Crown Holdings Inc (CCK) 2016 Q3 法說會逐字稿

Good morning and welcome to the Crown Holdings' third-quarter 2016 earnings conference call. Your lines have been placed on a listen-only mode until the question-and-answer session. Please be advised that this conference is being recorded.

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

Thank you, Jen, and good morning, everyone. With me on today's call is Tim Donahue, President and Chief Executive Officer. I will first take you through the numbers and Tim will review the operational performance.

On this call, as in the earnings release, we will be making a number of forward-looking statements. Actual results could vary materially from such statements. Additional information concerning factors that could cause actual results to vary is contained in the press release and in our SEC filings, including in our Form 10-K for 2015 and subsequent filings.

Earnings-per-share were $1.31 in the third quarter of 2016 compared to $1.01 in the third quarter of last year. Adjusted earnings-per-share were $1.33 in the quarter compared to $1.34 in 2015. Net sales for the quarter were down 5% at actual exchange rates and down 2% in constant currency rates, primarily due to the pass-through of lower raw material costs. Segment income of $333 million in the quarter improved 2%, or 4% at constant currency levels, due primarily to a strong performance in European beverage.

The adjusted tax rate of 25.9% for the quarter was in line with our expectation, and we expect a full-year rate of between 26% and 27%. We currently estimate fourth-quarter adjusted earnings of between $0.66 and 72% -- $0.72 per share or a range of $3.87 and $3.93 for the full-year. At this time we are maintaining our estimate of full-year free cash flow of approximately $425 million, with approximately $450 million in capital spending.

And with that, I'll turn it over to Tim.

Thank you, Tom. Good morning, everyone. I'll be brief, and then we'll open the call to questions.

As reflected in last night's release, and as Tom just discussed, performance was solid in the third quarter. Global beverage unit volumes improved 4% over the prior year, offsetting $5 million in new plant startup costs and 2.5% lower global food can volumes.

The impact of foreign currency on sales and segment income is once again shown in the release, so the following comments regarding third-quarter segment performance will be on a currency-neutral basis. In Americas beverage, segment income advanced 6%, primarily as the result of a 3.5% increase in North American sales unit volumes, which more than offset $5 million in startup costs recorded in the United States and Mexico.

Central and South American volumes advanced mid-single digits over last year, and we expect the fourth quarter to be firm as well. To remind you, we have three beverage can projects currently underway in the Americas. The first, a one-line plant in Monterrey, Mexico, with commercial shipments expected to commence in early December; the second, a two-line plant in Nichols, New York, with the initial line expected to be completed in mid-January; and the third, an expansion of production capacity in Tuconsipa, Colombia, with completion expected in the second quarter of 2017.

In North American food, segment income was level to the prior year, as the results of prior-year cost reduction activities, mainly the closure of two plants, offset a mid-single-digit decline in sales unit volumes, the result of an earlier end to the Eastern corn pack, and a lower overall fish catch. Unit volume demand throughout European beverage advanced 1% over the prior year. Positive sales mix, improved operating performance, and $3 million in lower aluminum premiums, resulted in segment income improving 15% over the prior year.

The installation of the second beverage can line to the Osmaniye, Turkey plant is nearing completion, and we expect to begin shipping cans next month. Additionally, we have commenced the dismantling of the steel lines and the installation of the new aluminum line to the Custines, France plant, which will complete that plant's full conversion to aluminum by April of 2017.

Segment income in European food was firm to the prior year, despite a 2% overall volume decline. As we discussed with you in July, the main producing countries of Northern Europe experienced exceptionally heavy rains in May and June. This was then followed by drought conditions in July and August, and has resulted in yield losses of 20% to 30%, depending on the crop.

Not all crops affected are canned, but include beans, carrots, peas, and spinach, among many others. Fortunately, our European food can business is very diverse geographically and in end market applications. And this, combined with ongoing cost reductions, almost fully offset the impact of extreme weather on fruits and vegetables.

Looking ahead to 2017, we would expect filled goods inventories to be low, which should lead to a strong planting season next spring. Beverage can unit volumes in Asia-Pacific increased 2% over the 2015 third quarter, as growth in Southeast Asia once again offset selective volume declines and pricing in China.

And Jen, with that, we are now ready to open the call to questions.

(Operator Instructions) Mark Wilde, BMO Capital Markets.

Tim, I wondered if you could first just talk about any impact from the weaker British pound on your UK business? And I'm thinking not only about cans, but whether it has any effect on the machinery business over there?

Well, the main impact, Mark, as we sit here today, we would view it should be a benefit. That is, it makes products produced in the UK more competitive as they leave the UK primarily to Continental Europe, but to other parts of the world. But I don't think we've seen any impact of the weaker pound or of Brexit to date.

We did have lower sales in our nonreportables, as you see, and lower segment income. Some of that was specialty packaging volume-related, and the balance would have been the lower equipment sales. But those lower equipment sales were forecasted at the beginning of the year, coming off a real strong year in 2015.

So, the answer is, not to date, but we would expect, as with any fairly highly automated or highly industrialized country that experiences weakness in their currency, they do have an advantage going forward. So we would expect to see that going forward.

Okay. All right. And then just the second question I had is, the entry or expansion of the kind of the number four can producer can pack into both Brazil and the Netherlands, does this have any impact on the markets, do you think?

Well, I think that remains to be seen. They are a very qualified and well-equipped can manufacturer who has a model which is perhaps a little bit different than the public companies you follow.

Europe continues to grow, so the entry into the Netherlands, perhaps sponsored by one customer, we'll be focused on that customer. We don't happen to supply that customer in that region, or not -- we're not to a big extent. It will have some effect.

In Brazil, our hope is that Brazil continues to improve. It looks like it's firming up a bit. Certainly, the confidence in the country looks like it's improving post some of the political turmoil that they are currently sorting out. And, hopefully, we see a return to growth in a market that's as large as Brazil is. But in the interim, without growth, obviously, any new capacity entered into a market without growth would have an impact that you are not too crazy about.

Okay. All right. The final question I had is, do you have any view yet, Tim, on your capital spending out in 2017?

Well, I think what we said last time, at least $400 million. We are running a little behind right now this year, as Tom said. We still project $450 million in capital spending for 2016, and we are running a little behind. Now that's not to say that we're not going to spend a lot of money in Q4. We have a number of projects underway and nearing completion.

But you know if we fall short in 2016, and it obviously falls into 2017, I wouldn't -- it's going to at least be $400 million. We do see a number of opportunities on the horizon, not all of which we've -- we're committed to. But depending on our ability to be successful commercially, we would certainly commit to those if they make sense.

So a little early, but the good news is we still have a lot of opportunities. And that requires spending from time to time.

Okay, that's helpful. I'll turn it over. Thanks, Tim.

Thank you, Mark.

George Staphos, Bank of America.

Thanks for the details. I guess the first question I had is on the level of startup costs, Tim and Tom. Should we expect this run rate really through, say, the first quarter, or call it $5 million-ish per quarter?

And kind of the related question there, with the momentum that you are seeing in global beverage, how should we look at that in relation to guidance for the fourth quarter, which is relatively flat? Is it just the start-up costs that are creating a headwind? Or are there any other things that we should be mindful of there?

Well, I think we had a -- you'll probably remember, George -- we had a pretty good back half of the year in 2015. So, the comps are a little more comparable in Q3 and Q4 than they were in Q's 1 and 2. One of the reasons being aluminum premiums, they annualized, and then currency as well.

But on top of that, we do have startup costs from time to time. We don't always call them out. We thought it was interesting enough to call them out this time because they happen to be somewhat larger than we are accustomed to. And, frankly, the reason is the Nichols plant is a really large plant to start with.

And so what we have is the plant is obviously not in startup, but we have startup costs, which happen to be the salaries and the training expenses of the people that you are hiring to run the factory once it's ready to go. And that's not an insignificant number. But we will have startup costs from time to time.

We're certainly going to experience some modest startup costs in Cambodia, not only in the third quarter that just passed, but for the next couple of quarters, but not really necessary to call it out. It's kind of -- just kind of what we do. And if I think we're going to tell you we have good opportunities, and we're going to continue to have opportunities to grow, and it's going to require capital, we are going to have those. And we're going to have to deal with it.

The one thing I would point out Q4 this year in European beverage, we certainly will have some headwinds. We'll have the startup costs in -- from the second line in Turkey. But more importantly, we're going to have the disruption in France, as the steel lines are down and we are installing the second aluminum line.

So, that -- I wouldn't call that startup. It's just disruption and it's lack of sales, because the two steel lines are down and you are putting a new line in. So you only have one line making sales now, not three lines. So -- but that's -- you know, as I said, George, that's part of our business and we need to deal with it.

Sure. Tim, on that latter point -- and clearly, this doesn't make an investment decision in Crown Holdings one way or another -- but is there a way to call out how much that affect in Custines might be in the quarter?

Well, there probably is. I don't think it's necessary to do it.

Understood.

I'm not sure what anyone gets from it other then we throw numbers out there that we somewhat have to try to validate internally before we put them out there.

Okay. I thought it was worth a shot there, but we appreciate the candor, as always. Can we talk a little bit about looking out to one of our topics over the years, return on capital? So, return on capital has remained relatively flat the last number of years. You are continuing to progress with your capacity expansions, which you have said in the past are earning you well above cost of capital.

When would you expect return on capital to inflect to the upside relative to what's been the trajectory the last few years? And do you get more of it, do you think, from the new capacity? Or do you get more of it from (technical difficulty) [buyback] and/or other capital allocation decisions? How would you have us consider that?

Yes. So I saw your recent piece, George, and you highlighted some of the reasons why capital turned down and then flattened over the last couple of years. And you know what I would argue is if we hadn't been so aggressive with what we thought were two very good acquisitions and a number of capital projects, we wouldn't be flat in return on capital. It would have continued to decline.

And the declines are attributable to one or two features of the portfolio, which have experienced trouble at different points over the last couple of years. And that's going to happen from time to time. So I think, as we look forward, we are not just throwing any project we think up against the wall, hoping a couple of them stick and they work out. We analyze each one of them and we turn a number of projects down.

But I think going forward, the hope is if we can get some stability in some of the areas where we've turned down over the last several years, that the benefits of the new capital and the new projects, as well as return of capital to shareholders, would all result in improving return on capital going forward.

That's fair. And then, within return on capital -- and I'll turn it over from here -- do you think you are considering dividends to a greater degree than in the past? Or is still to be determined and for the -- at the moment, just focus on if you advise us a buyback and/or a dividend at this juncture?

Yes, well, you know, George, we have a Board of Directors, and so it would be a bit premature for me to comment on that. It's something we review from time to time with the Board, and perhaps we'll review it at the upcoming Board meetings.

But I do think if you look at our leverage, we're going to end this year at about 3.3, 3.4. We've always said that our target is 3 times, as Tom has said. We can clearly see the path to getting to 3 times by the end of 2017.

And then the question becomes, as we've said before, do you really need to get to 3 times before you begin the return to shareholders? Or once you see the clear path to there, you would start your return scenario before you get to the 3 times, knowing that you are going to get there over a two or three-year period, as opposed to a one-year period. I think that's a decision we'll certainly -- we'll make after consulting with the Board.

Okay. Thanks for the answers, Tim. We'll turn it over. Thank you.

Thank you, George.

Adam Josephson, KeyBanc.

One on the guidance increase. Tom, can you just elaborate on the $0.025 increase at the midpoint, just specifically what drove that?

There's a lot of moving pieces, Adam. We just tightened the range. It is a smaller quarter; it's a last quarter, but I don't think there's any one specific item. It's a number of moving pieces.

Okay. One on the CapEx guidance for this year, $450 million, I know, Tim, you said you might be running a little short of that. But can you talk about line conversions, how much of the $450 million, or whatever it ends up being, are line conversions? And how much more you expect to spend on line conversions in the next few years, just so we have a better handle on it?

So the only line conversion we are undergoing in 2017 is the -- not really a conversion. It's -- in fact, it's the complete dismantling and rip-out of two old steel lines and the installation of a brand-new aluminum line in France. But having said that, let's characterize that as a conversion from steel to aluminum.

And so, the spend in 2016 is, I'd say, at least $50 million. I don't have an exact number. Post-France, we then have only two steel factories in European beverage, or put another way, two steel factories globally, and they are both in European beverage and they both happen to be in Spain. One is a three-line plant; one is a two-line plant. One of those plants is newer.

It will be conversion of lines. The other is older. It will have to be dismantling and installation of new lines. And it will be something where we would go from five lines to four lines. And it's not going to be inexpensive and it will happen over the next several years.

Does it start next year? Or does it start in 2018? I don't know. But it will be at least a couple-hundred-million-dollars. And it's just something that has to be done.

Got it. Thanks for that, Tim. Just a couple others. One on working capital, Tom. And any reason to expect working capital to be a source or a drag beyond this year? I know you had previously said it would be a $50 million source this year.

No, Adam, I would say, sitting here today looking to next year, I'd say about flat in working capital next year. That's both on the receivable side, payable side, inventory, it's all in. So, no, I would not expect today a big movement next year.

Thanks, Tom. Just one last one on operating rates in US, Europe, and Brazil. Can you just give us, Tim, some sense of roughly what they are? Not necessarily yours -- I guess yours would be obviously that's what you can talk about. Just where -- any update from what you've said previously about operating rates in those regions?

I think in Europe, we are -- you know you never want to say you are sold out, but we don't have a whole lot of spare capacity in Europe. And certainly, over the next two quarters with the situation in France where we are putting a line in and taking the old lines out, we'll be very tight.

And the industry is somewhat tight in Europe as well. There's not a lot of open capacity in Europe. Brazil -- Brazil has been certainly softer than the industry would have liked over the last couple of years.

We are fairly well-utilized. I'd say we are in the high 80s, low 90s, and I would expect that the industry is as well. And as I said earlier, there does seem to be some confidence returning to the country. So, the hope with that is that we re-energize the growth that we've -- the great growth that we've all experienced over the last five or seven years.

But operating rate is generally pretty healthy in Brazil. And in the United States, we have been sold out for quite a long time. And as we've discussed with you before, it's kind of limited our ability to grow more quickly in specialty cans, because we've been unable to convert the standard 12-ounce lines, which has led to the construction of the Nichols facility.

Certainly when Nichols comes up, as we've said before, we're not contemplating a share shift in the market. And it's largely for specialty cans and overall system cost reduction. So that will, depending on how many cans we convert to other sizes, and downtime for size and height and diameter changes, will lead to a little bit of open capacity for us, but it might be something we need to properly service customers.

But in large part, I would say that, for the industry in North America, utilization rates have to be in the low 90s at least. There's not a lot of open capacity. We don't have any, but there's not a lot of open capacity.

Thanks a lot, Tim. Best of luck.

Thank you.

Scott Gaffner, Barclays.

Just focus on European beverage for a minute here. The margins there were extremely high in the quarter at about 20%. Is that -- do you think that's -- was there maybe some production ahead of the Custines disruptions that are coming up? Or anything abnormal that would say that margin is not sustainable?

No, I'd like to tell you it is sustainable, but I don't really know -- from time to time, I couldn't tell you week to week what's sustainable sometimes. But there are a couple of things that happened in the quarter.

We had $3 million of aluminum premiums compared to the prior year, as we said. And then, I mentioned in my comments, positive sales mix. And that really was strength in what you would characterize as the Middle Eastern countries, which offset about a 0.5% decline in Continental Europe.

And that -- I can't forecast is the Middle East going to continue to recover? It recovered in the third quarter. It did not recover in the second quarter. What's it going to do next week or the fourth quarter? I don't know. It's been somewhat volatile, given the situations there and a number of the borders that are closed, which prevent cans from shipping from time to time, and sometimes for long periods of time.

But largely it had to do with sales mix. And then cost reductions. We have taken a lot of costs out of our system in Europe, not just in beverage but in all the product lines. And you see that in food as well, where, despite volumes being down, the margins are still pretty healthy -- 20% -- I don't know.

Again, we -- as I've said in the past, we like when the percentage margin goes up, but we're more concerned with absolute margin. Given the impact of the pass-through of raw materials on the denominator, the denominator effect on margins sometimes is a little bit misleading. But we'll see where it takes us.

Okay. Just to clarify on Europe, I think in your prepared remarks, you said Europe was up plus 1% positive sales --?

Yes, plus 1%, which is about 0.5% decline in Continental Europe and maybe 3% increase in the Middle Eastern countries.

And you said Turkey was down 2%, though? So is that --?

I did not say Turkey was down 2%.

Okay.

I said food was down 2%. But I did not say Turkey -- Turkey is part of what we call Continental Europe. Turkey would have been up in the quarter, I'm sure. I don't have it in front of me.

Okay. If I just go back to the return on capital question George was getting at, I mean, I think a few ways you can improve your returns on capital is, one, as you had mentioned, putting capital into some of these growth markets and leveraging volumes there. Another would be, I guess, taking costs out of the system. And the last would really be pricing. When you look at those three, where do you think the most opportunity is from a return on capital perspective?

Well, I mean, the one you have the most control over is taking cost out of your own system. To the extent you have opportunities to expand in markets that you think are good markets. And I think we've done a fairly good -- we've got -- we certainly got a big example of a market we did not go do a good job of evaluating, didn't work out well. That's China, obviously.

But the others have worked out well. So, we are going to continue to try to do that. We're not so discouraged by one bad result that we are not going to continue to try to find other opportunities.

As for price, well, price is the one that has the biggest impact. How likely is it to happen? You know, in most of the markets we are in, we are either the number two or the number three, so we are not really in a position to effectuate that as well as some others are. So I'd leave you to ask that question to some others.

Fair enough. I appreciate all the color, guys.

Thank you, Scott.

Arun Viswanathan, RBC Capital Markets.

I just had a couple questions on -- first off on the guidance. I know you are tightening up the range here. I guess your implied number for Q4 is slightly below what I was modeling, so I'm just trying to understand where the changes are. Was there a kind of maybe a larger impact that's carrying forward on the spending? Or is it some flooding or just some seasonality? Was it in line with your expectations? Or things may be a little bit slower than what we've seen at the end of Q3 -- or sorry, Q2.

I think the answer, Arun, is your model was wrong.

Right. Obviously.

Seriously, I think -- well, we typically try to tighten the range as we get to the end of the year, because obviously we have more confidence. And, as Tom said earlier, there's only one quarter left and it's a small quarter. So you have a little bit more confidence where you think you are going to be.

You know, we were -- I think, all year, we've been saying somewhat like [380 to 395]. Now we're [387 to 393]. Hopefully, we come in closer to the top end of that, but there's some things that can always happen. So, I'm not so sure there's any one thing, as Tom said. I think it -- there are a lot of things that can happen and it's kind of where we are at.

Okay. And then I guess in European beverage, I know you called out some improvement in Middle East. And you may not necessarily be in a position to talk about pricing. How much of that margin uplift, I guess, would you say was either from structural improvements you've made from the business or, say, some other market-related issues?

I think we are -- excluding currency, we were up $11 million in the quarter.

Right.

$3 million premiums and I would say the other $8 million was split equally between volume and maybe [5] -- what we would call volume mix [5] and [3] cost reductions. So your structural improvements are [3]; the volume mix is the overall volume growth, and the positive mix and selling more cans in the Middle East than in Europe, or parts of Europe where we were down. Some European sales are better than others. That's just the way it is.

But as I said earlier, it's a little hard to characterize how sustainable the Middle Eastern improvement is. It could all change again next week and it's pretty volatile.

Great, that's helpful. And then lastly, just in Asia, maybe you can just help us understand where were you kind of calling out some weaker business there? Or maybe was China continuing to be weak? Maybe just help us understand Southeast Asia versus China. Thanks.

Yes, we were up -- across the division, we were up 2%; about 6%, 6.5% growth in what we would call Southeast Asia, and about 5% decline in China. As we've said all year, we purposely have been pruning our activities in China around two things.

We are not going to make cans and sell them just for practice, and we're not going to expose ourselves to carrying receivables with customers who perhaps may not have the wherewithal or the willingness to pay us in the future. So, we're trying to be a bit responsible in that region.

The pricing in that country does not warrant any extraordinary effort to go out and try to sell cans at this point. So we are trying to run the business as tightly as we can, cut costs, stay responsible; service those customers whom we have and who we know are honorable and will pay their bills. And we are focused on the opportunities and the growth that we have from a -- really an exceptional platform that we have in Southeast Asia.

Great, thanks a lot.

Thank you, Arun.

Ghansham Panjabi, RWB.

Can you just give us a sense, Tim, as to the volume contributions in 2017 year-over-year relative to your very strong run rate in 2016, from all your growth capital initiatives in beverage cans? How should we kind of think about that? I know it phases in differently during the course of 2017, but any color would be helpful.

Yes. So I'm going to start in Asia. So we have the new plant in Phnom Penh. We fully expect Asia to be certainly at least firm to -- in 2017, at least firm to 2016, despite ongoing challenges in the -- in China. We think that we are going to continue to make good progress in Southeast Asia.

And in Europe, you've got the second line in Osmaniye, which we expect to come up fairly well. Turkey is a pretty strong market. And we expect performance in the factory to do well through learning curve, and that will contribute.

Custines, again, the first -- we had a pretty good experience with the first line that we put in. We do have can-makers in Custines. They are just going to convert from making cans off of crappy old steel lines on the brand-new shiny aluminum lines. And so that makes the effort much easier. And that line comes up in April. And we have every expectation that we are going to do well in Custines and throughout European beverage.

In North America, we've got Monterrey, Mexico. We're going to be up in -- I think we're going to start shipping cans in less than six weeks -- five, six weeks here. And I think, as we've said before, that plant should be sold out from the start. So really the number of cans that we sell from Monterey will have to do with how quickly we can come through learning curve.

And we've been putting a lot of effort in to make sure we get everyone trained properly. And so we see contribution there.

And then in Nichols, it's a large factory. We'll bring the one line up first, and the second line will come up several months later. And as I've said, though, Ghansham, we're not expecting any share shifts, right? So this is about specialty cans and craft beer, and cost reduction throughout the system. And I think since it's such a large plant, we're going to have more of an impact in Nichols next year with startup than we would in any of the other factories I just mentioned.

Okay, that makes sense. So if you kind of sum that up, would something in the 3 billion to 4 billion unit range, is that realistic for 2017 year-over-year?

No, that's -- I think that's far too high. So, you are not gaining any cans in France. Right? It's a conversion from steel to aluminum. The line in Cambodia, next year, we -- it's sized for much more, but perhaps next year, you pick up 0.5 billion cans. Monterey, obviously sized for much more, but you pick up -- because you are in first year, you pick up 500 million to 600 million cans.

And then as I said, at Nichols, we're not expecting any share shift. So, a lot of it is cost reduction, freight. A lot of it's perhaps more craft and more slim and sleek cans. So on the order of similar number of cans there that we've just talked in the other place -- so maybe half the number that you said, Ghansham.

Okay. That's very helpful, thanks. And then just in terms of European food, just based on your commentary last quarter on the flooding, and it sounds like it impacted 3Q as well, where are you on inventory relative where you'd like to be? In other words, should we expect the margins in fourth quarter to kind of reflect maybe a drawdown of inventory in that segment?

No, you know, I took a look at the transcript to remind myself what I said about the flooding, and the one thing I got wrong is I said it's not going to be horrible. I think 20% to 30% reduction in crop yields is horrible if you are a farmer and a food packer.

Luckily for us, it wasn't horrible for us. We did start drawing down can production in Q2 of this year. And I -- when I looked at the transcript, I reminded myself, I think I told you guys, in July, we probably produced about 100 million less cans in Q2 in our European food system in anticipation of this. So I think we are in pretty good shape with where food can units sit from an inventory basis right now as we enter the fourth quarter. And I would expect Q4 to be a real firm quarter for European food.

Okay, terrific. Thanks so much, guys.

Thanks, Ghansham.

Anthony Pettinari, Citigroup.

Just a follow-up on an earlier question on working capital. Is the working capital benefit for 2016 still around $50 million? And is that still driven mostly by payables?

And then when we think about the full year, EPS guidance is a little bit higher. Free cash flow guidance is kind of flat. Are there any offsets there? Or is it just the EPS guidance, the increases is not substantial enough to really raise the free cash flow number?

On the working capital, yes, the numbers remained about $50 million. You are correct, on the impact of the earnings on the cash flow, it is kind of rounding really. The components of the cash flow that we are giving now are in total and, in fact, the components are pretty much the same as what we gave last quarter.

Perhaps interest is a little lower on a cash basis because of the timing of interest payments on a refinancing we just did. And we think tax will probably be a little higher to offset that. So, not a big change from last quarter, and yes, $50 million is still a good number.

Okay. Okay, that's helpful. And then just following up on LatAm, specifically the Colombia expansion, do you ship any cans between Brazil and Colombia? And Colombia has obviously been a very strong market for you, but does the capacity expansion in Colombia have any kind of knock-on impact in terms of Brazilian supply and demand?

We actually ship more cans from Mexico to Colombia than Brazil. So if you -- you can get your map out later, but you'll notice that it's a lot easier to get to Colombia from the factory we have at Ensenada, which is out by Tijuana, than it is to go around and through the canal from Brazil. So, more of the cans come from Mexico.

Where we have certain size requirements for the Colombian market, we may, from time to time, take them from Brazil. But we also have another factory in Mexico, which makes sleek cans. So we can bring those down from Mexico.

Okay. Okay, that's helpful. I mean, is the volume impact meaningful for the Mexican market? Or is there any way that you can quantify it?

No. It's not meaningful.

Okay. Okay. That's helpful. I'll turn it over.

Thank you.

Tyler Langton, JPMorgan.

I had a question on, I guess, CSD can volumes in the US. Obviously they've been doing sort of well this year and especially well in Q3. I guess, Tim, maybe give us a sense what's been driving this? Is it sort of non-soda categories like tea is growing? Is it soda consumption leveling off? Is it conversion? Just any thoughts there would be great.

Well, we've experienced, as an industry, growth in all the categories -- all the nonalcoholic categories other than CSD -- for several years. And that continues. Energy drinks, teas, juices. Carbonated was okay this quarter, as well.

I haven't spent a lot of time looking at the major soft drink companies' financials or their commentary in advance of this call and perhaps I should have, so I can't really comment on what their overall 8 ounce or case shipments are. And because that perhaps it would tell us that they are shipping less in one of the other substrates than -- and then more in cans.

But given where we've been trending over the last several years, we'll take it. I mean, we've always told you, and we still maintain that, for a whole lot of reasons, the can should be the preferred package for our customers, the retailers, and the consumers, whether it's sustainability, recyclability, cost per fluid ounce, filling speeds, the whole cost throughout the entire distribution system. And so it's hard to say, but certainly welcome news.

Okay, great. Thanks. And then just I'll stick with the US. I think you said your volumes in the US and Canada were 3%, 3.5%, I think you said?

Yes.

Is that still just due to the strength of the customers that you've been serving? Or is there anything else there?

Well, I mean the market was up 1.5% and we were up 3.5%, so I think it can only be attributable to our good fortune in that the customers we service are doing well at this point. I wouldn't -- and that can always change next week or next year or next quarter. So hopefully our customers continue to do well, and if they do well, we'll do well.

Great. Thanks. And just final question for European food. I think you -- with the recent plant closures, there's still some savings that you expect in the future. Can you just remind us of what those kind of amount to and just the timing for those?

Talking about Nice? Yes, we closed a large end center in Wales. I don't remember -- to be honest with you, I don't remember what the cost savings are, as we move those ends to France and Spain. Tom is telling me about $7 million. So we'll see the benefit of that hopefully through next year.

Got you, perfect. Thanks so much.

Thank you.

Debbie Jones, Deutsche Bank.

I was hoping you could talk about North America again. You've provided a lot of color on Nichols. But once that gets ramped up, do you think you're going to be happy or content with your footprint in North America? Is there more capital that you need to spend there?

And then number two, in North America, could you just talk about your mix between kind of beer and CSD volume, and how you see that kind of progressing over time?

Yes, I think the mix -- probably when we say North America, let's just -- let's confine that to Canada and the US. Because if we put Mexico in, there are -- our mix in Mexico is close to three-quarters beer. But let's leave that to Canada and US for North America. And I'd say we're probably about 25% beer, 75% nonalcoholic. And at least two-thirds of that nonalcoholic number would be CSD.

Okay, post-Nichols -- Debbie, as we've said, we are not expecting any share shift from Nichols. What it does is it gives us the ability to service our customers in another part of the country without incurring exceptional freight cost with specialty cans, and perhaps pick up some more craft beer as we create a little bit more capacity in our system to deal with short runs.

One of the things -- so I don't think we have any great aspirations to change our share in North America nor cause any disruption in trying to do that. One of the things that Nichols may allow us to do -- and as I said earlier, we've had the inability to convert 12 ounce lines to specialty, because we've been sold out on specialty -- we will pick up a little extra capacity.

And so perhaps we'll have the opportunity to convert one of the lines in the Midwest, upper Midwest, so that we could produce specialty in the Midwest, upper Midwest, and service those markets with a lot less freight. But that's still to be determined.

But it's -- I wouldn't characterize Nichols as aspirational or any indication as to what our aspirations are for gaining share in North America. We have -- we certainly have a lot of aspirations around the world. North America would not be one of them, per se, at this point, in terms of share gain.

Okay. That's helpful. I was actually mostly referring to more conversion opportunities on the specialty side, so that's more clear. I guess even when I think about you spending more money on conversions and kind of your growth opportunities in Southeast Asia, it's a little hard for me to kind of wrap my head around elevated CapEx, call it, in north of $400 million range, or even a scenario I think you talked about potentially higher than that, unless you are adding some significant growth at CapEx in potential areas like Europe or Brazil.

So I just want to kind of understand what the opportunity is. Maybe not next year, but over the next couple of years. Where do you get the sense that kind of the can industry needs more capacity right now?

Well, I think one of the things we've tried to change here over the last year or two is, when we are ready to tell you what we're doing, we will tell you what we're doing. So you know the projects we are working on now, and it doesn't mean we don't -- it doesn't mean we are out playing golf the rest of the week. Right? We are still looking for other opportunities.

And so when we are ready to tell you about those other opportunities, we will. Now, having said that, there is still growth -- there still are growth opportunities; I don't want to say significant, but there still are growth opportunities throughout the world. Southeast Asia is one of them.

But Europe is a growing market. And we have a position in Europe right now, which is not as large as some of the others, but the market grows. And if we want to try to maintain where we are at and participate in that growth, that will require some capital from time to time. So there are opportunities.

All right, thank you. I'll turn it over.

Thank you. Debbie, the other item I mentioned obviously is the conversion that we are going to have to undertake in Spain over the next several years. And so again, that's not growth, but it's required capital to be spent, so.

Okay, thank you.

Thank you.

Chip Dillon, Vertical Research Partners.

I don't think you give us the overall segment volume change for Americas. I know you gave us the two components. Was that about 4%? Is that fair?

Yes, I'd say maybe 4.5%.

Okay.

Between 4% and 4.5%, not -- kind of in that range.

I think that's close enough. Thanks. And when you look at this volume gain in North America, I mean, for at least the perception I have is, there's a huge surge in consumption of like sparkling waters in cans. And I always see your logo on those, no matter where I am in the country and what store I go into.

And I guess I'm also perceiving more craft beer adoption out of bottles into cans. Would you say that's really behind us? Or am I barking up the wrong tree?

No, I think you've mentioned two end markets where the can is doing quite well. And it's not just Crown. You're -- depending on the region of the country you're in, you are going to see somebody else's cans in craft beer and sparkling. And -- but they happen to be two areas.

I think teas and juices are doing well. We happen to have carbonated do pretty well also here in Q3, so that was helpful. But, yes, I think the marketers understand the benefits of the can. The graphics, the integrity with which they can preserves the contents -- that is, it protects it from light and air, and you maintain carbonation and you maintain flavor, and then certainly sustainability.

If we are all really serious about the sustainability issue, and it's not just a check-the-box exercise, I think, over time, we all come back to cans before we'd go to any other substrate. But that's a different discussion for a different audience.

Okay. No, that's helpful. And then just a follow-on. And I don't think you answered this, but maybe you did. How long do you see the -- do you expect to take the Philip and Nichols plant? I know you throw the switch, I guess, in the next few months. Could that be running fully by the end of, say, next year? And if so, would that mean you would slow-back other facilities? Or do you think the market absorbs it right away?

Well, the way a can plant startup works, Chip, is it's going to be running full from day one. Full happens to be a real low number on day one. And as we continue to get better and come through the learning curve, it means more cans.

By the end of the first year, are we going to be at 70% or 80% of what we would fully expect? Hopefully, we are at 70%, 80% through a learning curve at that point. And at that point, we'll determine, based on the number of cans coming out of Nichols, what the portfolio needs to look like in the future, given the other opportunities that we have. And, as I said, some of those other opportunities could be moving 12 ounce -- standard 12 ounce capacity to more specialty can capacity as we see that need in the marketplace.

Okay. And then last one --

Far too early to discuss a footprint optimization. I don't think we are contemplating that.

Got you. And then just the last one. When you look at the food can business, obviously the movement of customers a year and a half or so ago has had a big impact and still does. But as we think about next year, do you think you'll -- is there any reason Crown would not grow in line or perform in line volume-wise with the market overall?

Are there other moving parts, maybe other contracts that help or hurt you, or -- I think you have a comment about the way the pack was this year, and how -- I'm talking US now; I know Europe should come back -- but should -- with the US, would you characterize it as being an average year or better or worse this year, so therefore, next year, you might see some offset?

You know, I would characterize it as, depending on the region, is it having some weather impacts. And certainly, on the East Coast, as I said, the corn crop ended early. I think we stopped packing -- a couple of customers stopped packing cans in August. And then there were some other issues in other parts of the country.

Now, having said that, pet food has been real good, and it's kind of masking human food can consumption. And it's -- I think we talked about this on the last call, it's been declining slowly. Not really big numbers year-on-year, but you look at it over an extended period of time, it's a bigger number. So you do have some concern there.

I would say that as we look at our customer base and where we are set up for next year, that we should perform in line with the market next year. But I don't expect that we are going to have any huge bounce-back in North American food next year compared to this year. I think it's a market where there is far too much capacity in the market, and there is a disruptive player in the market. We are doing our best to look after ourselves here.

Makes sense. Thanks so much, guys.

Thanks, Chip.

Phil Ng, Jefferies.

I think you called out your Continental Europe volumes down about 0.5%. What's driving the weakness? And is that driven by some of the supply constraints that you may have on your end? And can you help size up the volume or size of the Custines, France facility from a volume standpoint?

Yes, I don't think we had any noticeable volume decline because of the Custines conversion that we are undergoing now. I just -- and I'm not -- it's not clear to me how strong -- because I didn't go back and look how strong Q3 was, but it was -- we were down in a couple locations. And without doing a whole lot of work, I couldn't tell you why we were down. It's 0.5%, and that can happen from quarter to quarter, but continue to do quite well, I think, for the year. And in what we describe as Continental Europe, we are up several percent. So, try not to get too worried about quarter to quarter.

I'm sorry, Phil, what was the other question?

Can you size up how large that Custines, France plant is from a volume standpoint, just so we have a better sense of --?

Instead of being three slow-speed steel lines, it will be two high-speed aluminum lines. But it's -- we'll add a little bit of capacity to the European system, but the more important thing is we're going to be in aluminum, which is what the customers want; not steel cans.

So it will be on the order of 2 billion -- depending on size -- how many size changes we make during the year, about 1.7 billion to 2 billion cans. If we ran just one size, a couple-billion cans, but we're not going to run one size. We're going to move the sizes around. So you are going to be around the 1.6 billion, 1.7 billion range.

Okay, that's helpful. And then I guess switching gears to China, pricing has been obviously a headwind. Do you have any early read for next year? And I know you kind of throttled back on demand this year. Do you expect volumes to kind of level off next year? How should we think about that?

Well, I think China is going to continue to be challenging. And it looks like the market this year is going to grow somewhere between 5% and 10%, depending on who you listen to. And sometimes hard to validate those numbers, because there's so many can producers now. But it's going to continue to be challenging.

And we're going to do everything we can to offset that challenge with cost reductions in China, and reasonable growth projects outside of China in the region. But, no, China is going to continue to be challenging.

Okay. And this one last one for me. On Europe food, margins have been pretty impressive despite weaker volumes this year. What's been driving that improvement? And how much more runway do you have next year? Is a big part of the cost take-out? Or there's more to it, like price mix?

No, I'd say a big -- the major part is cost take-out. It's not just a couple of factories we've closed over the last couple of years, but also the -- an adherence to best practices across the acquired Mivisa operations in Crown, and aligning production and shipments to customers from factories that are closed or reducing freight.

We've had a new team running Food Europe now for, what, four years, five years? Head of manufacturing has been in the role for two to three years and he's doing an excellent job. So there's been a real renewed focus on cost and performance in that division, and frankly, the guys have done a tremendous job.

I don't want to describe it as a failing before, but certainly we saw the opportunity for improvement, and this team has really stepped up and improved. So, looking ahead, you know, you always hope there's continuous improvement in the operations, and price -- it's hard to talk about price. There's obviously -- there's a bit of over-excess capacity across European food, but we don't really know where tin plate is going to settle out.

And we do hope for a much better harvest next year. And as I said, it feels like they should plant a much larger percentage of the fields next year, just given on the -- given the real crop failure this year and the need to replenish -- fill goods inventories across their own system. So, we are hopeful for an okay year next year.

Okay. Thanks a lot.

Thank you.

Brian Maguire, Goldman Sachs.

Thanks for squeezing me in. A lot of questions asked this morning. Just had a couple more hopefully quick ones before the end of the hour here. Wouldn't expect much impact yet, but just figured I'd ask if you've seen any impact from the Ball/Rexam merger or the Art Ott divestiture? Any kind of feedback you are getting in the market from any shared customers or any impact you think that might have on the industry at this point?

Far too early to comment. We haven't seen anything yet.

Yes. Okay. Just tried. Then I just want to ask you about China. Obviously, you've been retrenching there. It doesn't sound like conditions have improved. Could you just maybe size that as a percent of the overall Company at this point? What are we sort of down to?

I think revenues are still in the $250 million to $275 million range. So, you know, 3%.

Okay.

It's never been a whole lot more than 3% to begin with. It just kind of got blown out of proportion here. It's a pretty small part and it remains a pretty small part of the Company.

Yes, okay. Makes sense. And then I think I missed your comments on the aluminum premium outlook in the prepared remarks. Can you just remind me -- I think it was a modest benefit in the quarter, at least in Europe -- just kind of what you guys are assuming in 4Q? And I would guess in 2017, it's pretty flat, but just any impact in 4Q?

We don't expect any impact, Brian. Fourth quarter, yes, it was a few-million-dollars in the third quarter. As far as projecting beyond that, we're just assuming it's going to be flat to the -- to where it is currently.

Okay. One last one, if I could. We had a meeting with a leading bottler a couple months back in August, they said that they saw craft beer growth hitting a bit of a wall during the summer. I know you guys aren't as leveraged there as some of the other can guys. But just wondering if you saw any trends similar to that, and anything that would kind of change your mind about the potential for craft beer going forward?

I wouldn't say we are not as leveraged as some of the other guys. I think we are probably -- if you take all the craft beer producers in Canada, we're probably as big as anybody in craft beer.

One of the things that the craft guys have struggled with over the last couple of months is their ability to get hops -- what they call quality hops. And so I don't really know if they are hitting a wall. There could be a slowdown in the rate of their growth, but they are still growing. And so I think I'm always hesitant to characterize slowdowns in the rate of growth as bad news. As long as they are growing, growth is good.

Got it. Okay, thanks very much.

Thank you.

Thank you. And our last question comes from the line of Chris Manuel from Wells Fargo. Your line is now open.

I'll just -- a quick one. I realize we are late in the call. Looking into 2017, Tom, could you give us some thoughts on pension? I know that you are still a little over two months out, but quick thoughts regarding what expense might do next year, what cash funding requirements, et cetera, might do next year?

Yes, I'd rather stay away from the P&L side of it. I think it's just too early. We have to see where discount rates end up and what the market does at the end of the quarter here. But I do feel a little more comfortable with the cash number. It shouldn't be altogether different than what we gave in last year's 10-K, which is about $80 million compared to a little over $100 million this year.

Okay. That's helpful. And then, Tim, if I could kind of come back to a couple spots -- this is going to kind of flip the script a bit about where we've been over the last, say, decade -- but you've talked about -- to use your words, some maybe some misguided capital or some projects in China. And we're trenching a bit there.

But as we've -- been discussed earlier in the call, we are seeing some expansion here in North America, at least for demand when we look at numbers year-to-date, and even last year, I think they were up marginally. You are sitting, as you said, in kind of a sold-out position. Do you think there is any opportunity here to maybe add a modest amount of capacity to kind of keep pace with growth? Or do you -- are you really in a sold-out position that you just can't ship much more than you are here?

Well, I think, we -- all of the can-makers, we create capacity every year just by what we learn by being in the business over time. And you are always surprised as to how much so-called low-hanging fruit there really is to improve within the system. So, each year, there's capacity creep, as we say.

So, one year, you're sold out, but you can actually sell more cans the next year. And that comes from the creep. I think it's challenging to think that you are going to add capacity in the North American marketplace, and believe that any growth, or somehow in a stable market, you are going to gain share. It's a very competitive market. And it's been, plus or minus, 1% over the last several years across all the end markets.

So, I would say that unlikely that you are going to add any capacity in the hopes to gain volume. More to the point, you are going to -- what we've done here is we've given ourselves the opportunity to convert some of the capacity we have, to participate in part of the market that's growing while the other one is declining slightly.

All right. And then with respect to -- just the last part there with respect to China, is there anything, looking into 2017, 2018, that changes the trajectory there? I mean when we look the last two or three years, it's continued to get incrementally worse. Does that trajectory change?

Do we -- are there tools you have available to go in and rip more costs out? Or reorganize a little bit over there from a manufacturing footprint -- rooftops, what have you -- to stabilize things? Or how do you -- how would you have us think about that?

Well, the first thing I would say, Chris, is we are always back to -- we spent a lot of time talking about a business that's 3% of our sales globally. And yes, we spent some capital there in 2009, 2010 and 2011, and it's where it's at but it's a pretty small part of the Company. We spend a lot of time talking about a small part of the Company. But having said that, the situation does not look like it's going to get any better, so we're going to have to continue to try to keep costs as low as we can.

Okay, thank you. Good luck.

Thank you. So, Jen, I think you said that was the last question. So, thank you and that will conclude the call today. And we'll speak with you again in early February to discuss the fourth-quarter and full-year 2016 results. Thank you very much.

Thank you, speakers. And that concludes today's conference call. Thank you all for joining and you may now all disconnect.