Good morning and welcome to Crown Holdings Third Quarter 2019 Conference Call. Your lines have been placed on a listen-only mode until the question-and-answer session. Please be advised that this conference is being recorded. I would now like to turn the call over to Mr. Thomas, Senior Vice President and Chief Financial Officer. Sir, you may begin..

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.

For additional information concerning factors that could cause actual results to vary is contained in the press release and in our SEC filings including in our Form 10-K for 2018 and subsequent filings. Earnings for the quarter were $1.36 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 passthrough of lower aluminum cost and $64 million of unfavorable currency translations.

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 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..

Thank you, Tom. Good morning everyone. I'll be brief and we will 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 damping 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 timings are summarized in the release and in the 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 unit declined 1.5% primarily due to the loss of a customer contract in Colombia and as previously discussed with your. North American volumes were up marginally to the prior year as we remain 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 line in both the Weston and Nichols plants over the next six months. In Brazil can demand remained extremely strong with the market up low double digits however we remain 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 need capacity for our customers growing requirements. In Mexico volumes were up 7%. Segment income of $10 million in the quarter benefited from numerous cost improvement initiatives offsetting the decline in volumes.

Unit volumes in European Beverage improved 5% primarily from the two new facilities in Italy and Spain offsetting softness in Turkey and the U.K. Both Italy and Spain continued to progress through their respective learning curves, however their efficiencies in cross performance are not yet at the level of the more mature plans in Turkey and the U.K.

yielding negative mix and we expect that continuing uncertainty 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 to 2.5% in the third quarter and after nine months stand at plus 1.6% to the prior year well of 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 few 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 contributed positively, but not enough to offset the negative price inflation. The disappointing result again in 2019 especially is 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 two facilities in China.

And to remind you of the scope of our Chinese beverage can footprint, we now operate three beverage can lines across three plants as compared to six lines across five 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 quarter and less protective packaging and tooling. I'll start over on transit and apologies for that. Excluding currency sales and Transit Packaging were down 2% in the quarter representing the passthrough of lower raw materials principally steel.

Volumes were up a 0.25% in the quarter 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 industry demand across a variety of sectors, steel, auto, white goods, construction among others.

In Tom's estimate for the full year we have taken a cautious approach to contracted 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 non-reportables 4% volume growth in North American food was offset by timing related shipping 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 with you in the beginning of the year two non operating items, currency and pension are approximately a 50% share headwind for the year, through nine 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 remained 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 are now ready to open the call for questions..

[Operator Instructions] Our first question is from Ghansham Panjabi from RW. Baird. Your line is now open..

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?.

Yes I don't have those - what I can tell you Ghansham on the aluminum. Let me just tell you what aluminum prices are today versus they were a year ago. You'll 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 net sales, the growth in the Mexico is netted out by Brazil. But last year at this time if you took LME plus the premium we were about $1.11 of 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..

Okay, that's helpful. And just I know you gave us the North American beverage can volume number 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 the 3% type number is a reasonable sort of base case assumption per industry growth in 2020 in North America?.

I do. I think that the reason it's 3%. 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 have been up 5%.

We could have 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.

I've never seen demand numbers like this except in the mid eighties and the only thing we are holding back our shipments as a company and as an industry is our capacity to meet customer requirements..

The next question is from Anthony Pettinari of Citigroup..

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 three months of quarter in October I wonder if you give me in a little bit more detail on Europe in terms of the trends you're seeing there specifically?.

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 a very little impact on the income. We were looking at it the other day.

High single digit volume decline yielded less than a $0.5 million of segment income decline, so we've described to you before the business was 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 – the income performance has been remarkably stable given what you would expect whether it's underlying industrial demand across the sector I mentioned earlier or overall general PMI indices that you're seeing. I know the German PMI right now is about 43 which is unbelievably low. I think we're about 47 in the U.S.

and despite that the business 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 is a different business than it was 10 years ago in terms of other products that we offer protective in 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 have expected given underlying industrial demand across so many different sectors, the performance has been relatively stable.

So we are pleasantly surprised by that, but we are 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..

Okay, that's very helpful.

And then in North American Bev, you sold out, you’re bringing on less than Nichols, can you just remind of when those will ramp and then given the strong demand that you're seeing kind and what you expected 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 two or three categories that have really surprised you or really driving your business that you'd been surprised by a year ago..

So, I think in the release we talked about, 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 plans were fully through their learning curve we would be fully sold out next year. And we are, - you know that volume is contracted.

We are very comfortable, very confident that we are going to be fully sold next year which yields a question later on are we reconsidering another 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 specs.

The categories we're seen these sparkling water category rolling over the last several years and they are more entrances now in the market including the big beverage, the big CST guys that have their own brands of flavored water delivered.

Sparkling water that are entering the market and you know if you're already one of the smaller independent flavored guys, you might be a little worried about the big guys getting into the market.

But in fairness, what it’s doing is the large promotional budget 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 Jude 60, it's across everything.

What we don't know, I kind of think into that in Ghansham's question, what we don't know is how much bigger could 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 said then in the past and so it's a good time to be in the beverage can business..

The next question is from Arun Viswanathan from RBC Capital Markets. Your line is now open..

I guess so first half on European Food, you addressed some issues around pricing last quarter which has been insufficient to offset inflation and potentially some structural headwind there. I guess we had that persisted and what's kind the outlook for the year, I mean this business is doing kind of $250 million in segment EBIT for a while.

You know maybe down to $220 million this year, is that kind of the structuring new level earnings should be expecting in European Food growing forward..

So that on the pricing front, no incremental changes for 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 materialized about 1.5% through nine months. So we didn't get enough growth just given the harvest.

So you got two ways to look at this going forward, clearly the results were not satisfactory, we were not happy, you're not happy. I can assure you, our folks in Europe are not happy compounded by the fact, since we are not happy. We are making their life really miserable and we are 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 to 20 years. There is 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 two growing seasons in a row and we're not being able to offset inflation with pricing. So as we go into next year, we are 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.

So the customers are not going to like that, they are going to, - but listen we are not it isn't a charity, right. They have the ultimate pricing power, the consumer, we don't. We have to recover the cost..

Okay. And then as you look at just trying to think about the future here and you decided really robust growth continuing for the next, for some time. So if you would be sold out in North American Beverage next year, even with the two new lines and the industry data is still in that 3% range.

I guess you know would you be in the 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?.

We are adding about on a full run rate basis. The plants won't be a full run rate next year but on a full run rate basis, we are going to add close to 2 billion cans on top of our 22 billion cans footprint in North American Kennedy U.S.

So you called that 9% and as I said earlier, I firmly believe because they are under contract that if we were full run rate, we would sell that entire 2 billion cans next year and so we'll be up 9% next year. We under indexed the market this year because we are sold out.

So it will be our turn to catch up only because of especially when capacity comes in by supplier. But let's say we, as the plants come to learning curves and they only come up in the first and the second quarter, that instead of $2 billion incremental cans we manufacture 1 billion cans that's 5%.

We're going to be up 5% next year in the North America at least..

Okay and…..

Regardless of what the market does, if the market is up 10%, we can only be up 5% because we don't have any more cans than that. If the markets up 2%, we're going to be up 5% because we are under contract..

Okay that's great. And I guess my follow-up which is your food can businesses and Signode do provide quite a bit of free cash, so what's kind of the decision-making process to I guess go out with more and more capacity, whether being North America or elsewhere.

I know that you'd like to build on to contract rather than specs, but why not consider greater investments at this point from what you're seeing?.

Well, I think just general prudence right. We have 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 of capacity and are faced with a different situations in three or four years. I firmly believe for the next three or four years, we had a pretty little risk in that regard but beyond that we don't know.

So we are trying to allocate capital appropriately without getting too excited and too ahead of ourselves but my out times have changed. A year ago, everybody, the lever and be responsible, now he wants us to pro capitalized. So I think we are trying to do this in a measured fashion.

We are going to continue to delever, you are right to point out that the food can business and the Transit businesses, the cash calls, the providers of the capital are going to allow us to expand the beverage business or modernize the beverage business to the costumers’ requirements.

Once that installation is in place, then the beverage can business returns to be in the cash call as well right. So we're just trying to do this in a measured fashion, we are committed to delivering.

We told you by the end of 2020, we are firmly in to get back down 3.5 times leverage 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 are still 12 to 15 months away from more capacity coming on.

So we are evaluating it just like everybody else is..

Our next question is from Tyler Langton from JPMorgan. Your line is now open..

Just on European Beverage. I guess pretty solid profits impacted by currency and startup costs.

Could you give us a sense as to exactly what those impacts have been, sort of when they should lap in, just kind of how you think about going into next year?.

I think currency, we’ve given you in the release, you can see it, if it’s starting $5 million through nine months, it was only $1 million in third quarter. So it’s starting 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.

Startup cost was big impact in the first quarter since subsiding through the year. The bigger difference, we have now is the volume tried to describe it you guys are not manufacturing guys, so but keep in mind we are manufacturing company.

So for us, it's all about absorption and efficiency and plus performance and while the plants in Italy and Spain are rapidly coming up learning curve. And they are actually performing quite well compared to their curve; they are not as efficient as the more mature plants than we have in the system. And so we have got two plants in the U.K.

and two plants in Turkey. All four of those plants are fairly large and fairly efficient but you’ve lower volumes in those markets for two different regions. 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, so we cycle through detailed one or two are both things happen. The Turkey and the U.K. stabilize and/or the timing which the cost performance in the new plants catches up to the cost performance in the more mature plants..

Okay..

But nothing is fundamentally wrong with the business. Things are progressing quite well..

Yes, that's helpful. And then just a question on demand growth. I mean, I get strong demand, can you provide some color, is it more being 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, provide some color there..

I think it's the prior, you mentioned its new products coming in the cans. Certainly more new products are being introduced in cans, that have been historically and the growth of these existing products, for example, in United States was up I think 3% in the third quarter.

And so for the last several years, has been down, so we are starting to see growth in existing products. I don't yet think we are seeing substitution other than new products being introduced more in cans than historically. Because we are still seeing, I think we're still seeing underlying plastic growth just not at the levels than in the past.

So the introduction of new products might be very similar in cans versus plastic were in the past plastics. But pure substitution from plastic back to can, I don't think we are quite seeing that yet and one of the reasons, we are not seeing that 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..

Our next question is from Gabe Hadey from Wells Fargo..

One on Europe Food, after I guess kind of the two years of poor weather, is there any risk that some customers could go away or I guess AR collectability or anything like that we should be thinking about and/or might as necessitated you guys having to move some capacity around or something like that..

We look at AR, I don't want to say in 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 collectability for a number of the customers we start collecting in Q4 but we haven't seen any weakness in customer collections as regards to your question yet but we are mindful of that.

I don't think, we might have, I know we have one plant we talked about rightsizing in the European Food footprint but we have 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 will limit our capabilities when the volume returns for the next food harvest.

I think we're in really 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 costs that we have had..

Understood, thank you Tim. Switching gears to Transit and always trying to give an opportunity to take a run on our models. It was actually couple of million better than what I was expecting this quarter but if I look EBITDA around 365. I think this is actually pretty well headlines coming into the year you were talking about 390 to 400 of EBITDA.

A couple of questions.

One can you parse out for us how much of the difference is between where we are and 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?.

So in fair I could say FX, but in fairness we would have modeled the FX, so the 365 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. I am not making excuses, but just to the point it's been very stable.

But in your model, for example, the absorption is probably going to be about $6 million or $7 million this year and I'll explain that very quickly for you. Obviously, we're all well aware. 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 flow given the growth that we have in beverage, so the only place we can go to make up the European food shortfall from a cash perspective is Transit, so as we rapidly drive down transit working capital to offset food there is an under absorption issue and that's about $6 million to $7 million.

So we're using transit to fill the hole from European food on a cash point. It's not an issue because if you do believe in a slowing economy rather begin the slowing economy with 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's. Second quarter this year was similar to the second quarter which we did not match this year. The second quarter this year was similar to the second quarter of 17.

And that's the - the biggest reconciling item from last year to this 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 supposed to the heavily model so there is less margin on that, but all in all its stable. It's just not the last year's record number.

It generally revolves around last year's record second quarter..

The next question is from George Staphos from Bank of America Merrill Lynch. Your line is now open..

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.

Where 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 may be a bit more robust in your pricing given what ultimate 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?.

So, we anticipated that volume would be up much more than it actually was up this year. The two large food cans suppliers in Europe make up about two-thirds of the market and the balance is made up of a 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 harvest was last year.

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

I'm not suggesting that we should have done anything different coming into this year. What I'm suggesting is that we need to take a much harder look at commercial decisions and appropriately recovering cost through selling price as we enter next year..

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 may be suggest you take an even harder look at the footprint.

I think you mentioned to one of the other questions, there is 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 the footprint so that you have the leverage if you need it to get a better commercial outcome than we saw this year..

Well I think if we take a different commercial strategy and we have lower volumes, 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 its.

As we look at the demand we have in a normal harvest scenario, we don't really have any excess capacity from the specification region-to-region. So as you know food can specification are far different than beverage can specification, but I think there's a variety of things we need to look at and we're going to have an understanding.

Our customers are going to have an understanding that if they expect Crown and perhaps the other large food can supplier to be the leaders in the industry with innovation and performance and other things, they are going to have to start paying for it, or we are going to a model where we are skinning a lot of things down and they don't get us to perform a lot of things that we perform for them currently..

Understood. I guess my last one on this one and I'll have one final and I'll turn it over. Again I forget who was asking the question, but ultimately where we would do see normalized profitability be for Food Europe.

I know it’s kind of a touchy segment to get into partly because you're now beginning these discussions with your customer, but is it in a normal year and normal harvest I recognize there is always going to be variability in the harvest across Europe.

Is $250 million a even place to be from a modeling standpoint if things normally for you?.

Well I think we were what 265 or roughly in 2017..

Correct..

Maybe you back off $15 million or whatever the currency number has been over the last couple of years. I do not really know off the top of my head. It is 12 this year. So if it 12 this year maybe it was a few last year. So 245 to 250 that's kind of a normal. Normal is a funny word to use, but let's 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..

Understood. My last question is kind of two parter.

As we look at Signode and Transit Packaging and certainly we're expecting given what's been a bit of fate 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 an up level of profitability.

And given that do you still anticipate getting to your leverage goals the 3.5 times and in that regard being able to maybe start buying back some stock as we get later into 2020? Thank you and good luck in the quarter..

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'll use the word stable to describe Signode 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 3.5 times or so we get to 3.58 times you might worry about the 0.08 times. 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..

Next we have Mark Wilde from Bank of Montreal. Your line is now open..

Is it possible for either of 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 start up costs that are going to be involved at all in the different plants and what's the net benefit for next year from an EBIT standpoint?.

Look, I'm not, you want to Americas Beverage specifically because that's where the big capacity coming on two in the U.S. and Brazil..

Yes..

The answer is up and so inside, yeah, there are start-up costs inside but it's overwhelmed by the contribution from higher volume..

And then just staying on Americas Beverage I think that’s just a line plant down in Colombia and so forth it's kind of pulled the overall segment down by percent and a half 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, you need to rationalize capacity, what are your options in Colombia?.

Roughly, the volumes in Colombia were down. I need to get your numbers. You’re talking about 170 million units of a base of 9 billion, that's roughly percent and a half and so the volumes in Colombia were down more than 50% in the quarter compared to last year because it’s up until now it’s more than last couple of years it's been 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 company, 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 overtime we will fill the plant backup but it's up - in the last 30 years it's been on one customer - one customer market.

There are other brewers now in the country so, but you know the brewery so..

Just turning to capital allocation since you brought it up. In the past, you’ve talked about both share repurchases but also that possibility of a dividend.

Can you just give us your kind of your current thinking on the relative merits of the two?.

Well, I think you get the leverage back in the 3.5 times range and you're generating certain $700 million of free cash flow after the minority dividends.

You got the ability to do variety of things and there are a whole list of companies out there that pay dividend, buyback stock, make acquisition from time to time inside all those numbers, $700 million of free cash flow is 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 goals that we have, we'll discuss that at the board meeting but they should be no reason why you can't do all of the above..

Last from me. I just wondered you’ve some contracts that got redone for this year. You've got some contracts that are being redone 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?.

There is, but I'm going to and mean to be cheeky but I don't think it's helpful for us to do that but I will tell you is that you see significant improvement in the segment income in the Americas Beverage segment from 2018 to 2019, and you'll see significant improvement from 2019 to 2020 maybe some of that price certainly a lot of that is going to be volume from the new facilities and we're going to be continue to be more cost-effective.

We really did a good job on the 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 is going to be up $40 million to $50 million this year compare to last year and would be up $40 million to $50 million next year, I don't know but it'll be up a significant number, so I'll leave it at that..

Our next question is from Debbie Jones from Deutsche Bank. Your line is now open..

I wanted to start by asking about the machinery business.

You mentioned some of the revenue is not coming through in 3Q, is that shift into 4Q or 2020 and then I was hoping you could just talk about that business in general given the growth we are seeing in the industry or imagine that it’s going to drive some growth in the non-reportable segment going forward?.

Yes, so we as you know we have a can making machinery business in the U.K.

and while we don't make all the equipment from front to back on a beverage can line, we make much of the equipment from the back on the 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 the facility for trying to match equipment one line to another line within the facility.

So as with any machinery business delivery dates sometime 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 will pick up the shortfall in Q4 and some of the slips in the next year but much of the shortfall will pick up in Q4..

Okay, thanks and then my second question.

I know it has been addressed in the 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 let's say three to five 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 U.S.

and Europe whether it be kind of trade considerations or CO2 emissions and things like that?.

There is plenty of metal out there now depending on whatever trade deal we come with China. Some of the metals may carry tariff and some may not. We can currently source metal from a variety of countries that are not tariff impacted, so there is plenty of metal out there.

The other thing is as we 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 will mean that conversion cost for - from ingot to the 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 to consumer we do not. We can't absorb those kind of costs and but there is plenty of metal available..

The next question is from Adam Josephson from KeyBanc Capital Markets. Your line is now open..

Tim, one on just the kind of your portfolio 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 competitors are trading at a very high multiple.

And so some industries want you to double down on that business and I think the emphasize one or more of the others, as you pointed out earlier though circumstances can indeed change pretty quickly, so can you talk about your portfolio mix and how do you think about keeping it the same or changing in the future based on what you're seeing today?.

Well, first thing I'd say 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. 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 regards. 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 the variety of the businesses. Fortunately, we have two businesses in food and transit which require a very little capital and generate amount in cash and that provides a lot of stability to the overall enterprise.

I think anytime you generate cash, things are okay. Things can be a lot worse if you're not generating cash. If 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 those cash in the future but we're going to continue to look at the allocation issue into the beverage can business globally with more capital.

We are 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 and beyond that I don’t have much you say..

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 and way the most capital?.

You know it kind of depends on what you sell the cans for? 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 can 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're looking at your food can business and you see what's happening in the food can business and you talk to yourself out of doing anything incremental in food cans because you can't believe you might improve price there.

So, you’ve to go 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 some, from time-to-time requires you to do things that may not have the returns that you would otherwise like but are quite necessary?.

I appreciate that, and just one on CapEx for next year while we are on the subject Tom so you're guiding to $450 million this year based on the projects you have in the pipeline.

Do you think it will be up March or even down for that matter next year I know it's early days?.

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..

Next, we have Chip Dillon from Vertical Research. Your line is now open..

Just a little bit to wrap up here, how we, and essentially as we look between Brazil and 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 so far on 5%, and you could see 9% total growth.

Can you just provide some clarity with regard to the other regions?.

Listen. Brazil, the market in Brazil this year I think is through nine months is up 13 or 14%, 16% through nine months and this is after many people, many of the analysts have remarked that they don't see can growth in Brazil continuing and so again another unbelievable year.

I think we’re up through nine months maybe only 5% or 6% only because of our capacity constraints so we're going to bring a new line on, that has the ability to produce a little over a billion cans and depending on how quickly we get the lineup 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 set, if we can make all the cans.

I know one think, we're going to sell every can we can make. Southeast Asia, I think Southeast Asia, again up high single-digits or low double digits through nine 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. .

The next question is from Neel Kumar from Morgan Stanley. Your line is now open..

We’ve seen several announcements of still water 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 shift?.

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

There are roughly 100 billion beverage cans in North America, there is probably 150 million PET bottles in North America. But if you look at the volume of liquid in bottles versus cans it's even a greater distortion, and that’s because you have two leaders in 20 ounce and for the most part we’re 12-ounce and 16ounce 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 is no way we could handle. I’m repeating myself, I apologize.

There's no way we can handle a large-scale shift 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..

Thanks that’s helpful, and then just in Transit Packaging.

Can you give a sense of how backlogs are tracking currently versus let’s say the end of second quarter or beginning the year?.

Well, I think the backlogs are a little lighter today than they were six months or nine months or 12 months ago, but they’re not shockingly lower as 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. But as I said is, we really need to get through the fourth quarter before I can give you any more 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 pool here in the fourth quarter compared to the first quarter of next year..

The next question is from Brian Maguire from Goldman Sachs. Your line is now open..

Just wanted to follow-up on some of the questions that are already asked about the leverage and the progress on getting there and the portfolio, just sort of combining the two, it sounds like you're happy with the portfolio the way it is in general, just wondered if there is any, I know Signode itself was a bit of a roll-up and may be any unique businesses within there that might make sense to try and bring to market, seems like may be the end markets are a little depressed but multiples are still pretty good in those businesses, like you mentioned it was off lot of good cash flow, interest rates are low.

I just wondered if there is any like, select smaller pieces within it that might make sense to try and monetize and accelerate the de-leveraging?.

You know well at small, it doesn't really accelerate the de-leveraging, I mean you sell a business for $200 million; okay reduces debt by $200 million. But on a leverage basis when you lose the associated income whether it doesn't move the needle a whole lot on your leverage, you might go from 4 times to 3.97 times.

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 made sense in terms of offerings to customers to protected packaged goods for transit.

So in a lot of regards there are lot of synergies in terms of commercial strategies that perhaps were not exploited well by the prior owners but we’re are going to try to do.

Now that doesn't mean that there isn’t a product or two 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 de-levering.

We’re not going to get sidetracked by trying to spin a business off; it might generate $70 million of sales proceeds, because in the near-term, that's not what's really important. .

Just a question on the impact of lower aluminum scrap prices.

Just wondered if that was material on the Americas EBIT, or margins, and you expected like full-year impact from that you can quantify?.

Well I think, it’s in the number, but it’s easy to point it out when your numbers aren't going to the directions you want.

We’ve got some businesses where the numbers aren’t going to the direction we want, so we point out some of the things for the reasons, but in a businesslike Americas Beverage where everything is going well, it just get absorbed and we’re, we got, demand is very strong, the commercial aspects are better than they had been in the past and we made significant progress on the cost performance this year.

So, no real sense to talk about something that's just getting absorbed by all positive things, that's just positive things generally absorb negative things and so that you want more positives and negatives, so I don't really have a quantification, yeah there is some impact in there but it's being overwhelmed by all the good guys..

Yes, an impressive performance given that headwind.

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

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

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 had some EBITDA improvement across all the businesses.

I'm not saying it's too early, but working capital flat and then the swing factor is going to be capital, how much capital do we believe is appropriate and does the board agree as appropriate to throw out this growing beverage demand issue, and that will be the 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 will depend on CapEx..

Well Joe it sounds like that's the last call. So, thank you Joe and that will 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..

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