Crown Holdings Inc (CCK) 2017 Q2 法說會逐字稿

Good morning, and welcome to Crown Holdings Second Quarter 2017 Earnings Conference Call. (Operator Instructions) Please be advised that this conference is being recorded.

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

Thank you, Ange, and good morning. With me on today's call is Tim Donahue, President and Chief Executive Officer. On this call, as in the earnings release, we will be making a number of forward-looking statements. Actual results could vary materially from such statements. Additional information concerning factors that could cause actual results to vary is contained in the press release and in our SEC filings, including in our Form 10-K for 2016 and subsequent filings.

Earnings per share were $0.94 in the second quarter and $1.71 for the 6-month period. Adjusted earnings per share were $1.12 in the quarter and $1.83 year-to-date. Net sales for both the quarter and year were up less than 1% as the increased beverage can volumes and the pass-through of higher raw material costs were offset by currency translation.

Segment income for both the quarter and year improved 3% in actual rates and 5% at constant currency rates, with the largest contributions in Americas Beverage and Asia Pacific.

Through the date of the release, we have repurchased 5.4 million shares of company stock for $296 million. As outlined in the release, we are increasing our full year adjusted earnings guidance to between $3.90 and $4.05 per share and project third quarter adjusted earnings of between $1.35 and $1.45 per share. These estimates assume a full year tax rate of approximately 26% and that exchange rates remain at current levels. We used a euro rate of $1.08 for the first 6 months, and our guidance assumes a rate of $1.11 for the full year. We are also maintaining our full year free cash flow guidance of $425 million after $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'll then open the call to questions. As Tom just discussed and as reflected in last night's earnings release, we had a good second quarter and, through 6 months, are slightly ahead of our original plan.

In February, we outlined for you 2 nonoperating items: foreign exchange and interest expense as well as start-up costs, which would impact 2017 versus 2016. At the 6-month mark, foreign exchange and start-up costs have been a bit more of a headwind than we anticipated, offset by lower interest expense and higher global volumes across all product lines. Global beverage can demand has remained firm, with volumes up a bit more than 2% both in the quarter and for the full year.

The currency impact on segment sales and income is shown in the release, so my comments regarding performance will be on a currency-neutral basis. In Americas Beverage, sales units improved more than 1% as high single-digit volume increases across Latin America, that is Brazil, Colombia and Mexico, offset a low single-digit decline in North America. Segment income was up 4% in the quarter as a result of the volume gain and improved mix, offsetting start-up costs in Nichols and Monterrey and the inflationary impact we have discussed before.

Sales unit volumes in North American Food were level to the prior year, with segment income benefiting from improved mix. Initial indicators point to what should be firm pack conditions, with beans and corn looking strong.

Unit volumes in European Beverage increased almost 2.5% in the quarter as strong volume performance were noted across all operations, with the exception of Saudi Arabia. Volume performance in the quarter was also helped by the start-up of the second aluminum can line in Custines, France during April. Segment income was off slightly due to geographic mix and a small start-up impact from the second Custines line.

And in the Middle East, volumes remain under pressure from the ongoing conflicts in the region and more recent introduction of beverage taxes in Saudi Arabia.

Unit volumes in European Food were level to the prior year in the second quarter. And is the case in North America, we expect crop yields in the seasonal pack for most products to be strong this year. The benefits of prior year cost reduction activities, combined with improved operating performance, offset a mix shift to smaller-sized cans to yield 3% growth in segment income.

Segment income in Asia Pacific advanced 15% on the back of mid-single-digit volume growth in Southeast Asia and the cost benefits of last year's Shanghai plant closure, which offset a 2% volume decline in China.

In summary and as Tom noted, the combination of solid first half operating results, some second half relief on currency and the front-loading of our share buyback program all lead us to increasing guidance at the midway point in the year. We still have the important third quarter food pack to come, but currently all signs point to a good season.

And with that, Ange, we're now ready to take questions.

(Operator Instructions) Our first question comes from Brian Maguire of Goldman Sachs.

Just a quick question on the share repurchase. As you noted, it's probably a little bit above your expectations maybe going into the year. I think last quarter, you commented on the M&A environment and multiples being a little bit elevated. I'm guessing that drove some of the thought process there. But could you maybe give an update on how you see the M&A pipeline and the landscape and how you would kind of prioritize or rank the options you've got for returning cash at this point?

Well, I think -- certainly, we believe multiples are elevated, and it's not just in the M&A landscape. And perhaps it's a resetting of where multiples are going to be long term just given low interest rates and the amount of money that's chasing assets, specifically some of the private equity firms that continue to raise huge amounts of money. Having said that, we're always on the lookout for assets to add to the portfolio that yield very good growth opportunities for us and have sustainable earnings and cash flow characteristics. I would say that those opportunities across the metal space are limited right now. So if you were to undertake that exercise, you're looking at expanding your portfolio of assets to add another leg to the stool, which obviously requires further thought and an increasing knowledge of a business that we don't have enough knowledge about now. Having said that, that's not going to put us off from that if we found an asset that we thought was really important to the future of the franchise. We look a certain way today, but that doesn't mean we're going to look that way in 5 years. But I would say that our efforts to buy back or front-load the share repurchase to the first half of this year were more in line with -- as we said before, we thought certainly multiples were elevated, but more importantly, we thought we were undervalued. And I think I -- unfortunately, I made my feelings clear about that, fortunate or unfortunate. So we thought at a time we were significantly undervalued. Perhaps we still think we're undervalued, but not as significantly undervalued versus some of the peers that we have across the paper and packaging landscape.

Yes, that makes sense, and good to see you putting your money where your mouth is on that one. Just one follow-up for me. Just most of the volumes were strong outside of the Americas. Just wondering if you could comment -- or maybe outside of the U.S. in particular, just wondering if you could comment on trends in the U.S. We just saw some weakness in some of the Nielsen data as the quarter progressed, and some of the comments from some of the large brand owners were sort of a little bit negative on June, maybe commenting on weather and things like that. Just wondering if you saw similar trends there and what sort of the outlook is for the third quarter and second half for the U.S. in North America.

So we've received the CMI data, I think, yesterday or the day before. It looks like the industry increased 0.4% in the quarter, and we were down low single digits, around 2%, 2.5%. As you recall, for the last several years, we've been outperforming the market, which was largely related to customer mix that we had or that we were enjoying versus the overall market, our customer mix performance. There was a small customer shift at the beginning of this year, so I would expect our volume performance for the balance of this year to trend in line more with our experience in the second quarter and for that to be more than offset by performance in Latin America.

Our next question comes from Scott Gaffner of Barclays.

Just looking at the free cash flow for a minute. Obviously, you raised the earnings guidance, but the free cash flow didn't change. Is there more working capital requirements associated with Nichols or maybe some of the conversions in Europe?

Scott, the primary factor there is that we have a one-off cash flow item that we're assuming is going to hit us this year, and that arose in the second quarter. And you'll see a reference to that in our non-GAAP reconciliation in the back of the release. And also, in that discussion, you'll get an idea of the magnitude of the amount.

And what is the item, just so we know?

A litigation item.

So if you go further into the release, you'll see that we had a litigation item that related to pre-acquisition of Mivisa that has arisen.

Okay. And as we think about 2018 around the CapEx, should we -- I mean, I think on the last call, you gave us the long list of projects. Should we think about CapEx coming down a little bit as we move into 2018 just as Nichols rolls off and some of these other capacity expansions?

Well, it depends what opportunities we're presented with. I think fortunately for us, we're present in a number of markets which still exhibit very good growth characteristics. And we're -- as you know, we've not been ones to shy away from trying to take advantage of those growth opportunities when they arise. So that, in combination with the ongoing need to convert Spain from steel to aluminum, I would say that -- what we have said is you should expect at least $400 million next year. And I think that's probably all we're prepared to say at this point. We don't have a finer point to put on it.

Okay. Last one for me. Just on Brazil in the quarter, I mean, can you reiterate what you said the volumes were in the quarter? And are you seeing any shift away from cans to glass given the macro drop -- backdrop there?

So we look at Latin America as Mexico, Brazil and Colombia. I can tell you, Latin America up high single digits in each market, each of those countries up. We have not seen a shift away from cans in Brazil.

Our next question comes from George Staphos from Bank of America Merrill Lynch.

I guess my first question, I'll segue off of what Scott was talking about with Brazil. Can you comment on what the volume trends were in the Middle East -- if you had mentioned that, I missed it -- and what the exit rates look like into the third quarter? Similarly, if you can comment on what the exit rate for Latin American beverage can volumes looks like. Are you still continuing around the high single-digit growth rate? And then a couple of follow-ons.

So I'll do Latin America first. I don't have -- you talked on the exit rate, you kind of want to know the last couple weeks of June. I don't have that. I do expect the third and fourth quarter to be fairly robust in Latin America. Whether it's mid-single-digit growth or high single, I can't really refine it more than that for you, George.

That's fine.

But somewhere along the line in our business, we forgot we're can companies. I think we're -- we naturally are more excited at mid-single digit than you are, but remembering we're can companies, mid-single-digit growth is really quite robust for a can company. So we're quite happy with that. If we get high single digits, I almost can do a backflip.

That's right.

Yes. I'm happy with better than 0 typically, so anyway.

Well, that's the point I'm trying to make, right? It's -- so it's all quite robust. And you understand, when you put more units under the roof, the multiplier effect to that. So we're quite happy with that. Whether it's 3%, 6% or 9%, I can get happy at any of those numbers. In the Middle East, yes, it's all about Saudi. I would say that our European operations were up high single digits. I'm looking at the numbers now. And the Middle East was down low double digits, with the Middle East all being confined -- that decline all being confined to Saudi Arabia and largely around lower can fillings from the conflicts but, more recently, the beverage tax that has been introduced in Saudi. And I -- it's hard for me to project the Middle East. But I think on the beverage tax, we're going to expect the next couple of quarters to yield soft volumes in Saudi. But I think over time, as we've seen, when they've introduced other taxes in the past, that it will come back. It'd just probably take 2 or 3 quarters for that to be fully seasoned before we start regaining.

Okay, Tim. So I seem to remember in the past, broadly, Middle East you're looking at mid-single-digit declines. And I think you just said low double-digit, obviously, due to Saudi. And I know it's hard to say what you're seeing early in the quarter, let alone the last couple weeks of June given your prior comments on Latin America. But is your opinion that you're running double-digit declines in Middle East right now for the foreseeable future as a result of what you just said?

I don't know. I think that as I -- I'm just looking at the other performances in the other countries there, Jordan, Dubai, and Tunisia, they were all pretty firm. It's hard to believe Saudi is going to be down as much each quarter as it was in the second quarter, but we'll see. Certainly, they didn't fill, so their level of inventory coming out of the second quarter is quite low. I -- it's -- well, what I will say is that despite all that, we're earning our way through it. So I don't want to leave a negative taste, right? We basically are right on top of last year's number with a big headwind in Saudi, so I'm not so concerned about it. Obviously, you're always concerned, but we've got a pretty broad business, and we'll continue to earn our way through it.

Okay. Second question, just on working capital. And the line item that you mentioned in terms of litigation, I wasn't able to find it in my version of the press release, but has that more or less -- is that taken care of? Or is it going to be an ongoing event, if you can comment? And then I seem to remember, last year, you had a better-than-normal, if you will, working capital year in part because you're extending payables and that sort of thing. So I remember that being one of the reasons that this year, you weren't expecting as much of a working capital benefit and the operating cash flow was where it was going to be. But if you can comment around those points, that'd be helpful. And then I have one last one.

Yes. So if you -- we have an 8-page earnings release. And if you go to Page 6, it's footnote 2. That's where you'll find that. Just remind me that the other...

It's a one-off.

It's a one-off, George. It's not ongoing. And then working capital, generally, for the first 6 months, using more working capital than last year. And that really has to do with the pass-through of much higher tinplate costs across the food and aerosol businesses in North America and Europe this year compared to last year. So building inventory, higher receivable balances, but I think we're anticipating working capital performance. Tom is giving me the level sign this year as compared to last year. So not the benefit that you would have seen last year. Is that what you're saying, Tom?

That's right.

That's right, okay.

Okay. But flat, more or less, and aside from that one-off, more or less where you expected it to be?

Yes.

Okay. And my last question. Just taking a step back, the last couple of years, there have been several headwinds, foreign exchange being one of them. The company's continued to plow ahead with its investments and strategy. If -- as you sit here today, and there are no guarantees in life, so we just want to know what your thoughts are as opposed to holding it as something specifically. But what gives you the most confidence in your ability to see growth in EBITDA and returns over the next 2 to 3 years? And what gives you, as we sit here, July of '17, the most pause in answering that question or concern? I'll turn it over.

Thank you. Well, yes, George, I think as we've said before, you -- we could take the strategy that we're not going to spend money to grow the company; we're just going to generate cash and buy back stock. That's not a long-term strategy. You're going to wake up in 5 years, and you're not going to have the business you thought you have. Things change. You become less competitive in the environments that you're in because you're in a number of markets with a number of different competitors in several markets. And you're going to find in 5 years you have less cash flow than you thought you were going to have because you're just not running as well or you're not as competitive.

No.

Yes. Tim, it was less of a capital allocation question. It's really more markets and the [pattern]...

Oh, so we look at some of the markets we're in. And all of these markets, from time to time, have their downs. But on balance, for the last 10 years, when you look at Latin America, Southern Europe, Southeast Asia, the demand trends have been really robust. And Brazil is a big country. There's 200 million people. They add about 2 million or 3 million every year, an extremely young population. They've had certainly some political and social issues, some -- a bit of instability. And despite that, they keep -- they live their lives. They're out having their celebrations and living their lives, and demand has remained strong. It's -- it may not be up 10% every year. It might have a year where it's down a couple percent or flat. But on balance, it's been very robust. So we're -- we remain positive. And then you come to a market like Southeast Asia, there's a lot of people in Southeast Asia, and they become wealthier every year. So our -- we remain bullish on Southeast Asia as do many other companies, and we're extremely well positioned in a number of those markets. And we're not -- I will tell you, George, we're not just taking capital and throwing it against the wall, hoping that we're right 6 out of 10 times. We are -- if we're not 10 for 10, we're always very disappointed. And I'll be honest, we're not always 10 for 10. We know we have some -- we've had some clunkers in there or -- I shouldn't say clunkers. We've had some disappointments. The disappointments, we've talked about it before, China. And I've said before, everything we anticipated about China on the volume side, we were actually a little light. The demand has actually been much more robust. It's just we didn't anticipate the level of state-sponsored funding that all these other smaller companies could come into the market with them, and the other -- whatever funding they get to offer prices that are really kind of ridiculous. So -- but other than that, I think we remain fairly optimistic about the opportunities over the next several years. And it's why we're -- it's why we continue to put capital to work in several of these markets. And I think from time to time, we have a hiccup. But I think generally, over time, the trend line in markets like Brazil and Turkey and Southeast Asia, not only for demand but our segment income performance, is quite positive.

Our next question comes from Ghansham Panjabi of Robert W. Baird.

This is actually Matt Krueger sitting in for Ghansham. Could you provide some added detail on what specifically drove the outperformance in Southeast Asia compared to your initial expectations? And then can you also comment on the pricing environment in China with maybe an outlook as well?

Yes. So the outperformance in volume, I think we were up mid-single digits, and I say mid -- I think we were up like 6.5% in Southeast Asia. I don't remember what we modeled, but I guess -- I think the Asian team had a number more like 4% in there probably for the first half. So it's a few percent better. And as I said earlier, you put a couple percent growth under the infrastructure you have, it's quite powerful from a leverage standpoint. As to China, pricing is where it is right now. It hasn't changed really from the beginning of the year. I mentioned earlier that it was a bit firmer this year than it has been in past years. That is as aluminum from the Shanghai exchange went up this year, we actually saw the ability to pass most of that through. And so it gives me some optimism -- where at the time it gave me some optimism that perhaps there's light at the end of the tunnel. And I think I told you I don't know how long that tunnel is, but I do see a light. It really remains to be seen. I think there's still far too much capacity in China. The market is expected to grow again this year, albeit it's going to grow at much lower rates than we've experienced in the past. I -- what our guys are suggesting is that Chinese growth is going to be in the 4% to 5%, 6% range this year, which is a much lower growth rate than we've seen in the past. And normally, 4% to 5%, we'd be quite pleased with. But given the amount of excess capacity in China, it -- we'll see what that means in terms of price yield going forward.

That's definitely very helpful. And then were there any notable start-up costs during the quarter? And then how do you expect start-up costs to trend for the remainder of 2017 and heading into 2018 as well given all your investments?

Well, I think what we said last time, the only start-up costs we were really calling out as an impact '17 over '16 were Monterrey and Nichols, only because they're very large projects in markets where we've not had recent start-ups. I think that on balance, while there are a number of projects that we're continuing to do in Asia and some in Europe, we've had start-ups. So year-on-year, there's no -- we don't really see any impact year-on-year. There is a start-up impact, but it's not too dissimilar to what we've experienced in the past. As to Monterrey and Nichols, I've made mention in the -- my comments that the start-up -- a little higher start-up costs than we had modeled this year, and that's just the start-ups have gone a little slower than we anticipated. But they are beginning to come up the learning curve. So hopefully, we can stop talking about that and move forward. But even with that, we're -- through the division, we're earning our way through that. So I like to use the word earning our way through. We all have challenges, but we continue to earn our way through it.

That definitely makes sense. And then finally, what type of impact did raw material costs have on your various regions in 2Q? And then -- and what type of environment is baked into your outlook for the remainder of the year?

Well, I don't -- there's not been any raw material change in Q2 nor do we expect in the balance of the year from what we outlined in our guidance at the beginning. Steel is set for the year. And aluminum, while it floats, is largely a pass-through item.

Our next question comes from Mark Wilde of BMO Capital Markets.

Tim, just to start off, there've been some reports about you building a new plant in Spain. Can you talk about that?

Sure. We've talked about, for at least a year, our need to have aluminum beverage cans in Spain. Currently, we have 2 factories with 5 steel lines. The market -- we're the only manufacturer left with steel in the Spanish market. There still are a number of customers who prefer steel cans. There are customers who want us to go to aluminum. Depending on the relative price of aluminum and steel, they change their mind from time to time. However, we know we have to get to aluminum. The question is, how do we get to aluminum from the 2 factories that we're in? One of the factories in the north is a very old 3-line factory. It's a steel factory. It's there because it's close to the steel mills in that part of -- in the country. The other factory is in Seville. It's a relatively new factory built in 2001, and I think the second line probably went in 5 years later. So how do we best go about getting ourselves to aluminum? We're relatively sold out in Spain, so it's not like we can shut lines down and convert them without losing them. And then we look at what are the customers are and where the customers want us to be. And so we've circled a little spot on the map, pretty nice place in Spain called Valencia. And we're analyzing if and when we should begin the process of acquiring land and putting a factory into Valencia, initially with one aluminum can line, to slowly get ourselves over to aluminum from steel.

Okay, that's helpful. Just toggling over to Southeast Asia because it's been a big growth region for you. I just wondered if you could give us some sense, in the countries that you're in, in Southeast Asia, of sort of what the per capita penetration rate looks like and where you think we are in terms of the potential growth in those markets.

Yes. Mark, I don't have any of that in front of me. So anything I say is -- boy, I'm wiping it off that part of my body. I will tell you that when we look at Southeast Asian growth, we're currently in 6 Southeast Asian countries and going to a seventh next year. So we're currently in Vietnam, Cambodia, Thailand, Malaysia, Singapore, Indonesia with the new factory, and we'll go to Myanmar next year. We are -- as we look at penetration rates in a country like Indonesia, it's very, very low. I think the market is 2 billion to 2.5 billion units, and you know the Indonesian market is 200 million people. So largely a Muslim population, so the markets that we're serving are soft drink, juices and teas largely, with a small amount of beer in Bali, which is Hindu, not Muslim. But we do expect that to increase over time, specifically as the glass float becomes older and more expensive to replace, the returnable glass float. Cambodia, Vietnam, as those markets have exploded, they've really bypassed glass and gone straight to cans. Only because the initial returnable bottle for the glass float is far too expensive, they found it better to be in cans than glass. One other important thing is most of the shopkeepers there are still very small individuals. They call them shop fronts. They don't really have any room to store returnable glass when somebody brings the glass back to them. They don't want to use up valuable retail space to store empty bottles that they can't sell, waiting for the producer to come and collect it. So I think we remain really quite optimistic on Cambodia, Vietnam, Thailand, Indonesia and even Myanmar into the future. I think that Singapore obviously is a very mature market. Malaysia mature, less so than Singapore, but still really quite bullish on the region.

Yes. I guess, I -- Tim, I've been thinking about Cambodia because you've got 3 plants there, and there's only about 16 million people in the country, which I think implies that the per capita there is already up around 100 cans per capita.

Okay, I can't do the math that well in my head. But I think -- as I said, cans have bypassed glass. PET is not a big package in that market. And I'll give you the -- anecdotally what we've been told and what you see when you're there. Used PET bottles are used for fuel. So many of these markets, people transport themselves via motorbike. And it's really the case where you...

A couple of liters of fuel in the PET bottle?

It comes out of the PET bottle, so people don't trust the PET bottle in the market because they've seen fuel in it. It's -- one thing, it's market specific. But it's been a great market for us, and it's been a really good market for our customers there. And there are 2 -- there is a large international brewer growing there, but there are 2 local Cambodian brewers that are really quite successful. And the future of that market looks quite bright.

Okay. Last question I had is, can you give us just any general sense of contract renewals this year and next year in North America and Europe? Like what percent of your business would be renewing in each region this year and next year?

Boy, I'm guessing again. I'll endeavor to get you a better answer in October. I'm just not able to do that for you right now, honestly.

Our next question comes from Chip Dillon of Vertical Research.

First question has to do with, you mentioned the volume in the Americas or at least in North America would be lagging a bit this year the market, I guess, because of some adjustments at the beginning of this year. Would you expect -- or how would you expect the U.S. business or the North American business to fare volume-wise in '18 versus '17? In other words, is there more to come in terms of this adjustment you mentioned? Or will it pretty much flow through and we see, all things being equal, the company grow with the market next year in the Americas?

I think that this is a one specific issue that, by the time we get to '18, we're in line with the market, plus or minus our customers' performance versus the overall market, but in line with the market, yes.

Okay, okay. So it's onetime. And then you mentioned the net working capital contribution from last year would be flat this year. Is there anything that either foreign exchange related or interest rate related that would lead you to think that it's going to be tougher to get -- squeeze more cash out of working capital? Or is it something else?

No, I don't think there's any foreign exchange or interest really impact on our ability to squeeze more working capital. I don't think we've squeezed so much out over the last several years. We continue to take working capital out. But as you grow the base business and you add new factories, there's an element that every time you add a factory, you probably have at minimum $20 million of working capital in each factory or the associated warehouse for that factory. So you've got a growing business, and a growing business has needs.

Got you, got you. And then speaking of adding plants, I know there's probably a bit of spend left that will fill or -- and see in '18 for Myanmar and the glass plant in Mexico. But between the potential to maybe see another line at Monterrey -- and you mentioned the Valencia opportunity and your optimism on some of the Southeast Asian markets. With all that being said, could we see the CapEx number stay at a similar level in '18 as to where we are in '17?

Yes. Listen, I -- you ask a good question. You've kind of identified a couple of projects and then a couple potential opportunities, which we're not prepared to discuss yet only because they're only potential. What we've said is expect at least $400 million, but maybe, I don't know, it's hard to say. We're -- we have -- a big part of our business is a growth business. This is not the -- as we were talking with George before, this is not the same old 0% growth can industry. There are a number of markets around the world that are embracing the can, both the consumers and the customers as well as the market -- the local markets for a number of really good reasons. And we continue to benefit from that. And so we'll see where it takes us.

And then lastly, there's no question, I think, in most folks' minds that you all have been, and correctly so, of course, more aggressive in the buyback so far this year. And I didn't know if there was any view you had toward what you think the normalized leverage should be given changes in the industry environment, industry structure. I know you've typically wanted to approach 3x, I think, on an EV to EBITDA [on] a net debt basis. But if you could flesh out what your thinking is there.

Yes. So we've had a lot of discussion around this. And you can imagine all of our friendly bankers, with their fancy Ivy League educations, have a lot of opinions on where we should be as well. But I think -- let's be honest, 3x is more comfortable than 4, and 2 is more than 3. Now having said that, I think given the strong cash flows and the confidence with which all can companies have in their cash flows, it would be not prudent to have a fair amount of leverage on the company so as not to punish the shareholder. I think using leverage is very appropriate to reward the shareholder. Now is that number 3% or 4%? I don't know. There are a couple companies in packaging land -- in paper and packaging land that have leverage rates much higher than that, and they continue to trade very well. I -- every company's situation is different, and we continue to look at that. I would tell you that 3 is better than -- is more comfortable than 4 for Tom Kelly, but somewhere between 3 and 4 is not inappropriate, I would say, in my view.

Our next question comes from Anthony Pettinari of Citi.

Just following up on Mark's question on Southeast Asia. We've seen some announcements from other companies about capacity additions in Thailand, Vietnam and Myanmar. Just wondering, have you seen or do you anticipate any kind of change in competitive intensity in Southeast Asia? Or do you think, generally, the region is growing fast enough to support the new supply?

Yes. So the one we've seen in Thailand is kind of interesting. It's a Japanese company that's partnering with an energy-based drink to be promoted in Thailand, and that energy drink company is going to take Red Bull on head on. And we'll see how they fare. In Myanmar, I don't believe the rumor we've heard in Myanmar, frankly, because they have no business to get. Everything else is under contract with us or the other can company for a fair amount of time. And Vietnam -- yes, and the Vietnam market continues to grow. And I think the announcement there was the addition of a second line as well as for one guy in the south and then another guy talking about a new factory somewhere in the middle of the country. And we'll see if they go ahead with that, and we'll see what business they really can get with it. So I'm not too concerned. Vietnam continues to grow. Myanmar, as I said, I don't believe, and Thailand is specific to a customer's intention to take on another customer head on.

Okay, that's very helpful. And then on Nichols, is there a rough time frame for when you think Nichols could be fully ramped? And then can you remind us what your specialty mix is in the U.S. presently and where you think that could go as Nichols is running full out?

So I think this -- we're about 14%, 15% specialty. When we say specialty, we're saying everything other than the standard 12-ounce can. There's a debate as to whether or not 16-ounce cans are -- should be considered specialty or not, but let's just say they are. So we're about 14% or 15%. The market's probably in the low 20s. Our idea is we kind of need to get to where the market is. Otherwise, we're going to fall behind. So that'll happen over time. Depending on how we fill Nichols with standard cans or specialty cans, and more of it will be specialty, I would expect Nichols to be in its full ramp-up sometime mid-next year.

Okay, that's helpful. Maybe one last quick one if I could. During the quarter, I think you sold the Philadelphia headquarters. Is there any time line for finding a new headquarters? Or any thoughts on that process in terms of what you're looking for?

No, not at all. I feel no pressure to make another decision. The first decision that we made was to sell a piece of real estate to -- and for many of you who've been here, you recognize, quite frankly, it's far too big for us, and it costs too much money. And we are overwhelmingly confident that we're going to be able to cut our headquarter's costs significantly with a move wherever we move to.

Our next question comes from Debbie Jones of Deutsche Bank.

I want to ask a question just in general about capital allocation overall. Obviously, there's been a decent amount in there for new capacity additions and some of the other projects that you talked about. Can you give us a sense how much you're invest -- you're reinvesting in your existing asset base and whether or not you think, kind of going forward, that level needs to tick up in certain regions or if you're comfortable with that?

Well, that's a very good question, and I'll try to answer it as follows. I think new capacity, let's -- Tom can correct me if I'm wrong on the fly here. Let's say new capacity is 50%. There's an element of compliance, safety and environmental, but it's not very large because we've done a lot of that in the past. And then reinvestment takes the form of a lot of things: cost reductions, conversion from standard cans to sleek. So across the European footprint now, more than 50% of the market and more than 50% of Crown is in nonstandard cans. So I would call that reinvesting in the business; investments made to factories across several pieces of equipment in the factory to allow us to lightweight the cans. Yes, so 50% is growth, and reinvestment, I'd say, boy, 45%, with 5% being compliance, something like that. You agree with that, Tom?

Yes, sounds about right.

Yes.

And so if we think about kind of going -- looking ahead, are you comfortable with that level? Or is there any -- do you think that you might have to step up that reinvestment?

Well, I think when we get out of the conversions in Spain -- and keep in mind, we just did a 2-line conversion in France over the last couple of years, and we need to get through the conversion in Spain over the next couple of years. When we get beyond that, depending on the growth opportunities, it could still be 50-50 or it could be more skewed to growth. We'll see.

Okay, that's helpful. And then just one point of clarification on guidance. The level of share repurchases in Q2, was that expected in the kind of initial range? And then as I -- for Q2. And if I think about the back half, you said that it was front half loaded. So does the back half still assume some share repurchases? Or should we think they're going to be more opportunistic in nature?

Yes. So yes, I don't think it was particularly that much front-loaded compared to what we had in our modeling anyway. So I think came in at more or less where we expected through the 6 months. As far as the rest of year, we may do additional share repurchases as the year goes on. But the amount and timing of those, we still have to determine.

Okay. And so as it relates to your guidance for the year, you assumed that you will not do share repurchases?

For the remainder of the year?

Yes.

I don't think you're going to see share repurchases of the magnitude we did in the first 6 months. But again, perhaps we may do some additional around the edges.

Our next question comes from Philip Ng of Jefferies.

Top line in Continental Europe, that was actually pretty strong. I'm just curious, how much of that was Custines versus just the overall market strengthening? And are you seeing that momentum carry through in the third quarter?

Again, I -- it's far too early to talk to you about the third quarter. I don't think there's any reason to think we're going to see a slowdown in the third -- well, I don't think there's any reason to think that the third quarter's not going to be strong. Whether it grows at the rate that it grew in the second quarter, I don't know. Let me just -- I'm taking a look here. It's hard to -- yes, Custines, we had a -- let's say Custines is up high single digits in the first quarter and still down mid-single digits for the full year, which implies that we restocked -- that we were able to restock or regain business that we weren't supplying during the conversion period. But we saw growth across almost every market, the U.K. and specifically across Southern Europe, whether that's Spain, Italy, Turkey. It was pretty broad based.

Okay, that's helpful.

But keep in mind, we also -- I think -- was it last October that we doubled Osmaniye in Turkey? So we've had -- we have a new -- we have a second line running in the Osmaniye plant in Turkey at this time of the year that we didn't have at this time of the year last year. So...

Okay. But overall, you -- it sounds like after seeing some soft growth in Continental Europe last year, it seems like it's strengthening a little bit and it's pretty broad based. So that's encouraging. Wanted some color...

Just, Phil, as we've said, it -- Europe continues to be a growth market for beverage cans. I mean, it's -- with the exception of 1 or 2 seasons over the last 15 years -- and they are specific to 2 issues: the global credit crisis and the German deposit system. With the exception of those 2 issues, the European Beverage business has grown tremendously over the last 15 years. This is a growth business for beverage cans. It may not be the levels of growth in terms of percentage that you see in some other markets, but it's off a big base. And it's low to mid-single digits, depending on the year. So yes, we continue to be -- as our competitors do, we continue to be very bullish on Europe.

Okay, that's helpful. And then a question for Tom. Just wanted some color on the cadence of earnings in the back half of this year. I know your 3Q guide is obviously above where consensus was shaking out, not to say we're modeling correct, but it does look like 4Q is a touch lighter. Is there anything that we need to be mindful of in the fourth quarter, like any drawdown in production for working capital stuff or any other incremental start-up costs we weren't anticipating?

Yes, Phil, nothing really out of the ordinary. I mean, the entire year, we're -- as we gave our guidance, we said we'd be affected by things like currency and interest. And that remains the case. But there's nothing particularly unusual about the timing of the quarters this year.

The only thing I'd -- I think, Phil, I think we had a pretty strong performance in Brazil Q4 last year. I'd have to go back and look. We're not expecting Brazil to weaken. We're expecting Brazil to continue to be strong. It's just how much will it outperform last year's Q4, but it will outperform. But how much, I don't know. I think if you model through to the midpoints, we're still up in earnings in Q4. It's just -- it's around the modeling, right? You're now trying to pin us down to being really fine on every item.

Okay, that's helpful color. And just one last one for me, I guess, piggybacking off of Mark's question earlier. Just curious, as contracts are up for renewal towards the end of the year, this time of the year actually, are you seeing any more bidding opportunities this year versus years past or any change in behavior by some of the major players?

You said -- did you say bidding opportunities?

Yes. Just more opportunities for you to bid for new business this year versus years past. Any change in behavior just by some of the bigger market players?

Well, I would say that you always have bidding opportunities, so there's no more or no less opportunities. How you behave in that process is a different issue, but I would say that we have not seen any change in behavior.

Our next question comes from Adam Josephson of KeyBanc.

Tom, just a couple of housekeeping items. Just to make sure, you're assuming $1.14 euro in the second half. Is that right?

Yes. And combined with the dollar rate that we had in the first 6 months, that would put us about $1.11 for the year. That's right.

Okay. And then just in terms of the earnings increase, the guidance increased $0.075. Is that -- I know there's some FX. There's maybe a little bit of front-loaded buyback. Are there any other items in there that we should be aware of?

No. I mean, the operations did a little better in the first 6 months here. So that's in there. Our interest expense a little bit lower. We had factored in some potential rate rises that haven't happened, at least yet. So a little bit of each of those.

Okay. And so you're bumping up your net income guidance by, call it, $10 million. You have that litigation of -- I think it's $15 million net of tax. So that's why you're saying there's not really -- you don't think your free cash flow guide is overly conservative in light of that litigation. Is that an appropriate characterization, Tom?

Yes, that's right, Adam.

Our next question comes from Chris Manuel of Wells Fargo.

Tim, I wanted to -- Tim and Tom, I guess, I wanted to center around what I kind of perceive as maybe some potential opportunities over the next year or 2, and if you could help me kind of frame those, that would be helpful. So I'll kind of read off a list, and then if you could kind of address each. First, you've talked a little bit about start-up costs. So just remind us what the absolute level last year, this year and -- or what -- at least what the delta is year-over-year and how that might perhaps look the next couple years as you still have some projects that you've highlighted as underway. A second item being China, I know you mentioned it's a far-out tunnel, but help us size the business. I want to say it was like $400-ish million if memory serves. But is that a potential $10 million, $20 million EBIT lift if pricing and things kind of resume there? And then kind of final pieces. I think you've already talked about Spain, but if you could also address either Mexico or that you have a one line in today, thoughts of a second and Nichols that -- getting that to running full specialty versus kind of a mix today. So if you could kind of run through those items or any others you see.

So start off, I think what we said in February was that we expect start-up to impact us about $0.06 this year versus last year, and that was specific to Monterrey and Nichols. As I've said, we generally don't look at incremental start-up from new projects in Asia, Latin America, Southern Europe, only because we've had projects ongoing, and they kind of offset -- they're kind of equal to the prior year. That $0.06 has probably been -- we probably feel like it's more like $0.08 or $0.09 or $0.10 this year, and we've been able to offset that in other ways. So that's an opportunity going forward. What was the second question?

China.

Oh, China. Yes, so China is a -- I think our revenues in China, you're much higher than we are. Our revenues in China are $250 million to $275 million, depending on the price of aluminum. We're still profitable at segment income, albeit at levels we're not satisfied with. My view, Chris, given the overcapacity, it's unlikely that you should add $10 million to $20 million or $30 million, whatever you described, to China over the next couple of years. We'll see how that plays out. And then...

Nichols and Mexico?

We -- I prefer not to comment on Mexico and Nichols only because they're really market specific to other people in the market for competitive reasons. So...

Okay. But those are still regions that -- in Nichols, I think you're running closer to full, but it might not be at specialty. And then in Mexico, it's one line. I think the thought was always you would go to 2 lines at some point. Is that still accurate?

Yes. I think that when you build a can plant with one line, you will always have the thought in your mind you're going to go to 2 lines, absolutely. So yes, we are -- we've always thought we might go to 2 lines. It's just when we might do it when it makes sense. Nichols is not running full right now. As we said, we're -- units are down 2%, 2.5% in North America in the second quarter. And -- but we're -- as I said, we think we'll be through that by the middle of next year.

Our next question comes from Arun Viswanathan of RBC Capital Markets.

Just back on Asia. Looks like the margins were quite strong this time around. Maybe you can just reiterate how that kind of flowed through and what your expectations are for future margins out of Asia.

Yes. Well, it was a good performance. We had -- we closed the Shanghai factory, I want to say Q4 last year. So we're starting to get the benefits of that closure come through. China, while things remain extremely competitive in China, our income performance in China this year is level to last year on a quarter and year-to-date basis, a little up actually on a year-to-date basis. So we're not having the China offset to the Southeast Asian performance we'd experienced in the last couple of years. I can't -- Arun, I can't put that fine a comb on it whether we're going to be 15.7% or 15.9% or 15.2% or 14.8%. It's -- from quarter-to-quarter, things move around depending on customers' demand trends, what they're seeing from the consumers and the promotions they have and the weather and different events that they have. As you know, the different countries celebrate Chinese New Year and/or the celebrations that they have at different times. So -- but I think generally, things are all moving in the right direction. We're -- we continue to be pleased with the performance in the region.

Okay, great. And then on the start-up costs real fast, I guess would you say that all of the new lines that you're starting up this year are accretive to earnings after start-up costs? Or would that be more of an '18 kind of characterization?

I think several of them are, but I think it's more of an '18 characterization for all of them.

Got it. And then just lastly, for Americas, any kind of view on volume growth going forward? It sounds like your comments indicate that you're pretty optimistic that things can continue to grow from an organic standpoint. I know it's going to vary by 12-ounce and non-12-ounce. But are you guys just kind of feeling a little bit more optimistic on developed market growth?

Yes. I think Latin America's going to keep growing. And North America, we had a -- one situation this year. It'll season itself as we get into next year, and we'll be back to in line with the market. Now the market has steadied itself over the last 1 or 2 years. After several years of declines, the market's been fairly firm. We actually had, I think, growth in North America at 1.5% last year. So we don't see why we shouldn't be right in line with the market.

Our last question comes from Tyler Langton of JPMorgan.

Just had a -- Tim, just had a quick question on Europe. I know the volumes were up high single digits, and you mentioned, I think, profits were down just due to a few one-off items. Can you just give a couple of details on those cost pressures?

Well, what I said was we had geographic mix. So we have better margins in the Middle East than we have in Continental Europe. And Middle East was down in total on Saudi Arabia, and that has a much bigger impact than the up in Continental Europe.

Okay, perfect. And then, Tom, just last question for -- can you tell us what you're planning for interest expense for the year?

Interest expense for the year, about $225 million to $230 million, Tyler.

No, it's got to be more than that.

Oh, I'm sorry, no, that's cash -- sorry, that's cash interest, that would be right.

Probably $250 million or $245 million or...

No, no. Mid-230s on the expense, and about $225 million to $230 million on the year. Yes, yes.

Thank you. Ange, I think that was the last call, you said. So that concludes the call today. And we thank everybody for joining, and we look forward to speaking with you again in October. Thank you very much.

That concludes today's conference. Thank you for your participation. You may now disconnect.