Ardagh Group S.A.
Q2 2018 Earnings Call Transcript

Published: 29 Jul 2018

[Paul Coulson:]

So, welcome, everyone, to Ardagh Second Quarter 2018 Investor Call, which follows the publication earlier today of our results for the quarter. I'm joined on the call as usual today by David Matthews, our CFO; and John Sheehan, our Corporate Development and Investor Relations Director. Just before I commence my remarks, I'd point out that the information provided during the call will contain forward-looking statements. Forward-looking statements reflect circumstances at the time they're made and the company expressly disclaims any obligation to update or revise any forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied due to a wide range of risks and uncertainties, including those set forth in our SEC filings such as the company's latest annual report on Form 20F as well as the company news releases. Our second quarter earnings release, financial report, and the related materials can be accessed at ardaghgroup.com. Information regarding descriptions of our segment reporting and the use of non-GAAP financial measures may also be found in the notes section of today's earnings release. Today's release also includes a reconciliation to the most comparable GAAP measures of adjusted EBITDA and adjusted earnings per share. This disclaimer is only a summary of the company's statutory forward-looking statements disclaimer, which is included in the company's filings with the SEC. So, to the results. As we outlined in April, we have adopted the new revenue standard, IFRS 15 or ASC 606, since January 2018. This has no effect on cash flows, but can impact phasing of revenues and adjusted EBITDA between quarters. In the half year, it increased revenues by $8 million and adjusted EBITDA by $3 million. My comments on volume and mix that I make during these remarks are exclusive of any of these IFRS 15 effects, just to say that. So, second quarter revenue increased by 6% to $2.35 billion, reflecting 5% currency translation effects and the pass-through of increased input cost. Volume/mix in the quarter was in line with the prior year with growth of 3% in Metal Packaging being offset by a reduction of 5% in Glass Packaging. In the first half through June 30th, volume/mix increased by 1% with growth of 5% in Metal Packaging more than offsetting a decline of 5% in Glass Packaging. Adjusted EBITDA for the quarter of $392 million declined by 6% at actual exchange rates compared with the same period in 2017 as growth in three of our divisions was more than offset by a reduction in Glass Packaging North America. On a constant currency basis, second quarter adjusted EBITDA decreased by 10%. All our businesses other than Glass North America are performing well. We saw a growth in Glass Packaging volume and mix in Europe of low single-digits in the quarter. In Metal Packaging, our food and specialty volume/mix grew in Europe and made strong progress in North America where our new food plants are now in their fourth pack season and performing very well. Global Beverage Can volume and mix increased by 4% during the quarter with strong growth in the Americas. Second quarter adjusted EBITDA was around $20 million below our previous guidance. And almost half of this shortfall resulted from unfavorable currency translation effects due to the recent strengthening of the U.S. dollar, with the balance of the shortfall principally being attributable to Glass Packaging in North America. Elevated freight and logistics costs in North America continued to pose a headwind in both Glass and Metal and they increased approximately $15 million in Q2 and by approximately $35 million in the half year compared to the same periods last year. Adjusted earnings per share was $0.51 per share in the second quarter, a decrease of 6% compared to the same period last year at actual exchange rates. And we have declared a quarterly dividend of $0.14 a share to be paid on the 31st of August next. So, if I could turn to each division, in the Metal Packaging division, second quarter revenue increased by 10% to $1.47 billion at actual exchange rates compared with the same period last year. Constant currency revenue increased by 4% with growth of 14% in Metal Packaging Americas more than offsetting a 1% reduction in Metal Packaging Europe. Constant currency revenue growth for the quarter reflected a volume/mix increase of 3% as well as the pass-through of increased input costs. Metal Packaging Americas volume/mix increased by 9%, reflecting broad-based growth, while Metal Packaging Europe volume/mix increased by 1%. Adjusted EBITDA in Metal Packaging of $231 million increased by 5% in actual exchange rates and before any IFRS 15 effects, increased by 2% at constant exchange rates compared with the same period last year. In Metal Packaging Americas, adjusted EBITDA for the quarter before IFRS 15 effects increased by 3% compared to the same period last year, with the strong operating performance being somewhat offset by significantly higher freight and logistics costs. In Metal Packaging Europe, second quarter adjusted EBITDA before any IFRS 15 effect increased by 1% at constant exchange rates, reflecting volume/mix growth, partially offset by increased input costs. It is -- it's now two years since the Beverage Can acquisition and, as integration nears completion, it is worth noting the continued progress in the business. Though the Beverage Can volume/mix increased by 5% in the first half and in North America, our capacity is fully sold out for 2018. During the quarter and on schedule, we completed the conversion of our Rugby, U.K. facility from steel to aluminum and commissioned our Manaus end plant in Brazil. Both projects were identified at the time of the Bev Can acquisition and underline our commitment to invest in support of our customer's growth. Turning to Glass Packaging, where we reported second quarter revenue of $877 million, in line with the prior year at actual exchange rates. Constant currency revenue declined by 4% with a reduction of 3% in Glass Packaging Europe and 4% in Glass Packaging North America. Second quarter volume/mix in Glass Packaging decreased by 5% compared to the same period last year. In Glass Europe, broad-based growth in the Glass Packaging of 2% in the quarter was more than offset by lower year-on-year glass engineering volumes. Glass Packaging North America volume/mix declined by 5% in the second quarter, with growth in spirits and beverages being more than offset by declines in food, wine and beer. Adjusted EBITDA in Glass Packaging Europe of $91 million for the quarter increased by 3% at actual exchange rates. And at constant exchange rates, adjusted EBITDA decreased by 4% in the quarter, principally due to lower engineering volumes compared with the same period last year. All our capacity in Glass Europe is fully sold. Glass Packaging North America recorded adjusted EBITDA of $70 million in the second quarter compared with $106 million in the prior year. The reduction was attributable to the lower-than-expected volumes and to increased freight and logistics costs, which I've already noted, as well as the $12 million cost of production downtime under a program which we initiated to bring inventories down from elevated levels. The U.S. glass market is being adversely impacted by a substantial rise in glass containers being imported from China and Mexico. Our multipronged initiatives to improve profitability at Glass Packaging North America continued during the quarter and these included capacity management measures where we closed our Milford, Massachusetts facility in March and have since seen a competitor announce a further plant closure. We see further capacity rightsizing initiatives across the industry as being likely. And we have also recently suspended production at one of the furnaces at our Ruston, Louisiana plant. We are also targeting investments aimed at further orientating our business mix towards stronger-performing end markets by enhancing our capability to best serve evolving customer requirements. We're also working on freight and logistics initiatives which are intended to mitigate the very steep inflation in this area, which has led to the increase in costs of over $20 million in Glass in the first half of 2018. And this initiative will entail repositioning certain production to better match plants and customer locations. We've also implemented a program of cost reduction and performance improvement right across our entire U.S. Glass network. And we are also working on improving the commercial arrangements with customers relating to the recovery of freight and related overheads. Now, these and other initiatives are expected to improve operational and financial performance in Glass Packaging North America, although they will take longer than we previously expected to have meaningful effect. And whilst in the short-term, they will give rise to some increased costs and disruption, we are very clear that these are the right initiatives to pursue and that they should be implemented without delay. We've previously noted the level of what we believe are effectively subsidized import glass containers being sold into the North American Glass market. And we welcome the recent inclusion of glass containers on the proposed list of Chinese-manufactured products to be subject to new importation tariffs. As a leading and committed player in the U.S. Packaging sector directly providing over 7,000 permanent skilled roles in the U.S., we view initiatives to ensure a level playing field and fairness and trade practices as essential to the long-term future of the North American Glass Packaging industry. And our immediate objective remains returning Glass Packaging in North America to an appropriate and sustainable level of profitability, regardless of the operating environment. If I could turn to capital structure, after the quarter end, we called our $440 million 6% senior notes due in 2021 and they are due for redemption at the end of this month. Following this redemption, we will have an average debt maturity of six years, an average coupon of less than 5% and no maturities arising before September 2022. In addition, we have minimal exposure to increases in interest rates, given that over 90% of our portfolio is fixed -- our debt portfolio is fixed rate. And we also maintain and reserve significant secured debt capacity. Since the beginning of 2017, the group would have applied $1.2 billion of cash flow generated from operations, IPO proceeds, and available liquidity to the repayment of fixed term debt. If I turn to the outlook, as I mentioned, second quarter performance lagged our expectations due to a weaker-than-expected out churn in Glass North America and adverse currency translation effects. As we look to the full year for 2018, which we see as a transitional year for the group as we seek to rebuild medium term profitability in Glass North America to appropriate levels, we now expect adjusted EBITDA of around $1.5 billion. This reduction from previous guidance of around $1.6 billion is attributable to two factors. Firstly, weaker-than-expected first half performance in Glass North America as well as the fact that the various initiatives we have underway to restore profitability to appropriate levels will deliver benefits on a more gradual basis than originally expected. The second factor is the adverse currency effect arising from the recent strengthening of the U.S. dollar. And assuming that current exchange rates prevail until the end of the year, it would give rise to a non-cash currency translation headwind of approximately $50 million versus our previous guidance. Of course, if this were to happen, net debt would also reduce to leave leverage multiples unchanged, given our appropriately matched earnings and debt profile. If I could turn to the quick-return projects which we mentioned previously, we've been evaluating multiple organic investment projects across our broad operating platform. The process is ongoing, but we've now identified projects involving a cumulative spend of around $150 million over the period of 2018 and 2019. And although these projects are all individually modest, they offer attractive return profiles, typically of less than three years. These initiatives will be marginally leveraging in 2018, deleveraging in 2019 and will contribute a full run rate contribution to earnings in 2020. And this program is an ongoing program and we continue to evaluate such further opportunities across our network of over 100 production facilities. A word on environment -- the environment and sustainability. We note the increasing focus and engagement of consumers on environmentally friendly and sustainable packaging materials. This has been a key area of focus for us at Ardagh over many years and we would point out that both of our metal and glass packaging substrates are sustainable and infinitely recyclable. We continue to work with customers on initiatives such as down-gauging in Metal and light-weighting in Glass, two areas where we have a long-established record of innovation. And we are focused on delivering quality premium products in both metal and glass that offer our customers brand differentiation and enhancements and a means to generate incremental returns. We've consistently led the European glass industry in the usage of recycled glass, which now accounts for approximately 75% of our batch input mix. This has reduced energy consumption, benefited furnace performance and underpinned our products' appeal to our customers. And in the same way, we're working on improving and increasing the use of recycled materials in our Glass Packaging business in North America. So, as we enter the seasonally more cash-generative second half year of the year, we remain focused on optimizing our overall business performance, improving performance at Glass Packaging North America, pursuing high-return attractive investment projects across the group, and achieving further deleveraging. So, having made these opening remarks, we'd now be pleased to take any questions which you may have. Thank you.

[Operator:]

[Operator Instructions] And the first question is from the line of Anthony Pettinari from Citi. Please go ahead, your line is now open.

[Randy Toth:]

Good morning. This is actually Randy Toth sitting in for Anthony. Can you talk about what you're seeing in Brazil from both a volume and competitive perspective? And can you remind us kind of what type of EBITDA uplift you expect to see in 2019 related to the end plant down there?

[Paul Coulson:]

Well, I think we're seeing -- what we're seeing in Brazil is it has been a very good market for us this year. Performance is excellent there. We've completed the Manaus end plant, which makes a significant contribution to EBITDA. It's been completed on time. What we've seen in the evolution of our business, there is very strong volume growth in substantial double-digits. After we did the deal with -- the Ball-Rexam deal and bought Brazil, there was some adjustment to accommodate a new market entrant and also following the divestments and the takeover of Rexam. That led to us improving our mix, but reducing our volume there. That left us with spare capacity in Brazil, which we -- we're now filling. And we're very happy with the growth in both our market share there and also in the growth of the market generally. So, Brazil has been very good performance for us this year. We're very pleased with it.

[Randy Toth:]

Okay. Thank you. That's helpful. And then, how much of the $150 million of incremental CapEx between 2018 and 2019, how much of that will be in 2018 versus 2019? And does that change the timing or size of the special dividend at all?

[Paul Coulson:]

No, it doesn't change the special dividend or timing of that. About $60 million will probably be in 2018, the balance next year. Obviously, there will be a contribution to EBITDA next year, but full run rate will be in 2020.

[Randy Toth:]

Okay, Perfect. Thank you. I'll turn it over.

[Operator:]

Next question is from the line of Tyler Langton from J.P. Morgan. Please go ahead, your line is open.

[Tyler Langton:]

Good morning. Thank you. Paul, I just had a question. I think you said freight was sort of a $35 million hit in the first half and I guess, I think you mentioned glass was about $20 million of that. So, now, I'm guessing maybe sort of the U.S. metal would be the rest. But can you just talk a little about what type of pressures you think you could see in the second half and then sort of your ability to offset them in 2019? I don't know if there's a sort of an annual pass-through in your contracts, but just any color there would be helpful.

[Paul Coulson:]

Yes, I think you're right. It's about two-thirds in our Glass business in North America and a-third in Metal. There are -- in Metal, there are ability to claim back some of these things, but the index still has lagged the cost increases a bit and also the index is not perfect in measuring the increased costs in freight either. In Glass, we don't have that opportunity really. We're assuming in our guidance for the rest of this year, Tyler that freight will continue at the current levels. It's very high, as you know. This is going right across U.S. industry. Obviously, one of the things we're doing is we have programs to mitigate the cost by a more careful planning of when our freight takes place so there's less use of spot rate freight. And secondly also, we're working on making sure that we manufacture, particularly in Glass, our products as close as possible to the customer location. So, I think this will -- we've assumed that current levels will take -- remain for the remainder of this year and that our mitigation program should start to take effect hopefully next year, although we are assuming that these elevated levels in freight costs remain.

[Tyler Langton:]

So that means -- I'll just follow-up a bit with that -- you have a $35 million hit year-over-year in the second half as well? Or are there any other -- will it be a little lower, if you can mitigate it?

[Paul Coulson:]

It's very hard for us because this thing goes up and down, but I mean, we're -- you've seen what happened in the quarter. That's the latest information we have on what's been going on.

[David Matthews:]

And we did say there is an increase in freight rates from the second half of last year. So, the base level coming up was higher in second half.

[Tyler Langton:]

Okay. No, that's helpful. And then just -- I think you said volumes in Metal Americas were up 9% and I think that's after a 21% increase, I believe, in Q1. Could you sort of talk about how much of that might some contribution from the end plant or just higher capacity on the Bev Can side in Brazil versus U.S. Bev? And just sort of if those rates are strong, but just sort of what's driving them and sort of how sustainable those levels are?

[Paul Coulson:]

Well, I talked earlier about the performance in Brazil. I think in Bev Can North America, we've seen strong growth. We're fully sold. In fact, in Bev Cans in North America, we're actually buying in cans to meet demand. I don't think the end numbers are the big influencer in the overall number for our reporting segment of the Americas. There's been good growth there. We're very happy with it. In Q2, we're up 4% in Beverage Can in North America. We're also seeing an environment -- good market environment in Bev Cans in North America. I think for the first time for a long time, we see an environment where price increases should start to happen. I think we see our peers being fully sold. And we're certainly, as I said earlier, fully sold. And we haven't had price increases in Bev Cans in North America for some time and it's long overdue. And I think the environment is -- for that to happen is good. Also in our Metal segment in North America, we've seen very good performance from our food can plants. These are plants -- as you know, they're new plans. They're very -- they're the most efficient in the industry in the U.S. And we're seeing a very good performance from them this year so far and we're very pleased with that business.

[Tyler Langton:]

Got it. Thank you so much.

[Operator:]

Next question is from the line of Tom Narayan from RBC Capital Markets. Please go ahead, your line is open.

[Tom Narayan:]

Hi, thanks for taking the question and good morning. I just wanted to break down that $100 million EBITDA guidance revision. Again, just from your comments, Paul, it sounds like perhaps $50 million of it is from the strengthening dollar and then the rest is largely from U.S. Glass profitability being more gradual. Does that also incorporate freight, the production downtime, the China issue you called out as well? I know it's an approximation, so apologies if this is too granular of a question.

[Paul Coulson:]

Yes, your assumption is broadly correct. It includes all those factors.

[Tom Narayan:]

Okay, got it. Okay. And then, I guess, based -- a follow-up from the last question. In Metal Americas, that 9%, it is -- is that mostly volume or is there some price in there as well?

[Paul Coulson:]

Mostly volume, mostly volume, but I think as I said earlier, I think the environment is moving towards a situation where we will see some, hopefully, price improvements in North America.

[Tom Narayan:]

Okay. And if I were just to -- just high level look at Europe Metal and Americas Metal, I see that 9% versus 1%. Appreciating Brazil and what's going on there in North America, is Europe Metal performing to your expectations? Is there -- I know there's some macro things perhaps happening. I mean how would you characterize the kind of dynamic between the two regions?

[Paul Coulson:]

In Bev Cans?

[Tom Narayan:]

Yes.

[Paul Coulson:]

I think we would say that pricing is softer in Europe than in the -- and demand softer in Europe than in U.S. because we had some new capacity built over the last period of time in Europe, but the market is growing and growing into that capacity, so we're not unhappy with what's going on there. In food and specialties in Europe and the food business in Europe, we're happy with performance there. Our business in the U.S. on food is a different business. Most of its under long-term contracts, including the ConAgra contract. And we're seeing very good performance in North America there and we're seeing pretty good performance in food and specialties in Europe as well. The higher growth rates in volume and mix in the Americas reporting segment are down to the U.S. market in both bev cans and food cans and also down to the strong growth in Brazil.

[Tom Narayan:]

Okay, great. Thanks. I'll turn it over.

[Paul Coulson:]

Thank you.

[Operator:]

Next question is from the line of Roger Spitz from Bank of America. Please go ahead, your line is open.

[Roger Spitz:]

Hi, thank you. Two things. First, would you be able to provide your off-balance sheet amounts outstanding under your securitization facilities for each of December 2017, March 2018 and June 2018, please?

[Paul Coulson:]

Yes, sure.

[David Matthews:]

Yes, I can do that, Roger. It's about $325 million, December 2017; around $300 million, March 2018; and then moving up to $375 million in June 2018. And that sort of follows the seasonality of our working capital. Our working capital tends to be low in December and then it rises during the course of the year to December. And if you look at those numbers in the context of some of our peers, they're actually quite modest.

[Roger Spitz:]

Thank you for that. And then, I'm looking -- the other question is I'm looking at the -- your $1.5 billion EBITDA and the $500 million free cash flow and looking at the pieces in between. If I take your last quarter's guidance, I'm getting something closer to $430 million. I'm wondering whether some of the CapEx, taxes or change in working capital--

[David Matthews:]

Yes.

[Roger Spitz:]

Including the $25 million for Milford, Mass closing.

[David Matthews:]

Yes, let me help you there, Roger. How we see it is as follows

[Roger Spitz:]

Gets me there. Thank you very much.

[Operator:]

And next question is from the line of Karl Blunden from Goldman Sachs. Please go ahead, your line is open.

[Karl Blunden:]

Hi, good morning guys. Thanks for taking the time and questions. Just first, on the industry and glass supply/demand. We saw a fire at a competitor facility in Oklahoma. Any sense that you have about the materiality of that for long-term supply/demand balance in the market would be helpful. And then, probably related to that is there was a loss of a plastic contract at large also at a competitor. How should we interpret that for the industry? Is that a data point that we should be concerned about or that yourselves are concerned about? Any color there would be helpful.

[Paul Coulson:]

Well, I think that particular switch of business was expected for a long time, right? So, that has been in the pipeline and it was only a matter of time. So, I don't think it's a general trend as such. Obviously, we have yet to see it come the other way in terms of the change in sentiment towards plastics, both in the U.S. and in Europe and we'll have to see how that all plays out. So, I wouldn't put too much -- that was a very specific situation. In relation to the fire, I don't know what the extent of the damage was. I think it's reasonably substantial. I'm afraid you have to ask our competitors whose plans it is as to what their plans are, whether they plan to rebuild it or what they plan to do. I think what they will say to you is that I -- my remarks that I made earlier that I do expect there to be some further closures in the U.S. over and above the closures we announced and the one that I announced. I do think there will be further closures and rightsizing of capacity in the U.S. market.

[Karl Blunden:]

Okay, that's helpful. And then just on the balance sheet and the HoldCo refi strategy that you'd outlined a couple of months ago, when you think about the equity prices today, they're down a bit from when you initially unveiled that plan and then also glass restructuring and other profit improvement initiatives taking a bit longer. Does that affect at all the timing of that HoldCo refi or the probability of it? How should we interpret those data points?

[Paul Coulson:]

Well, that still remains an important platform for us, but remember, it's -- it was -- it's pretty much 18 months away minimum and we did always say that it would be subject to market conditions. So, we will look at everything at the time, but it remains something that we want to do.

[Karl Blunden:]

Great. Thanks guys. Appreciate it.

[Operator:]

Next question is from the line of Debbie Jones from Deutsche Bank. Please go ahead, your line is open.

[Kyle White:]

Hey, it's actually Kyle White filling in for Debbie. Thanks for taking my question. Just pointing to the comment about tariffs on imported glass from China, have you seen any kind of acceleration of these imports, of customers probably trying to get ahead of any potential tariff implications or anything of that nature?

[Paul Coulson:]

No, we haven't seen that, but we have seen a substantial rise in these imports. And the acceleration of such. It's in a -- I think, a 60-day review period now at the moment, so it would be -- it won't happen immediately, but I think the -- well, I think the government is -- certainly, it's something the government is looking at very seriously.

[Kyle White:]

Okay. Thanks for that. And then staying on -- or going to the kind of sustainability topic, you mentioned a little bit about the impact of plastic. And I'm wondering if you've seen any increased discussions from your customers or potentially new customers that want to shed away from plastic into metal and glass. And then on that topic, are you -- are they looking to go more towards one substrate over the other, whether it be metal versus glass? Thanks.

[Paul Coulson:]

I think it's early days in that whole thing. I think people are coming to grips with pressure from consumers -- our customers coming to pressure with consumers, market preference, investors, et cetera, but I think it's still early days for us to see any impact yet on moving to more sustainable substrates away from plastic. Have we -- and we certainly haven't seen any material effects of these yet, but these things take time. It takes a long time for that to happen. But we have seen and noticed the increased sensitivity to this whole issue, both in the U.S. and in Europe.

[Kyle White:]

Thanks for that. I'll turn it over.

[Operator:]

And next question is from the line of Flor O'Donoghue from Davy. Please go ahead, your line is open.

[Florence O'Donoghue:]

Thank you. Just looking, if possible, gentlemen, for a bit more color on glass engineering in Europe. What happened there in the quarter and how it may look going forward, if that's okay?

[Paul Coulson:]

David, would you like to comment on that?

[David Matthews:]

Yes. Yes, very much so. First of all, it's a slightly different business. It's a capital business. So, by its very nature, sales tend to be a little bit lumpier. The second quarter this year, the sales had been a little softer. It's a very good business. It's a very good -- got a very good marketplace and position in the market. And we see it very much as timing. There's nothing structurally at all that we're concerned about in this business.

[Paul Coulson:]

If you look back over the last number of years, you'll see it's always fluctuated because it's very project-related.

[Florence O'Donoghue:]

Sure. Okay, that's great.

[Operator:]

And next question is from the line of Ken Robinson from GSO [ph]. Please go ahead, your line is open.

[Unidentified Analyst:]

Thanks very much presentation guys. And Paul, you noted that you sort of expect further capacity closures in North America. I'm just trying to understand, like, from your perspective -- so you mentioned the addition of furnace closure. Outside of that, is there anything else that you're potentially look at closing in North America? And then, do you have any sort of -- or can you provide any color in terms of this closure in Milford? What percentage of your total North America capacity will be closed?

[Paul Coulson:]

Well, Milford was about 6% of our total U.S. capacity, right? So, it was 15% of our beer capacity that's been closed. The furnace in Ruston that we've suspended production at for the moment is about 3% of our annual capacity. In relation to other closures, there's nothing decided yet. I did say in my opening remarks that we're evaluating. We are evaluating our network continuously to see how it fits in with customer demand and et cetera, et cetera, and investment, et cetera. And that's something that would be, as you would expect as we move forward, to sort these profitability issues out. It's something that we will have under continuous review. I think my remark that I made earlier as well is that I think there will be other closures from elsewhere. There's been obviously [Indiscernible]. There may be other closures too, but we don't know yet. We'll wait and see.

[Unidentified Analyst:]

Helpful. And then, have you guys talked about conversion of the Mass capacity? Has that started yet? Is that included in your special CapEx items or that would that be on top of that?

[David Matthews:]

That's included in the overall CapEx guidance of $530 million I guided to earlier on.

[Unidentified Analyst:]

Okay, got it. Got it. Got it. Okay. And then sort of outside Mass, is there anything -- any developments elsewhere, I don't know, in wine in North America, any weakness there or food or how are the others sort of by segment?

[Paul Coulson:]

I mentioned the volumes were down in food and wine and craft beer. So, there has been weakness there. And food and wine have been particularly impacted by imports.

[Unidentified Analyst:]

Got it.

[Operator:]

And next question is from the line of Tyler Langton from J.P. Morgan. Please go ahead, your line is open.

[Tyler Langton:]

Yes, thanks for taking my follow-up. Just on CapEx, I guess, for special projects, you expect $90 million or so in 2019. Can you just talk about, I guess, what the CapEx for the rest of the business could be, just given your sort of goals of deleveraging and the potential special dividend, just kind of how you think about CapEx for 2019?

[David Matthews:]

I think it's probably a little bit early to start giving out guidance with 2019. And the special CapEx of $150 million, as we said, it was $67 million for this year and will continue to evolve in terms of ideas as we move into 2019. So, I think that's probably the guidance we would want to give at this point in time.

[Tyler Langton:]

Okay. No, that's helpful. And then just last question, just -- could you talk about, I guess, where your kind of capacity stands now in the U.S. Food Can business and sort of your desire to kind of continue to grow that business?

[Paul Coulson:]

Well, I -- those plants, as I mentioned earlier, are the most efficient in the industry. And I think we're set up -- and the basis of the investment thesis was that they didn't need to be full to make a very good return and they earn good margins. We have been very careful in the way we've approached new business, getting new business. We have not been going in and heavily discounting, et cetera. We've got on it very quietly and firmly. We are looking to grow that business, yes. We have spare capacity, yes. And we have very efficient capacity.

[Tyler Langton:]

All right. Thanks so much.

[Operator:]

And next question is from the line of Roger Spitz from Bank of America. Please go ahead, your line is open.

[Roger Spitz:]

Thanks for the follow-up. Just for clarity, should we be adding the special CapEx for 2018 of $60 million to $70 million on top of the $530 million 2000 CapEx you've provided?

[David Matthews:]

That's correct.

[Roger Spitz:]

Okay. And secondly, I just saw this. Are you familiar with this hourglass -- new U.S. glass container plant and if you know what's happening, if you're familiar with that?

[Paul Coulson:]

Yes, down in Atlanta, near Atlanta. Yes, we are. I don't -- I haven't heard anything about it going ahead. I would be very surprised if anyone wanted to tune a new glass plant in North America in the current climate.

[Roger Spitz:]

Understand. Thank you very much.

[Paul Coulson:]

I think it would be brave investors who did that.

[Roger Spitz:]

Right. Thank you.

[Operator:]

And next question is from the line of Raul [Indiscernible] from Chenavari. Please go ahead, your line is open. I do believe we just lost connection to Raul. [Operator Instructions] And the next question is from the line of Teo Lasarte from Insight Investment. Please go ahead, your line is open.

[Teo Lasarte:]

Hello. Can you comment on -- given the record temperatures we're seeing in Europe and also in the U.S., can you comment on how that should affect the business overall, looking at the upcoming quarter?

[Paul Coulson:]

Could you just repeat that? I lost you there, sorry.

[Teo Lasarte:]

Yes, sure. I was wondering if you could comment on, given the record temperatures we're seeing in Europe and also the temperatures in the U.S., overall, given the impact on beverage consumption, but also on crops and so forth, I mean, what sort of impact do you expect overall in the business for the rest of the year?

[Paul Coulson:]

Within our business, we haven't seen anything or we're not seeing anything that's impacting in a material way.

[Teo Lasarte:]

Okay. Thank you.

[Operator:]

And next question is from the line of Christina Hwang from Angelo, Gordon. Please go ahead, your line is open.

[Christina Hwang:]

Hi, thank you for taking my question. You mentioned earlier that you're using 70% recycled glass in Europe. What is the current percentage of recycled glass usage in North America for you? And what is your ability to change that percentage? And how much savings in costs are there for you by using recycled glass versus virgin raw materials?

[Paul Coulson:]

It's a little bit more than half in North America. The systems aren't -- the industry levels are not as developed in terms of collection and the supply chain there. But we do look at many initiatives to improve it because, obviously, there are environmental benefits for this also, more energy-efficient for our own operations and it's less wearing on furnaces. But at the moment, it's a bit more than half in North America versus the European levels.

[Christina Hwang:]

And do you see a pathway to increasing that in the near future? And would that have a meaningful impact in terms of your cost of goods?

[Paul Coulson:]

We'd like to increase it. It's not something immediate. I mean, as John says, there are deficiencies in the collection system relative to Europe.

[Christina Hwang:]

Got it. Thank you.

[Operator:]

And next question is from the line of Richard [Indiscernible] from Jefferies. Please go ahead, your line is open.

[Unidentified Analyst:]

Hey Paul, could you just give us maybe a little bit more detail on the total amount of expected cost savings you expect to get out of the initiatives you've undertaken in the North American Glass business and when do you expect those to really start to meaningfully impact results?

[Paul Coulson:]

I think, as I said, yes, Richard, it will be next year before we see meaningful effects from these benefits. I wouldn't want to put a figure on it at the moment. There's a lot of moving parts here, but what -- we're obviously targeting a return to appropriate profitability. I think -- whereas we might have originally expected to see improvement in the second half of this year, I think it's now going to be next year before we see the initiatives we're taking having effect. We are taking some short-term pain to try and solve these -- make the thing more sustainable going forward medium term, long-term, recognizing that there have been potential shifts within the industry. So, it's a big ship. We have a big business here in the U.S. in glass and it takes time to turn it around.

[David Matthews:]

What I would add to that, Richard, is the payback can be fairly quick. In terms of Milford, that's cost us $25 million in terms of cash costs, but that would pay back within two years. So, you can get payback pretty quickly when you take these actions.

[Unidentified Analyst:]

Got it. Okay, that's helpful.

[Paul Coulson:]

I think, Richard, the other thing I'd add to what David said is that the effect of automation and technology and the investment in the U.S. The investment in the U.S. Glass industry, not just by us, but by others, is less than you see typically in Europe. And certainly, our plants in Europe are more invested in -- than they are here. So, there is room for improvement in that area as well.

[Unidentified Analyst:]

Got it. Thank you.

[Operator:]

And next question is from the line of Raul [Indiscernible] from Chenavari. Please go ahead, your line is open.

[Unidentified Analyst:]

Thank you very much. Sorry, apologies for [Indiscernible], I just got pushed out from the line. Can you hear me?

[Paul Coulson:]

Yes.

[David Matthews:]

Yes. Can you hear us?

[Unidentified Analyst.:]

Yes, definitely. Thank you. Sorry for earlier. So, just a couple of questions. Just on the steel and aluminum tariffs and the significant increase we've seen in those input costs, given how important obviously they are for either the beer can mark -- the bev can market and also the food can market. And I understand is that, so far, you have not really seen any kind of meaningful effect I've observed in revenue and EBITDA, which have significantly increased? And you also saw -- you told us that Metal Packaging Americas, the volumes also were up year-on-year. The question I have is as all of these higher prices are filtering through the value chain and ultimately, the end consumer, isn't there going to be a point where there's going to be some elasticity of demand or volumes reacting to those higher prices where we could see maybe some import substitution or some substrate substitution? Isn't it fair to assume that maybe on the second half or maybe in the first quarter of next year, you -- if this carries on, you would see some import substitution and some hit in volumes in North America moving forward?

[Paul Coulson:]

Well, first of all, the tariffs have just come in really and we're now, along with the rest of the industry, passing these through to our customers. I'm not so sure that you're going to see these effects in any great form. It may, of course, make it more difficult if there's inflation in the packaging materials, but I don't -- it takes a lot to switch substrates, et cetera, et cetera, and I -- you've also got what you switch to. You've got the plastics issue there as well. So, I -- one, you would prefer that you didn't have this inflation in packaging materials in the U.S. where you didn't have this situation, but I'm not sure where else it goes. And imports -- I think imports will be -- where they're coming from, you may find other measures taken by the government here. I mean these things are bobbing around, but that's life, I'm afraid, at the moment.

[Unidentified Analyst:]

No, of course, absolutely. So, what did you say, excuse me, on imports?

[Paul Coulson:]

Well, I mean, whether imports would escape any future tariffs as well is another matter.

[Unidentified Analyst:]

Okay. So, you think that it could -- if there is a substitution as we've seen in glass because that's a phenomenon we've been seeing actually with imports from, I think you were alluding to Mexico and other jurisdictions, are you saying that the U.S. administration would react by actually imposing tariffs as well on those imports of packaging substrates, right?

[Paul Coulson:]

Well, I don't know what they do, but I mean, you're watching what's going on. And certainly, they -- Washington is looking closely at what's going on with glass imports, no doubt about that.

[Unidentified Analyst:]

In terms of -- absolutely, yes. And the two other questions I had is just if we can look at historically the elasticity of, I don't know, call it, 1 percentage points increase in prices in, for example, metal substrates and the impact it has, ultimately, in demand effectively. Historically, has that been -- what is the kind of elasticity? Is it a one-to-one factor or not really because the price of the--

[Paul Coulson:]

Raul, I don't have those exact numbers. What I can say to you is that the filling lines are set up. Cans remain a very attractive option. It's -- we're seeing, as you say, good growth in bev cans in North America. And in food cans, for instance, in North America, we've, in the past, had substantial in place price increases, which haven't really affected end demand. So, that's all I can say to you. That's our historic experience. In terms of elasticity percentage, I haven't got them.

[Unidentified Analyst:]

Okay. And the last question is more a housekeeping one. I just trying to want understand -- so you -- going back to guidance of adjusted free cash flow, you say -- that $500 million is after EBITDA -- adjusted EBITDA minus interest, minus tax, minus CapEx and working capital movement, but the CapEx is, excluding the special item CapEx that you've indicated, would be around $80 million this year. Is that correct?

[David Matthews:]

No, no, no. It would be between $60 million and $70 million this year. So, the $500 million is before that cost.

[Unidentified Analyst:]

Okay. All right. So, if I really want to look at a free cash flow after all CapEx, that would be around $422 million, $436 million?

[David Matthews:]

Well, that's right, but clearly, in the current year, there'll be virtually no impact from EBITDA from that spend. The spend will come through next year. So, we'll get the benefit for the EBITDA coming through next year from $60 million to $70 million spend this year.

[Unidentified Analyst:]

Okay, perfect. Okay. But clearly, on the free cash flow, it should be $430 million to $440 million after specialized -- special CapEx effect?

[David Matthews:]

That's correct.

[Unidentified Analyst:]

Okay. All right. And then the last question I have is just on the working capital movement. So, you're guiding for a positive working capital movement for the second half of 2018, which is basically a seasonal factor. Could you just explain a little bit the dynamics of that reversal typically that you're seeing in the second half on what you're seeing? And then should we expect basically the reversal to be as large as the -- or higher than the outflow that we've seen for the first half of 2018?

[David Matthews:]

Yes, our business is seasonal insofar as people tend to drink more beer in the summer, crops are harvested in the summer. So, the working capital climbs during the first half year, peaks in the summer and then comes off towards the end of the year in quarters three and four. That pattern has been the same for many, many years. It is a pattern that we see as we look forward over the next six months and beyond. And the guidance that we've given of free cash flow $500 million pre the special CapEx clearly reflects the benefit we have in the second half of the unwinds of the working capital we built in the first half, plus also some working capital efficiencies that we've achieved as well year-over-year.

[Unidentified Analyst:]

Perfect. Thank you very much.

[Operator:]

And there are currently no further questions registered. So, I'll hand the call back to the speakers. Please go ahead.

[Paul Coulson:]

Well, thank you very much, ladies and gentlemen, for joining us today. And we look forward to talking to you with our Q3 results in late October. Thanks very much everyone.

[Operator:]

This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.