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Edited Transcript of CCK earnings conference call or presentation 17-Oct-19 1:00pm GMT

Q3 2019 Crown Holdings Inc Earnings Call

PHILADELPHIA Oct 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Crown Holdings Inc earnings conference call or presentation Thursday, October 17, 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

* Brian P. Maguire

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Deborah Anne Jones

Deutsche Bank AG, Research Division - Director

* Gabrial Shane Hajde

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* 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

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Neel Kumar

Morgan Stanley, Research Division - Equity Analyst

* Salvator Tiano

Vertical Research Partners, LLC - VP

* 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 Third 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, Senior Vice President and Chief Financial Officer. Sir, you may begin.

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

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Thank you, Joe, and good morning. With me on today's call is Tim Donahue, President and Chief Executive Officer.

On this call, as in the earnings release, we will be making a number of forward-looking statements. Actual results could vary materially from such statements. Additional information concerning factors that could cause 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 $1.36 per share compared to $1.23 in the prior year quarter. Comparable earnings per share were $1.56 in the quarter versus $1.71 in 2018. Net sales in the quarter were down 3% versus prior year largely due to the pass-through of lower aluminum cost and $64 million of unfavorable currency translation. Segment income in the quarter, excluding currency, was down 3% as improvements in Americas Beverage were offset by lower results in European Food and Transit Packaging.

As outlined in the release, we estimate fourth quarter 2019 adjusted earnings of between $0.93 and $0.98 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 approximately $725 million with approximately $450 million in capital spending.

And 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. Good morning, everyone. I'll be brief, and we'll then open the call for questions.

As reflected in last night's earnings release and as Tom just summarized, overall third quarter performance was as expected, although the results were mixed across the operating segments. Unit volume demand remained extremely robust for beverage cans globally while another poor harvest dampened the food can demand in Europe. And in Transit, overall volumes were up 0.25%, although the mix was unfavorable. The major projects in progress and associated timing are summarized in the release and in a supplemental table to the release. We have provided the currency impact on sales and segment income, so my comments will focus on currency-neutral performance.

In Americas Beverage, overall sales units declined 1.5% primarily due to the loss of a customer contract in Colombia, as previously discussed with you. North American volumes were up marginally to the prior year as we remained sold out and are not sourcing cans from other suppliers as in the prior year. We look forward to the commercialization of the third production lines in both the Weston and Nichols plants over the next 6 months.

In Brazil, can demand remains extremely strong with the market up low double digits. However, we remained sold out and we did not have enough production capacity to match last year's third quarter unit shipments. The new plant in Rio Verde is nearing completion and will begin shipping cans to customers over the next several weeks, providing much needed capacity for our customers' growing requirements. In Mexico, volumes were up 7%. Segment income up $10 million in the quarter benefit from numerous cost improvement initiatives, offsetting the decline in volumes.

Unit volumes in European Beverage improved 5% primarily from the 2 new facilities in Italy and Spain, offsetting softness in Turkey and in the U.K. Both Italy and Spain continue to progress through their respective learning curves. However, their efficiencies and cost performance are not yet at the level of the more mature plants in Turkey and the U.K., yielding negative mix. And we expect that continuing uncertainties surrounding a looming Brexit and the weakening Turkish economy will again offset expected volume growth in the fourth quarter.

Sales unit volumes in European Food were down 2.5% in third quarter and, after 9 months stand at plus 1.6% to the quarter, well off the 6% growth we had anticipated this year after last year's poor harvest. This year's high heat and poor growing season were particularly notable in 2 of our bigger food businesses, that is in France and the U.K. As described to you in July, selling price realization was positive in 2019 but not enough to cover inflationary cost increases. And this accounts for the $6 million decline in segment income in the third quarter as our cost reduction efforts offset the impact from lower volumes.

For the year, cost reductions and volume contribute positively but not enough to offset the negative price inflation, a disappointing result again in 2019, especially when compared to a poor 2018 growing campaign. However, we continue to improve our cost profile through a variety of initiatives and believe we are well positioned to benefit from future harvests, which are more in line with historical growing patterns.

Asia Pacific benefited from double-digit demand growth in Southeast Asia, more than offsetting the volume impact from the closure of the 2 facilities in China. And to remind you of the scope of our Chinese beverage can footprint, we now operate 3 beverage can lines across 3 plants as compared to 6 lines across 5 plants last year with annual revenues approximating $95 million to $100 million, not so significant to a roughly $12 billion company.

Excluding currency, sales in Transit Packaging were down 2% in the

(technical difficulty)

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Thomas A. Kelly, Crown Holdings, Inc. - Senior VP & CFO [4]

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Hello? Joe are we back on?

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Operator [5]

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Yes. Mr. Kelly, we are live.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [6]

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Okay. So sorry about that everybody. I'll start over on Transit, and apologies for that.

Excluding currency, sales in Transit Packaging were down 2% in the quarter representing the pass-through of lower raw materials, principally steel. Volumes were up 0.25% in the quarter, although the mix was unfavorable as we sold more strap and less protective packaging and tooling.

Segment income down $7 million to the prior year reflects the product sales mix and $2 million related to lower absorption of fixed costs as the business drives down its working capital levels. Adjusting for absorption, third quarter results were in line with our earlier estimates. Overall demand for our Transit Packaging products has been relatively stable despite declining underlying industrial demand across a variety of sectors: steel, auto, light goods, construction, among others.

In Tom's estimate for the full year, we have taken a cautious approach to contract the customer equipment shipments as it relates to deliveries in December versus what might be pushed into January. The business continues to perform well. Capital requirements for the base business remain low, and cash generated remains a significant proportion of the company's overall free cash flow.

In nonreportables, 4% volume growth in North American Food was offset by timing-related shipment delays in our can-making machinery division. Aerosol volumes in the U.S. and Europe were level to the prior year in the quarter.

As we identified to you at the beginning of the year, 2 nonoperating items, currency and pension, are approximately a 50% share of headwind for the year, so through 9 months, about $0.37 per share headwind. Operationally, results have increased versus the prior year but have been mixed across the businesses, which, from time-to-time, happens in a company with diverse product offerings. Demand for beverage can remain high, and we believe will remain so for some time. And with several projects nearing completion, our ability to service our customers' growing requirements and our own growth prospects for 2020 and beyond are quite strong

And so with that, Joe, we're now ready to open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Ghansham Panjabi from R.W. Baird.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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So I guess first off on Americas Beverage. The decline of $37 million or so in terms of a sales basis year-over-year in 3Q, can you just reconcile that for us? How much of it came from the loss of share in Colombia, aluminum pass-through? Any insight you can give us there beyond the volumes you already gave us?

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

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Yes. I don't have the -- what I can tell you, Ghansham, on the aluminum -- maybe stay with aluminum prices are today versus they were a year ago and you'll -- you get a feel for it because I don't have anything specific other than volume down 1.5%, which is all Colombian cans. Everything else kind of nets out. The growth in Mexico is netted out by Brazil.

But last year at this time, if you took LME plus the premium, we were at about $1.11 a pound for aluminum. Today, LME plus premium is $0.95. So you're talking about a 15% reduction in aluminum before conversion, so not insignificant year-on-year. So more or less, it's a little bit of volume down, offset by higher pricing, real pricing, and then offset by lower aluminum pass-through.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Okay. That's helpful. And just -- I know you gave us the North American Beverage can volume numbers from your standpoint for 3Q. But just based on the CMI data, up 3% so far this year, kind of based on what you're seeing at this point in terms of discussions with customers and so on, do you think that 3% type number is a reasonable sort of base case assumption for industry growth in 2020 in North America?

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

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I do. I think that the reason it's 3% -- let's -- I'll make this statement. We were flat because we have no capacity. The reason the market was 3% because the market has no more capacity than 3%. I believe firmly that in the third quarter and even in the second quarter this year, that the can market could've been up 5%. We could've been up 5% except nobody has any more capacity than what you're seeing.

So the demand is there. It is -- actually, the demand is absolutely astounding right now. You've covered packaging now for 20 years. I've been around for 35 years. Never seen demand numbers like this except in the mid-'80s. And the only thing holding back our shipments as a company, as an industry is our capacity to meet customer requirements.

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Operator [6]

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The next question is from Anthony Pettinari, Citigroup.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [7]

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In Transit, I was wondering if you could maybe contrast the performance in Americas, which I guess is about half the business, versus Europe and Asia. And as you went through the 3 months of the quarter and into October, wonder if you could give maybe a little bit more detail on Europe in terms of the trends you're seeing there specifically.

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

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Yes. I mean earlier in the year, remarkably, Europe was very stable. The business slowed down a little in September in Europe, but it had very little impact on the income. We were looking at it the other day, and high single-digit volume decline yielded less than $500,000 of segment income decline. So we've described to you before, the business is extremely diverse and you need a combination of a lot of factors to move the income numbers up or down in either direction.

But it is -- it's been -- income performance has been remarkably stable, given what you would expect, whether it's underlying industrial demand across the sectors I mentioned earlier or overall general PMI indices that you're seeing. I know the German PMI right now is like 43, which is unbelievably low. I think we're about 47 in the U.S. And despite that, the businesses is relatively stable.

Asia has been weak all year. Principally, the steel markets, Australia, India, extremely weak. But again, the incomes -- the business is diverse enough and it's a different business than it was 10 years ago in terms of other products that we offer, protective and equipment. So it's not just so focused on steel as it used to be in the past.

So that's why I said in the prepared notes that despite what you would've expected, given underlying industrial demand across so many different sectors, the performance has been relatively stable. So we're -- we are pleasantly surprised by that, but we're obviously -- we are cautious, as you might be, and we're cautious because we can see some of the buying habits from our customers are a little bit cautious.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [9]

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Okay. That's very helpful. And then in North American Bev, you're sold out. You're bringing on Weston and Nichols. Can you just remind us when those will ramp? And then given the strong demand that you're seeing, I mean, would you expect to be close to sold out shortly thereafter those additions come online?

And then just regarding this demand that -- we haven't seen demand like this in 30-plus years. Are there, I don't know, 2 or 3 categories that have really surprised you or really driving your business that you would've been surprised by a year ago?

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

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So I think in the release, we talked about -- we're going to -- Weston should be up early in the first quarter. And I would hope that Nichols is ready early in the second quarter. We will be sold out in 2020 again. Even if the plants were fully through their learning curve, we would be fully sold out next year. And we're -- that volume is contracted.

We are very comfortable and very confident that we're going to be fully sold next year, which yields a question later on, are we considering other capacity? And obviously, we'll continue to consider a variety of things, but understanding that we prefer to have things under contract as opposed to building on spec.

The categories, we've seen the sparkling water category rolling over the last several years. And there are more entrants now in the market, including the big beverage -- the big CSD guys that have their own brands of flavored water, flavored sparkling water that are entering the market. And if you're a -- one of the smaller, independent flavored guys, you might be a little worried about the big guys getting to the market. But in fairness, what it's doing is the large promotional budgets they bring to that category actually pushes -- it rises the tide for all the boats in the ocean. So it's been very healthy.

Energy drinks, juices, teas, I mean, it's across everything. What we don't know, I kind of hinted at it in Ghansham's -- to Ghansham's question, what we don't know is how much bigger can the growth be and how many other categories could we be seeing remarkable growth if there were more cans available. So there is a move underway. And clearly, more new products are being introduced in cans, as we've said, than in the past. And so it's a good sign to be in the beverage can business.

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Operator [11]

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The next question is from Arun Viswanathan from RBC Capital Markets.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [12]

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I guess -- so first off on European Food. You had addressed some issues around pricing last quarter, which has been insufficient to offset inflation and potentially some structural headwind there. I guess has that persisted? And what's kind of the outlook looking forward here? I mean this business is -- was doing kind of $250 million in segment EBIT for a while, maybe down to $220 million this year, is that kind of the structurally new level of earnings power that we should be expecting in European Food going forward?

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

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Yes. So not -- on the pricing front, no incremental changes to pricing between the second and third quarter. All the pricing was set at the beginning of the year. Understanding that we were expecting underlying growth to be 6% and it's only materialized for about 1.5% through 9 months, so we didn't get enough growth just given the harvest. So you've got 2 ways to look at this going forward. Clearly, the results are not satisfactory. We're not happy. You're not happy. I can assure you our folks in Europe are not happy, compounded by the fact since we're not happy, we're making their life really miserable, and we're going to continue to do that.

Structurally, nothing's changed in that demand for can food in Europe is not declining as it has in the United States over the last 15 or 20 years. There still are a variety of different food products, packaging cans and preferred by consumers in Europe. Much different market than we have here. What we have is 2 poor growing seasons in a row, and we've not been able to offset inflation with pricing. So as we go into next year, we're going to have to take a real look at appropriate levels of pricing to get the income number back up to the number you just mentioned, which historically has been there.

And so the customers aren't going to like that. They're going to -- but listen, we're not -- this isn't a charity, right? They have the ultimate pricing power, the consumer. We don't. We have to recover the costs.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [14]

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Okay. And then as you look at -- just trying to think about the future here, and you cited really robust growth continuing for the next -- or for some time. So if you would be sold out in North American Beverage next year, even with the 2 new lines, and the industry data is still in that 3% range, I guess, would you be in a position to report numbers in that range? Or would it be kind of -- I guess you'd be up by the amount of the Weston and Nichols line.

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

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So we're adding about -- on a full run rate basis, the plants won't be at full run rate next year. But on a full run rate basis, we're going to add close to 2 billion cans on top of our 22 billion can footprint in North America, Canada, U.S. So call that 9%. And as I said earlier, I firmly believe because they're under contract, that if we were at full run rate, we'd sell that entire 2 billion cans next year. And so we'd be up 9% next year. We under-indexed the market this year because we're sold out. So it will be our turn to catch up only because -- it's basically one capacity comes in by supplier.

But let's say we -- as the plants come to your learning curve and they only come up in the first and second quarter, that instead of 2 billion incremental cans, we manufacture 1 billion. That's 5%. We're going to be up 5% next year in North America at least, regardless of what the market does. If the market's up 10%, we can only be up 5% because we don't have any more cans than that. If the market's up 2%, we're going to be up 5% because we're under contract.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [16]

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Okay. That's great. And that gets to my follow-up, which is your food can businesses and Signode do provide -- or Transit do provide quite a bit of free cash. So what's kind of the decision-making process to, I guess, go out with more capacity, whether it be in North America or elsewhere? I know that you'd like to build on to contract rather than spec. But why not consider greater investments at this point from what you're seeing?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [17]

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Well, I think just general prudence, right? We've not seen, and you've heard me say this -- listen, we're extremely excited about the current conditions in the beverage can market, as you are and many others are. But this is something that's not been seen for 35 years in the can business. This is since the mid-'80s. And what we don't want to contribute to is an over-exuberance in which we all put too much capacity in and we're faced with a different situation in 3 or 4 years. I firmly believe for the next 3 or 4 years, we have very little risk in that regard. But beyond that, we don't know. So we're trying to allocate capital appropriately without getting too excited and too ahead of ourselves.

But my, how times have changed. A year ago, everybody wanted everybody to delever and be responsible. Now you want us to throw capital at it. So I think we're trying to do this in a measured fashion. We're going to continue to delever. You are right to point out that food can business and the Transit businesses are the cash cows. They're the dirty providers of the capital that are going to allow us to expand the Beverage business, modernize the Beverage business to the customers' requirements.

Once that installation is in place, then the Beverage can business returns to being a cash cow as well, right? So we're just trying to do this in a measured fashion. We are committed to delevering. We've told you by the end of 2020, we're firmly entrenched to get back down to 3.5x leverage, which is where we were at before the acquisition. And -- but I think we're able to do all that and expand the beverage can business at the same time.

But even if we threw more capital at the project starting today, we're still 12 to 15 months away from more capacity coming on. So we're evaluating it just like everybody else is.

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Operator [18]

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Our next question is from Tyler Langton from JPMorgan.

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Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [19]

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Just on European Beverage. I guess the volumes have been pretty solid this year, but profits, I guess, have impacted by both sort of currency and start-up cost. I mean do you have a sense as to exactly what those impacts have been, sort of when they should lap and just kind of how you think about going into next year?

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

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Well, I think currency, we gave you in the release, right? So you can see that it's starting -- it's $5 million through 9 months. It was only $1 million in the third quarter. So it's starting to -- we're starting to get closer to where the currency rates were last year. So maybe it's another $1 million in the fourth quarter.

Start-up cost was a big impact in the first quarter. It's subsiding through the year. The bigger difference you have now is that the volume, as I tried to describe it, it's -- you guys are not manufacturing guys. So -- but keep in mind, we're a manufacturing company. So for us, it's all about absorption and efficiency and cost performance.

And while the plants in Italy and Spain are rapidly coming up learning curve and they're actually performing quite well compared to their curve, they are not as efficient as the more mature plants that we have in the system. And so we've got 2 plants in the U.K. and 2 plants in Turkey. All 4 of those plants are fairly large and fairly efficient. But you have lower volumes in those markets for 2 different reasons, Brexit and a weakening economy in Turkey, offset by higher volumes, more than offset by higher volumes from the new plants. So you just have a negative cost mix right now until we cycle through -- till 1 of 2 or both things happen. If Turkey and the U.K. stabilize and/or the time at which the cost performance in the new plants catches up to the cost performance in the more mature plants. But yes, nothing fundamentally wrong with the business. Things are progressing quite well.

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Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [21]

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Okay. Yes. That's helpful. And then just a question on sort of the demand growth. I mean -- I guess the strong demand. Can you just maybe provide some color? Is it more being driven right now by sort of new products going into cans, just I guess growth of existing products sort of in cans? Or are you starting to see some substitution away from other materials sort of into cans? I don't know, if you just can provide some color there.

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

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I think it's the prior what you mentioned. It's new products coming into cans. So certainly, more new products are being introduced in cans than have been historically, and it's the growth of existing products. For example, in the United States, mass beer was up I think 3% the third quarter. And so for the last several years, mass beer has been down.

So we are starting to see growth in existing products. I don't yet think we're seeing substitution other than new products being introduced more in cans than historically because we're still seeing -- I think we're still seeing underlying plastic growth, just not at the levels than in the past. So the introductions of new products might be very similar in cans versus plastics, where in the past, it was much more skewed to plastics.

But pure substitution from plastics back to can, I don't think we're quite seeing that yet. And one of the reasons we're not seeing that is there is no can capacity to meet that potential demand yet. It could only be because the can industry is limited by the amount of can we can supply.

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Operator [23]

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Our next question is from Gabe Hajde from Wells Fargo.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [24]

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One on Europe Food. After, I guess, kind of this 2 years of poor weather, is there any risk that some customers could go away or I guess, AR collectibility or anything like that, that we should be thinking about? And/or might it necessitate you guys having to move some capacity around or something like that?

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

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We look at AR, I don't want to say on a monthly basis because I think we look at it even more often than that. But we haven't seen -- we're not yet through the season, right? So the collectibility -- for a number of the customers, we start collecting in Q4. But we haven't seen any weakness in customer collections as regard to your question yet. But we are mindful of that.

I don't think -- we might have -- I know we have 1 plant we've talked about rightsizing in the European Food footprint. But we've done so much reorganization in that footprint over the last 15 years, we're actually in a pretty good place as it relates to the industrial footprint. And to do any more than that would limit our capabilities when the volume returns for the next good harvest. So I think we're in pretty good place. It's really about we need some volume. And then importantly, as I said earlier, we do need price to offset some of the inflationary cost that we've had.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [26]

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Understood. Switching gears to Transit. And always try to give you an opportunity to take a run at our models, it was actually a couple of million better than what I was expecting this quarter. But if I look at TTM EBITDA of around 365 million, I think this is actually holding up pretty well, given all the headlines that we read. But coming into the year, you were talking about $390 million to $400 million, I think, at -- of EBITDA. Couple of questions.

One, can you parse out for us how much of the difference between where we are and -- or where we may end up and what you're looking for to FX versus sort of some of the unfavorable mix that you talked about as well as maybe a little bit lower volumes versus, again, kind of expectations coming into the year?

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

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Yes. So I -- in fair, I could say FX. But in fairness, we would've modeled the FX. So you know the $365 million that you're modeling, plus or minus, you're in the range. And that's kind of right about what the performance was in 2017. Understanding last year was a record year, not making excuses, but just to the point, it's been very stable. But the biggest -- there's a -- in your model, for example, the absorption is probably going to be about $6 million or $7 million this year, and just -- and I'll explain that very quickly for you.

Obviously, we're all well aware of, we've talked about today, the decline in our European Food can performance largely around volume as it relates to harvest. Obviously, the cash flow comes down with that. However, with the growth in Beverage, we don't have the ability in Beverage to do anything from a working capital standpoint to make up the shortfall in European Food cash fall, given the growth that we have in Beverage. So the only place we can go to make up with the European Food shortfall from a cash perspective is Transit.

So as we rapidly drive down Transit working capital to offset Food, there's an under-absorption issue, and that's about $6 million or $7 million. So we're using Transit to fill the hole from European Food on a cash point. Not an issue because if you do believe in a slowing economy, you'd rather begin the slowing economy of lower inventories than higher, so it kind of works for us.

But the biggest item is volume. And we had a remarkably strong second quarter last year, which we didn't match this year. Second quarter this year was similar to the second quarter of '17. And that's the biggest reconciling item from last year to this year is the second quarter. We had a normal second quarter, not a record second quarter, and that revolved around volume.

Price has been very stable. Demand has been stable, although I will tell you that the mix is a little different. Customers -- we are selling equipment and tooling. Customers are being very cautious, and perhaps, they're buying equipment and tooling without all the bells and whistles on it. They're buying the lighter model as opposed to the heavier model. So there's less margin on that. But all in all, it's stable. It's just not the last year's record number. It generally revolves around last year's record second quarter.

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Operator [28]

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The next question is from George Staphos from Bank of America Merrill Lynch.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [29]

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I want to come back to a question or comment you made about Food Europe, and I just wanted to make sure that I interpreted it correctly. Were you suggesting that based on the volume outlook you had in Food Europe going into 2019, that there were certain commercial decisions that were made that, in retrospect, you probably could have or should have tried to get different commercial terms and maybe a bit more robust in your pricing, given what ultimately transpired with volume? Or would it not really have worked like that at all? If you could provide a little bit more detail around that and color, that would be helpful.

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

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So we anticipated that volume would be up much more than actually it was up this year. Some of the -- the 2 large food can suppliers in Europe make up about 2/3 of the market, and the balance is made up of variety of smaller regional players from country to country or region to region. And many of those smaller guys were quite aggressive coming into this year, just given how poor the harvest was last year.

And then we felt at the time, it was appropriate that we don't risk losing any business and that the income shortfall from making a commercial decision would be offset by the volume growth that we would experience as we return to a normal harvest.

I think that was the right decision. I'm not suggesting that we should've done anything different coming into this year. What I am suggesting is that we need to take a much harder look at commercial decisions and appropriately recovering costs through selling price as we enter next year.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [31]

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Okay. That's clear. I guess would that then not suggest perhaps you take -- and I know you're always looking at the footprint, Tim. So I don't want to suggest that. But does it maybe suggest you take an even harder look at the footprint? I think you mentioned to one of the other questions, there's one facility that you've been looking at. But why not perhaps be a bit more aggressive from where we are right now in terms of footprint so that you have the leverage if you need it to get a better commercial outcome than we saw this year?

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

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Well, I think if we take a different commercial strategy and we have lower volume but we have higher income, and we believe that's the right answer, and that lower volume translates into lower capacity needs, then we'll look at it from that standpoint. But as we look at our -- at the demand we have in a normal harvest scenario, we don't really have any excess capacity from specification, specification region to region. So as you know, food can specifications are far different than beverage can specifications.

But I think there's a variety of things we need to look at, and we're going to have that understanding -- our customers are going to have an understanding that if they expect Crown and perhaps the other large food can suppliers to be the leaders in the industry with innovation and performance and other things, they're going to have to start paying for it, or we're going to go to a model where we skinny a lot of things down and they don't get us to perform a lot of things that we perform for them currently.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [33]

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Understood. I guess my last one on this one. I'll have one final, and I'll turn it over. Again, I forgot who was asking the question. But ultimately, where would you see normalized profitability be for Food Europe? I know it's kind of a touchy segue to get into partly because you're now beginning these discussions with your customers, but is -- in a normal year, normal harvest, I recognized there's always going to be variability in the harvest across Europe. Is $250 million a reasonable place to be from a modeling standpoint if things go normally for you?

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

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Well, I think we were, what, $265 million or roughly in 2017. So back off -- maybe back off $15 million or whatever the currency numbers been over the last couple of years. I don't really know off the top of my head. It's $12 million this year. So if it's $12 million this year, maybe it was a few last year. So $245 million, $250 million, that's kind of a -- normal is a funny word to use, but let's use -- just use the word normal. That's kind of what you would expect.

Can we get back there? I don't know. We're going to have to change some things and make sure that our team in Europe and our customers in Europe understand that this is a business, and we expect to be compensated for what we do for them.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [35]

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Understood. My last question is kind of a 2-parter. As we look at Signode and Transit Packaging and certainly -- we're expecting, given what's been a bit of a fade in the business, not surprisingly. Is next year likely to be more of a flat to down year, Tim, based on what customers are doing in terms of mix and order patterns? Or do you think, given the world that we're in, that Signode can actually show enough level of profitability? And given that, do you still anticipate getting to your leverage goal, the 3.5x, and in that regard, being able to maybe start buying back some stock as we get later into 2020?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [36]

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I think it's probably too early to describe any of the businesses for next year. And as it relates to Signode, I think we've used the word stable to derive -- to describe Signode's performance this year, relatively stable, given what's happening in underlying demand. But let's -- I think we really need to see -- we need to get through the budget process, and we need to understand how fourth quarter demand looks, specifically, fourth quarter demand right now looks in that business before we comment on next year.

Whether we get to 3.5x, or we get to 3.58x, you might worry about the 0.08x. I won't worry about it. We're going in the right direction. And at that level, we have a much different conversation with the Board as it relates to capital allocation, which may or may not include more shareholder-friendly uses of our cash. But that's the direction we're headed in.

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Operator [37]

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Next, we have Mark Wilde from Bank of Montreal.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [38]

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Is it possible for either or both of you guys to help us think about the give and take next year between the benefits of having this new capacity in the market versus the startup costs that are going to be involved at all the different plants? And what's the net benefit look like for next year from an EBIT standpoint?

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

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Look, I'm not -- you're talking about Americas Beverage specifically because that's where the big, big capacity is coming on and 2 in the U.S. and Brazil. The answer is up. And so inside there, yes. There are start-up costs inside there, but it's overwhelmed by the contribution from higher volume.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [40]

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Okay. And then just staying on Americas Beverage, Tim, I think that's the single line plant down in Colombia. And so for it to kind of pull the overall segment down by 1.5%, so just the volume is down quite a bit down there. Can you just tell us how you're thinking about handling that situation going forward? Do you need to rationalize capacity? What are your options in Colombia?

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

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Roughly, the volumes in Colombia were down -- it's -- I hate to give you numbers. You're talking about 170 million units off a base of 9 billion. That's roughly 1.5%. And so the volumes in Colombia were down more than 50% in the quarter compared to last year because it's a -- up until now or the last couple of years, it's been a one-customer market. It is a joint venture. We are a joint venture partner with a bottler who has another relationship with other global bottlers and global beverage beer companies. So we're going to run the plant, and we're hopeful that our partner and his partners continue to promote cans and grow the promotion of cans for their businesses. And over time, we'll build the plant back up. But it's up -- for the last 30 years, it's been a one-customer market. There are other brewers now in the country. So -- but you know who the brewer is. So...

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [42]

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Okay. Just turning to capital allocation since you brought it up. In the past, you've talked about both share repurchases but also the possibility of a dividend. Can you just give us your kind of your current thinking on the relative merits of the 2?

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

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Well, I think you get the leverage back into 3.5x range and you're generating circa $700 million of free cash flow after the minority dividend, you've got the ability to do a variety of things. And there are a whole list of companies out there that pay a dividend, buy back stock, make acquisitions from time to time inside all those numbers. So $700 million of free cash flow is a lot of money. I think we have the ability to do a lot of things. So we'll continue to evaluate that. And as we move towards the leverage goal that we have, we'll discuss that at the Board meeting. But there should be no reason why you can't do all the above.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [44]

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Okay. Last one for me. I just wondered you've had some contracts that read on for this year. You've got some contracts that are being read on for next year in Americas Beverage. Is there any way for you to just help us size sort of what the impact of that might be as we go into 2020?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [45]

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There is, but I'm not going to. I don't mean to be cheeky, but I don't think it’s helpful for us to do that. What I will tell you is that you see significant improvement in segment income in the Americas Beverage segment from '18 to '19, and you'll see significant improvement from '19 to '20. Maybe some of that's price. Certainly, a lot of it is going to be volume from the new facilities. And we're going to be -- continue to become more cost effective. We're -- we really did a good job on cost this year, whether it was rightsizing our freight, not sourcing cans from others, performance improvement in Nichols, and we're going to continue to do that.

I don't know if the Americas Beverage group going to be up $40 million or $50 million this year compared to last year. And would it be up $40 million, $50 million next year? I don't know, but it'll be up a significant numbers. So I'll leave it at that.

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Operator [46]

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Our next question is from Debbie Jones from Deutsche Bank.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [47]

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I wanted to start by asking about the machinery business. You mentioned some of the revenue not coming through in 3Q. Does that shift into 4Q or 2020? And then I was hoping you could just talk about that business in general, given the growth we're seeing in the industry. I imagine it's going to drive some growth in that nonreportable segment going forward.

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

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Yes. So we -- as you know, we have a can-making machinery business in the U.K. And we -- while we don't make all the equipment from front to back on a beverage can line, we make much of the equipment front to back on a beverage can line. And so we source equipment for ourselves from that subsidiary, and many of our competitors also source equipment from that subsidiary depending on price competition, as you would expect, versus the other major supplier and versus the equipment they might have in a facility if they're trying to match equipment on one line to another line within a facility.

So as with any machinery business, delivery date sometimes slip either because we slip in our process or the customer isn't yet ready for the equipment because they might have a building, manufacturing delay or some other delay. But I think we'll pick up the shortfall in Q4, and some of it slips into next year. But much of the shortfall, we'll pick up in Q4.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [49]

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Okay. And then my second question. I know it's been addressed on prior calls. But if we think about the growth in the industry, especially in Europe and North America, that could occur in the next couple of years, do you have enough metal supply in, let's say, 3 to 5 years? And what kind of steps do you have to take to ensure that? Number one. And then two, what are the considerations you have to make for some of the suppliers outside of the U.S. and Europe, whether it be kind of trade considerations or CO2 emissions and things like that?

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

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There's plenty of metal out there. Now depending on whatever trade deal we cut with China, some of the metal may carry a tariff and some may not. We can currently source metal from a variety of countries that are not tariff-impacted. So there's plenty of metal out there.

The other thing is, as we've talked about before, I think some of our aluminum suppliers and suppliers of other products are looking at the growth in the business and they want to be rewarded as well. So it'll mean that conversion costs for -- from ingot to can sheet is going to be more in the future, and that's going to have to be borne by our customers because, again, as I've said, they have ultimate pricing power, the consumer. We do not. We can't absorb those kind of costs. And -- but there's plenty of metal available.

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Operator [51]

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The next question is from Adam Josephson from KeyBanc Capital Markets.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [52]

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Tim, one on just kind of your portfolio of businesses. I know you're getting asked more about perhaps emphasizing one over the others. And specifically, beverage cans now are the kind of the [sexy], fast-growing business. Your closest bev can competitor is trading at a very high multiple, and so some investors want you to double down on that business and, I think, deemphasize one or more of the others. As you pointed out earlier, though, circumstances can and do change pretty quickly. So can you talk about your portfolio mix and how you think about keeping it the same or changing in the future based on what you're seeing today?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [53]

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Well, first thing I'd say is that I don't think we want to become a single product line company. There was a single product line company in the beverage can space, and they were acquired a couple of years ago. And the mandate is not to sell the company. The mandate is to increasingly try to generate returns and grow the business and reward shareholders in that regard. I don't think -- it's very difficult to be a single product line company because as you rightly summarized, things can change. And if they change in that one business, things don't look too good.

But we talked about earlier, the business is diverse. From time to time, you're going to have some ups and downs across a variety of the businesses. Fortunately, we have 2 businesses in Food and Transit, which require very little capital and generate a mountain of cash, and that provides a lot of stability to the overall enterprise. I think any time you generate cash, things are okay. Things can be a lot worse if you're not generating cash. You generate a lot of cash, things are pretty good.

To Mark's question, we talked about what we might do with all that cash in the future? It's a great problem to have, what we might do with all that cash in the future. But we're going to continue to look at the allocation issue the Beverage can business globally with more capital. We're trying to do it in a responsible way, and we're trying to do it in a way in which we get the appropriate returns and the capacity is appropriately spoken for before we put it in. And we'll continue to look at it. Beyond that, I don't have much to say.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [54]

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Just one more on that, Tim. How do you think about the incremental return profiles in each of those businesses? Because obviously, bev cans are growing the most quickly now, but they also require by far in a way the most capital.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [55]

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It kind of depends on what you sell the cans for if the selling price is not very good and the returns are not very good. One of the challenges you have right now, it's really easy to make decisions in beverage cans because you're looking at the demand profile going forward and you're thinking price is going to continue to get healthier and healthier. That can change. And you look at your food can business and you see what's happening in the food can business and you talk yourself out of doing anything incremental in food cans because you can't believe you might improve price there.

So you've got to take a balanced view. And remember, you're in a business and you're trying to always remain relevant in the businesses you're in, which, from time to time, requires you to do things that may not have the returns that you would otherwise like but are quite necessary.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [56]

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I appreciate that. And just one on CapEx for next year while we're on this subject. Tom, so you're guiding to $450 million this year. Based on the projects you have in the pipeline, do you think it'll be up much or even down for that matter next year? I know it's early days.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [57]

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I think it's inappropriate for us to comment at this point because we haven't had the budget approved yet by the Board. I would say it's not going to be lower than that.

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Operator [58]

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Next, we have Chip Dillon from Vertical Research.

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

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Chip, are you there? Joe, I think we've lost Chip.

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Salvator Tiano, Vertical Research Partners, LLC - VP [60]

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This is Salvator Tiano filling in for Chip. Just a little bit to wrap up here. How we -- essentially, as we look a little bit in Brazil, Southeast Asia, can you provide us a little bit with the same data you provided in the Americas, where you mentioned you have kind of contracted volumes of around 5% and you could see 9% total growth? Can you just provide some clarity with regard to the other regions?

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

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Yes. Listen, Brazil -- the market in Brazil this year, I think, is -- through 9 months is up 13% or 14%?

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Thomas A. Kelly, Crown Holdings, Inc. - Senior VP & CFO [62]

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16%.

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

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16% through 9 months. And this is after many people -- many of the analysts remarked that they don't see can growth in Brazil continuing. And so again, another unbelievable year. I think we're up, through 9 months, maybe only 5% or 6%, only because were capacity constrained. So we're going to bring a new line on. It has the ability to produce a little over 1 billion cans. And depending on how quickly we get the line up and how we get through learning curve, we're going to sell it all. And so we could be up on the order of 10% to 12% next year if we can make all the cans. I know one thing, we're going to sell every can we can make.

Southeast Asia. I think Southeast Asia, again, high single digits or low double digits through 9 months this year, and that's our business. And depending on the market, the country you're in, whether it's Vietnam, Cambodia, Singapore, Malaysia, Thailand, Indonesia, Myanmar, you name it, they're all different by country. But again, no reason to believe that the markets aren't going to continue to grow at very healthy rates and that we're not going to continue to participate in that healthy growth rate.

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Operator [64]

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The next question is from Neel Kumar from Morgan Stanley.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [65]

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We've seen several announcements that Stillwater Brands moving into cans. I was wondering if you can just talk about what kind of impact that can have on the industry volume growth next year. Do you think the supply chain can handle a large-scale ship?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [66]

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I think I've answered that already. I -- the supply chain in 2020 cannot handle a large ship or even a small ship. We are all rapidly looking at ways to add capacity and trying to understand if this is real and how much capacity we add. But there is limited capacity for us to handle a large ship. We're quite happy to handle it.

There are roughly 100 billion beverage cans in North America. There's probably 150 billion PET bottles in North America. But if you look at the volume of liquid in bottles versus cans, there's even a greater distortion in that because you have 2 liter and 20 ounce. And for the most part, we're 12 and 16 ounce in cans. So the volume disparity is greater than the 50% unit disparity. So we are -- as an industry, we are sold out currently for the products we have. So there's no way we could handle -- I know I'm repeating myself, I apologize. There's no way we can handle a large-scale ship, and we're all trying to understand how we can handle that more appropriately if we believe it's real. But certainly, there is an extremely large opportunity there as marketers and fillers of beverage products understand the sustainability benefits of the can versus the competing products.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [67]

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That's helpful. And then just in Transit Packaging. Could you just give us sense of how backlogs are tracking currently versus, let's say, the end of the second quarter or beginning the year?

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [68]

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Well, I think the backlogs are a little lighter today than they were 6 months or 9 months or 12 months ago, but they're not shockingly lower as I -- I keep using the term relatively stable. And I say that because -- listen, we're as cautious or as concerned as you might be, given what's going on in the market. And there are other packaging companies that are in the industrial packaging space that may or may not see the same trends that we're seeing. But we're cautious. But things are a little bit more stable than we anticipated.

So that's positive. And -- but as I said, it's -- we really need to get through the fourth quarter before I can give you anymore color. We're -- so far, things are pretty good. I just -- we're a little cautious because we don't know what's going to happen with equipment pull here in the fourth quarter compared to the first quarter of next year.

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Operator [69]

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The next question is from Brian Maguire from Goldman Sachs.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [70]

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I just wanted to follow up on some of the questions that were already asked about the leverage and progress on getting there and the portfolio, just sort of combining the 2. It sounds like you're happy with the portfolio the way it is in general. Just wondering if there's any -- I know Signode itself was a bit of a roll-up and maybe any unique businesses within there that might make sense to try and bring to market. Seems like maybe the end markets are a little depressed, but multiples are still pretty good on those businesses. Like you mentioned, it throws off a lot of good cash flow, interest rates are low. Just wondering if there's any like select smaller pieces within it that might make sense to try and monetize and accelerate the deleveraging.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [71]

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Well, if it's smaller, it doesn't really accelerate the deleveraging. I mean you sell a business for $200 million. Okay, it reduces debt by $200 million. But on a leverage basis, when you lose the associated income with it, it doesn't move the needle a whole lot on your leverage. You might go from 4x to 3.97x.

So I think what we're really looking at is a business which, when you look historically back, was assembled mainly by a very large industrial conglomerate. But in this regard, in this silo that they had Transit Packaging, they had a strategy that they were trying to put together businesses, which makes sense in terms of offerings to customers, to protect and package goods for Transit. So in a lot of regards, there's -- there are a lot of synergies in terms of commercial strategies that perhaps were not exploited well by the prior owners. But we're going to try to do.

Now that doesn't mean that there isn't a product or 2 that you wouldn't look at and say that we don't really need this, but it's -- we're focused on running the business as best we can and delevering. We're not going to get sidetrack by trying to spin a business off that might generate $70 million of sales proceeds. Because in the near term, that's not what's really important.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [72]

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Okay. And just a question on the impact of the lower aluminum scrap prices. Just wondering if that was material on the Americas EBIT or margins and any expect there like full year impact from that you could quantify.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [73]

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Well, it's in the number. But it's easy to point it out when your numbers aren't going the direction you want. We've got some businesses where the numbers aren't going the direction we want. So we point out some of the things for the reasons.

But in a business like Americas Beverage where everything is going well, it just gets absorbed. And we're -- we got -- demand is very strong. The commercial aspects are better than they have been in the past, and we made significant progress on cost performance this year. So no real sense to talk about something that's just getting absorbed by all the positive things. That's just -- positive things generally absorb negative things. And so that you want more positives than negatives. So I don't really have a quantification. Yes, there are some impact in there. But it's being overwhelmed by all the good guys.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [74]

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Yes. Impressive performance given that headwind.

Just last one for me. Just wanted to try and make sure I understood that -- the movements on the free cash flow. I think, Tom, you explained that the sort of the -- maybe the weaker EBITDA result in Europe Food would be offset by maybe extracting some added working capital out of Transit. Just wondering as you think about bridging to 2020, would we expect that to consume some cashback as you restock early next year to kind of rebuild that?

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Thomas A. Kelly, Crown Holdings, Inc. - Senior VP & CFO [75]

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No, not necessarily. I think we'll be, at this point, kind of looking flattish on working capital next year, but too early to say.

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Timothy J. Donahue, Crown Holdings, Inc. - President, CEO & Director [76]

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Too early to say. But Brian, why don't we just say this on cash flow next year. Let's start with our number this year. Let's hope we have some EBITDA improvement across all the businesses. I'm not saying let's -- it's too early. But working capital, flat. And then the swing factor is going to be capital, how much capital that we believe is appropriate and does the Board agree that it's appropriate to throw out this growing beverage demand issue. And that will be swing factor. But I think we firmly believe we're going to have an EBITDA growth next year. And so with working capital flat, you would expect higher cash flow next year. It'll depend on CapEx.

Well, Joe, it sounds like that's the last call. So thank you, Joe. And that'll conclude the call for today. We thank all of you for joining us, and we'll speak with you again in February. Thank you very much.

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Operator [77]

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That concludes the conference. Thank you all for participating. You may now disconnect.