Crown Holdings Inc (CCK) 2017 Q4 法說會逐字稿

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

The loss in the fourth quarter of $0.67 per share included a noncash tax charge of $177 million to recognize the accounting impact of U.S. tax reform. We do not expect any cash tax impact from the deemed repatriation provisions of the law due to available tax credits that will fully offset any tax that would otherwise be paid.

Adjusted earnings per share was $0.79 in the quarter and $4.03 for the year. Net sales on a currency-neutral basis were up 8% for the quarter and 5% for the year due to the pass-through of higher material costs and increased beverage and food can volumes.

Segment income was up 4% for the quarter and 5% for the year at actual rates. Adjusted free cash flow for the year of $503 million exceeded our earlier guidance, primarily due to working capital improvements and a weaker dollar as strong fourth quarter cash flows came in at higher translation rates. This improvement was partially offset by higher capital spending, largely due to an acceleration of spending on our new glass bottle plant in Mexico.

Adjusted free cash flow excludes the impact of a $241 million voluntary prefunding payment to our U.K.-defined benefit pension plan that will reduce future contributions.

As outlined in the release and excluding the impact of the Signode acquisition, we are estimating first quarter 2018 adjusted earnings of between $0.75 and $0.85 per share and full year earnings of between $4.30 and $4.50 per share. These estimates assume a full year tax rate of approximately 26% and that exchange rates remain at current levels. To be consistent with the scenario that excludes the Signode acquisition, and as most analysts have modeled, these estimates assume share repurchases in 2018. To be clear, however, we fully expect to close the Signode acquisition, in which case we would not repurchase shares in 2018.

Again, excluding the impact of the Signode acquisition, we are projecting full year adjusted free cash flow of approximately $500 million after $425 million in capital spending. Also included in the release, and as previously disclosed in our 10-Q filings for 2017, is information on the potential impact the new accounting guidance may have on our reporting and disclosure in 2018. I won't repeat the information from the release, but will say that we do not expect that the changes required by the new guidance will materially impact our net income or earnings per share and that they will have no impact on cash flow available for debt pay-down, but will impact how certain items are reported on the income and cash flow statements.

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

Thank you, Tom, and good morning to everyone. As reflected in last night's earnings release and as Tom just discussed, we had a solid fourth quarter and full year 2017 performance. For the year, we outperformed our initial expectations by about $0.15 per share, as strong global demand for beverage and food cans offset higher-than-anticipated start-up costs. Headwinds from currency translation reversed during the year, also contributing to the outperformance.

In response to increasing global demand for beverage cans, we completed 5 major can projects and have 3 more currently underway for completion in 2018. Additionally and earlier than expected, we completed and commercialized the new glass facility in Chihuahua, Mexico early in 2018. We refer you to last night's release for the progress and timing on the major projects underway or recently completed.

The positive impact from foreign currency translation accelerated in the fourth quarter, reversing earlier headwinds to end the year with an overall negligible impact. As has been our practice recently, we have included the currency impact on sales and segment income in the release, so my comments on performance will be currency-neutral.

In total, net sales advanced 8.4% at constant currency in the fourth quarter and 4.8% for the full year, with the pass-through of higher raw material cost accounting for about 50% to 65% of those increases. With tinplate steel up double digits in 2018 versus 2017 and delivered aluminum up some 33% currently versus January of 2017, we expect significant reported sales gains in 2018 from the pass-through of raw materials.

In Americas Beverage, fourth quarter sales unit volumes advanced 4% over the prior year, and for the full year were up 2.6%. Strong demand throughout Latin America drove the volume gains, with North America flat in the fourth quarter and down 2% for the full year.

Segment income benefited from the additional volume, which offset higher-than-anticipated start-up costs at Nichols and Monterrey and the pass-through of our contractual inflation index, which for the past few years has been negative.

In North American Food, sales unit volumes increased low to mid-single digits in both the fourth quarter and for the year and were partially offset by a weak chili crop in Mexico. Unit volume demand in European Beverage increased 3.6% in the fourth quarter and 2% for the year, as strong performances throughout most operations offset continued demand softness in Saudi Arabia, the result of ongoing border closures and recently enacted beverage taxes.

As expected, segment income was off slightly from strong 2016 levels due to geographic mix, which we anticipate will continue into 2018. Unit volumes in European Food were level to the prior year in the fourth quarter and increased 1% for the full year, with cost reductions offsetting the mix shift to smaller-sized cans. Segment income in Asia Pacific advanced 10% for the year as continued strong demand throughout Southeast Asia, combined with cost savings from recently closed beverage can plants in Shanghai and Beijing, offset our continued pruning of nonprofitable business in the Chinese market. Segment income in our nonreportables businesses was in line with the prior year as our global aerosols and machinery businesses continued to perform well.

So in summary, a real productive year in 2017. Numerous projects completed and some others started. We have bracketed our 2000 (sic) [2018] EPS guidance right around a 9% to 10% growth over 2017 and free cash flow at $500 million, excluding the impact of the Signode acquisition.

As always, we will try to do better than that. Specifically to Signode, we do not yet own the business so it is inappropriate to comment on their business other than to reiterate what we had previously communicated to you: that is a full year pro forma incremental cash flow of $165 million and earnings accretion after the amortization of acquired intangibles. We do expect closing to occur in the late Q1, early Q2 time frame.

Before we open the call to questions, we say Dilly, Dilly, Philly, Philly. (Operator Instructions) And Darren, we're now ready to open the call to questions.

(Operator Instructions) Speaker comes from Ghansham Panjabi of Robert W. Baird.

This is actually Matt sitting in for Ghansham. Given your strong working capital performance and strong free cash flow, how much did lower production or inventory destocking impact your EBITDA during the fourth quarter? And then if did impact that, can we expect any lingering impact in the first quarter of 2018?

We -- and I'm assuming you're asking this question based on what some others may or may not have done. We made no changes to the production schedule in Q4. And so there was no impact in Q4 nor would there be any lingering effect from something that didn't happen in Q4 in the next year. So it's a nonissue for us.

Okay, very helpful. And then touching on the outlook for 2018. Can you provide an updated outlook for regional volumes for the year? And with a particular emphasis on Latin America given the new market entrants on the beverage can side in Brazil, that will be helpful.

Yes, so I think Latin America, there are a number of different markets in Latin America. We participate in Colombia and Brazil. We would expect Colombia to be up mid-single to low double digits. And Brazil, we expect the market to be up low to mid-single digits. Our volume should be similar to that. There will be -- there always is price pressure. Obviously, there's a new competitor in the market. And hopefully, there will be enough growth over the next couple of years to absorb that and to absorb their aspirations. And hopefully, they're going to enter a market and they're going to be somewhat responsible. We'll see how it goes. But yes, there will be some pressure. But there's always pressure in every market, in every business we're in.

That's helpful. And then would you mind touching on the remainder of the regions as well?

So North American beverage, I think we anticipate the market to be largely flat. It was somewhat flat this year, down a touch, but largely flat, plus or minus 1%. That's slowing declines in carbonated soft drinks offset by the growth in sparkling waters. Albeit, my comments anticipate that mass-market beer in the United States recovers from what we've seen here in the third and fourth quarter. European Beverage, we expect to see growth in the order of 3% to 5% as we've been consistently seeing as an industry over the last decade or more. And Southeast Asia, again, depending on the country we're talking about, could be low single digits to mid- to high single digits, low double digits. China, we would expect the Chinese market to grow on the order of 5% to 10%, although we will not participate in that growth as we are -- we closed 2 plants recently and we're being very careful about which customers we extend credit to.

Our next question comes from Tyler Langton of JPMorgan.

Tim, could you just -- I guess, the guidance for the year, the $4.30 to $4.50. Could you just talk, I guess, some of the puts and takes, what could kind of get you to the higher end, where are the risks that you see that could put it towards the lower end?

Well, the big item that puts you to the higher end will be foreign currency, right? I think we've seen the dollar weaken. And I think the -- whether it's the administration specifically and/or the other forces, it seems they want to have a weaker dollar policy than the previous administration, which happens to be very good for us. I think this time last year, we were probably talking about a euro that was $1.07 or $1.05, and we're sitting at $1.22, $1.25, something like that today, and the sterling, which was in the $1.20s, is now back into the $1.40s. So currency is clearly an opportunity. And we, like many multinationals, have faced significant headwinds over the last 4 years, 3, 4 years from currency. So we're hopeful and we're looking forward to getting some of that back. I think we've baked in -- into our interest expense model, we've baked in 3 more rate rises this year. So I think we've -- we think we've been prudent there, but that could drag that down a touch. But another 0.25 points or 0.5 points is not going to move the needle too much when you consider post-tax divided by the number of shares. And then, obviously, demand. We had a real good, real solid demand profile globally in '17. We see no reason why that shouldn't continue in '18. The can continues to be the preferred package by beverage marketers and consumers globally for a number of reasons. And so we feel pretty good about the business. And so it's a 20% band -- a $0.20 band. I think we give you a $0.20 band every time in the first quarter just to give ourselves a little leeway for a lot of things that we don't know that might happen during the year. And then we generally shrink that to $0.10 or a $0.05 later in the year, but it's the band that we have right now.

Okay, no. That's helpful. And then just with the closure of the Lawrence plant, do you have a, I guess, a rough sense on how much savings you can generate from that?

Yes, on the order of -- just if you want to pencil in a number, on the order of $10 million.

We have George Staphos from Bank of America Merrill Lynch.

I guess, the first question I had is a 2-part question on guidance. Tim or Tom. Can you relay to us what you would have baked in for repurchase in terms of the EPS guidance? And in your comments, Tim, I think you said your guidance assumed some recovery, at least sequentially, from the downdraft that had been occurring within the beer market. Could you provide a bit more color in terms of why that's the case? And I had a follow-on.

Yes, I'll take the shares, George. So without share repurchases, we think we would be about 135.5 million shares. With the pro forma share repurchases, we're at about 132.5 million. So it's about $3 million difference...

3 million shares.

I'm sorry, 3 million shares, $350 million of repurchases spread throughout the year.

And George, on the beer, I didn't make that comment in my prepared remarks. It was an answer to Matt's question as to our volume estimate for the North American market. And I said plus or minus 1%, which would imply that the decline -- the rapid declines we saw in Q3 and Q4 in mass-market beer in North America would abate. Keeping in mind, we're not extremely exposed to mass-market beer in the United States. We have one factory in the Southwest that is specifically a beer customer. And we generally have been experiencing better canned beer sales in Canada over the last couple of years. So we would expect to see that as well.

Okay. So it's more of an expectation or extrapolation as opposed to something that you're seeing real time. And obviously, it's less important to you, I guess, than...

It was more of a comment on the market in general as opposed to Crown, specifically.

I'm with you. The other question I had then, obviously, you haven't closed Signode, but you expect to close Signode. And you've talked in the past about what that provides to you presumably in terms of a platform. Meantime, we look at the number of projects in beverage cans. This year, I think you called out 3, one that you're completing after 5 last year. Implicitly or explicitly, should we then expect that the organic growth spending on beverage cans is probably at a lesser rate the next several years? And if you can provide some parameters around that, that will be great.

So I think what we said in December when we had the call to announce the Signode transaction, that this would not change our strategy with respect to our existing can businesses, be they beverage, food or aerosol. And so where we see opportunity to grow the business organically, we're going to continue to try to win as many of those opportunities as we can. But from time to time, capital might be plus or minus $25 million or plus or minus $50 million 1 year to the next, depending on the number of opportunities and the rate at which we complete those opportunities in any given year. But no, I think the good thing about the beverage can industry, we and our competitors, I think we all realize, we've all known this a while, and I think others realize that the can is the increasingly preferred package. And we are presented with more and more opportunities each year, and it's really a good thing. So we're very positive on the beverage industry. We're positive on the opportunities we see going forward. The rationale for the Signode acquisition is -- was not in any way to replace what we theoretically don't see in the future in the can business. It's a great business that we got at a really attractive cash price and it offers us opportunity to continue to grow our overall franchise. It's a franchise business that's the clear leader in their industry and it has pockets within their own business that have tremendous opportunity for growth. So it was purely looking at the future and continuing to look at how we can continue to grow Crown as an enterprise.

Our next question, we have Scott Gaffner from Barclays.

I just wanted to talk for a minute about Latin America. Going back to this new capacity that's coming online in the market there and really revisit your -- Crown's strategy in Brazil. Because if I look back, I think the last major facility you added in Brazil, if I'm correct, was in 2014. And you had added sort of ahead of the market growth just given the growth profile there. What's sort of the go-forward strategy there? Is it -- are you a little bit more, maybe, conservative than you have been historically with capital in the region? Or is it just something that you looked at as far as this new capacity and maybe got outbid?

I'm assuming -- are you talking about the plant in Paraguay or are you talking about the new entrant in the market?

The new entrant in the market.

Oh, the new entrant in the market was not an opportunity for any of the existing can makers. They bought a small one-line, one in -- one-can, one in-line factory that was making steel cans in the Northeast part of the country. We and the other existing can makers probably would not have been able to buy that, nor would we have wanted to. They used that as their entrée into the market. They converted it to aluminum. And with the sponsorship of 1 or perhaps 2 other -- 2 customers, they built another plant more towards the center of the country. And so I don't think any of us were outbid, it was more -- they were -- they've been looking at coming into the Brazilian market for a number of years and they were offered an opportunity and sponsored by 1 or 2 customers to come in.

Okay, fair enough. As far as substrate mix in that region, what are you -- are you seeing anything that gives you pause as we head here into 2018 around can's ability to gain share in the region?

No, I think in soft drinks -- on the soft drink side, the cans seem to be stuck right around 10% of the mix, and it doesn't seem to move a whole lot more than 0.1% or 0.2% one way or the other each year. So that's right around 10%. On the beer side, we've rapidly ascended from 25%, and if we're not at 50%, we're real close to 50%, the can versus the other, 1- or 2-way glass and draft. So if anything, we continue to see a creep-up in Brazil towards cans. Certainly, not at the 2/3 or 68% of the market like we have in North America, but creeping in that direction. And we're real positive on the Brazilian market. Yes, there's a new entrant. They've got sociopolitical issues from time to time, like a lot of places in the world. They've got a consumer that sometimes is weaker or stronger. They've got unemployment that perhaps is a little higher than you'd like to see right now. But all in all, it's a great market for cans and it's a great market for beer consumption, and cans do real well with beer.

Our next question, we have Chip Dillon from Vertical Research.

So listen, I had a quick question on the Signode deal since that was announced since the last call. And I just want to be clear on a couple of things. One is you mentioned $165 million in incremental free cash flow, and I'm just wondering if that is something that we should see starting day 1. And so let's say you closed, for example, on the end of March, would we see 3/4 of that this year or is it going to take it time to ramp to that level?

No, I think we should see 3/4 of that this year. I -- their business is not as seasonal as the can business. There is some seasonality and so we got to get into it a little bit more and understand the cash flow seasonality. But it could be that they -- for example, Chip, they could have a slight working capital build in Q1 that when we make the working capital adjustment in purchase price, we pay them a little bit more purchase price and the working capital comes out, we get a little more cash flow. But the pro forma, as if we owned it from January 1, is $165 million. So roughly 3/4 of that, yes.

Okay. And then I know -- not to get in the weeds here. When you guys came out with the very good details in December, there was a free cash flow slide that's indicated or suggested, as I see it, that you see maybe growth from the $590 million level pro forma, recognizing that's a full year pro forma, to $775 million by 2019. Is that sort of a mid-range of kind of your best guess as to how, based on what you see in the business, how free cash flow could evolve? How should we think about that $775 million number for '19?

Yes, I think the $590 million implied $425 million plus $165 million to get to $590 million. And I think whether we're talking about '17 or '18, we're $500 million plus $160 million so that's $665 million. And so we're looking for another roughly $100 million between '18 and '19. And I think given the capital that we've put in the ground over the last couple of years and continue to put in the ground, we're going to have earnings growth in Crown that's going to yield much of that right there. And there'll be some small -- we've only modeled very small improvements to the Signode business, although that could be much better than we've modeled. But you're looking at $665 million roughly in '18, which could be better than that as well. So...

Got you. And then last question is, you guys do a great job of matching your debt domicile, I guess, so currency exposure to where you have operations, it seems to be that way. How are you positioned if rates do rise? You mentioned you're putting in 3 rate increases. And I guess, the first question is, where do see interest expense this year, number one? And number two, how much of your debt is exposed to short-term rates and is there any thoughts towards fixing more of it?

So our interest expense for 2018, ex Signode, is about, yes, let's say, mid-240s, $240 million to $245 million. And then beyond that, we have about 2/3 of our debt, excluding Signode, fixed. And then we would obviously layer in Signode above that. And we're happy with the mix right now and post-Signode with the floating versus fixed.

Our next question, we have Mark Wilde from Bank of Montreal.

First, just on North American beverage can. I wondered, Tim, if you could give us some sense of where the business will be operating with the closure of Lawrence? What kind of operating rate you're looking at there? And then also, maybe just an update on the ramp-up up at Nichols.

Yes. So I think post-Lawrence, we're in the low 90s on a full year basis, which obviously implies from April through August or March through September, you're well over 100% when you're in the season. So we think that we and the industry are pretty good relative balance as it relates to demand on our capacity. Nichols, I mentioned twice, I think, in the prepared remarks, we had higher-than-anticipated start-up costs. It's been -- we're a can company. We're a manufacturing company. We're supposed to be able to make cans. We've built a lot of plants around the world and we probably struggled a little bit more in Nichols than we would have liked, but it is coming up, it is coming up now. So -- but last year, the performance was disappointing. Manufacturing performance was disappointing and the guys, the guys in Nichols and the guys in our beverage manufacturing team know they have to do better and they're going to do better. But -- so it is getting better.

And then just in terms of like filling the plant, though, with specialty volume. I'm just curious about what the time line is looking like there.

Well, so in specialty, as we've said before, for us, specialty is everything other than standard 12-ounce. So you've got 16-ounce cans as well. And we have a large proportion of the Canadian beer business that we supply. We only make 12-ounce cans in our 2 Canadian facilities. So all the 16-ounce will come from Nichols. So -- and then, obviously, the growing slim cans or sleek cans are for the entire Northeast, Midwest are coming out of Nichols as well. And then to the extent that we have displaced 12-ounce standard capacity from Lawrence, that will go in Nichols as well.

Okay. All right. The other question I had is just -- over the last few months, there have been some concerns about European Beverage can pricing. And I wondered if you could just update us about how you see the competitive market and pricing in Europe.

Yes, listen, I don't -- there are -- let's be clear, we're in a competitive business. Every business is competitive, every industry is competitive. If our industry wasn't competitive, there would be other people coming in to make it competitive. So that's just the nature of the business. I haven't seen anything in European Beverage cans that tells me that, that market's any more competitive than any other market, save for China, which is an anomaly brought on by government subsidies. But Europe is -- it's competitive, but it's no more competitive than North America, Brazil, anywhere else in the world.

We have Adam Josephson from KeyBanc Capital Markets.

Tom, just one regarding your guidance. Would you expect the inclusion of Signode to be any more or less accretive than the buybacks that you've penciled in now?

Yes, the buybacks were -- well, the buybacks would have been about a few percent of our shares, whereas Signode could be about 5% accretive. And remember, the Signode accretion is after large amortization charges as well. So...

Noncash amortization.

Noncash amortization.

Okay. So it'll be a bit more accretive than the buyback, it sounds like?

Yes, definitely, particularly if you exclude the amortization.

Yes, if you exclude the amortization, which we're not excluding, you're talking about $0.90 to $1 per share of accretion. But after -- when you deduct the amortization, then your accretion perhaps is in the, as Tom said, 5% range.

Got it, that's perfect. Just one on Brazil. Tim, demand has fluctuated pretty substantially over the last, I don't know, 3, 4 years. I know it's picked up of late. Can you just compare what you're seeing now to where it's been over the last 3, 4 years, both the ups, the downs and where you see it going from here?

Well, I think the good news is when you look back -- if you look back 3 years or 5 years and you look at the volume that the market had, the can volume that the market had 3 or 5 years ago and you look at it today, it's up significantly. And by significantly, it's certainly in the double-digit range. In some years, that could be plus 7%, plus 12%. We had a year in there that was flattish or minus 2% or 3%. But all in all, the market keeps moving in the right direction. I -- we run a business where we can't -- you guys can buy and sell stocks on a daily basis. We can't buy and sell our businesses on a daily basis. We have to take a much longer-term view of the market. And you look at a market like Brazil with a longer-term view and you feel really good about the market. So I wouldn't -- we expect to see 3% to 5% growth again in '18. And -- but I wouldn't look at '18 and make my decision on Brazil based on '18. I would look at over a 3- to 5-, 6-, 7-year period. And as we do that, we feel equally as good looking forward as we do when we look back. So it's one of those markets that's been real healthy for the can industry and we see no reason why it shouldn't continue to be so.

And just one -- I know Mark asked about Europe. Can you just kind of characterize what you think demand and supply are growing by in Continental Europe? And he asked about the pricing issue, so that would relate to the extent to which demand and supply are growing. So just any more detail there about what you think is happening there?

Yes, I mean, there is supply coming into the market, any number of lines or factories being added. But the market is growing. And it grows, as I said, 3% to 5% on a base of 60 to 70 billion cans, so that's fairly significant. So 3% on 60 billion is 1.8 billion. That's roughly 2 lines a year that need to be added to keep up with that. So in large part, the market is sold out in Europe. Certainly, in the shoulder seasons of Q1 and Q4, it's -- they're the low seasons and much lower in Northern Europe, Northwest Europe than we experience in North America. But in the summer there, they sell cans like we sell cans. They're flat out. And overall, the market is generally -- demand and supply are pretty well in balance. You're always hesitant to say you're sold out. You could always sell more if you had to, but we're pretty close to sold out, I think, as an industry. I know at Crown we are, and I think as an industry. Should pricing be better given the demand/supply characteristics? We think so. But it's a competitive business. And as you know, our customers have a lot of power, and it's incumbent upon us and the industry to make sure we get the proper returns for the assets we employ in our business. But it's -- pricing could be better, but it's no -- it's certainly no worse. It's obviously better, but it's no worse or no more competitive than other markets.

We have Arun Viswanathan from RBC Capital Markets.

Just some questions on, I guess, the volumes. I mean, I don't know if you explicitly are in a position to give out volumes by region in Q4. But do you have those, sir?

Yes, I think we said them in the prepared remarks. But I'll repeat them very quickly for you. Americas Beverage, up 4%. North America was flat. Brazil was up low teens. Mexico, mid-single digits. Europe was up high single digits. Saudi was down mid-teens. China, down mid-teens. Asia, up low double digits. Who did I miss here? That's about everybody, right? I think I got them all.

Okay. And just on North America then, just going back to that issue of cost. Do you expect that the Q4 result was -- or do you think the Q4 result was negatively impacted by those higher start-up costs and fixed costs? And so do you expect margin expansion, I guess, in Americas Beverage in 2018 as you fill the lines and probably see some of those start-up costs roll off?

Well, I think one thing to keep in mind when you're looking at percentage margins, the pass-through of raw materials is not going to be insignificant. We had huge pass-through of raw materials in Q4. And so that's dollar for dollar. So there is no margin expansion on that. If I was to look at Q4 in total for the company, our pass-through, if sales were up $200-and-some million, FX was $80 million or $85 million. I think pass-through alone was probably another $80 million or $85 million. So big numbers on pass-through and we expect to see that again. So percentage margins probably don't expand just because of the math with a larger denominator. We do expect absolute margin, that is segment income in every business, all of our reportable segments, to be up year-on-year with the exception of European Beverage, which we continue to see the mix effect of more sales in Europe at lower margins being offset by lower Saudi sales that have higher margins.

And Europe Food, lastly, some nice performance there, was that kind of versus our model. What's your expectations for '18? I guess, continued growth in some of the...

You always allow me the chance to say your model is wrong. I love that, Arun when you -- no, so...

I don't know how to model you guys so...

No, I know, I know. I'm joking. You know I'm joking. I think Europe Food -- I read a number of the reports this morning, and everybody was surprised how well we did in Europe Food. I got to tell you, excluding currency, I think we were flat to the prior year, so we weren't as happy as you were. It's a big business. It's a $2 billion business. And depending on my mood from day-to-day, I can get pretty gnarly around the fact that at a $2 billion business, you should be able to find a lot of cost reductions or perhaps more than you found. So we have been generating cost reductions. We are running the factories well. Like any manufacturing operation, from time to time, we have production problems or claims. And so we need to get better and we know we need to get better. But we would have -- this year, we were probably less excited about our performance in European Food than you were. I was a little disappointed that we were even year-on-year. We would have expected to do a little bit better and we do expect to do better next year -- or next year being '18, I'm sorry.

And lastly, if I may, on cash flow. What's the opportunity to potentially exceed your working capital again in '18 and post a slightly better free cash flow number (inaudible)...

Yes, at some point -- we generally try to put targets out there that we think are prudent so we don't mislead you or investors to believing we're going to do better than we actually think. So this is where we think we're going to be for the year. The business is expanding and, obviously, we're in a competitive environment. There's pressure everywhere. And so we've modeled what we think cash is and, as we say, we hope to do better. The problem with that is the last several years, we have done better or significantly better than we've told you initially. But this is where we're at right now and other than that, I don't think Tom wants me to say we're going to do better other than to say we're going to try to do better.

We have Anthony Pettinari from Citigroup.

The industry saw very strong volume growth in North American Food cans in 4Q. I'm just wondering if you were seeing pre-buying in 4Q ahead of steel prices going up or if there was something else driving that? And is that something that could maybe reverse or impact 1Q volumes? And then just looking at North American Food cans broadly in 2018. In previous years, we've seen maybe some pricing pressure, a competitor ramping capacity, some share shifts. Is pricing pressures may be stabilized somewhat in that business as you think about '18? Or any kind of color you could give will be helpful.

So on the pre-buy, the answer is in both of our food businesses, Europe and North America, we did see accelerated shipments in Q4. If you want to call that pre-buy, yes, there was pre-buy. Not -- didn't see any negative impact from the December -- November/December activity in January. So not clear that we're going to see any negative impact there. So it looks like that's okay. I think there's always, in that business specifically, North American Food, there is significant excess capacity and there has been other capacity brought on by not just the new entrant, but the largest entrant in the market and there's going to continue to be pressure in the business. So it's a smaller business for us and we're going to defend our turf and do what we need to do to protect our business.

Okay, that's helpful. And then just a follow-up, I guess, on Arun and Mark's questions. You had 5 projects last year and you talked about the higher-than-expected cost at Nichols. Is it possible to size the benefit from the roll-off of all of those project costs that you might see in 2018?

I think there probably is. I don't really want to give it out because we're going to have costs again. We've got a large factory we're building in Spain, a large 2-line factory in Spain. We've got another line going into Cambodia, which is similar to what we did this year in Da Nang -- or last year in Da Nang. We've got a 1-line plant going into Myanmar, which is similar to the plant we built in Indonesia. So there is -- there are similar projects we're doing in '18 like we did in '17. And some of the later projects that we completed in '17, such as Da Nang and Indonesia, still have a little start-up associated with them or drag associated until they get to full production in '18. But as you're sitting there, I wouldn't -- the problem with giving the numbers incrementally, you guys just keep adding all the stuff incrementally up. And we've given you a number which has everything in the blender. And incrementally, if you want a number, $5 million. But it's -- that number can move around, right?

No, that's helpful. And then maybe just one last one. In the Middle East, you talked about that business being negatively impacted by the Saudi tax and also border closings. I guess, the tax anniversaries or laps this summer. As you think about the second half and maybe prospects for Middle East being better in the second half of the year, just wondering if you could size how much of the headwind is Saudi tax and how much of the headwind is kind of the border closings and just sort of general instability in the region.

That, I don't -- that I can't parse out for you other than to say we were down mid-teens in Saudi and it could be the same again in -- at least in the first half of '18. And I don't have a clear view right now for the back half of '18. So other than what we -- what we communicated to you was that, as part of our overall guidance, we see the European Beverage business declining in terms of segment income in '18 versus '17, and that has to do with Saudi.

We have Debbie Jones from Deutsche Bank.

One more question on North America. When you ramp down Lawrenceville, do you feel like you'll be happy with your footprint at that point? I'm asking this partly because you're seeing some growth with some customers and not with others. And I'm just curious how that kind of changes the regional needs for you.

Yes, Debbie, I think post-Lawrence, we have a footprint that we're very satisfied with. Over time, we probably -- if and when sleek can sizes continue to grow, we perhaps need some more sleek capacity either in the Midwest or Upper Northwest. But post-Lawrence, we're right where we need to be.

Okay. And thanks for the $5 million number, but I was just curious on the guidance for Q1. Could you just give us some sense of what is baked in, in terms of ramp-up or ramp-down impact? Is it meaningful in the quarter?

Well, everything is meaningful. But the answer is I don't know.

Our next question is from Brian Maguire, Goldman Sachs.

Just to come back to Lawrence one last time. Is there going to be any volume hit from that? Or do you expect to just to replace that volume from other plants, which I'm assuming is the case? And just related to that, the $10 million number you gave in savings, is that just fixed cost savings from that? Or is that net of any additional freight or logistics you might have to support those customers from plants a little bit further away?

So no business expected to be lost and the $10 million is net.

Okay, great. And then just, Tom, one for you. On the accounting changes and the pension, just wanted to make sure I get it right. So the EBIT and EBITDA will be reduced by about $67 million, but that'll be offset by a little bit of an add-back below the line, is that right?

Yes, and exact add-back below the line, so no net impact. But yes, it comes out of operating income, and we pick it back up below the line.

Our next question is Chris Manuel from Wells Fargo.

, Question for you. Working capital side. So the assumption for 2019 -- or 2018 is relatively flat, I'm guessing. But we're seeing aluminum going up, but at the same time, you guys are closing some plants, you've added some plants. How should we think about overall levels? Is there -- is this something that could end up being a drag if aluminum continues to run? Or how do you think about that?

Well, it's one thing for aluminum to go up. It makes our revenues look higher, and as long as it's rising, there generally is no negative working capital impact because you have payables that offset your carried inventory. And typically, in the beverage business, we don't -- we either factor or securitize the receivables so we're not out on that. The challenge with rising aluminum -- and I think some of the guys on the aluminum aerosol business are seeing it because the aerosol customers, some of them are talking about going back to tinplate. But the challenge is that the product becomes less competitive. And now having said that, the all-in delivered cost from manufacturer fill through warehousing and distribution is still cheaper with cans than it is with glass, but we don't necessarily see any working capital headwind coming from the rising aluminum. Obviously, the expanding business, every time we build a plant, we probably do add $15 million or $20 million in inventory or repair parts just to have a factory that can service customers. So that is something that we always have to work to offset, but we've been doing that for several years.

All right, that's helpful. And then, when we think about Signode, so that's still slated to close end of the quarter or any update on timing there?

Yes. So as you might imagine, there is no vertical or horizontal overlap, right? This is a complete different business than cans and so it should be pretty routine, but these are antitrust reviews. It's more really just bureaucratic filings as opposed to antitrust. We've received clearance from several jurisdictions already and we're waiting on some others. It's hard to predict. It could be March 1 or it could be April 1, I just don't know. It's out of our control.

Okay, last question. Historically, you guys have always kept a pretty good slug of cash on the balance sheet that had been trapped different places. With some of the repatriation stuff that's going on and being able to cycle it through, and I think, Tom, you mentioned via NOLs or other tax treatments you had, there won't be much of a hit. Is this something that going forward, instead of having a year's worth of free cash flow kind of sitting there, is this something that we might see down to a much, much smaller number?

I don't...

No, Chris. I wouldn't call it trapped, first of all. It's cash that builds up and then it's kind of timing, you just...

It comes in late.

Yes, it comes in later. And if you're just looking at the end of the year, the other issue is we build working capital in the beginning of the year so we need the cash for that. I don't expect the tax law to materially change to the amount of cash we carry on the balance sheet.

And that ends our question-and-answer session for today's conference. Speakers, please go ahead.

Thank you, Darren. As Darren said, that concludes the call today. We look forward to speaking with you again in April to discuss the first quarter. Thank you very much. Bye now.

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