Good morning, and welcome to Crown Holdings' first quarter 2018 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 begin.
Thank you, Angela, 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-K for 2017 and subsequent filings. Earnings for the quarter were $0.67 per share compared to $0.77 in the prior year quarter. Adjusted earnings per share were $0.94 in the quarter compared to $0.77 in 2017. Net sales on a currency-neutral basis were up 9% for the quarter, primarily due to increased beverage can volumes and the pass-through of higher material costs. Segment income was up 8% for the quarter at actual rates.
Corporate costs were below the elevated amounts from the first quarter of last year and are more representative of the run rate we experienced in the last three quarters of 2017. As you can see in the release, we no longer report North America Food as a separate segment. Beginning with its initial reporting in the second quarter, we will report Transit Packaging as a segment. On the cash flow statement, adjusted cash used for operating activities in the first quarter is above the prior year amount, primarily due to higher exchange rates, higher material costs, and lower utilization of our factoring and securitization programs due to large cash balances already on hand from borrowings to fund the Signode acquisition. These are timing items and will have no impact on full-year cash flow.
Net leverage at the end of 2018 is expected to be approximately 4.7 times, and we expect the ratio to decline by about half a turn each year going forward as we use cash flow to delever. As outlined in the release, we are estimating second quarter 2018 adjusted earnings of between $1.55 and $1.65 per share, and full-year earnings of between $5.35 and $5.55 per share. In the release, we have provided a reconciliation between our previous guidance and the revised guidance. These estimates assume a full-year tax rate of between 25% and 26% and that exchange rates remain at current levels. We are projecting full-year adjusted free cash flow of approximately $625 million after approximately $460 million in capital spending.
Finally, on our website, we will post revised 2017 segment income numbers by quarter as adjusted for changes in the presentation of pension costs and the exclusion of intangibles amortization charges. With that, I'll turn the call over to Tim.
Thank you, Tom. Good morning to everyone. As reflected in last night's earnings release, as Tom just discussed, we've had a real nice start to the year and expect an excellent overall performance for the year 2018. For the quarter, we outperformed our initial expectations by about $0.08 per share, primarily from strong global beverage can demand and cost performance throughout our European operations. The headwinds that we experienced in recent years from currency translation have reversed, as expected, will continue to benefit our performance compared to prior year. We have reviewed the progress on the major projects we have underway or recently completed in the release, all of which are on the same timing as we described in February.
The Signode transaction was completed in early April, as Tom just described, Transit Packaging will be reported as a separate segment beginning with the second quarter of 2018. As such, we have streamlined our current segment reporting in preparation for the inclusion of the transit business. Notably, we now combine North America Food with our other non-reportable businesses. In total, net sales advanced 15% over the prior year first quarter, with increased volumes, currency translation, and the pass-through of higher raw material costs all contributing to the overall gain. As we discussed in February, tin plate steel is up double digits versus 2017, and delivered aluminum is up more than 20% year-over-year. We expect significant reported sales gains in 2018 from the pass-through of these raw materials. Given the aforementioned, the following segment comments will focus on volume performance versus the prior year.
In Americas Beverage, overall volumes advanced 4%, due primarily to volume gains in the U.S. and Brazil. Segment income, as expected, was down slightly in the first quarter due to start-up costs at the new glass factory in Chihuahua and a planned furnace rebuild in Orizaba. Both projects are now complete. We expect our glass capacity to be sold out for the balance of the year. Unit volume demand in European Beverage was down low single digits overall, with Continental Europe flat and the Gulf States down mid-single digits. Segment income was up due to strong cost performance year-over-year and a couple of million USD from currency. While volumes in European Food were lower as expected following customers pulling ahead of the 2018 steel increase, segment income in European Food was up $5 million due to cost performance, positive mix, and currency.
Segment income in Asia advanced more than 10% over the prior year, as continued strong demand throughout Southeast Asia and a lower cost base in China both drove the improvement. Segment income in our non-reportables businesses was up over the prior year due to a strong performance in North American food cans. In summary, a real good start to the year. As we have said before, the first quarter is seasonally small, and we have generally stayed away from changing guidance this early in the year before having more clarity on the various food packs. Having said that, the outlook for our can businesses at this time is quite positive. That is, demand looks to be solid for the balance of the year, and operationally, we are performing well.
As noted in the release, and as Tom just described, we have raised the pre-Signode guidance 3% at the midpoints. Turning to Signode, the acquisition closed on April 3rd, 2018. As shown in our updated guidance, Signode provides significant accretion to earnings and cash flow. With only nine months of inclusion in 2018, earnings per share accretion is 15% at the midpoint, and cash flow accretion is 25%, with more to come in the full year of 2019. As shown in the release, we expect Signode to add $0.69 per share to our results in 2018, which is before approximately $0.55 per share of amortization of acquired Signode intangibles. As is customary in our peer group and to more closely match cash earnings, we now add back intangible amortization to our adjusted earnings per share results.
We are confident that the addition of a premium business such as Signode to Crown's strong and diversified existing metal packaging franchises will create value for our shareholders for many years to come. Many of you have expressed some concern surrounding the level of debt, growth rate, and perceived cyclicality of the Signode businesses. We think it's important to deal with these head-on. As to the debt incurred to acquire Signode, we used all debt and no equity, given our desire to have all the benefits of the transaction accrue to our shareholders. With the availability of attractively priced fixed and floating rate debt, we believe this was in the best interest of our shareholders.
With expected free cash generation of more than $2 billion over the next three years, total leverage will return to mid-3 levels, with almost all of the paydown coming from our floating rate debt, thereby reducing any impact from rising rates. As to growth, we do believe that with minimal CapEx, the transit business will grow at GDP levels. While their growth over the last four years was only 1% ex-currency, there have been numerous organizational and operational changes enacted by management during this period, which we believe position the business for higher growth levels. As for cyclicality, yes, the business is a bit more cyclical than the can business. We firmly believe any reference to the global financial crisis of 2008 and 2009 is misguided due to the unique nature of those events.
What we can say is the Signode business today is far more diversified now than then, with its proportion of overall sales to end markets such as metals and construction being 25% lower now than in 2008. As restated in the earnings release, we remain confident in the free cash flow target of $775 million we have set out for 2019. While I don't want you to get ahead of yourselves, in recent years, we have taken great care to at least achieve, if not outperform, the free cash targets that we have set. Lastly, before we open the call to questions, we ask that you limit yourselves to two questions initially so that others will have a chance to ask their questions. You're always free to jump back into the queue. With that, Angela, we're now ready to open the call to questions.
Thank you. We will now begin the question-and-answer session of today's conference. To ask a question, please press star, followed by the number 1. Unmute your phone and record your name after the prompt. Your name will be required to introduce your question. To cancel your question, you may press star followed by the number 2. One moment, please, as we wait for questions. Our first question is from Chip Dillon of Vertical Research. Please go ahead.
Yes. Good morning, congratulations, Tim, on your Wildcats. It'll be our turn next year.
Well, it's like putting two roses around a thorn the last three years. Even more enjoyable than that, we'll get back to Crown in a second, two members of our legal team went to Michigan, so I find it necessary to remind them that Michigan lost the championship game. Let's get on to Crown. Thank you.
There you go. Well, listen, I had two quick questions. One and a follow-up is, when you look at the leverage, are you all open if you got an acceptable offer to sell what might now not be as core of a business as maybe in the past? You mentioned that the U.S. food can business is doing better. Is that something that is as important going forward as maybe it was in the past, given Signode and given some of the changes in that business?
I think our North American food business operates well. Clearly, with the addition of incremental capacity by a new player into the market a few years ago, the market itself has a little bit of overcapacity. I think as an industry, we're learning how to deal with that. The key thing is to provide customers with quality containers and quality service, and we believe we do that well. I wouldn't say that North American food is not core. Our decision to place it in the non-reportables as opposed to a separate segment is just really an effort to try to streamline and make more efficient our description of the larger businesses we have with the inclusion of the transit business. As you know, we have a very large food can business in Europe.
We have food can operations in Southeast Asia. Our North American food can business is not only cans, but it's vacuum closures and includes operations in the United States and Mexico. It still remains core to us. It would have to be a very enticing offer, I think, at this point for us to want to let go of that business. We're firmly committed to the business, and we actually do quite well at it.
Okay, that's helpful. Real quickly for Tom, the net working capital build, almost $1 billion. That's certainly a big number for one quarter. We've never seen one that big. Is part of that timing related, or maybe you could otherwise give us a little help with that number?
Yeah, it is timing. As I mentioned in my prepared comments, really three things. Currency rates are higher, so as the cash is going out at higher rates, you're going to see a bigger US dollar number. Input costs are higher as well. The third thing is.
Required accounting changes.
Yeah. Those are the two primary items.
Okay. Makes sense. Thank you.
Thank you, Chip.
Thank you. Our next question is from George Staphos of Bank of America Merrill Lynch. George, go ahead, please.
Thanks for the time. Good morning, everybody. Two questions, gentlemen. With Signode, could you provide any color on how the business did in the quarter? Obviously knowing that you didn't actually have it during the quarter, and therefore it's not in the results. How did it perform relative to what the expectations were? Can you put a volume or EBITDA growth figure on the business? That's question number one. Question number two, totally on the other side, just trying to find the $24 million in acquisition costs that you had adjusted out of earnings in your P&L. I'm assuming $9 million of carried interest was certainly an interest expense. Does that mean there was $15 million of acquisition costs in the corporate line? Thank you very much.
Just quickly, if I get it wrong, Tom will fix this, you've got $3 million of acquisition cost in the restructuring line, in the foreign exchange line, there's $15 million, George. It's $15, $3, and $9 is the $27, actually.
Okay.
You can see that on the reconciliation table. But Tom can come back and explain that in more detail after I deal with the Signode Q1 performance. As you can see, we provided you, just for context, the historical revenue for Signode for the last five quarters, only because we figured you'd want to know. If they were up $62 million or 11% or 12%, about $25 million-$30 million, I'm looking at something here, $25 million-$30 million of that was currency, and the balance was volume. So, real strong volume performance. If I'm being selfish, I would've hoped that they would've had no volume growth and would've saved it all for Q2. But seriously, I think this is more indicative of what we saw when we looked at the business throughout the latter half of last year.
Notwithstanding many people's concerns that, as we said in the prepared remarks, that their growth has not mirrored GDP over the last several years. But we have seen a number of changes that they have enacted, and we believed that their business was at an inflection point to reap the benefits of growing economies, specifically Europe and even the United States, but more importantly, to refocus on revenue growth within their own system and to refocus on their premier equipment and tool package that they offer, not only as a way to grow equipment and tool sales, but also as a way to tie in growing consumable sales. And I think we see a little bit of that in the first quarter, and we're hopeful, certainly.
We're more than hopeful, we're confident that the business is going to grow at higher levels than you've seen over the last four years.
Tim, just a quick follow-on if I could, and I'll let it go. Did the revenue growth, the volume growth, meter into EBITDA growth at pretty much the same rate? And just as we think about the quarters, will there be any seasonality that we should think about in terms of margin? Thank you, guys.
Well, I don't have the EBITDA in front of me. I think if their revenue growth was 11%, I think the EBITDA growth was more like 6%, George.
Okay.
Again, timing, they obviously have cost input issues like any other business, including the can business.
I think what actually happened is Crown will get the benefit of that as they pass that through in Q2, as opposed to the prior owner not getting it in Q1. Second part of the question, George?
Just the cadence on margin seasonally.
Um-
Is there much difference across the quarters? Is one quarter a little bit heavier?
Oh, boy, I don't have it in front of me. They are nowhere near as seasonal as we are. They will have higher earnings in Q2 and Q3. It's much flatter. Q1 looks like the smallest quarter for them from what we've seen historically and what we see projected for this year. Q2 is a little bigger, Q3 is a little bigger, Q4 is a little smaller than Q2, but it looks like Q1 is smaller. It's not to the level, the seasonality that you expect to see in Northern Hemisphere food and beverage can businesses, you won't see in this business.
Okay. Thank you so much.
Thank you.
Our next question is from Scott Gaffner of Barclays. Please go ahead.
Thanks. Good morning, guys.
Morning, Scott.
Morning.
Hey, Tim. Just following up a little bit on the volume comments around Signode. You mentioned some of the changes that they've made within the business to go after growth. Can you get a little bit more granular? It sounds like they tried to get less cyclical out of some of those cyclical upside, now they were saying that the business is going to grow faster. Is it in new end markets? What are the new end markets? Maybe you could just provide a little bit more detail so we could understand that.
I think I got to be a little careful here because we're always caught between trying to explain to you or justify to you why we believe that something's going to happen and giving away trade secrets or business. I may not make you fully happy, but I'll do my best. Certainly, they are a much more broadly distributed business across end markets today than they were seven, 10, 15 years ago, and they've continued to do that. I gave you two examples, metals and construction. Those two markets clearly being markets that are impacted much more in recessionary times than other markets, for example, food and beverage. Then the metals market, for their products, is largely a mature market.
They made a large effort not only to try to diversify their product lines in other areas, not really just to get away from recessionary characteristics, but more to establish growth if the metals market is a mature market. I want to be a little careful saying too much. I think the big thing is a renewed focus on their identification with the new management team as to the equipment and tool business that they operate, which is widely regarded as the superior equipment and tool business for strapping and stretch across all markets, to use that as a competitive advantage, not only to grow equipment and tools but to grow consumables. Beyond that, I'm hesitant at this point to say too much because I'm mindful of the fact that there are others listening out there, and we're trying to protect the business we just bought.
Sure. Understand that. Just two quick things on guidance. One, on the working capital, what's the assumption for the full year? Just for a minute, focusing on the rationale to change the adjusted EPS to exclude the intangibles of amortization. I understand the rationale to get closer to cash EPS, but you do provide free cash flow guidance, so that number's already out there already. I guess I just don't see the peer analysis. Maybe you could enlighten us a little bit on that as to other peers or what peer group you looked at to make that more of a comparable analysis.
I think if, just on the working capital, probably a negative of $25 million-$30 million this year. On the peer group analysis, I think if we look at the two global beverage can companies that have recently done a large transaction, they exclude the amortization of acquired intangibles. They are our two most significant global peers. Listen, while I may agree with many of you that it's not optimal and we haven't excluded it in the past, I think we do ourselves a disservice and our shareholders a disservice when we look at comparability, especially as investors screen companies on different metrics, whether they be PE or any other metrics. I think just as a measure of comparability so that we're not disadvantaged when prospective investors screen, we believe that it was appropriate to make that change to be more comparable.
To not do that, we'd be incomparable and probably put ourselves at a disadvantage because I'm not sure that, Scott, you're covering 30 companies. You don't have the time to figure all that out and spend a lot of time explaining to people, "Yeah, but you got to understand, one company does it this way and the other way." I think it's just easier from the standpoint of the beverage industry. We're all doing it that way, we're all consistent.
All right. Thanks, Tim. Thanks, Tom.
You're welcome.
Thank you. Our next question is from Ghansham Panjabi of Baird. Please go ahead.
Hey, guys. Good morning.
Morning.
Good morning.
Tim, you addressed some of the cyclicality and debt concerns related to Signode. One of the other issues that people seem to have is just leadership continuity, given that it's a very different business for you. Maybe you can just touch on that as well.
That's a great question, Ghansham. I don't have a firm answer for you right now. I think what they have is, and many of you know who the CEO of Signode is. You've had experience with him in other packaging companies. Listen, he's a great leader, and he's very disciplined, and he's got great vision. We're hopeful that he'll stay with us for an extended period of time. Having said that, he's ambitious. We understand that. We understood that when we bought the company, and we'll deal with that as it arises. Now, having said that, they have a pretty deep team at Signode. We have a number of managers at Crown as well who are seasoned managers. It's always easy to look at somebody else's business and think you can run it If you've never done it. I don't want to give that impression.
We have a fair number of managers here at Crown that if we felt that that was a better avenue than one of the managers at Signode, we could. I think they have a pretty deep team at Signode, and we've spent a fair amount of time with numerous senior managers. While we want the CEO to stay, we understood when we bought the company, there might be a time limit to that. We're prepared to undertake that and plan for that transition, if and when it should occur.
Okay. Just in terms of Signode's contribution as it relates to EBITDA for this year, what are you assuming? What is the budget for 2018 EBITDA for Signode? Of the core volume growth you saw in the first quarter, can you just sort of parse that out between the three verticals they have, and also the major geographies? Thanks so much.
Okay, let's see here. This will take a while. What was the first question?
How much EBITDA?
Oh. I think probably in the 395-400 range, roughly, Ghansham, for 2018 for Signode. Here it is. The volume growth. With roughly $25 million-$30 million of volume growth, I'd say that strapping steel and plastic was probably half of that number. Protective looks like it was five to seven. Equipment I'm adding numbers up here. I apologize. Equipment and tools and service were seven to eight million. It was kind of spread across all of the verticals, Ghansham.
Did any geography stand out?
No, I think they did well in both Europe and Asia. Understanding that the protective business is primarily a North American business. The strapping and stretch business are global businesses, equipment and tools obviously are global businesses. I'd say the performance was pretty strong overall. It was a pretty nicely, broadly distributed gain across the board.
Okay, perfect. Thank you so much.
Thank you.
Thank you. Our next question is from Anthony Pettinari of Citi. Please go ahead.
Good morning. This is actually Randy Poole sitting in for Anthony. You guys mentioned the furnace rebuild and new glass capacity in Mexico as the main drag in NA bev. Is there any way you can quantify that?
Yeah. In addition to those, obviously we've talked previously about the inflationary pressures relative to our contractual passthroughs. All of which changed on April 1, because based on our contracts, we do reset pricing to beverage and food can customers based on inflation. This is the first year in several years that we've had positive PPI to pass through. That pressure will abate as we go forward the last three quarters of this year. I would say that if you combine startup and the Orizaba rebuild, the furnace was down for 65 days. One third of our furnace capacity was down in Orizaba for almost the entire quarter. You're talking upwards of $7 million-$8 million there.
Okay, that's helpful. Europe seems to have done pretty well in the quarter. Can you parse out how much of that was continental Europe versus maybe some recovery in the Middle East? Or just how you guys think about that?
Yeah. Year-on-year, Europe did better. Primarily driven by, in the first quarter of last year, we were in conversion in France, converting the second line from steel to aluminum. We only had one line operating in France last year, and we're carrying all the cost of the factory, all the labor of the factory, with only one production line. Whereas this year, we're absorbing labor and all the other overheads across two lines, and the incremental volume. That's the big driver. I think there was about $2 million of currency, but the big driver was cost performance, and the big driver of cost performance was the Custines, France conversion that happened in Q1 last year that didn't occur this year. Volumes were down in the Middle East around 5%-6%, as we expected.
As we told you in February, as we have budgeted in our numbers that we provided in the guidance, we do expect European Beverage to be down each quarter, year-on-year for the balance of the year. That is baked into the guidance, and that's largely driven by the Middle East.
Okay, that's helpful. I'll turn it over.
Thank you.
Thank you. Our next question is from Adam Josephson of KeyBanc Capital Markets. Please go ahead.
Tim and Tom, good morning.
Morning, Adam.
Yeah. Tim, just one Signode question. Correct me if I heard you wrong, but if you're thinking Signode does about $400 million of EBITDA this year, at the time you announced the deal, you gave a number of $384. Presumably there's some FX benefit 2017 to 2018. What are you thinking, just roughly, in terms of organic or EBITDA growth ex-currency this year?
Let me explain the $384 for you. Their actual audited EBITDA for 2017 was $370 million. We gave you $384 because we currency adjusted the 2017 numbers to what was the end of the year currency rate. That's already built into the $384. That was about $9 million, and then they had some other one-offs that we added back to get to our $384. The real growth is $384 to roughly $395 to $400. Let's put a band on it, because I don't want to be so fine to tell you that.
Sure
that's the number. That entire growth, $11 million-$15 million, is organic.
That would be roughly representative of what you would expect in future years, that type of growth, it sounds like.
Well, I think that's about 3% or 4%. Considering that the capital needs of that business are quite low, you should not expect, unless we do something bolt-on acquisition-wise, with such low capital and high cash flow, you wouldn't expect any more than that. I think that's a pretty good return.
Sure
given the high cash flow nature of the business.
Got it. Yeah. No, I got it. Just on the guidance, Tom, the $775 implies about $110 million of organic free cash flow growth next year. Right? Can you help us with how much of that is lower CapEx and how much is organic EBITDA growth, just because it would seem to imply pretty substantial EBITDA growth next year, more so than you've achieved in recent years. Just a little more help along those lines would be terrific.
Yeah. At this point, we have about $25 million of improvement from CapEx.
Lower CapEx.
Beyond that, a big piece of it comes from EBITDA. Don't forget, it's a combination of Crown and Signode. We have an extra quarter of Signode, for one thing, we expect growth at Signode. Organic growth at Crown should be in line with what we've seen in the last number of years, $40 million or $50 million. We're going to repay debt. We could pick up some on interest as well.
Okay. Just on the leverage, Tom, I think you said 4.7, but at the time you announced Signode, you said pro forma would be 5.1 at closing. You earlier mentioned you expect to get down to 3.5. Can you just help me with what you're at right now compared to the 5.1 that you thought you'd be at, and when you expect to get to the mid threes, roughly?
Yeah. It's 4.7 at the end of the year. If you pro forma the Signode numbers in and the debt and everything else, we're at a peak period, you're well above five. Had you done at the end of the year, we would've been at 5.1 or something in that neighborhood. We'll use the cash flow this year to get down to the 4.7, and then from there, it's about half a turn a year.
Thanks so much, Tom. Appreciate it.
Thank you. Our next question is from Tyler Langton of JPMorgan. Please go ahead.
Good morning. Thank you. Just had a question on the working capital. I guess with just aluminum prices, where they're rising, is there any risk, I guess, on the working capital and free cash flow front, or does the use that you talked about of $25 million-$30 million kind of capture that?
No, that captures that.
Okay, perfect. Just on, I think you mentioned the Bevcan business in the U.S. saw growth. I know the industry was flat, CSD did better than beer. Can you just talk a little about what you're seeing in your business there?
As you said, CSD did better than beer. As you know, we're more heavily skewed towards CSD than beer. We have one factory in Houston, Texas, which supplies a brewery that's real close by, and we do a lot of Canadian beer. Canadian beer is certainly performing better than U.S. beer. Having said that, we don't believe U.S. beer consumption is down. What is happening is that you've got a shift of Mexican imports coming into the U.S. The CMI numbers do not include the Mexican imports. Beer consumption is, we believe, as healthy as it ever was. It's probably up a little. The U.S. numbers are down, being offset by Mexican imports. We'll be up more than the industry just because we're skewed more to CSD.
Got you. Okay. Thanks so much.
Thank you.
Our next question is from Mark Wilde of BMO Capital Markets. Please go ahead.
Morning, Tim. Morning, Tom.
Morning, Mark.
Can you guys talk a little bit about what you're seeing in terms of transit and transportation costs and give us some sense, is that all going to be kind of a pass-through for you guys?
We, like everybody else, are faced with, and we saw this coming. This is not new, right? You've heard this from others as well, and a lot of you have written about it. There is a shortage of drivers. Some lanes are extremely tight. Because some lanes are tight and drivers are short, there are some lanes that carriers don't want to do. Having said that, when you work all through it, you get increased freight costs. We, like others, have had an experience of that. It's probably $5 or $6 million in the first quarter that we experienced. That's obviously included in the numbers, and in our guidance that we've given you for the balance of the year, we've made adequate provision, to take into account what we see for the balance of the year in terms of freight costs.
For those businesses where we're responsible to deliver, we have many customers who actually pick up cans, and they have the freight responsibility on themselves. For those customers where we deliver, we have formula pricing. As I mentioned earlier, we adjust that formula one time a year via the pass-through, up or down, relative to the PPI index. As I said April 1 this year was the first time in several years we've actually had a positive pass-through on PPI. That'll soften the blow a little bit as we go forward here.
Okay. Just as kind of a follow-on to that, Tim, I'm just curious what you're seeing in terms of package mix down in Mexico, particularly for the beer coming up here, because it just seems like if transit's a bigger issue that the Mexican beer companies may want to pivot toward cans, which cube out better and have a lot less weight than glass. If you add that to the fact that millennials seem pretty comfortable with buying kind of premium beers in cans versus glass, I just wonder whether all of that is creating any kind of shift in the Mexican kind of packaging market, especially for export beer.
As we described to you, I think a couple of years ago when we bought EMPAQUE, our view, and we still have the view, that the southern part of Mexico, if you will, is more of a glass market, and the northern part of Mexico is skewing more towards not just one-way glass, but more towards cans than returnable glass. We continue to see that. There's a marketer that is U.S.-based that has a Mexican operation but does not sell in Mexico, only sells into the U.S. I don't want to say they're exclusively importing cans, because they're not, but they're increasingly importing cans versus bottles. Our large customer that we have in Mexico is, for their imports into the United States, specifically Texas and the Southwest, they have skewed recently to bottles into that market.
It's a little bit all over the place, but your general premise is correct, Mark, that millennials are very comfortable, just like our fathers were, with drinking beer out of a can. The northern part of Mexico, i.e., those plants that would import into the U.S., are skewing more towards cans as opposed to the southern part of Mexico.
Okay, very good. I'll turn it over. Thanks, Tim.
Thank you.
Our next question is from Arun Viswanathan of RBC Capital Markets. Please go ahead.
Great, thanks. Good morning.
Morning.
Morning.
Just a question on Signode first. You discussed some initiatives to grow that equipment and tools part of the business. Where is that right now versus consumables, and what's kind of the optimal level you think, going forward?
Well, I think like a lot of our can businesses, currently, I think the order backlog in their equipment and tools businesses is pretty full right now. We're obviously talking to the Signode management team about how to relieve some of that pressure. Their prospects for the balance of the year are quite strong given the backlog.
Related to that, as a % of sales, is there anything you can do to help us understand that? Similarly, you discussed prior, using this as potentially a platform for future growth. I know it's really early in the process here, where would those opportunities arise? Would they be in technology or consolidating smaller competitors or anything like that?
Yeah, you're right. It is early. You'd also be right to assume that we undertook to try to understand that exercise before we made the acquisition, which we did. The opportunities are certainly in equipment and tools. It could be that, given the backlog and what we see in the future, we might need more capacity in that regard. There are numerous opportunities across all of their businesses, be it industrial packaging, consumables, protective, and equipment and tools. Within protective, as we've described for you before, while they have a very strong share of the market in the protective areas that they participate in, the protective market is quite big. There could be adjacencies that we wish to explore, not only in protective, but also in equipment and tools as you think about the back end of a manufacturing line.
There are a number of opportunities. As we all know, we don't have a limitless balance sheet, and we have return hurdles. We'll evaluate those going forward. There's no shortage of opportunities. We have to find the ones that we believe make sense and make the most economic sense.
Just, sorry, just one quick one. Maybe you can just give us an update on your filling up on Nichols. How do you see that progressing through the year? Similarly your own volume outlook for Americas Beverage through the year. Thanks.
I think Nichols is running quite well. We've made a number of improvements through the back half of last year, and we've come up learning curve quite well over the last six months. We're pretty satisfied with Nichols improvement and the continuing opportunities for them to improve. As for demand versus capacity in North America, and I would describe this as Mexico, U.S. and Canada, as we sit here today, we believe we are sold out, and I think the industry's in a pretty strong position right now. We have the concern, certainly at Crown, and I imagine throughout the industry, and you'll get a chance to talk to the other guys. There's an increasing preference for cans such that there could be can shortages this summer. We're all trying to find ways to make more cans to service our customers.
Thanks.
Thank you.
Thank you. Our next question is from Brian Maguire of Goldman Sachs. Please go ahead.
May, good morning.
Good morning.
Just wanted to follow up on the 4% volume growth in the Americas. Just wondering if you could break it down a little bit more regionally and, in particular, just focus on Latin America and what you're seeing there, particularly with Brazil seeing some better volume trends the last couple of quarters. Just sort of what's the outlook down there?
I think, Mexico was low single digits, Brazil mid-single, and North America or U.S. about four. Brazil, maybe I'm sorry, not mid-single. Maybe Brazil closer to three or four. Brazil, I think, as we look at Brazil, and we actually have our Brazilian folks in this week, the business environment and the outlook by the people in the business community right now is very positive in Brazil. There have been a number of business reforms enacted by the new president, which leads everybody to have a positive outlook for the business environment. There is an election. I guess they have elections in five or six months from now, the only thing that everybody's waiting on is what's going to happen in the election, which I think is September, October. I'm not sure when it is.
Everything will skew towards being more political this year than business. The market is quite strong. One thing we look at is Brazilian beer production. Our guys went back and provided us some detail, compound annual growth for the five years ending 2014 was about 2.5%. For the three years ending 2017 was flat. The market's projecting about 2.5% for the next five years. As we look forward, we think beer production is going to resume its positive growth trajectory. More importantly, the share of beer that's in cans, we believe will continue to grow. If in 2010, 35% of the beer was in cans, last year it was about 49%. We see that number growing a couple of percent this year, and we don't believe there's any reason why it shouldn't be within five years, 55%.
As you know, the North American marketplace is about 68%-70%. We don't think in five years we get to 68-70, but we do see a continuing trajectory of more beer packed in cans versus glass in Brazil, which will skew very positively for the can makers.
Okay, thanks. That's very helpful. Just a follow-up question on the rise in aluminum and steel prices, I recognize you pass that through very quickly to your customers, but just wondering if there's any inventory timing lag that would impact you at all. Then just sort of philosophically, I know you pass it through to your customers, so not much impact to your margins, but when your customers are faced with a price increase, nonetheless, due to that, do you see them change their behavior at all, or does it really just take a long time for that to play out?
That's a good question. Just to clarify, it does impact our percentage margins, right? Because you have the denominator effect.
Right.
It doesn't impact the absolute margin. You're right about that. In the first quarter, there was buy ahead in December by the European Food can customers ahead of the increase, and we knew that volumes would be a little lower in Q1 because of the year-end buy ahead. We've quickly seen here over the first couple of weeks, April demand is snap back. That's quite good. There's always the thought that if your raw material costs go up too high, are you disadvantaged compared to other substrates? I think that food cans, as compared to the other substrates, are still extremely I don't want to use the term cheap. That's not the right term. The value that a food can affords to the customer and the consumer is far superior than other packages.
That is, even with rising tin plate costs, food cans are still less expensive and more valuable throughout the entire supply chain than other substrates. They hold nutrition as well, if not better than even fresh food. Yeah, there's a concern there, but what I'll tell you, food cans are still a screaming bargain compared to what the flexible guys and others are offering to our food can customers.
Okay. The bigger picture, just I guess aside from the working capital hit, you wouldn't expect much real impact then?
No.
Okay. Thanks very much.
Thank you.
Our next question is from Chris Manuel with Wells Fargo. Please go ahead.
Good morning, gentlemen, and congratulations to a strong start to the year. Tim, do you happen to have, I guess two quick ticky-tacky questions, I really want to get to what my question is, but what the free cash flow from Signode was or would have been in first quarter? Does $40 million sound about right? Then what was your previous assumption for working capital? Again, I had a $40 million number for that, too. Is it dragged? Does that sound right?
Tom, why don't you take working capital?
Well, Signode was $165 for the year is what we said. Yeah, generally $40 for the quarter doesn't-
Chris, that's a levered number at our borrowing and everything else, right? That's not their cash flow based on their old capital structure.
That's where I'm going with this, is you talked about raising the numbers, I'm looking at your 3% on your earnings numbers basically is what you suggest an improvement. It appears to me as though the free cash flow numbers actually didn't get raised. It's flatter, in fact, maybe even down a little. That's why I'm trying to dig into this. If I took your old $500 number, I added the $165 in, it would be $665. If I back out what Signode would've been in the first quarter, about $40, that would imply it's about flat. If memory serves, your new assumption for working capital of a $25 to $30 million hit this year, I was thinking you guys talked about opening a couple plants.
I thought the hit was more in the $40 magnitude, it would seem like that's a little less. Is there something perhaps I'm missing?
I think, Tom, that number we just gave you, $25 to $30 hit is a new number. I think in February, Tom, probably I told you working capital was going to be flat.
Okay.
As we sit here today and as one of the other questions earlier, we just look at the magnitude of the steel and aluminum costs. Obviously, we're going to carry more working capital through the end of the year balance sheet just because of the impact on inventory and receivables with raw material costs. I think that's probably the part you're missing.
Okay, that's helpful.
We've been able to make up the cash flow from increased working capital from higher material costs in other ways.
Okay, that's helpful. Man, I don't want to keep sounding like I'm negative here, but it feels like, is there something different in the first, I don't know, 19 or so days that you've owned Signode that caused you to somewhat downgrade your outlook for it? When you announced the acquisition back in December, you talked very clearly that Signode was a GDP plus growing business. Today, you told us it was a GDP business. Maybe I'm just kind of tomato thinking this a little differently, but it feels like perhaps you've kind of backpedaled a little or softened your outlook for growth in the business. Any thoughts there?
No, I think you're parsing terminology. There are businesses within Signode that are double GDP. There are other businesses which are more mature, but in total, GDP plus. If GDP is 2.5, Chris, we come in at 2.6, I think that's GDP plus. If GDP is 2.5, you should not expect 5%, right?
Yep.
This is-
No, Tim, that's fair. I guess I am parsing, you're correct, but I'm just trying to make sure I understand that nothing changed-
No, nothing's changed.
in your view of the outlook on the business. That's all.
No, nothing has changed. This is a business that given its installed capacity base and its network of plants, which is its real advantage, has the ability with minimal capital to grow at GDP rates. That's something you don't find very often.
Okay. That's helpful. I just wanted to make sure that nothing changed in your mind with the view.
No.
It felt like maybe it did, but I don't want to overread that.
No, I think if anything, Chris, given what we saw through the end of the year in their budget process and their reforecasting process over the last month, we probably feel a little better about the business than we did before.
Okay. Thank you. That's perfect. Good luck in the quarter, guys.
Thank you.
Our next question is from Debbie Jones of Deutsche Bank. Please go ahead.
Hey, good morning. It's actually Kyle White filling in for Debbie. Just wanted to ask on the 3% raise to pre-Signode EPS guidance $0.14 about, what is the drivers of that? Looks like you got most of it this quarter, which is interesting given the seasonality. Just curious if there's a certain business or region that is doing better than expected.
Well, I think we said it in the release and in the prepared remarks, it's global beverage can growth. As I just said to an earlier question, as we sit here and look at some of our key markets, North American beverage, which is Canada, U.S., Mexican beverage, Southeast Asia, we and many others are going to be stretched for cans. We're in a sold-out position. It's a real good position to be in. Not only does it speak to the strength of our business in 2018, but I think it speaks to the strength of the business and the strength of the industry as we look forward, as more of our customers and more consumers understand the benefits of the beverage can versus other packaging substrates. We've got a pretty positive outlook.
Okay. Just following up on that, given the positive outlook and the shortage that you're kind of seeing there, also some of the rationalizations that's happened in the market, just kind of curious on your views going forward in terms of just getting the value of your can versus other substrates and seeing if you can get more for it.
We agree with you. We think we should all get more for what we do. We think we provide an incredible service to our customers, high quality product, protects the integrity of their product like no other. We agree. We think we should get better prices.
All right, thank you for that. I'll let it go.
Thank you.
Our next question is from Edlain Rodriguez of UBS. Please go ahead.
Thank you. Good morning, guys.
Morning.
Also, you've talked about lower cost base in China. Is that something that's sustainable going forward? Is that going to improve, I guess, your results there?
Real simple in China, we closed the factory in Shanghai in late 2016. We closed the factory in Beijing in late 2017. As we have communicated to you before, we started pruning customers that were not economically viable to supply. We probably had lower can sales compared to capacity. Now the capacity is in line with those customers who are willing to pay a fair price for our products. That's just matching our capacity and cost base to those customers who are willing to pay a fair price for cans. Southeast Asia is fantastic. It is very competitive. There are some new entrants into the market, but we have an extremely strong position in several of those markets. We have a very deep, local management team that understands each one of the countries, the customs, and the habits of the people that live in those countries.
We continue to be very fortunate in that regard. Again, the market has grown so much, so quickly that it basically, in many respects and in some of these countries, the beverage can jumped right over the glass bottle. The package of choice is the beverage can. It is viewed as the premium package throughout Southeast Asia.
Yes, that makes sense. One last one. In terms of, again, free cash flow and the guidance, you have that $0.14 improvement in there. How come that doesn't flow through the cash flow guidance? Your cash flow seems to be unchanged, and yet you have that positive $0.14.
I'll answer it two ways. I think in response to Chris's question, we were not modeling any working capital impact in February when we gave you our number. We now model $25 million-$30 million headwind in working capital. The only other thing I'll say, and I wanted to caution you all, because I don't want you getting ahead of yourselves or ahead of us, we typically have tried to do better than the guidance we've given you in the past with cash flow. We'll see how the year plays out. We're certainly comfortable with the number we've given you.
Okay, thank you.
Thank you.
Our next question is from Adam Josephson of KeyBanc Capital Markets. Please go ahead.
Tim and Tom, thanks for taking a couple follow-ups. One on Brazil, the capacity additions that you've spoken about in previous calls. Can you just update us on what you see happening there and when you expect that capacity to actually hit?
I'm not aware of the three major can makers, any capacity there that's been publicized. You do know there's a fourth entrance to the market who bought the steel can maker in the northeast part of the country. They're in the process of converting that to aluminum. I do believe they already have opened up their beverage can plant in the middle of the country, near Brasilia, the capital. That is up, and they're working through a learning curve, and they have a plan, and they have a customer, and it's a big growing market. We should be able to absorb that.
Sure. Just on the growth in the legacy bev can business versus Signode. Correct me if I'm wrong, but I think you talked about how Signode's GDP, perhaps GDP plus, and your legacy bev can businesses is lower than that, right? Now you're talking about really good growth in global bev cans and being short this summer. Can you just help us with your long-term outlook for the growth in the beverage can market versus that for Signode and how the two compare to each other?
Yeah, I think global beverage can growth can be, and it has been certainly for us for the last five or 10 years. We've grown at levels far in excess of the market, just given our aggressiveness in building new capacity in certain markets around the world ahead of others. I still believe we can grow at GDP plus levels, 3% certainly is ahead of GDP in my mind. We can do that. That requires capital. The great thing about Signode is it's a GDP business or GDP plus business with very little capital. Both businesses are really good businesses. I think we're happy with our beverage can business. We're happy to continue to invest in growing that business, and we're happy to have Signode join the Crown family and deliver value there.
Signode is a bit like our European Food business, which with minimal capital, generates consistent and sustainable free cash flows year in and year out.
Sure enough. Thank you, Tim.
Thank you.
Thank you. Our next question is from George Staphos of Bank of America Merrill Lynch. Please go ahead.
Hi, guys. Thanks for taking the question. It's late. I'll make it quick. Tim, we've been asked this question a lot recently. When we've seen volatility in aluminum, do you expect there to be any kind of change in buying behavior by your beverage can customers? Traditionally, we've not seen a lot of elasticity in demand relative to the underlying material. Is that your expectation going forward? Why do you think that's been the case? Second, maybe a different swag on the question. You've mentioned that the industry's tight, you might be short of cans this year. Recognizing it's kind of hard to stock up on cans for the obvious reasons, do you think there's any pre-buying in the beverage can numbers ahead of higher aluminum pricing so that demand is maybe a little inflated earlier in the year relative to what you'll see later in the year?
Thank you, and good luck in the quarter.
In answer to the second question, I don't, George, because our customers don't like to carry inventory any more than five minutes before they fill the cans. They want the cans delivered 15 minutes before they fill them. There's not a lot of warehousing that they do on their part.
I'm sorry, the first question, George?
Just historically, we've not seen, historically being like the last 15 years when we look at it.
Oh, yeah. I'm sorry
not a lot of Yes.
No, I think, I don't know where the breaking point is, but it's not at $1.12 for delivered aluminum, which is kind of where we sit today. I don't know how high aluminum would have to be, but they obviously have restraints in their filling system, what they can fill, and economically what makes sense for them to move the most volume and cover their overhead. Clearly, we can see that clearly the can is what drives their volume and covers their costs. I think the other thing we haven't talked about, there is growing momentum in the European community. I think we're going to see it in a number of other regions. Plastic's going to have some real challenges and the Chinese don't want to take any more plastic scrap.
The Europeans are now trying to figure out a way, what are they going to do with their plastic? How are they going to get rid of the plastic? How are they going to recycle it? How are they going to reuse it? Those systems are not yet in place to do that. Whereas we know that metal, not only are the systems in place, but metal has real value, and metal pays for the entire recycling effort around the world. We will see where that takes us over the next several years. I do not see higher aluminum costs changing our customers' buying habits.
Appreciate the time, Tim. Thank you.
Thank you, George.
Thank you. Our last question is from Mark Willi of William Blair Capital Markets. Please go ahead.
Yeah. Tim, I wondered if you could just talk a little bit about sort of growing the can business further in both Southeast Asia and in Latin America. I think in Latin America right now, you're in Mexico, you're in Colombia, you're in Brazil. I know that can penetration has actually moved up pretty markedly in some of the other economies down in the region.
It has, there are can plants already in Chile and Argentina. I think there's an announced can plant in Paraguay. We're where we're at. We do well. We don't have to be in every country, and I think our competitor feels the same way. They don't have to be in every country. You take the opportunities that are afforded to you, and if you get there first, you have an opportunity. If you don't get there first, you've got to wait for the market to grow significantly enough so that there's room for somebody else. With Southeast Asia, we have a great position. We have a platform that we certainly believe is unmatched by anybody. In some respects, our platform in Southeast Asia is unmatched by everybody else put together. We feel pretty good about that.
It's been a lot of hard work for the last 12 or 13 years by the team in Asia. We can see those numbers paying off now. There will be more opportunities, but as I said earlier, we're going to be judicious in how we spend capital. We do need certain returns, and our Asian team knows that. We do a fairly good job using our own project management and engineering group to build plants in the most economical fashion, yet still provide quality, low-cost containers. We're always looking for opportunity, but there are others out there doing the same, we'll continue to look.
Okay. Fair enough. Good luck.
Thank you, Mark. Angela, I think you said that was our last call. Thank you very much. That concludes the call today. We thank you for the interest in Crown, and we look forward to speaking with you again in July. Bye now.
That concludes today's conference. Thank you for your participation. You may now disconnect.