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Edited Transcript of CCK earnings conference call or presentation 18-Jul-19 1:00pm GMT

Q2 2019 Crown Holdings Inc Earnings Call

PHILADELPHIA Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Crown Holdings Inc earnings conference call or presentation Thursday, July 18, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Thomas A. Kelly

Crown Holdings, Inc. - Senior VP & CFO

* Timothy J. Donahue

Crown Holdings, Inc. - President, CEO & Director

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Conference Call Participants

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* Adam Jesse Josephson

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Anthony James Pettinari

Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst

* Arun Shankar Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Clyde Alvin Dillon

Vertical Research Partners, LLC - Partner

* Edlain S. Rodriguez

UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals

* George Leon Staphos

BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research

* Ghansham Panjabi

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Kyle White

Deutsche Bank AG, Research Division - Research Associate

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Neel Kumar

Morgan Stanley, Research Division - Equity Analyst

* Tyler J. Langton

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning and welcome to Crown Holdings Second Quarter 2019 Conference Call. (Operator Instructions) Please be advised that this conference is being recorded.

I would now like to turn the call over to Mr. Thomas Kelly, Senior Vice President and Chief Financial Officer. Sir, you may now begin.

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Thomas A. Kelly, Crown Holdings, Inc. - Senior VP & CFO [2]

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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 the actual results to vary is contained in the press release and in our SEC filings, including in our Form 10-K for 2018 and subsequent filings.

Earnings for the quarter were $1.02 per share compared to $0.99 in the prior year quarter. Comparable earnings per share were $1.46 in the quarter versus $1.55 in 2018. Net sales were in line with 2018 as increased beverage can volumes were offset by $180 million of unfavorable currency translation. Segment income in the quarter was also in line with the prior year as improved results in Americas Beverage offset lower results in European Food and Transit Packaging and unfavorable currency translation.

As outlined in the release, we estimate third quarter 2019 adjusted earnings of between $1.50 and $1.60 per share and full year adjusted earnings of between $5.05 and $5.20 per share. These estimates assume exchange rates remain at their current levels and a full year tax rate of between 25% and 26%. We currently estimate 2019 full year adjusted free cash flow of between $725 million and $750 million with approximately $440 million in capital spending.

With that, I'll turn the call over to Tim.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [3]

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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 second quarter performance was about as expected although the results were mixed across the operating segments. Unit volume demand for food and beverage remained firm through the second quarter and was up in most geographies.

In Transit, overall volumes were down 2%. We have summarized the major projects in progress and those recently completed in the release, all of which are on the same timing as we described in April with the notable addition of the 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 million in the quarter, continued to benefit from a significantly improved cost structure in 2019 as well as the higher volume levels. Lower freight costs and the lack of start-up costs in third-party can sourcing in the United States compared to 2018 are just some of the factors contributing to the improved cost position in 2019.

Can demand in the Brazilian market remains extremely strong, which our results to date reflect. However, we remain sold out and will be short of needed capacity until the new Rio Verde plant comes online late this year. From already very tight capacity, we have sold 6% more volume in Brazil in the first half and will not have enough production capacity to match last year's second half volume output. There is a new can competitor now operational in Colombia. And beginning July 1, we will experience a significant reduction in can demand in that country. The resultant income loss, as budgeted and expected, combined with our Brazilian capacity constraints, will flatten income results for the segment in the second half compared to the prior year.

Unit volumes in European Beverage improved 6% over the prior year with Europe up 8% and the Middle East down 0.5%. Strong performances in Eastern Europe and the U.K., coupled with volume from the new facilities in Italy and Spain, offset softness in Dubai and Turkey. Segment income, up 3% in the quarter, reflects the volume increase, lower start-up costs in Italy and Spain compared to the first quarter and the cycling of prior year Middle Eastern volume comparisons.

Sales unit volumes in European Food increased 0.5% in the second quarter although our mix was unfavorable to income across product categories. Growth in tomatoes was more than offset by decreases in dairy and fish contributing to a segment income decline of $20 million compared to the prior year.

Selling price realization, while positive, was not enough to offset inflationary cost increases. While some of the seasonal crops were delayed up to 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 million 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 currencies, sales in Transit were down 1.6% in the second quarter due almost entirely to 2% lower overall net volumes as price impacts were negligible. The impact of volume and negative mix drove the reduction in segment income compared to the record performance in last year's second quarter. While down from the prior year, this is a business that has generated $90 million to $95 million of EBITDA per quarter in 9 of the last 10 quarters. So the second quarter was right in line with our expectations.

Looking ahead to the balance of the year, we are forecasting the third and fourth quarters to be the -- to be in the lower part of that EBITDA band. So roughly 4.5 -- roughly $4 million to $5 million per quarter below last year as we make allowances for what could be slower economic activity. This is a very diverse business across end markets, product applications and geographies. And while more cyclical than cans, it is nonetheless a stable business. The business continues to perform well, requires very little capital and generates significant cash.

In nonreportables, 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 harvest.

A mixed operating result through 6 months, 2 nonoperating 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. Food can demand remains firm throughout although below our expectations in Europe following last year's drought conditions. Transit has performed according to plan in the first half and perhaps the team is being overly cautious heading into the back half, but we'll see.

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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Speakers, our first question is from the line of Anthony Pettinari of Citigroup.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [2]

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Tim, in Transit, you cited the 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 in mid-July, did you see trends deteriorate significantly in certain regions or in certain categories? Any kind of detail you could give would be helpful.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [3]

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Sure. So I think if we look 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 first 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 third and fourth quarter is to be off about $4 million to $5 million per quarter, $8 million to $10 million for the back half in a $1.2 billion business, back half business. So down a touch but not strikingly down. And I think where we're at in July for the first 17 or 18 days, we feel pretty good about that right now.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [4]

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Okay. That's helpful. And then 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's place in the portfolio.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [5]

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So to parse out mix and -- compare it to the prior year, then I'll give you compare 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 costs. And I'd say that's probably of the $20 million, let's say, $8 million of it's price and $12 million of it's mix, if you just want some round numbers, and I could be off $1 million or $2 million, one 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. One 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 in that the interest that you would save by paying off low-cost debt would not be enough to offset the free cash flow that you 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 is 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.

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Operator [6]

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Our next question is from the line of Ghansham Panjabi of Baird.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [7]

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So I guess first off in the plant conversion, can you sort of take us through the logic, the conversion versus just building a new plant? And since you called out the new lines as having the capability to produce specialty cans, should we expect further investments on your end to boost your capability in North America?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [8]

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Yes. So the Weston -- 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 third line in Weston for beverage will be new equipment. And so I would describe to you that if we're spending X dollars in Nichols to put a third food can line in, that we'll spend X minus $10 million or $12 million in Weston, and that minus $10 million or $12 million is the -- using the washer, and I think we're -- we've got a couple 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 we'll operate as if it's a brand-new line from front to back in Weston just as it will in Nichols or any other brand-new lines. 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'll 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 are 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.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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Okay. That's helpful. And then just a broader question on your North American sort of capacity footprint. Pepsi, on their call last week, seemed to indicate that they would push alternative can sizes for their sparkling water brand and also start to trial still water on the West Coast. I guess is your current footprint across the U.S. able to supply these type of large customer initiatives, especially for specialty cans? I'm just trying to put your 1% volume growth you called out in North America in context as it relates to capacity footprint.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [10]

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Yes. Well, 1% volume growth -- essentially, we're sold out, right? And as we described in April, we are not sourcing cans from third 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, '20 and forward. And we would expect much more volume growth next year than the 1% we just reported.

As it relates to supplying customers on a national basis for a variety of these sizes, our nonstandard 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 if there's something we should be doing in the Midwest or West Coast to further broaden our portfolio.

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Operator [11]

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Our next question is from the line of Edlain Rodriguez of UBS.

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Edlain S. Rodriguez, UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals [12]

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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'm quoting last quarter, you said you didn't want to lower prices. So how do you deal with that?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [13]

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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 sales 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.

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Edlain S. Rodriguez, UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals [14]

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Okay. And in bev can, like are you changing your expectation for growth in -- 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?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [15]

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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, were 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 install new capacity, until we see more concrete signs of demand or we get business under contract ahead of putting capacity in. 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.

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Operator [16]

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Our next question on queue is from the line of Chip Dillon of Vertical Research.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [17]

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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 first quarter. You said, I think, 8% in the second. Can you talk a little bit about what's going on there? Is that the market itself? Or are you -- just happen to be in segments where it looks like you're gaining share when you look at the overall market?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [18]

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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 2003, the German deposit legislation in 2009, 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 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 you seeing with the new 2 factories that came online.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [19]

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Okay. All right. Got you. And then just to be clear on the 2 new lines in North America, the Nichols third 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, 1 billion can rate a year. Is that ballpark correct?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [20]

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Yes. I'd say the Nichols line clearly could go to about 1.2 billion; the Weston line, think more of in the 750 million to 900 million range. I would -- they have the ability to make a variety of sizes. But Chip, let's be clear, there is -- 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, only sleek cans. So these are -- it's a changing marketplace in which the marketers, consumer product marketers or 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 as specialty, we just think they're alternative sizes.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [21]

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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 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?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [22]

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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 expectation. So that -- clearly, that's disappointing.

And then we did get positive price this year, but steel costs and -- that went up significantly. And other costs were 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 costs overall and next year is a new year, and we'll have to do better next year.

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Operator [23]

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Our next question on queue is from Tyler Langton of JPMorgan and Chase.

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Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [24]

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Tim, some of that last comment that you made in European Food, and I guess 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.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [25]

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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 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 harvests 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, what, 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 I -- this year, it's been disappointing. But again, not a -- it's still a business we're making. I think in the third quarter, margins were 13%. The margin I think in the quarter last year was probably 15% or 16%. It was a pretty strong quarter last year in the second quarter. But notwithstanding that, we are disappointed, as we said.

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Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [26]

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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 a strategy maybe more on hold now just given sort of the weaker volumes you're seeing in Transit and caution in that space? Or would you sort of still consider looking at a...

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [27]

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Well, I think we say smaller deals -- everybody gets nervous when we say this, right? I think you probably should -- if we did anything, you wouldn't expect us to do total purchase price of more than $20 million this year. So we're talking at multiples that are 5 or 6x. 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 -- of various markets in 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.

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Operator [28]

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Our next question is from the line of Neel Kumar of Morgan Stanley.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [29]

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In Brazil, what do you think is driving the strong can volume growth you're seeing there? Would you say that's due to glass essentially being sold out?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [30]

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Well, glass is sold out currently. But underneath that, there has to be demand growth coming from the 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 a 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, four 9-ounce cans are -- and [ends] are now required to meet the same equivalent as three 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, a considerable growth yet to come in Brazil in our opinion.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [31]

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Great. That's helpful. And then in Asia Pacific, can you just talk about what drove those, the 180 basis points improvement in operating margins, for the quarter? And is that level sustainable for the second half of the year?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [32]

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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.

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Operator [33]

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Our next question is from the line of Arun Visnanathan.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [34]

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Viswanathan.

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Operator [35]

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RBC Capital Markets. I'm sorry, Viswanathan.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [36]

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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 billion cans, I guess. Is that right? And would you see any footprint optimization opportunities also in your portfolio that would be necessary?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [37]

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So the market -- I think the market is more like 94 to 95 billion 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.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [38]

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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?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [39]

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So it's a -- part of your question is a great question, and I'm glad you asked it because I -- we oftentimes talk about it here and we forget to talk about it. So it will allow us to grow our nonstandard, nontraditional 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 nonstandard 12-ounce over the next couple of years. But importantly, as you point out, we have 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.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [40]

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And just lastly on this issue, where would you characterize Nichols, I guess, in general, from a start-up standpoint? Do you feel that the learning curve is -- you wouldn't face any issues going forward? And what is -- what are the existing lines kind of running at these days? If you can help us understand that.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [41]

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Yes. So we -- a good question. We, like some others, from time to time, not all start-ups are equal. We have very good experience in a lot of places in start-up. Nichols is 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 third line to have a much smoother start-up than the first 2 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.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [42]

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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 million-or-so cut on the free cash flow at the midpoint. And if you go through the EPS guidance, that accounts for maybe about 2/3 of that and the rest is CapEx. Is that right? It sounded like...

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [43]

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Well, I would say that at the midpoint, $40 million, you're probably right. That's right. I would say about $30 million of that is capital because we've gone from about $410 million to $440 million or $420 million to $450 million, whatever the numbers are, on the 2 lines. So we've moved some things around in capital so we could accomplish this at a $30 million 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 million.

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Operator [44]

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Our next question is from the line of Mr. Mark Wilde of Bank of Montreal.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [45]

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Tim, is it possible to give us any sense of sort of the benefit that you're getting in '19 from just contractual changes, and any perspective on what you might pick up in 2020?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [46]

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Oh, it's possible, but you're not going to get me to say it.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [47]

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Okay. I thought I'd try. But what...

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [48]

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I say a lot of crazy things, Mark, but I'm not that crazy.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [49]

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Yes. Okay.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [50]

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Listen, we are -- let -- I mean we'll -- 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 of 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.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [51]

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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.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [52]

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So we continue to state to you that we believe we'll be at 3.5x leverage by the end of '20, which is where we were before the Signode acquisition. So 2 years and 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.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [53]

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Okay. And Tim, just thinking about sort of the 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?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [54]

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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.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [55]

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Yes. Okay. The last one I'll ask, just in terms of this view that the market is going to accelerate in terms of growth and we've got the -- 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?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [56]

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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 than 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.

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Operator [57]

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Our next question is from the line of George Staphos of Bank of America.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [58]

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I know what I heard on food Europe, but I just want to go over this again. I think you parsed out $12 million in mix and $8 million from price/cost, if I heard you correctly, to the earlier question. 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 million, 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?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [59]

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Stay on the line, George, because you asked a couple of questions there. So remind me the first question again.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [60]

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Well, I mean the first question, pricing is usually set by April, right?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [61]

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Oh, 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 second quarter and will below -- be below what we expected in the third quarter considering how poor the harvest was last year. So with lower volume, George, you get lower recovery, right, compared to expectations.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [62]

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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?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [63]

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So up 0.5% compared to prior year and probably down about 8% compared to expectations. And in the third quarter, we'll be up mid-single digits I believe in the third quarter, but that will still be down mid-single digits compared to expectations. Just that it did not -- it'll be some recovery this year compared to last year, but nowhere near what we thought we were going to get.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [64]

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Okay. And did your contract negotiations give you any issues in terms of setting the price or not really relative to what you were budgeting?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [65]

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No. I think we might have touched upon this in February or April. The -- 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 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.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [66]

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Okay. I know it's getting late in the call and maybe some others are dialing in, so I'll try to ask my remaining question 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 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.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [67]

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So on the minority -- Tom, 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. And so the Brazilian partner gets half of that, but that's scheduled out in the -- not -- the reconciliation table. That was just a [separate] item.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [68]

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Yes. I thought adjusting for that, your minority was up even with that, but I'll verify that.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [69]

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The minority, that's up $14 million or $15 million of the minority.

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Thomas A. Kelly, Crown Holdings, Inc. - Senior VP & CFO [70]

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Yes. It is still up, George. But for the full year, if you take that out, you're running about $23 million in the third -- second quarter, which is about what we would expect, and the full year will be low 90s.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [71]

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Okay.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [72]

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And then on Transit, I -- we did the reforecast right at the beginning of July based on activity that occurred in the second quarter. And as I mentioned, everything was going pretty well until 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 present. So they could be a little cautious, but we'll see.

I think all in all, as I said, it's a $1.2 billion business in the last half of the year. And if we're off $8 million to $10 million, it's off a little. But where all you guys are sitting with your economic activity glasses on, it's not going to be off as much as you guys are worried about. It's fairly firm.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [73]

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And last one from me. Recognizing you're going to get ultimately more earnings out of the beverage line conversion in Weston, what does that conversion take out of, if you will, the food and nonreportable segment on an annualized basis?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [74]

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We didn't announce it, but we will replace that food can capacity in another location. So my -- at the beginning of next year, maybe a $1 million or $2 million per quarter in the first couple of quarters, but after that, we'll be back in line.

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Operator [75]

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Our next question is from the line of Kyle White of Deutsche Bank.

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Kyle White, Deutsche Bank AG, Research Division - Research Associate [76]

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Just curious on Brazil, I think you called out volumes up 4% in Latin America. I was just wondering how that compared to the overall market and the industry. It sounded like maybe you had to leave some sales on the table, just being capacity constrained there.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [77]

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You're 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.

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Kyle White, Deutsche Bank AG, Research Division - Research Associate [78]

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That's helpful. And then on the new competitor in Colombia. I now 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 compete 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.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [79]

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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.

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Operator [80]

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Our last question on queue is from the line of Adam Josephson of KeyBanc.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [81]

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Tom, a couple for you to start. Just on CapEx, I know -- so '19 guidance now is $440 million. 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.

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Thomas A. Kelly, Crown Holdings, Inc. - Senior VP & CFO [82]

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Well, we came into the year saying $400 million to $425 million. We're essentially -- I mean $440 million is not that much off that number. So similar, let's say, at this point.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [83]

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For next year?

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Thomas A. Kelly, Crown Holdings, Inc. - Senior VP & CFO [84]

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Yes.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [85]

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Okay. And then on working cap for this year, any change compared to your previous expectations, and the same pertains to dividends to minorities on the cash flow statement?

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Thomas A. Kelly, Crown Holdings, Inc. - Senior VP & CFO [86]

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Yes. On working capital, we've said we thought we we're 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 our 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. But the minority dividend whereas previously, we were saying about $75 million, perhaps that number is up $10 million or so.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [87]

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And is that $85 million then, is that a sustainable number, Tom?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [88]

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It could be back to $75 million or $80 million.

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Thomas A. Kelly, Crown Holdings, Inc. - Senior VP & CFO [89]

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Yes.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [90]

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It's a -- Adam, it's a -- the tax settlement was a onetime settlement this year. So to get the money out of the country. So to pay a dividend.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [91]

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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 to Signode and beverage cans, for that matter, changed fairly significantly? It 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 2 businesses have changed since that time.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [92]

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So I would say on beverage cans, your -- the thoughts over the last 12 to 18 months are everything is significantly more optimistic just given the sustainability environment we're in. And -- 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 the last 10 quarters, the EBITDA is in the $90 million to $95 million range. And last year's second quarter, 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 '19 compared to '18 and '17 even in the face of some currencies. 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.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [93]

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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 '09, EBITDA was down a lot, and then it was up similarly in '10. 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?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [94]

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So I think 2 things are different. I think the global financial crisis of 2008, 2009 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 or let's say, it's -- while it is cyclical, it's less cyclical than it was then, yes.

Missy, I think you said that was the last call so thank you very much and that concludes the call today. Thank all of you for joining us and we'll speak to you again in October. Bye now.

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Operator [95]

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Thank you so much, speakers. And that concludes today's conference. Thank you all for participating. You may disconnect your lines at this time.