 or 18 years, we've seen 2% to 4%, 4% to 5% market growth in Europe. As 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 last year because we were capacity constrained and at the time we told you
we had 2 new projects coming online
and that in 2019 if we had an undersized portion of the growth last year that we would get an oversized or more relevant portion of the growth this year and that's what you're seeing with the new 2 factories that came online.
Okay. All right. Got you. And then just to be clear on the 2 new lines in North America, the Nichols 3rd line and the one in Weston, I would imagine those would be considered specialty lines. And I guess if you ran them on 1 or 2 basic sizes, you could get up to what a $1,000,000,000 can rate a year.
Is that ballpark correct?
Yes. I'd say the Nichols line clearly could go to about $1,200,000,000 The Westin line think more of in the $750,000,000 to $900,000,000 range. I would they have the ability to make a variety of sizes. But Chip, let's be clear, there's we keep throwing this term specialty around. There's nothing special about making a can other than the 12 ounce standard can.
We and others make them all around the world and in some markets, the 12 ounce 211 diameter can doesn't exist anymore. It's only sleek can. So these are a changing marketplace in which the marketers of the consumer product companies are always trying to find ways to invigorate their brands and we're fortunate that we have the flexibility and the engineering know how in the industry to be able to accomplish that. And so while you may refer them to specialty, we just think they're alternative sizes.
Got you. And then 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. And could you talk about the cost issue? Is it really just a 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?
Yes.
So 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. So volume up but down versus expectations. So clearly that's disappointing. And then we did get positive price this year, but steel costs went up significantly and other costs are always rising whether it's labor or utility. So 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 and that's also disappointing.
But we'll endeavor to reduce our cost overall and next year is a new year and 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 and Chase. Your line is now open.
Yes. Good morning. Thank you. Tim, just
on that last comment that you made in Europe European Food, Magnus, do you have a lot of visibility at this point that you can kind of overcome this cost inflation for next year? Or just sort of any color there would be helpful?
Yes. I think we have the opportunity to adjust price. We adjusted price this year in the market and clearly that wasn't enough to offset the inflation. So we'll see what the inflationary pressures are going into next year. And under contract, we have the ability to do that.
Some of the 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. And then we do need we'll need to run better and we need to be a bit more accurate with our volume forecast. But overall, the market is healthy, right? The demand is there for the cans, although it's a little lower this year than volume will be a little lower.
One of the issues is volume is a little lower than we expected. More or less the harvest look like they're going to be okay. And when I say okay, I mean let's say 90% to 95% of what we expected, which is about 105% of last year, but last year was down. There are some markets where the weather was extremely rough. So for example, Eastern Europe, the weather was extremely rough.
That's a very small market for us. 90% to 95% of our business is in Western Europe, Italy, Spain. So these are all items around the edge which in a tight margin business items around the edge have an impact. But we'll do better on price realization versus cost next year and we'll see where it brings us. But this year has been disappointing.
But again, not a it's still a business we're making. I think in the 3rd 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. But notwithstanding that, we are disappointed as we said.
Okay. That's helpful. And 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 mean, I guess, is that more strategy maybe more on whole 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
Well, I think we say smaller deals. Everybody gets nervous when we say this, right? I think you probably shouldn't if we did anything, you wouldn't expect us to do total purchase price of more than $20,000,000 this year. So we're talking at multiples that are 5 or 6 times. So the multiples are right, it doesn't increase, but you're talking extremely low numbers across a balance sheet like ours.
So, but that presupposes we find the right deal and it's in a market that's a growing part of the various markets and that they provide. So all of the 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. So 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 cam volume growth you're seeing there? Would you say that's due to glass essentially being sold out?
Well, glass is sold out currently. But underneath that there has to be demand growth coming from consumer. So I think the after a very tumultuous period with the last administration they had, they've had some a little bit of stability here politically and economically they're doing a little better. So consumer confidence much better this year than over the last couple of years driving continuing consumer demand for growth. You do have size change proliferation occurring from what you would describe as a standard 12 ounce can to the sleek 9.1 ounce can.
So when you think about consumed ounces, 4 9 ounce cans and ends are now required to meet the same equivalent as 3 12 ounce cans. So a variety of things happening. And but again, the can well positioned to continue to grow share in Brazil. And if we're right around 50% of the beer market and if North America is 65% to 70% of the beer market, still considerable growth yet to come in Brazil in our opinion.
Great. That's helpful. And then in Asia Pacific, can you just talk about what drove those 180 basis points improvement in operating margins for the quarter? And is that level sustainable for the second half of the year?
Well, it's country mix, right? We closed 2 plants in China at the end of last year. So our Chinese business is now roughly 60% of what it was before and the Southeast Asian business continues to grow and you have heard Crown and others talk about challenging conditions in China for years. And so 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 our the Asians have done well through the first half.
They've actually exceeded their own expectations and we'll see how they do in the second half. They're traditionally pretty conservative in their forecast. 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 Varun Viswanathan. At Home Markets. I'm sorry, Viswanathan. Your line is now open.
Great. Thank you. So it sounds like the additions that you've described in North America would bring another 1% to 2% into the industry on a can size basis if you look at about 90,000,000,000 cans. I guess is that right? And would you see any footprint optimization opportunities elsewhere in your portfolio that would be necessary?
Thanks.
So the market I think the market is more like 94,000,000,000 to 95,000,000,000 units. But 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 customers, by our contract customers. I do not see any necessary portfolio adjustments or downsizing in our footprint.
And then as a follow-up, if we look out over the next couple of years then, 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.
So it's a 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. So, it will allow us to grow our non standard, non traditional 12 ounce volume. And so if we're 16% or 16.5% now and the market is 22% to 24%, we can I don't want to say rapidly, but we can responsibly approach industry levels for non standard 12 ounce over the next couple of years? But importantly, as you point out, we've been in a sold out position in North America for several years.
We're operating extremely tight and for us not to miss or to not properly serve customers, it requires us to sometimes be too perfect. So 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.
And just lastly on this issue, where would you characterize Nichols, I guess, in general, from a startup standpoint? You feel that the learning curve is you wouldn't face any issues going forward. And what are the existing lines kind of running at these days, if you could help?
Yes. So we 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 like, but I wouldn't say it was poor.
But the lines now are fully through learning curve and we are above 90% efficiency as we measure it. So we're quite pleased with where we're at right now at Nichols and I would expect the 3rd line to have a much smoother start up 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. And I'm sorry, just one last quick one just to clarify the comment you made on the guidance. It sounds like about a $40,000,000 or so cut on the free cash flow at the midpoint. And if you go through the EPS guidance, that accounts for maybe about 2 thirds of that and the rest is CapEx.
Is that right? It sounded like Well,
I would say that at the midpoint $40,000,000 you're probably right, that's right. I would say about $30,000,000 of that is capital because we've gone from about $410,000,000 to $440,000,000 or $420,000,000 to $450,000,000 whatever the numbers are on the two lines. So we've moved some things around in capital so we could accomplish this at a $30,000,000 bump. And the balance would be the shortfall in EBITDA that you mentioned offset by some working capital initiatives. So non CapEx related about $10,000,000
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.
Good morning, Tim. Good morning, Tom. 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'd say a lot of crazy things, Mark, but I'm not that crazy. Yes, okay. Listen, we are 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. But 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. So 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 and 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. And so the conditions are right for us to have a little bit strength to try to recover some of that. But 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.
So we are going to do better. Some of that will come from price. Some of that will come from terms. But 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 dividend in the past. And I wondered if you could just update us on your thinking there after you reach an appropriate level of leverage?
So we continue to state to you that we believe we'll be at 3.5 times leverage by the end of 'twenty, which is where we were before the Signode acquisition. So 2 years 9 months, we're back to the same leverage level. And I think at that time, that's an appropriate time for our Board to consider capital returns to shareholders as you've described.
Okay. And 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. But we've endeavored to make offerings to numerous customers and service those customers over decades And they entrust with us the ability to provide them quality and service and a product and meet their needs.
And so we will 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. But I would say that the capacity we've announced is under contract. It is necessary for us to supply and service our customers. But 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.
Yes. Okay. The last one I asked, just in terms of this view that the market is going to accelerate in terms of growth and 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 kind of capacity moving there both in North America and abroad?
I think in North America there are essentially 3 can sheet manufacturing locations across 4 suppliers. 2 of them share 1 location or 4 locations maybe there's 4 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. So they're far better off supplying the can business and the auto business long term. But they've got visions of volume growth with auto and trucks moving to aluminum sheets. So they'll continue to look at that. But I think they are committed to can sheet and there's a lot of can sheet capacity around the world, especially in China.
Now we have some trade issues going on there, but the Chinese have brand new facilities, high quality facilities, high quality can sheet. So 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 Tafos of Bank of America. Your line is now open.
Hi, everyone. Good morning. Thanks for the details.
Hi, George. Tim, how
are you doing? I know what I heard on Food Europe, but I just wanted to go over this again. I think you parsed out $12,000,000 in mix and $8,000,000 from price costs, I heard you correctly to one of the earlier questions. Now pricing is set more or less annually, usually by April. So what else went wrong in terms of your view on pricing and its ability to cover cost relative to what your expectations would have been back in April?
And then in mix, again, this is a relatively stable business. You called out dairy, you called out fish. Maybe the fish didn't swim in the second quarter, but and we know that that happens sometimes in terms of the catch. But can you give us a bit more detail, because $20,000,000 I don't remember a quarter in a long time in Food Europe that was off that much versus the prior year and versus expectations?
Stay on the line, George, because you asked a couple of questions there. So remind me of the first question, Ken.
Well, I mean the first question, pricing is usually set by April, right?
So the big yes, so as I at one point I described, you've got comparisons versus the prior year and comparisons versus expectations. So the big challenge for us pricing was set and while volume was up 0.5% in the second quarter versus the prior year it was far below what we expected in the Q2 and will be below what we expected in the Q3 considering how poor the harvest was last year. So with lower volume, George, you get lower recovery, right, compared to expectations.
I understand. I mean, if you had mentioned it earlier, I missed it. Where were volumes versus your expectations for 2Q and as we sit here today 3Q in Food Europe?
So up 0.5% compared to prior year and probably down about 8% compared to expectations. And in the 3rd quarter, we'll be up mid single digits I believe in the Q3, but that will still be down mid single digits compared to expectations. Just it did not it will be some recovery this year compared to last year, but nowhere near what we thought we were going to get.
Okay. And 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 and so they may have been on the edges because they only compete on the edges, but they can hamper issues. They coming out of a very poor volume a year last year, everybody including the small guys was trying to ensure they had as much volume this year. So it probably was a bit more competitive than we would have liked.
Okay. I know it's getting late in the call and maybe some others dialing in. So I'll try to ask my remaining questions just 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 the world in beverage.
But could you confirm that or give us what the source of that was? And then 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. So if you carry July into the back half of the year, there's upside to the guidance there?
So on the minority, Tom will correct me if I'm wrong, but 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. And so the Brazilian partner gets half of that, but that's scheduled out in the reconciliation table that was
just the tax item.
Yes. I thought adjusted
for that your minority was up even with that, but I'll verify that.
$14,000,000 or $15,000,000 of the minority.
It is still up George. But for the full year, if you take that out, you're running about $23,000,000 in the 3rd second quarter, which is about what we would expect. And the full year will be low 90s.
Okay. And then on transit, we did the reforecast right at the beginning of July based on activity that occurred in the Q2. And as I mentioned, everything was going pretty well into the last 10 days of June. So I don't know how conservative the guys were. And when I say activity is firm in July, it's firm to the forecast they presented.
So they could be a little cautious, but we'll see. I think all in all, as I said,
it's a
$1,200,000,000 business in the last half of the year. And if we're off $8,000,000 to $10,000,000 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.
And last one for me, recognizing you're going to get ultimately more earnings out of the beverage line conversion in Weston. What is 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. So Mike, at the beginning of next year maybe $1,000,000 or $2,000,000 per quarter in the 1st 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 my question. Just curious on Brazil, I think called out volumes up 4% in Latin America. I was just wondering how that compared to the overall market in the industry. It sounded like maybe you had to leave some sales on table just being capacity constrained there?
You are absolutely correct. So we were up 6% in Brazil in the quarter. The market was up firmly in double digits. But as you rightly point out and as we said, we were capacity constrained and we couldn't go any further.
That's it. Thank you. That's helpful. And 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 can be 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 and 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 and they had an opportunity to come to Brazil. I'm assuming, 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 and we'll see where they go.
But they're a competitor like any other competitor. They're a good competitor.
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.
Good morning, Adam.
Tom, a couple for you to start. Just on CapEx, I know so 2019 guidance now is $440,000,000 Just given the North American Bev Can 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 to 425. We're essentially I mean, 440 is not that much off that number. So similar, let's say, at this point.
For next year. Okay. And then on working cap for this year, any change compared to your previous expectations? And 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. And on 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.
So the minority dividend whereas previously we were saying about $75,000,000 perhaps that number is up $10,000,000 or so.
And is that $85,000,000 then is that a sustainable number Tom?
It could be back to $75,000,000 or $80,000,000 Yes. Adam, it's a the tax settlement was a one time settlement this year. So get the money out of the country. So we'll pay dividend.
Got it. Okay. And Tim, just one on Signode. So 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. And now you're ramping up spending on beverage cans, obviously, because of the recent pickup we've seen in the North American market.
So 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. So I'm just wondering how your thoughts on those two businesses have changed since that time?
So I would say on beverage cans, the thoughts over the last 12 to 18 months are everything significantly more optimistic just given sustainability environment we're in. But it will require capital and cash to build out more capacity in various regions around the world. But 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, 9 of the last 10 quarters, you're describing the business declining. 9 of last 10 quarters, the EBITDA is in the $90,000,000 to $95,000,000 range. And last year's Q2 for a variety of reasons was far beyond anything they've ever done before. And we talked about that last year some of the reasons why. So 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 2017 even in the face of some currency. So really generating a lot of high cash flow 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 and 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?
So 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?
So I think 2 things are different. I think the global financial crisis of 2,008, 2,009 was not a what you would describe as a normal downturn or an operating recession. So I think everybody needs to remember that, right? That was something far different. But 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. So the business is far more stable today. Let's say it's while it is cyclical, it's less cyclical than it was then, yes.
Okay. Thanks a lot, Tim.
You're welcome. Mitsy, 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. And that concludes today's conference. Thank you all for participating. You may disconnect your lines at this time.